The QE2 “bag of tricks” has done its dirty work as attested by Dean Foods’ stranguflation report yesterday. Company indicated demand for milk was rather poor, input goods had gone through the roof, and they would respond with “cost cuts”, a Ministry of Truth euphemism for “lay people off”. If there is one thing to focus on throughout this QE2 meltdown it is knowing what the words “cost cuts” actually means. I will be reporting on this without fail.
The last few days had a different tenor. The Fed has conducted its expected QE2 operations, but the bond market has been trading poorly almost in a tired, “what else is new” pattern. However, I see something even more ominous, the trade of front-running the Fed to buy Treasuries, has shifted towards “let’s sell these Old Maid Cards” to the Fed, and buy more commodities. The primary dealers have been peeling away from recent Treasury auctions, as I think they prefer input goods and commodity speculation. The powers to be are playing whack o mole on commodities, raising margin levels, which stops these trades from their parabolic moves for the moment, but then the demand leaks into other commodities such as oil, gasoline, and heating oil. Further raising margin does little but give advantage to larger speculators.
One player in the old trade was Japanese retail who buy Treasuries and then hedge them back into Yen, in effect the most overrated, overpriced trade in the world. Both sides of that trade have been hurting of late, not nearly as one sided. Given that the Japanese love late stage bubbles and maniacal trades, one wonders just how much they have jumped on the commodity trade already, and whether they will divert more from Treasuries.
Apparently the criminals who run these trading operations are willing to put it all on red that the Fed will never respond to the runaway in commodities and its stranguflation effects. My sense is that they have strapped dynamite to themselves and are daring the Fed to act. I don’t even pretend to know or even guess as the cluelessness of pumping up a stranguflationary hurricane, so the key is to focus on real economic effects, which are horrifically negative. That way I don’t really have to wait with baited breath for every Fed heroin injection into the patient or protestations from financial gangsters, I just know the patient is dying.
