Zero Hedge points out the strong correlation between Federal Reserve bank reserve creation and the rise in the stock market. Their chart is just the latest in a long series of evidence:

SPX Monetization Corr_0

The relation is just too strong to lead to any other conclusion…the Federal Reserve (with the cooperation of its owners) has orchestrated the rise in the stock market since March to pad the income statements of the banks, with the side benefit of building a false confidence in the consumer.

From FT (ht Alea):

From Mr Eric Keetch.

Sir, In a sleepy European holiday resort town in a depressed economy and therefore no visitors, there is great excitement when a wealthy Russian guest appears in the local hotel reception, announces that he intends to stay for an extended period and places a €100 note on the counter as surety while he demands to be shown the available rooms.

While he is being shown the room, the hotelier takes the €100 note round to his butcher, who is pressing for payment. The butcher in turn pays his wholesaler who, in turn, pays his farmer supplier.

The farmer takes the note round to his favourite “good time girl” to whom he owes €100 for services rendered. She, in turn, rushes round to the hotel to settle her bill for rooms provided on credit.

In the meantime, the Russian returns to the lobby, announces that no rooms are satisfactory, takes back his €100 note and leaves, never to be seen again.

No new money has been introduced into the local economy, but everyone’s debts have been settled. Is this “quantitative easing”?

So…is it?  Of course, the sucker is the hotelier who is stuck with coming up with €100 out of savings that he thought he had received as income.  If QE is designed to trick us into paying off our own debts, we guess it’s working.  Alas, the picture of QE is more accurate than even planned as QE is designed to trick us into spending on new consumption – not reducing our exisitng debts…on that score it seems to be failing so far…

Reuters reports:

Federal Reserve purchases of U.S. Treasuries have not produced a lasting drop in long-term yields, according to a study by the St Louis Federal Reserve…

The Fed shocked markets on March 18 with a $300 billion purchase program of longer dated U.S. Treasury bonds, which quickly reduced longer bond yields by about 50 basis points.

Here’s the funny part:

“The marked flattening of the yield curve associated with the (Fed’s) announcement has vanished. Instead, the yield curve has become more steeply sloped,” the study noted. It said it was not possible to single out what was driving up yields.

Duh, yields are going up because the purchasing power of the dollar is expected to fall with the FED’s announced monetization, er “quantitative easing”. But it’s not possible for the St. Louis FED to figure this out…

China has certainly figured it out.  They are staying in the short end of the yield curve… From China Daily:

Shen Minggao, chief economist with the business and financial magazine Caijing:

I doubt the US government’s ability to ensure the safety of China’s investment in Treasuries. At least for the present, Washington has nothing to assure us on.

What the US government can guarantee is avoiding credit risk – it will not default on its debt. But that cannot provide any shelter for investors to avoid inflation, the depreciation of the dollar or risks in liquidity. These pose major threats to China’s holdings of Treasuries with maturities longer than a year.

Bloomberg reports one-month treasury bill rates went negative today:

One-month bill rates turned negative today for the first time since Dec. 26 as investors sought the debt approaching the end of the quarter. At that time, banks prefer to carry securities on their balance sheets instead of cash, driving demand for bills, according to Donald Galante, chief investment officer and senior vice president of fixed income at MF Global Ltd. in New York. He expects rates to rise again by mid-April.

“We’re in a funds rate range of between zero and 0.25 percent,” said David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania. “If you keep rates this low, you’re going to end up having periods, especially in the Treasury bill market, where the yield goes negative.”

The rate on the one-month bill touched negative 0.0152 percent in New York, compared with 0.03 percent yesterday. It was last negative on Dec. 26, when it reached minus 0.05 percent.

We are not so sure that the implications of another few days of negative treasury yields are so benign.  As the article says, the last time the one-month yield went negative was Dec.26.  Take a to see what the S&P did then:

sandp-march-26

Simon Johnson in RGE Monitor:

As [Bernanke] sees the world, there is only one course of action remaining: print money and hope for a moderate degree of inflation.  The money part was, of course, the announcement yesterday from the Fed….The inflation part is a leap of faith…if you can explain to me exactly why oil prices rose as they did during the first part of 2008, despite the slowing global economy, I might be greatly reassured that we are not heading immediately into a runaway inflation spiral. “

Hmmm, we are having difficulty explaining it…so Dr. Bernanke may not get just a moderate amount…

From The Pragmatic Capitalist:

“… corporate earnings are going to slide again this year…we remain convinced that this is another bear market rally.”

From RGE Monitor:

The Swiss National Bank announced it would begin quantitative easing by intervening in the currency and corporate debt markets to “increase liquidity substantially”. The fear of deflation is growing in Europe.  The Swiss cut their economic growth forecast from about -.75% annual to between about -2.75%,  acknowledging the collapse in global demand for manufacturing.  The European banks are even more leveraged than US banks. Could Europe be ground zero for the next leg of the financial crisis?