QE

QE is taking a beating in the press the last 2 days as equity markets have turned red and commodities went splat. We noted last Tuesday on Squawk Box that the breadth of the initial commodity selling was significant and should be taken seriously. Right through the corrective equity move, the markets are reacting in similar fashion to prior well advertised monetary stimulus. The surest sign that all is not well remains the plethora of bubble calls as equities marched higher from Memorial Day and immediate chants of crisis on the pullback.

QE is doing its thing, however. MBS spreads no longer warrant the "spread" moniker. Taking MBS production from the market extinguishes 10 year equivalent Treasury supply. The "dime" (as we call 10yrs) was 1.63 to 1.66 on the structure referred to as "current coupon" MBS.  Obviously, we believe this gambit to be folly. Federal Reserve policy aimed at spread compression and volatility suppression was the mistake that germinated the crisis. A system that functions only under that artificial "stability," breaks when inevitably tested. The elasticity and flexibility of market determined relationships is replaced with brittle quant assumptions of low and narrow.

The news is not that QE is not working. It is. If your mortgage is pooled and bought by the Fed, we believe you should stop paying it. Spend the money elsewhere. Take a nice Fall vacation. Buy more Apple. Throw it on your bed and roll around on it. PIMCO likes to say, "The Central Bank is where bad bonds go to die." Prove them right, stop paying.

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