Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
I’ve spent some time this afternoon trying to figure out the whole point of what the Fed is considering. I got this blurb from Realmoney.com, essentially it sounds like the hedge fund Bernanke & Partners is considering laying on a massive carry trade. And since they are the bank, and can create unlimited funds to do it, they have a different risk parameter than Joe Schmoe’s hedge fund.
In a little-noticed, but incredibly audacious announcement this morning,
Federal Reserve officials said they are considering a new type of
bond-buying program. This is meant to address worries about future inflation if
[when] the Fed decides to take new steps to stimulate the economy in coming
months.
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The math (per $ billion)
Borrow …….$1,000,000,000 at 0.13% annual rate [today’s 6-mo. T-bill
rate]
Lend ……… $1,000,000,000 at 3.08% annual rate [today’s 30-yr.
T-bond rate]
Earn ………..$29,500,000 per billion of carry trade EACH YEAR
If only we could do this on a grand enough scale we could wipe out the
national debt post haste. [No laughter, please].
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Imagine borrowing from your spouse at 5% while recording only a 1% cost of
borrowing in order to see the insanity involved here.
Your family debt rises by $1 billion. Your family liabilities increase by
$1 billion but you declare yourselves much richer at year-end and protected
against inflation as well.
This may well be the plot for the next Harry Potter movie.
(I want royalties if this occurs.)
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Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
