Here's an interesting quote from Hussman that follows the news that the US Treasury has announced they provide unlimited support to Fannie and Freddie's securities:
"The Federal Reserve has expanded the U.S. monetary base by more than 150% since the beginning of the recession. That is not a typo. The monetary base has soared from $800 billion to over $2 trillion. Much of this has been accomplished through outright purchases of mortgage-backed securities (not repurchases) [...]"One thing that hit me when reading this was the how much Robert Prechter was right and that he had predicted this would happen.
During the interview I have posted here, he explicitly mentions that all the MBS that the Fed has bought have only been acquired because they were guaranteed by the US government and that the Fed has no intention on making losses on those securities and it will force the US government to make the guaranty explicit and reimburse any loss.
These actions are of course far less inflationary than outright money printing. The trillion dollars worth of MBS that the Fed and Chinese have bought are now going to be transformed into debt that will sit on the Treasuries balance sheet and burden the US government and citizens since the Treasury will have to borrow to make the Fed and the Chinese whole.
So in one sense, we can guess that the Fed is twisting Geithner's arm and forcing him into this action. We can also think that the trillion dollar of additional debt that might fall on the back of the US will further limit their ability to borrow and spend, which should lead into deflation until/unless the Fed decides to monetize the Treasury's debt.
I will listen to that interview one more time tonight, and so should you ;-)
Finally, here's John Hussman's very insightful take about the current market conditions:
At present, stocks are characterized by an overvalued, overbought, overbullish, rising yield profile that is generally coupled with poor average returns. Though the tendency is for the market to actually make marginal new highs for some amount of time following the emergence of these conditions, very steep and abrupt subsequent breaks are also the norm. Defensive positions in that sort of environment promise to be frustrating, because of that tendency for the market to creep to new highs, retreat a bit, and then press to marginally higher levels. Still, despite this tendency toward further marginal progress, the fog tends to be thick, and the cliff tends to be steep.