What Happened to the Fed Exit Strategy?

If you’re not a subscriber of Minyanville's Buzz & Banter, let me tell you why you’re missing out.

Yesterday, Mr. Bernanke and friends basically threw the exit strategy out the window when the FOMC said it was going to reinvest maturing paper into longer-term Treasuries. It wasn’t really a surprise as the topic was well-covered on the Buzz. We also posted it here for the public to see.

But then it hit me when I saw that the NY Fed trading desk was going to manage what, according to Bloomberg, is going to be $15 to $20 billion a month in maturing agency bonds. That seems like a lot of work, doesn’t it?

Well, here’s what Professor Lance Lewis wrote on the Buzz on August 12, 2009, almost exactly a year ago today:

It’s no secret that I don’t believe the Fed will ever be “exiting” and shrinking its balance sheet back to pre-2008 levels, because it’s impossible to do so without collapsing the financial system. Massive inflation was required in order to support the system, and the Fed provided it. The Fed can no more take back this inflation than a heart transplant surgeon can take back a heart that he has given to a patient once he seems to feel better post-op.

But don’t take my word for it. Look again to what the Fed is DOING, not what it is SAYING. For example, why is it that the NY Fed is aggressively hiring new employees and looking to nearly double its staff levels in order to manage all of the assets that it has been monetizing if it is about to imminently “exit”? Hmmmmmmm?

This is just one of the many impressive calls by Lance, one of our most valuable contributors on the Buzz.

But back to the story of the Fed. What does this mean for you? It means inflation is headed our way. The Fed’s actions are obviously bullish for the precious metals and this morning’s stall could be a gift.

However, for some odd reason, sentiment in Gold (GLD) is terrible. People just tend to hate the yellow metal, a good thing for this contrarian investor. So for those that refuse to invest in this sector, even agriculture-related plays like Monsanto (MON) and Agrium (AGU) could see some real upside in the coming weeks even after the move they’ve already had.