Fed Chair Powell’s Stunning Admission: “The Fed Has A Short Volatility Position”

Do you need any more proof the Fed is manipulating the financial markets? They know exactly what they’ve done and who has benefited.

 

For years, market watchers and Fed skeptics had warned that the record low volatility “blanket” that has fallen like a pall over the comatose market was the result of Fed actions, both direct or indirect. And while they mostly spoke metaphorically (although back in 2012 we observed a distinct shift in the VIX futs  when the current head of the Fed’s trading desk, Simon Potter, replaced Brian Sack), we now have explicit confirmation that the Fed’s “short vol” position appears to be rather literal.

This is what the next Fed Chair, Jerome Powell – who is scheduled to replace Janet Yellen next month – said during the October 23-24, 2012 FOMC meeting – just one month after the Fed announced QE3, as today’s just released 2012 FOMC transcripts revealed:

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I have concerns about more purchases. As others have pointed out, the dealer community is now assuming close to a $4 trillion balance sheet and purchases through the first quarter of 2014. I admit that is a much stronger reaction than I anticipated, and I am uncomfortable with it for a couple of reasons.

First, the question, why stop at $4 trillion? The market in most cases will cheer us for doing more. It will never be enough for the market. Our models will always tell us that we are helping the economy, and I will probably always feel that those benefits are overestimated. And we will be able to tell ourselves that market function is not impaired and that inflation expectations are under control. What is to stop us, other than much faster economic growth, which it is probably not in our power to produce?

And then the punchline:

[W]hen it is time for us to sell, or even to stop buying, the response could be quite strong; there is every reason to expect a strong response. So there are a couple of ways to look at it. It is about $1.2 trillion in sales; you take 60 months, you get about $20 billion a month. That is a very doable thing, it sounds like, in a market where the norm by the middle of next year is $80 billion a month. Another way to look at it, though, is that it’s not so much the sale, the duration; it’s also unloading our short volatility position.

Ah yes, unloading the Fed’s “short volatility position”. Maybe someone can ask Powell at the next FOMC press conference just where that stands today, and whether he is still as skeptical the Fed will succeed in unwinding its balance sheet, as he was in October 2012:

My third concern—and others have touched on it as well—is the problems of exiting from a near $4 trillion balance sheet. We’ve got a set of principles from June 2011 and have done some work since then, but it just seems to me that we seem to be way too confident that exit can be managed smoothly. Markets can be much more dynamic than we appear to think.

When you turn and say to the market, “I’ve got $1.2 trillion of these things,” it’s not just $20 billion a month— it’s the sight of the whole thing coming. And I think there is a pretty good chance that you could have quite a dynamic response in the market.

Fed’s VIX trading aside, here is perhaps the most fascinating part of Powell’s speech, one which contains some truly unprecedented – for a future Fed chairman – admissions:

I think we are actually at a point of encouraging risk-taking, and that should give us pause. Investors really do understand now that we will be there to prevent serious losses. It is not that it is easy for them to make money but that they have every incentive to take more risk, and they are doing so. Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road. You can almost say that that is our strategy.

Almost.

Source: Federal Reserve

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IndenturedServant

No worries. The fed is soon to become property of the US Treasury/US Citizens if it doesn’t just cease to exist entirely when the Treasury resumes its rightful Constitutional authority over our monetary system again. Might be late first term though as rescuing kids from satanic pedo cults and prosecuting the corrupt/treasonous actors is a higher priority right now.

Yeah, perhaps I’ve lost my mind but fuck it feels good!

ASIG
ASIG

IS
You might want to take a look at this, looks to fall in line with much you’ve been saying.

https://www.youtube.com/watch?v=wxDjZlTSuK4

nkit
nkit

ASIG, thanks for posting that. One can only hope and pray that this is all true. I’m fed up with evil winning all of the time. Let them all hang.

Truther
Truther

Very interesting what he said about us coins being a quarter dollar whereas a dollar is a federal reserve note, essentially debt, wonder if that is why hedge fund managers have being buying tens of millions of dollars worth of pallets of nickels? Also thenexec order in regards to voter fraud, seems those FEMA camps obummer built for god loving gun owning patriots will now be filled with snowflakes, democrats and illegal immigrants part of the voter fraud. What irony, we already have FEMA camps to hold all these bastards…..

TC
TC

You’re worse than Charlie Brown and the football. I admire your optimism though. Keep kicking, Charlie. 🙂

Neil Dunn
Neil Dunn

I am just happy that nothing illegal has happened so that no one needs to worry about possible jail time.

Andrea Iravani

The Swamp Creatures That Ate Over 2/3 of GDP:
The Swamp Creatures That Ate Over 2/3 of GDP

Anonymous
Anonymous

Don’t remember, but was Durden among those predicting a total collapse of the financial markets and economy if Trump was elected or among those predicting a boom in them?

Trader Jim
Trader Jim

While I am not a huge believer in conspiracy theories, I do believe in powerful people of similar interests working for a common (their common) good.
Many that trade the markets have seen the large volumes in TVIX, and other trading vehicles that are used to bet on volatility. The TVIX and various others used to be a result of the market action, however, because of the large concentration of trading in ETF’s, it has become the tail wagging the dog. Now the VIX ETF’s being shorted, can result in lower vol. I suspect the Fed has been participating in shorting the VIX for a while, then add in the “rumor” around the hedge funds of the fed doing this, and then those same funds betting with the fed, and now you have some serious money pushing this down.
This sets up for a colossal short squeeze at some point, but until then, it could last much longer…. Probably the best move is to keep a small bullish position, and then hedge against it with a long Vol position (smaller due to ETF price rot and fees). The VIX will jump much faster, on a percentage basis, and more quickly than the SPX will fall, so the trade is in your favor…much better than simply BTFD…

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