Final Post

This will be my final post on this blog, yes I could talk about the lessons I learned, about UBS, or more about Sales and Trading. But that really is boring stuff for me to talk about; after all in my view aside from learning about company specific things like culture, infrastructure and workflow, the life lessons really are the same across all internships. Hence I will attempt to explain the sharp drop in equity markets over the past 2 days instead. Hopefully you, the reader, finds that more interesting and applicable.

So the Fed came out on Tuesday and confirmed that they will be using principal payments from the mortagage backed securities they purchased during the crisis to reinvest in treasuries (recall basic bond math and all the articles in the financial press during fall of 2008 here). They further stated that the purpose of this is to keep their balance sheet at a constant size. In layman's terms this means the Fed will engage in a further, albeit much smaller, round of injecting cash into the financial system. This should be bullish for stocks right? Yes, it was on initial impressions, hence the short lived rally in equities post the immediate announcement. And then people started to realize the facts - the Fed is keeping its balance sheet constant, so going forward, aside from really small investments (around 150 billion), there will not be another stimulus or huge amounts of cash printed and pushed into the system. Furthermore, it was a policy announcement, not an operational one, i.e. no principal payments were reinvested.

The immediate result of this was the further tanking of the stock market and a sharp rally in the US dollar as the market came round.

Do note however, that the fact remains that the US economy is on tenterhooks, and the possibility of a double dip recession remains looming on the horizon. Implicit in the Fed's announcement and decision was the basis of a weak US economy, hence the need for a little nudge and reassurance. However the market plays out to this is anyone's guess, but unfortunately for the Fed, they remain cornered in a tight spot between a weakening economy and fiscal profligacy - not a good spot to be in.