Make-A-Wish Foundation Rings Opening Bell, Tanks Stocks. Seismic Collapse in Bond Market Yields Benefits Non-Profits Everywhere. Quantitative Easing!

The Make-A-Wish foundation destroyed the stock market today. Charity is even more out of style than clowns and Kiss.

This is ironic because a properly run foundation should have the majority of their investments in bonds. Well lets hope they do because the entire yield curve collapsed to below the rates where the Treasury has ever issued bonds. Assuming Make-A-Wish is properly run, they racked up massive gains today as the collapse in Treasury rates make their bond holdings extremely profitable.

As the market moves to price in quantitative easing, banks are aggressively hedging their exposure to the bond swap market, in which they have guaranteed long term rates for borrowers. This has kept swap rates below the bonds they're linked to... previously considered to be a mathematical impossibility. This is because banks normally charge a premium over the market rate on bonds to compensate them for the long term risk they're taking on.

Let's review the Bernanke playbook for conducting monetary policy in a zero Federal Funds rate environment which we spoke about a week and a half ago.

1) Take the Federal Funds rate to zero. Check.

2) Lower the rates on long term (5-30 year) bonds, by either promising to keep short term rates low for a number of years or commit to make unlimited purchases of long term bonds until their interest rate falls. Check.

3) Push down interest rates on private securities by buying them as well. Check for Commercial Paper (short term debt) Not much impact on long term corporate bonds, unfortunately.

4) Intervene in the Foreign Exchange market to weaken the dollar and raise the price of imports. No action yet.

5) Coordinated easing of both monetary and fiscal policy, for example tax cuts financed by issuing money so there is no increase in government debt. Check, sort of.

So it appears the majority of their gunpowder remains only in Foreign Exchange intervention. This is an extremely politically sensitive measure and is unlikely to be implemented except as a last resort.

But what is truly shocking about this whole thing is that the Fed has not come out to announce these courses of action. Very strange for a Fed that prides themselves on transparency.

The Fear Gauge

Today was the most fearful day in the markets that probably anyone living can recall. Gold surged 11%. Banks essentially stopped loaning money to each other. At one point banks were so scared that they were willing to invest in 3 month U.S. government debt (which they can use as collateral in case of disaster) for 0.03%, essentially for free. This was the lowest rate anyone has seen since the Second World War. The Vix, a measure of the amount of volatility traders expect over the next thirty days, reached its highest point since the crisis began last July. Since its inception it has only been this high twice, once during Russia's default on its debt in 1998 which caused the largest hedge fund collapse up until that time, and once during 2002. At its current level the Vix indicates that the S&P 500 will move up or down by 10.4% over the next 30 days. My personal feeling is that this is either the end of things as we know it or the worst its gonna get, staring into the precipice wise. Since I've been expecting Armageddon for since 2006 the fact that it hasn't happened yet is encouraging. Also despite the extreme stress in almost all markets, the Japanese yen which has typically surged during times of crisis has remained steady over the past 2 days. Finally, for the past 14 months it has been profitable to bet on volatility declining every time the Vix has broken 30 on an intra-day basis. I believe it is extremely unlikely that the Vix will break 40. That said, I have no idea what other policy initiatives the central banks of the world will pull out of their pockets. They can't just make bad loans good, and despite the massive injections of liquidity into the markets, there is no way that temporary liquidity can solve credit problems. Oh and by the way, the Federal Reserve has run out of money and has asked the Treasury to begin borrowing money on its behalf so that it can continue to function