The Complete Cost-Benefit Analysis Of QE2, And How To Best Hedge For Federal Reserve "Fat Tail" Risks

Tyler Durden's picture

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Mercury's picture

Our economics team believes that QE2 will come in the form of purchases of Treasury securities of $500bn - $750bn every six months until the economy reaccelerates.

Don't hold your breath...

kaiserhoff's picture

And when the fed owns 500% of the outstanding treasuries (through repo agreements and other creative accounting), then what?

egdeh orez's picture

So how does a retail investor buy puts on HSI?

kaiserhoff's picture

Not something I have done, but any of the full service brokers could do the trade for you.  The trouble with trading options in a retail account is two fold.  You have to find a broker who understands options and a competent margin desk, especially if you are doing spreads.

                                                      Happy Trails

B9K9's picture

I'm going to take a page from Johnny Bravo and declare that I will eat one US dollar if QE is implemented to any meaningful degree before the 112th Congress is seated in Jan 2011.

We are nearing a critical inflection point; Bernanke knows the cause is lost, yet he is still hoping for some kind of miracle. What he will not do, nor would anyone conditioned by a corresponding level of power & authority, is to make a unilateral move of this magnitude without sufficient cover.

It really is all over - people need to finally accept this and begin to prepare for what happens next. The initial bail-outs were designed to facilitate the transition from MBS to Treasuries and (excess) reserves for certain favored parties. Subsequent dollar destruction (hyper-inflation) serves absolutely no purpose to further these objectives. IOW, the power-elite think they are safe as long as the dollar survives.

(I grant small-scale QE served to pump equity prices, but that was a last ditch attempt to trigger animal spirits and reinvigorate organic credit growth. Who amongst the elite actually have their primary wealth remaining in these instruments? Could anyone get out at any significant volume? Of course not.)

So, we have a very natural human instinct not to make any rash/risky moves, especially without adequate support in a period of imminent, and potentially massive, political change, combined with the fact that the most powerful groups in the world are safely ensconced in their investment vehicle of choice. (With gold as added insurance.)

Now tell me again what Bernanke is going to do? QE you say? LOL - we topped and it's all downhill from here on out as the ride accelerates down the deflationary slope. As the next Congress of idiots are going to find out, hyper-inflation will come not from printing, but from the realization that the US is completely insolvent & the debt(s) can never (and will never) be paid. So they will have to start bailing and quick - the list below provides a brief synopsis of the repudiation order that will be coming next:

  • Unfunded mandates
  • Unsustainable entitlements
  • Un-payable debt

Now, what it's gonna be like in this kind of environment? Sure you still want to be around?

Shameful's picture

I fail to see why the dollar being saved would benefit them at this juncture.  Seems to me that a wave of outright purchases with freshly printed dollars would help them just fine, a glorious round of looting before the bomb goes off.  The dollar is doomed anyway as is the US, the math does not lie.  Why would they not steal the march on that fact?  Now an argument can be made that they would lose their fiat money monopoly, but that is unlikely.  What is more likely is that another faith based currency would step up in it's place, either emanating from the smoking wreck of the US or the IMF, or using an existing one.

Though I can see not announcing it.  Printed money spends like real money the first time.  There is little to prevent them from loading up on real assets with printed money at this point.


kaiserhoff's picture

Printed money spends like real money the first time...little to prevent them from loading up on real assets...

Wonderfully said, except that all assets turn to steaming wookie doo in government hands.

PS  No offence meant to our esteemed colleague, of similar nomenclature.

Kayman's picture

Printed money spends like real money the first time.  There is little to prevent them from loading up on real assets with printed money at this point.


Shameful - am I in a time warp?  Isn't that what the crooks have been doing for 2 years ??


Shameful's picture

2 years?  My number was about 97.  They have been using the monetary system to get real things without working for them for almost a century, why stop now?  I only point out that now that the big collapse is on us they will redouble their efforts to rob us.

Seer's picture

"Seems to me that a wave of outright purchases with freshly printed dollars would help them just fine, a glorious round of looting before the bomb goes off."

I'm not sure if you think that or whether you think that They think that...

As I've stated in the past, what the hell are they going to do with all the game pieces when no one else is going to play the game?  You want fucking maintenance headache McMansions, gas guzzling SUVs, big screen TVs that air nothing but shit, worthless dollars?  There's no future in any of this crap!  And this, friends, is exactly what's playing out, all the shit is being dumped.  But... NO ONE knows how to proceed in the future, because, well, because everyone played as though the game would go on forever- TPTB, those that tell us that they are "guiding" us, have been, like the folks at the SEC, asleep at the wheel (watching porn).

Slowly, everyone will turn away from this collapsing hulk we call an "economy."

Shameful's picture

Bull, assets are assets.  And when they are effectively free who cares about upkeep if that is free to, and if it's not let them rot, or sell them back as scrap.  But you also miss what I mean by assets.  Land is always nice, or buying up companies.  Sure you might not put your hard earned money into them but when they are free would you turn down 50k shares of say Microsoft or Apple?  I doubt they are buying up lots of SUVs, but they could.  Why not it's FREE.

The game is radically different when one party basically gets free money.  Unless everyone decides to do without material things and we all ascend to become being of pure spirit and energy then I'm pretty sure free assets are a good deal for the person getting them.

minus dog's picture

"imminent, and potentially massive, political change"

Is this sort of like a sky-diver talking about "imminent ground-human juxtaposition attempts" or what?  

Governments, particularly local and city, are hooked on spending just like everyone else.  They can't screw everyone, but that doesn't help the first victims when they decide to try.

DoctoRx's picture

Perhaps BB not hoping for a miracle, just doing what the Street wants; which is more business, meaning more debt to buy/sell/bundle etc.; and even more to the core point, doing what Timmay demands, which is buyers for the unending debt he has to sell.  What the abstraction called "the economy" does from quarter to quarter may be of little fundamental importance to what his role really is. 

masterinchancery's picture

In other words, until the year 2050 or the year in which starving hordes sack DC, whichever comes first.

Hansel's picture

I read that to mean we are going to monetize the deficit in perpetuity.

carbonmutant's picture

Time to start sacrificing small animals...

Rusty Shorts's picture

Tragedy of the Commons

Sqworl's picture

Even the Devil hates fixed games!

Shameful's picture

So I'm reading "Our team believes the Fed will buy 500bn - 750bn in Treasuries every six months until the full recognition of a currency crisis".

On the plus side to our elected criminals it means that they don't need to worry about funding.  Zimbabwe Ben stands ready, willing, and able to make all the funny money they can spend.

Hansel's picture

Exactly.  How would this plan be any different from what Reichsbank did?

Mercury's picture

The cheapest crash hedges remain in Asian equities and FX such as AUD.

Be interesting to see the positions in chart 14 expressed in terms of their recent corelation to the S&P 500 too.

MsCreant's picture

The link to the video is sick assed stuff listened to in this context. 

Ben- A bankster's tribute.

Ben, the two of us need look no more 
We both found what we were looking for 
With a friend to call my own 
I'll never be alone 
And you, my friend, will see 
You've got a friend in me 
(you've got a friend in me) 

Ben, you're always running here and there 
You feel you're not wanted anywhere 
If you ever look behind 
And don't like what you find 
There's one thing you should know 
You've got a place to go 
(you've got a place to go) 

I used to say "I" and "me" 
Now it's "us", now it's "we" 
I used to say "I" and "me" 
Now it's "us", now it's "we" 
Ben, most people would turn you away 
I don't listen to a word they say 
They don't see you as I do 
I wish they would try to 
I'm sure they'd think again 
If they had a friend like Ben 
(a friend) Like Ben 
(like Ben) Like Ben 

For the record, Ben is a RAT. No doubt with a FAT TAIL.

Miss Expectations's picture

That was the karaoke version...who's drunk enough to step up to the mike?


DonutBoy's picture

It surprises me that BofA would publish this.  They are parties to the fraud, yet they have the honesty to call it what it is.  The implicit assumption in their projection is that so few people will read and understand it that the shell game can continue.  We are in the Wiley Coyote runs off the cliff scenario, we're OK until we look down.

sweet ebony diamond's picture

The Wile E. Coyote metaphor is priceless.

Ben is just not smart enough.

davidsmith's picture

"this is not a good thing because it may invite greater risks in the future"


I wish people would stop peddling this myth.  This is not monetization, it is liquidation.  This is not risk, it is the decline of economic activity.

masterinchancery's picture

Wrong; when one govt entity buys the bonds of another with money created out of thin air, it is by definition monetization.

Kayman's picture


Think you missed young David's point.

kaiserhoff's picture

Is this or is this not a sea change?  This stuff makes my head hurt, and I am agnostic at best about macro-econ, but I don't see any inflation coming out of this, in spite of Ben's wet dream.

He would love to give cash to anyone who will spend it, but Europe is on an austerity kick.  He won't get much help from Merkel, et al. 

He would love to give a new cadillac to anyone who votes for Obama, but a new congress will queer that deal.

If the money is borrowed, even at zero rates, that isn't the same as spent, at least it wasn't in the seventies.  Rates will stay lower than a snake's navel in a wagon rut, but if the fed owns the treasuries, they are not available for reserves elsewhere.  I'm betting there will be no massive bailout for the states, because there would be hell to pay, but that's a wild card.  So too are commodities.

Commodities look inflationary, probably a chimera.  Remember $145.00 oil?  Commodity games bring swift penalties.  Some damn fool ends up with $100 per bushel wheat.  Then the lesson is learned for six months.

I keep coming back to the same point.  Ben is in fail mode because he can stuff money into assets, but he can't effect spending.  That only looks worse going forward, meaning less stability, and probably, more deflation.  What am I missing? 


Dismal Scientist's picture

The biflation idea remains the most likely to continue for now. Inflation in things you need (food, energy etc), deflation in things you own (especially if bought with leverage). The US will have to go for the austerity route now to have any hope at all, and we know that it is a) too late for that anyway and b) impossible politically for a sitting Democrat president advised by rabid Keynesian money printers.


kaiserhoff's picture

Well said, and of course, dropping wages unless you work for the government, and bad joke interest on savings.  This site is often criticized for being too negative.  As compared to what?  A complete reset due to depression or hyper-inflation looks better than this slow bleed out of all things decent and productive.

gwar5's picture

Yep. Biflation -- I like that one. Is that different than stagflation? I look at other countries that have gone through such things. Essential imports like oil skyrocket while local and domestic items don't, but no one can pay for the local items after they fill up the car. The oil thing is going to kill us.

Seer's picture

"but no one can pay for the local items after they fill up the car."

Exactly!  This is the kind of thinking that's missing.  It's as I'd long ago said, the concern isn't peak oil, it's peak oil export: I only ever ran into ONE person out in publication land that understood this!

Further, add in a reversal of "economies of scale" and one can clearly see that this has nowhere to go but down.  Deflation tends to kill the rich (who are saddled with tons of expensive worthless crap), and there's no way that Ben can rescue them.  They all thought he would drop money, that this was guaranteed to correct things, but clearly not so...

No one bothered to ask the most important question: can this System operate with NO/Negative growth?  Because, clearly we could not (ever) have perpetual growth on a finite planet.

Conrad Murray's picture

Table 3 makes me want to dive further into my bottle of rum.  This is a sad, sick joke of a world we live in.

For anyone that didn't catch the big support Barry rally in D.C. this weekend, here is a video you must see:

Invisible Hand's picture

Those of us that risked our lives (small risk for me, not so small for others) to win the Cold War are proud and pleased to see how what the victory has led to. 

Anton LaVey's picture

True (and proud) socialists don't even support Obama anymore. That video was one the worst example of cherry-picking I have seen in a while...

gwar5's picture

70 democratic members of congress are members of the Socialist Party of America. This rally was also heartily attended by the Comunist Party of America, marxist pink ladies, amnesty for illegal communists, and every other crackpot group known to mankind. The Communist Party of America also advertised on Obama's "Organizing for America" website calling for people to show up as a sign of support and power.

Seer's picture

What?  No mention of the party of fascists?  The pro-slave group?

You party/ideological morons get so fucking tiring...

RockyRacoon's picture

They have to hate something and are easily swayed by the political games.

Easy to play but impossible to win.

Kayman's picture

Uh... scuze me Senior Trotsky, but  a fellow socialist has come to visit.... 

DonS's picture

In other words, this is precisely what Morgan Stanley's Jim Caron said on Fridaywhen he confirmed that in this market nothing else matters, except what side of the bed Ben Bernanke wakes up on: "Investment decisions across many asset classes today are tantamount to an educated guess on what the Fed decides to do regarding QE. 

What a sad state of affairs. Really. Their was a time when sector and stock analysis used to mean something; when stock pickers and analysts used to try to put all of their best ideas forward and pick the next winners. I remember alayzing balance sheets and cash flows and industry trends and the old green chart books which came out once a week, looking for the breakout stocks. That shit was fun and rewarding. Now, i just trade on 2 minute time intervals, having to think like a robot does to scalp 20 cents when I can 2x a day.

There was a time when people and market makers and specialists and investors and entrepreneur ment something. Where they contributed. Where the industry produced new people to get into the game and wanted to excel at it. To do good and the right thing. 

NYC was so great!

There was an article written in 2003 or 2004 in either Fortune or Money Magazine. It was fictional and it talked about the transparency that was to come in the market and how ultimately we all would get the same returns, how nothing was real, how no individual stocks and no individual companies would prosper on their own, and how it all moved together as one, up and down. How the market was static and fixed and how the original purpose of capitalism, of the markets, would be compromised. How individual stock picking would be and has been morphed into something unintended.

I wish someone could find this article and post it. I tried Google it and cant find it. It would be so timely today. There are no more markets and It is not even a casino, I dont know what it is.


Look at the floor today at the NYSE, its vacant. Its boring looking.

Seer's picture

Computers run the game now.  These people have been out of jobs for a long time now.  They too ar ebeing propped up by the System/TPTB to cheerlead for the System run by computers.  Hm... seems that we were warned about this a long time ago...

jm's picture

@ DonS... amen.


“Our economics team believes that QE2 will come in the form of purchases of Treasury securities of $500bn - $750bn every six months until the economy reaccelerates.”


Does it come down to this?  Providing opinions on what some team thinks some other team will do at some unknown point in the future?


“…recent IMF research suggests that while economies with significant negative output gaps tend to post similar percentage declines in inflation (disinflation), outright declines in prices (deflation) – such as experienced in Japan − are very rare due to stickiness of prices and wages”


Stickiness of wages? U6 = 16%.  And accelerating numbers of people dropping off welfare…  


“the probability of 'tail risks' is higher-than-normal and recommend multiple hedging solutions.”


People spend more time worrying about tail risks than trying to get the center (FAR more likely to occur) right.  If you are really going into stocks because of what someone thinks that someone else will do, the best thing is a stop-loss or a conservative VaR.  Why not just spend time pick a few names that can generate superior returns and buy the bond (if they have debt) AND the stock?


“Sell expensive tail protection, and exchange for cheap.” 

This is how you blow up, not how you hedge.  You are supposed to build a hedge book that generates some basis points, and then sell VIX just in case your hedge isn’t needed? Am I missing something here?

frankTHE COIN's picture

Once you're born a dog you cant die a cat. This bitch is gonna crash.

mynhair's picture

QE2 = capital flight = guaranteed 'double dip'.

gwar5's picture

Yep. Firsters left in 2008 with the new regime. We all live in a Latin Banana Repuublic now. I think the Fed foresaw this 2-3 years ago and was closing off access to foreign bank accounts per expectations

merehuman's picture

Dollar terminator, future killer tonite channel 7! 6 oclock watch burnankey fly

free toasters!   The end is near, save your ends!  Nothing makes sense, flow with it..ride the tsunamy   29.95 w/ coupon

TheGreatPonzi's picture

The cause is lost and the FED knows it since the beginning. I don't know what they're wanting right now. I don't think they hope for a miracle. Bernie may be dishonest, but he's not stupid.

Anton LaVey's picture

As Albert Einstein used to say: "There are only two things that are really infinite: the Universe and human stupidity. And I am not so sure about the Universe".

Food for thought. Make of that what you will.

RockyRacoon's picture

They are not quite looting the Treasury yet.  There is still a little life left in the old girl.