What prompted these moves? I think it was the threat of QE-2. The
market was full of rumors that the Fed was going to initiate a $1
trillion POMO buy to re-grease the economic wheels. The talk was that
this very significant step could come as early as next week. This rumor
had legs. It was repeated by the TV talking heads and also by some
‘white spats’ boys from Wall Street. The following was the opening line
to an article written by Morgan Stanley early on Tuesday the 14th.
Let's start with policy and economic uncertainty – the Fed may open the door to QE2 at the September 21 FOMC meeting.
You can bet that if MS was writing this on Tuesday they were telling
their clients well before this was published. As that talk spread,
market players made bets. The bets were against the dollar and in favor
of anything that was not paper money (gold). The long end of the
Treasury curve suffered while the near end benefited. The market
conclusion: “We hate QE”.
But then came the most amazing thing. A reversal by Morgan Stanley on the timing of QE-2. I was floored by this retraction:
"we now believe the likelihood of additional easing being announced at the Sept FOMC meeting is quite low (perhaps 10% to 20%)."
This type of flip flop does not happen very often. One has to ask the
question, “Why?” For MS to turn on a dime like this means to me that
someone whispered in the ears of MS: “You have the story wrong, There
is no chance that we will introduce a major QE program in September.
November is the earliest that could happen.”
There is only one source that could convince MS that they had to reverse
their published position. It had to be the Fed doing the talking, In my
opinion the Fed must have been talking to more than just MS. I think
the Fed must have talked to most of the Street. As the concerns of an
imminent QE eased, so did the tensions in the market. Save for gold, all
of the early week “I’m afraid of QE” trades were reversed.
You could argue that I am reading too much into the MS flip-flop. I did
not come to the conclusion re MS right away. My initial thought was that
it was just laughable. Not nefarious. But then there was an article
by Neil Irwin at the Washington Post. This article first appeared on
Wednesday the 15th. This means that it was written based on information
received on Tuesday (the same day as the MS flip-flop). This article was
clearly written with input from Fed officials. Consider some of the
phrases used in the article:
Fed analysts are exploring whether new bond purchases can do much to lower interest rates.
Fed officials are also looking for unintended consequences of new measures.
Top Fed officials will be preparing formal forecasts for the economy over the coming years in advance of their meeting Nov. 2 and 3.
Fed officials are also weighing whether lower rates would spur business investment.
Economists at the central bank are undertaking a new round of analysis on the likely impact of such moves.
The WaPo does not say things like this unless they have in fact gotten
some clarity from Fed officials on what is the thinking and what is the
timing. The paper ran an important article with no attribution for the
quotes from “Fed officials” and "Top Fed Officials" (Bernanke is the
only Top Official). They describe what "Fed Economists" and "Fed
Analysts" are currently doing. Irwin has no idea what the Fed
economists and analysts are currently working on. And I assure you that
those economists and analysts do not speak with the press unless they
are specifically told who to talk to and what to say.
The critical conclusion that one gets from the WaPo article is that nothing will happen at next week's Fed meeting.
No action is likely at the policy meeting scheduled for Tuesday.
The use of the word “likely” is just press talk. The actual words from the Fed “Officials” to Irwin were probably:
“As of today it is 95% sure we are not doing anything on QE next
week. Please get that message out. The market thinks we are rushing into
things too fast. We want to use the WaPo to change this thinking. We
don’t want the markets to get ahead of us on this. It has having
negative consequences in the markets and we are taking flack from the
Japanese and Swiss CBs”
If you believe in my interpretation of these facts then you have to draw some troubling (and dangerous) conclusions.
(I) The Fed is using the press to shape public perception on what and when it will do things.
(II) The Fed is providing guidance to major Wall Street firms so
they too can spread the message that the Fed wants. In the process they
give those same firms a significant trading edge.
(III) The Fed was made acutely aware of the market’s
dissatisfaction of a new major round of QE. They responded with sub rosa
“Official Guidance” to redirect the market. This is intervention. It
uses words not cash. But the result (this time) is the same.
In my opinion the Fed has provided information to the press on numerous
occasions this year. Articles from the WSJ, NYTs and the FT have all
contained information that had to have come from Bernanke’s lips. But
there was never a confirmation that he was the actual source. It was
always “Senior Fed Officials”. Editors of these big papers do not run
stories like this without first confirming that the quotes are solid.
They were solid. They were whispers from Ben.
I am troubled by the Fed’s attempts to use the media like this. If the
Fed has anything to say they should make it public. If they want to talk
to the media they should do it for attribution. Hints and
disinformation are no way to run an open monetary policy.
I am quite comfortable about my assertion that the Fed is using the
media. I am not alone in that observation. I am less confident regarding
my conclusion that MS got a call from someone and as a result they
quickly published a clarifying comment that reversed their opinion
publish only hours before. To me, that would be more than just
disinformation. That would be inside information that was very
trade-able. The markets backed and filled for the rest of the week. The
talk of an imminent QE died as of Tuesday. Big money was made in the
process.
Tyler Durden at Zero Hedge got me thinking on this. He wrote about the MS flip-flop on Tuesday. From the article:
False Alarm: Morgan Stanley Recants From Its Expectation Of A QE2 Event In One Week
Today's peculiar stock trading action was exclusively due to Morgan
Stanley's previously highlighted expectation that the Fed would announce
QE 2 in one week.
The Fed talk is moving the bond, stock currency and gold markets. I
would say that it worked rather well this time. But it is a losing
strategy. To me it shows a weak hand.
The market showed Bernanke and Co. that it does not like the prospect of
QE-2. That does not mean it will not happen. It means that when it does
happen in November (conveniently one day after key elections) the
markets will react accordingly. We are not done with the weak dollar,
strong gold, scared 30-year and generally “risk off” markets. Ben just
hid them in the closet for a few more weeks.
When some pimp swallow all like Lindsay Graham suddenly shows up in Alberta where all the oil is located for the next 10 yrs for US consumption what does that tell the bitchzs?
Black lipstick fuckers!
Excuse me, I meant white face black lips........imagine, as Walt Disney used to say.
Bruce - you are dead on. I'll take it one more step and suggest that MS was used, either with or without their knowledge (the latter extremely unlikely) to get out the story that QE2 was coming soon, the cover story being to test the market reaction, but in reality it was "naval task force training exercises" to test the resolve of other CBs, as in "play ball with us, or you will suffer the consequences". When the Japanese and Swiss CBs cried uncle, it was retracted. I don't think the remaining market reaction was unexpected at all - I think it was tactical vis a vis other central banks. It's pretty clear that lower interest rates will accomplish nothing, and what will - wiping out bad debt and policies to encourage actual growth, the next driver (s) of the American economy - is still a pipe dream.
Who knows if the FED has not intentionally used the MS rumor to reverse engineer an expectation of QE?
The FED has been engaged in intervention 2x a week through POMO not to mention a series of other interventions if just over the past several weeks from the Aug 31 retrace off the lows around Dow 10,000 - POMO is slated to continue so what has changed except that market perception of what is expected from the FOMC meeting Tuesday looks to have been successfully manipulated; advantage FED.
As David Rosenberg put it, " Do not think for a moment that the US dollar is not viewed as a policy lever." And, Rosenberg wrote that last Sept 2009, but referenced the upcoming mid terms of 2010.
See pg 15-18
http://www.zerohedge.com/article/david-rosenbergs-special-report
To underscore the point; RBA's Stevens - economy likely to grow above trend in 2011 - inflation unlikely to fall much further.
Just for the record and to be honest; long Nov WTI Oil at $75.30.......Tapis riding at $5 premium, and for the sake of George Washinton that is not including the cost subsidized at the expense of the environment.
This video is just HILARIOUS.
http://www.presstv.ir/program/142939.html
Oh, one other point, when Bruce says 'the markets didn't like it', he means the FX markets, the equity markets did, and they will be very unhappy at having 6 more weeks of uncertainty.
October Crash on it's way (check Ireland, being hung out to dry by the ECB next week).
Here is another view worth reading....
The Fed cannot do QE2 until there is a crisis. There will be one in the next 6 weeks, it has to have good cause. QE2 is ONLY to benefit it's shreholders, the big banks.
The dollar wil strengthen up to early November, risk will be off, markets will plunge. he will talk doom and gloom next week to spook the world.
Just read this...
http://wealthadviseruk.blogspot.com/2010/09/connecting-dots.html
perhaps my opinion is due to my lack of knowledge...but this is simple
The fed will print because it has no choice.
Not printing would allow the consumption of banks and they are protecting the banks. Thing is they cant win, but wont keep them from trying. Gold going up shows they already are passing out the confetti.
The FED has lost the de-leverage battle, but it was not the focus. Saving the member banks from bankruptcy was. The FED cares little about the economy or its mandates. Relatively speaking, it cares more about equities. Very strange, considering sound economic fundamentals are the foundation of household wealth creation, and the reason for investment potential in equities.
----------
To me what is important is to gauge the overall T buy percentage (through what ever pipe) and see how this grows with conversion of MBS and regular POMO churn. The overall participation percentage is what ultimately will be watched. Further QE to buy more Ts is not to lower rates. It is to fund government. The FED is, and will be expanding, it monetization of US sovereign debt, and it would like to cloak these transactions as much as posible from the politicians. Long term holders of US debt probably are already aware of the FEDs role to play in monetization, and are hoping to recoup some value.
----------
Something has occurred over the past 4 months that has convinced the FED that the de-leverage battle is over. It is no longer promoting fiscal restraint. The decision has been made that the US sovereign bond holders will now require sacrifice. The bonds will be devalued through monetization of debt. The decision has been made, the bond holders will pay.
----------
So where are we? At what point will the US Sovereign bond market collapse? What percentage of overall FED auction participation will be the trigger? 35%? 40%?
As I have said before, what we could see is a very strange non-market dynamic. The FED will put policies in place to control rates as it monetizes the debt. This would be the objective of QE2. The FED is and will continue to monetize the debt until the currency is so debased as to align funding of government (including interest payments) with the limited real worth capacity (labor).
----------
What would be very interesting is for the FED to announce QE2, perhaps $1T long term T purchase to help the economy. But, the question would be asked, how this would help? If we consider that the goal may be a prop to equities, is this debasement really effective. Is it worth the price?
----------
We talk about job creation, but at the same time acknowledge that the trade deficit is what really finances external T buys.
You cannot base national economic success on political ignorance/corruption and FED greed. National outsourcing is not long term investment.
The truth is our economy is fundamentally weak. The people have been obligated, and the price, I fear, will be freedom.
Mark Beck
Great work Bruce. You've really been publishing some original and insightful work in the last few months. I had a similar thought when Tyler posted MS's retraction, but didn't really think to try to evaluate it, I guess because I'm not much of a trader. I just want to make sure I'm in Paraguay with all my assets converted over to gold, and agricultural and medical supplies when the market figures out Bernanke's been lying and stalling for more time all along, so any respite I can get betwen now and the day the earth stands still is fine with me.
Your analysis is well thought out, but I went back and looked at both comments, the orignal and the retraction, just to get a sense of what might be going on.
You'd think that something like calling the timing of QE II is a pretty significant, maybe one of the more significant judgements that MS is going to make this quarter, at least. And they get it wrong and have to call for a do over?
I think all the other conclusions you've drawn concerning the Fed's recent actions, based on deducing it's conduct in this instance, are justified as well, though I'm not especially surprised, nor troubled my any of them. I suspect that they lost count of how many statutes they're violating several months ago, but then, who in Washington has time to keep up with details of that sort these days? What does concern me is the apparently increasing tendency at the Fed, at the banks, and in the Congress to dispense with the caution that would normally have been observed in order to obscure this behavior from the public in the past.
It's as if Ben's getting desperate, or maybe he figures he's going to be getting a promotion sometime soon, from Fed Chairman to something more imperious sounding, like maybe Commander of Resources and Labor. Either way, his concern for at least the appearance of propriety seems to be slipping.
To quote Marla, "there is no animal as dangerous as a politician up for election" or sompin to that effect. We are now in an election environment with huge stakes. There is a perception of deception. Or has the cancer of deception destructed rational perception. The point is that when the leaders no longer have any believability, they can no longer lead, they can only push. Then, the cohesiveness of the society is endangered. It may seem to some that the financial markets are manipulated and dishonest. The Tea Party movement appears to reflect distrust of the Government. I suspect that the less bright may trust the general media, but how much? The looming problem could be the realization by the public that the banking system is corrupt and not the place to deposit your money. I guess the banks could close the doors and trade all day and not be bothered with customers who totally retardedly ask for loans. The moral to the story is that there are no morals and trust is harder to gain than destroy. Kinda like an economy or a glass vase. I guess Im gonna vote for change.
Well, given the comments and posts about Pimco and Mr Gross by TD et al over the last few days, it does seem more likely that the Fed WON'T QE2 in the next week or two unless it has to.
Mind, who really knows what desperate people in (their) desperate times, will do?
My own feeling is that the Fed will continue to intimate that it WILL QE2 and not do so if the (stock) markets hold up - only if the (stock) market falls will it then do so. No reason to do so if the markets are holding up (Dow above 10,000 and S&P above 1040).
DavidC
QE 1.5, the reinvestment of MBS paydowns (yeah, right) is sufficient for now as a continuous "pump" to the equities markets, with the willing (or is it required?) assistance of the TBTFs. This "recycling" of prior QE is an attempt to get around the problems that come if anyone thinks the Fed is going to do "limitless" QE. They'll get one more chance with QE2, but the road is will be rocky as UST holders understand that QE2, once it fails, augurs QE3, 4 5 and so on, which is limitless QE. The Fed must somehow convey discipline in its use of QE, even as it realizes it is the only real tool in its toolbox.
Watch the Fed came out next week and announce qe2.
Now that would be interesting.
The FED wants to keep rates low for as long as possible.
Solution let everyone in America refinance their home loan for 1.5%. No qualification. If you have a loan you can refinance the balance for 1.5%. But, this would hurt the Banks, so they will not do it. Yet, they will give Banks 1%/ If every homeowner could refinance for 1.5% they would have plenty of Money to spend to improve the economy.
By the same token, you could have used the $23 some odd trillion in bailouts and guarantees to retire virtually every mortgage in the US, purging the banks balance sheets while creating a HUGE windfall for the homeowners at the same time.
That would have been the answer to the push the consumers back out into the malls again.
Alas the, "can't have something for nothing" ethos applies to Main St. but not Wall St.
Within a decade all those homes would have been fully leveraged up and we'd be back where we started, but hey, this is can kicking, not problem solving!
I totally disagree. There's no reason to think anyone from the Fed had to say anything here. The MS analysts' clueless prediction embarrassed their bosses who forced them to recant, end of story.
Didn't the FED say that one of their tools was "conversation"? Yes, they are trying to get everyone to front run them and then they do nothing. Just the hint of Quanative Easing has everyone buying everything in the Market. Yet, I fail to see how the FED encouraging higher Oil, Gold, Silver, Copper, Stock Market helps the Middle Class. Or, how it achieves their Mandate of maintaining Jobs.
always more manipulation, even when it's unaffordable.
http://covert2.wordpress.com/
Imagine the greatest economists, scholars, most learned in history (Bernanke) ivy league/GS grads floating trial baloons.
"hey guys, what do ya think?"
Sounds like this trial balloon went over like a lead zeppelin.
Shouldn't this kind of stuff be illegal?
Great post Bruce.
I sense a great disturbance in the force, as if dozens of central bankers suddenly cried out in terror, and were suddenly silenced.
i dont get why it would be "announced" when its being done all along.
The burglar came into the house, stole everything but the TV.
Finally done carrying things out to the truck he reenters the house for a final once over and announces he is taking the TV.
Gold, the ultimate wealth preservation vehicle for the contrarian. The truth will be derived by following this indicator.
KEYNESIAN PUPPET
http://williambanzai7.blogspot.com/2010/09/keynesian-puppet.html
BEN'S BUNKER
http://williambanzai7.blogspot.com/2010/09/federal-reserve-bank-remote-c...
Wow, great post Bruce! You are an accomplished Kremlinologist. It's a pity Kremlinology is necessary. I guess we're more soviet than we like to think.
And... the U.S. media is run by ex Tass operatives . US journalists " cheerleaders" are good students.
Thanks again Bruce for your valuable contributions.
In my opinion, the only thing that's holding back Uncle Ben for announcing QE2 (at least formally) is gold. Their power to knock the price down has diminished greatly. You can see how quickly the price jumps back up right after every JPM raid. And the other problem they have with knocking it down is that people are buying the dips and demanding physical. They don't have it, Bruce, the COMEX warehouse is virtually empty.
Just my opinion.....
Politically impossible to do this before the election.
Difficult during the lame duck session.
Won't happen when the chairs on the Titanic re-arrange in January.
No QE2, and no Geithner, with the well dry all the fed front runners <pimco> will have a bad 2011.
"Fed analysts are exploring whether new bond purchases can do much to lower interest rates."
Ha ha ha ha ha ha! This is THE most pathetic thing I've read yet. Are they really this clueless? That it's about 'rates'?
Gawd, just start giving out 7X-income Option-ARMs to anyone with a pulse, drop 'em into Fannie Mae's already enormous cess-pool, and get on with it already.
I agree. People who are arguing the "rates thesis" just don't get it in my opinion. This crisis we are having has nothing to do with rates, people are just flat out broke. There is way too much debt in the world that has to be written down before we can start the next secular expansion.
We are fighting a debt crisis by creating more debt. Does that make any sense? I dont have a PhD in Economics, but that just doesn't seem like the solution.
There are massive global imbalances that have to be fixed. (aka China) As some point we will have to confront them, wheather they agree or not is a story for itself, but anyone who spews the "China will save the world" thesis is doing the world a disservice. How does anyone trust any numbers coming out of China anyways (we dont trust are own governments #'s) is beyond me, but oh well.
We are in for a very tough economic times ahead, the whole world, how low we go in the markets is anyone's guess. But anyone talking about a new bull market is full of BULL in my humble opionion.
Sorry Deep, no PhD in economics, your opinion counts for naught. Common sense? Forget it.
My Mother, who left school at 14, who brought up a family of five (three intelligent, thinking children) on my Father's (one) income, who knows more about balancing income and expenditure than all these Harvard and Yale economists put together, knows nothing because she and my Father don't have a PhD in economics between them.
Hmm, spot a sense of anger there? Not with you!
DavidC
Great analysis Bruce -- very disturbing the Fed is performing "dry runs" on its policies by rumoring through the media to measure the response. Agreed, it shows they have a weak hand.
Why is doing a dry run in the media such a bad thing? And is it necessarily new? The policy card tip to the media is an old institution.
Nice illustration of Russell's paradox. Set theory, bitchez.
It is certainly nothing new. It used to be labled "running it up the flagpole to see how it flies"...
Nothing new under the sun...Solomon
I would welcome a pullback in PMs. More buying opportunity.
As an interesting aside... I don't believe that the central banks want PMs to decline too much because the result would be like throwing a dead cow into a river full of Pirhinnas...and, the CBs do not want to part with their gold/silver now that the future of their fiat is an iffy affair.
The "dry run" on the media shows a few things:
This is very concerning, since we *already* have massive lack-of-trust in the market, and this will make it worse, and it implies desperation (i.e., increasing future volatility).
No, using rumors is not new for the last couple years, but it is increasing: The Fed *used* to fiddle with rates and programs to shift money/sectors/risk. Now it can't even do that: Those things didn't work (and they work decreasingly well, creating the *opposite* desired effect of the stated goal). So, while the Fed *used* to do stuff, now it increasingly looks like a toothless lion with a nuclear detonator. (Again -- think Japan's Central Bank. They are screwed and everybody knows it.)
Further, the Fed's use of rumors really *is* new. In years past, markets and capital would move based on some kind of market activity. It's only in the last couple years that *nobody* will do *anything* without the promise that they are actually front-running the Fed with permission, or at least have the Fed's blessing.
Now, it is truly a centrally planned economy: You'd better not do *anything* without FIRST getting the Treserve's blessing, or understanding the next Federal program announcement. The Fed's use of rumors is an acknowledgement of that paralysis. Using rumors simply means we are injecting *further noise* (not rationality, not reasoning, not substance) into the markets. Be Very Afraid.
+1 - very dead on post!
mikla, that was very clarifying for me. It's worth fighting through some of the dribble to find posts like this.
mikla,
Thanks for the thoughtful response.
I don't really disagree, but I would say that if the Fed is going to do something as insane as print another two trillion dollars, I would hope that they would float a trial ballon in the media!
So... so, how bad is the market gonna puke... huh... till the dry heaves crack ribs, huh... OK, maybe better hold off...
Awesome.
See also this historical perspective of political / monetary high stakes showdown from over fifty years ago:
http://www.richmondfed.org/publications/research/economic_quarterly/2001...
plus ça change, etc..
This isn't an epic paradox - Pinnochio's nose will grow only on the INTENT of his statement, which is where the lie, or not, lies.
Since we do not and cannot know the INTENT of his statement we CANNOT know whether it will grow or not. The only choice is not to join in.
Contrast this with the statements of the Fed - a whole different ball game, methinks.
DavidC
Great analysis Bruce. The gov't/Fed will continue to think they are the only way out of this mess they created. I still think they believe if only they can keep the balls in the air long enough everything will work out but the balls out of control and are bound to hit the floor and I think when one does they all will hit the floor.
Notice how there is no talk anymore about the "FED exit strategy" - because there is none.
Somewhere I saw a great quote (Santelli?) saying that economists are trying to convince you that your tax dollars can keep that anvil in the air indefinitely.
Go Roadrunner! Beat coyote!
I remember that clip. Here you go: http://www.cnbc.com/id/15840232?play=1&video=1564239366
It's all a lyers game at this point. Eventually everyone will get tired of it and just massive dump the dollar reserves and crash the system.
Only if the PTB have the fallback plan and reversion to absolute control perpared and ready to go or if all players that matter in our markets have large personal stashes of PM's. Otherwise everyone will fight to remain within this system.
Erin "The Coug" Burnett would not approve.
Anal ize it. Good work Bruce . Thank you.