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The Fed Wants to Unleash a BIG QE 2 Program… But CAN It?
Last Friday
I wondered aloud if perhaps China and the US had struck a “backroom” deal
regarding their roles in the ongoing “currency wars.”
My primary
reason for wondering this stemmed from a dramatic change in Treasury Secretary
Tim Geithner’s rhetoric concerning the US Dollar, combined with China’s sudden
decision to raise interest rates.
After all,
the US had been branding China a currency manipulator and blaming it for the
former’s financial and economic woes for months. China, in turn, had responded
by lowering the rate of its purchases of Treasuries, charging that the US Fed
was damaging global balances and issuing veiled threats that it might consider
the “nuclear” option of actively dumping US debt.
In this
context, the sudden change in Geithner’s rhetoric, combined with China’s move
to raise interest rates, marks a MASSIVE change in monetary posturing. It is,
in a sense, a 180 on the US’s part combined with an “actions speak louder than
words” move on China’s part.
Seeing these
two developments, I couldn’t help but wonder if the world’s two super powers
(one on the decline, the other on the rise) had struck a “backroom” deal on
currency issues: the US to stop demonizing China while destroying its own
currency and China to make monetary gesture signifying it won’t continue to
“manipulate” its currency lower (yes I know the two currencies are pegged, but
China’s move is a gesture towards
strengthening the Yuan).
Of course,
this is mere conjecture... for now However, given how lopsided the “inflation
trade” is and given just how much this latest stock market rally has been
fueled by expectations of the US Federal Reserve announcing an enormous ($1
trillion+) QE 2 Program at its November 3 meeting, these developments could
have a MAJOR impact going forward.
Indeed, this
change in China/ US rhetoric provides a new, totally non-discounted backdrop to
the market’s expectations of a QE 2 program from the US Federal Reserve.
Everyone assumes the Fed WILL announce a massive program. But in light of these
recent developments, I wonder if it actually CAN.
Consider
that over the weekend the G20 meeting saw Germany, India, and China all
blasting US monetary policies for creating bubbles and damaging global trade
balances. We’re already seen hints of trade wars between China and the US with
rare earth elements. And we’ve also seen a currency war break out globally with
Brazil, Colombia, Peru, Russia, South Korea, Serbia, Romania, Switzerland, and
Thailand all actively intervening in the currency markets.
This last
point is key as it indicates foreign powers are more than willing to engage in
outright intervention in order to fight the Fed’s anti-Dollar policy (cheaper
Dollars means appreciation in foreign currencies, which in turn squeeze
exporting margins). In this context we have to seriously ask, CAN the Fed
really announce a MASSIVE QE 2 program?
After all, if the Fed DOES announce such a program, then we are undoubtedly
heading into outright trade wars, tariffs, and even MORE currency intervention.True,
Bernanke has ultimately got his sights set on destroying the US Dollar. But
with global tensions growing, he’s got to walk a fine line between saving Wall
Street and pissing off the US’s biggest creditor (and the only country that
still owns more US debt than the Fed).
However, if
the Fed DOESN’T announce ANY QE 2, then we are likely heading into a Crash for
stocks. Remember, the only thing that kept us above 1,000 on the S&P 500 in
July (and that caused stocks to rally from mid-August onward) was hints and
promises of more liquidity and hopes of more QE. If the market is disappointed
by NO QE 2 announcement, then we are wiping out the 12+% rally from September
in short order and likely heading to 1,000 on the S&P 500.
Obviously,
neither of these options is too appealing for the Fed. So it seems to me that
the most likely outcome is more “half measures” similar to the current QE lite
program which involves the Fed buying US debt WITHOUT (supposedly) printing
money to do it.
Thus, I expect that the Fed’s November 3
meeting will unveil something along these lines: a program that involves the
Fed buying more US debt in a way that doesn’t piss off the US’s creditor nations
or the US populace too much.
A good
example would be for the Fed to announce another $100-200 billion or so in debt
purchases (a decent amount but not nearly the HUGE amount the stock market
expects). The Fed could always sugar coat this disappointment with promises of
additional stimulus if needed so as to mitigate the damage to stocks.
My primary
point is this: the Fed WANTS to announce a large QE 2 program. But it might NOT
be able to do this without rocking the global monetary boat too much.
Consequently, we may be approaching a fantastic trading opportunity to the
downside after the Fed’s November 3 meeting. The market has already priced in a
massive QE 2 program. So any disappointment could result in a sharp reversal
and correction.
Good
Investing!
Graham
Summers
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"It's not just the international situation - depending on the form it takes any additional QE could be seen as a bailout of the banks." ----------- To paraphrase a quote from the movie Terminator: "He'll [Bernanke] bail them out! That's what he does! It's ALL he does! You can't stop him! ..."
The central Wankers are just a bunch of fat guys sitting around in a hot tub - yukking it up about who can let off the stinkiest one. They even have had the time to come up with "theories" on how their stinking up the joint has an effect on economies.
The BoE was jawboning more QE for weeks now and look what happened today........oooh, yeah, they were "surprised" by the better than expected 3rd Q. growth.....yeah, right!
The article is very well written, kudos Graham. Those who are expecting a major QE II announcement will be deeply disappointed.
I agree with the kudos, and that the article was well written. I'd also add that it was an excellent contribution.
Right Taraxis, Q/E2 has been a huge hype that has never actually been mentioned by Bernanke or Geithner or anyone else except the media! Notice that? Bernanke has only said theyre keeping interest rates low and standing by observing and 'ready to act if need be'...but never said 'Im going to print $5 trillion dollars and shower the banks and stocks with it! That was all media BS. So this 1,400 points on the DOW and everywhere else since Sept 1 is about to go up in smoke, all built on hype.
As long as QE is in play, the market is a cash machine, a no lose affair.
GOD JR., commands it!.
OK well QE is 'in play' for 7 more days, thats all. And I've never heard Ben Shalom discuss a 'Q/E2 package' at all myself. Biggest propaganda operation in history, in my opinion.
We've been hearing that from you for the last .... 1400 Dow points ! LOL
Uh...yeaaaa....and what also have you heard? Just media hype. Can you please show me the quotes from any Bernanke speech where HE mentions a 'Q/E2'?
But didn't Goldman say, just yesterday, that... oh. Now I see...
ok...i'm convinced....It'll be more slow-mo POMO until we start seeing amerikan asses in the street
POMO -- Po mo gas on the fiyah.
Tru dat.
+1
The bigger picture is , QE2 ether big bang, or little wimper or none, it doesn't make a difference. The end result is the same. Bankrupt planet Earth. It is all semantics now. You will see formations in the sky of private jets/helicopters of all the wealthy leaving for fear of their lives; off to the Caymens we must hide.
We dont rely on China for - Food. We dont rely on China for Energy. yes we get access to big scale cheap manufacturing for our Apples , IBMs and Dells. Also cheap clothing and shoes ( but can easily be done in Mexico or bangladesh or a dozen other countries).
China relies on the US for - Food. To maintain access to Oil . On technology.
China owna a ton of paper popularly known as Treasuries. So? Do our Kids owe them anything? How are they gonna exactly enforce that? Huh?
LOL, wishful thinking. Bernanke will do whatever Wall Strret wants and needs. He could care less what China says.
When has Bernanke ever actually discussed a multi trillion further Q/E? He hasnt.
See, if the Fed were honest with us, they'd publish a little primer like that of the BoE ...
http://www.bankofengland.co.uk/monetarypolicy/pdf/qe-pamphlet.pdf
How sweet. All in nice pastel colours. Shame they forget to mention the impact on Sterling.
It seems only logical that whether the FED comes with an incremental or big bang approach its primary objective must at the very least be to have as much of the liquidity circulate inside the US economy as opposed to it chasing yield and return in EMs.
Has the FED already thought this through? Probably.
They have already telegraphed how they are going to do it, 100B at a whack, and continue until they get the results they WON'T get....but they will try.
2 Trillion is the number.
I dont know RoRoTrader because Ive never heard Bernanke discuss printing Trillions$ and showering banks and stock markets with it, just that theyre keeping rates low and 'ready to act if need be'. Have you actually ever heard Bernanke or ANY other 'official' discuss incremental QE other than POMO? I sure havent. This whole Q/E2 hype has been a bunch of generated BS, all hot air.
How about this comment from Bernanke,
"What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."
as many = trillions or more.
Yes he showering the banks / PD's with it. That is what POMO is about. The PD's are buying the stocks for him.
Right, theyve been POMO'ing with $5 billion daily and all that, but the expectation is Ben on Nov 3 will show up and shower down trillions of dollars upon wall st to the tune of $4 trillion at least?
Ive heard banks say that, Ive heard the IMF say Q/E2, Ive heard the media yappers say Q/E2, but Ive never heard Bernanke explicitly SAY thats what he intends to do. Just that hes keeping rates low (0) to infinity and standing by ready to 'act' if need be.
Since late August, 1.400 DOW points have materialized based upon this hype, and I bet Nov 3 Bernanke again says 'We're keeping rates low and standing by ready to act if need be' because thats all he can say. There is no $4 trillion dollars.
Sheepdog, I just don't understand on how you can be so convinced that they are not going to do it, or refer to some large amount in the future. Yes, bluffing is tool for fed, but what happens when the market calls their bluff and tanks 10% in a single day? Oops, sorry and that's all? Or, oops sorry, will give a half trillion, oops not enough, market tanks more, okay, one trillion. I remember all those special rate cuts in 2008. Right after their regular meeting of no changes.
To me, its 50/50.
Place your marker down and hold on...
bada boom, Im just saying the whole thing stinks big time, Ive never heard Bernanke or any other FED official discuss delivery of trillions in QE. Besides, theyve milked this cow into a skeleton already.
Well bada boom what Im saying is that IS their plan! In late August the DOW was barely clinging to 10,000, they needed upward push, their boy Obama was in trouble! (And still is). So what do they need, hype to drive up a market rally which in all THEIR eyes would turn the awful polling data around and cause retail panic buying market mania (it hasnt)...so now what? Repubs sweep in and they pull the rug out from the markets, as designed.
Also, whats this talk now of $1 trillion? I thought the media hype whisper number was $5 trillion. Yesterday GS said $4 trillion. Markets have already priced in a massive Ben miracle delivery, so even if it was delivered its still a big sell the news.
You know the little Chinese dudes who spin a bunch of plates on those sticks? Never goes on forever.
For what it is worth the safe play is to let the market determne price direction and then take a position/s post announcement.......looking for wide price swings closer to, and up and into the release.
This whole QE thingy could be a massive head fact. If it's only POMO going forward, the market may take a 20% hit. Place stops on all your positions on election day.
"...to produce as many U.S. dollars as (the U.S.) wishes at essentially...
no cost."
Is it possible that Ben's had a change of thesis?
wish i knew
You are right. The POMOs are the plank to QE or possibly to walk the FED over the side.
Aside from the POMOs there is the constant drumbeat of the information/disinformation campaign of the explicit, imlied and infered rhetoric which has been a cheap and effective tactic for Bernanke to get the best bang for the buck (no pun intended) in this round of manipulation.
What is the real price? Who knows? I certainly do not.......is it Door # 1, Door # 2 or Door # 3?
I think Bullard, along with others from the FED and have implied/have been implying the possibility of incremental QE dependant on USD GDP.
GS's Hatzius has been touting the 2T, 4T or big bang numbers which was reported by ZH.
Whatever the FED comes with it is all trading risk.......incrementals, big bang QE or no QE at all.
Right, but the hype of a massive Q/E2 drop over Wall St has driven these broken markets up 10% since early Sept when this hype was first formulated...now its just supposed to be 'baked in' based upon nothing at all? When theres no Bernanke Santa and his fat sack of trillions on Nov 3rd, then what?
SheepDog, there won't be any sacks of trillions. We are seeing a massive pump and dump in the markets on basis of Fed rumor. Someone will cash in.
Yes, this has been the setup to the mother of all pump and dumps!
You may be very right. The consequence to the FED in that event may also be catostophic as it would bring the question of FED competency front and center in the public discourse.
I think the FED knows that, does not want that kind of attention or degree of scrutiny and is likely to at the very least manouver to avoid that outcome at almost any cost.
You are describing it as a kind of social parasite. It is probable is wants to avoid killing its host.
Just yesterday Neil Barofsky and Bill Black said Geithner and Bernanke should be immediately removed, accused them directly of fraud, manipulation, and basically behavior that would get any dog owner thrown in jail immediately.
The life of a ravenous parasite is tricky, the parasite does great until its voracious appetite kills the hosts body, then it also dies. And this FED is the most ravenous parasite in history.
Symbiotic parasite - both host and parasite are co-dependent.
I think I misused the word 'competent' in the FED context.......competent to act in the best interests of the interests it is designed to serve which is where I think the FED has a distinct advantage over what the public percieves to be its role.
I asked a friend several weeks back the question about who owns the FED. The reply was the government. My friend literally did not believe the FED is privately owned.
Not to make generalizations, but the general public is probably not aware of who the FED represents or why. No doubt the FED prefers it that way.
Personally, I think Black is all about credibility and integrity. Ditto for Barofsky, however cutting through the shit storm to get people like Black and Barofsky heard is another story.
Your so on the money RoRo. The FED is not serving to the American people. It serves a few elite.
"a kind of social parasite. It is probable is wants to avoid killing its host."
The FED is a kind of parsasite's Den Mother...it's her little charges that don't give a FUCK
The new season of American Idol is right around the corner. Steven Tyler and J Lo are going to be judges!
Central Banks, like vibrators, are nothing more than electromechanical impostors of the real thing and succeed at nothing more than fucking people faster than any living man could.
I'll be refining that idea for later...
Kind of puts it all in context.........lol.
My guess is that the FED has that figuered out.......no QE or a disappointment, has already been factored into the FED thinking.
It must be aware of the risk and the FED wants to survive with its powers mostly intact so probably a Goldilocks announcement......not too cold, not too hot, just right......that is just my best guess so far.
It makes me SAD to hear what Marc Faber said today. Because he has been 100% correct. He thinks QE2 is a Bernankee promise. Most likely @ 1 Trillion. And if the market does not like it. We will get QE3 then QE4 or whatever it takes.
It seems to me that Bernankee considers and equates the stock market as being the economy. Not caring about devaluation of the dollar at all. After all, Gas, Food and Energy does not equate into the CPI.
Gold, Silver, Platinum, Nickel, Copper and Paladium Anyone ??? Just Do It !!!
See thats the thing rocker, these guys say the FED will 'do whatever it takes'...to do WHAT? Fool everyone into believing the FED is not totaly insane? Lets say Bernanke announced $10 trillion would be dropped from helicopters to Wall St banks....does that solve anything? NO! So the number is insignificant, like wondering how many gallons of gasoline it takes to put out a fire. I'd rather have the Joker in charge is the FED (the Health Ledger one) HE had some common SENSE!