Goldman Explains Why It Is "QE2 Or Bust" For Stocks Tomorrow

Just in case you missed Goldman's economic team shift to outright bearishness, Jan Hatzius presents several key observations that other economists (particularly BofA's Bianco and Dutta) have yet to grasp. And even as Goldman openly expects a recommencement in debt monetization tomorrow to the tune of $1 trillion, Hatzius openly acknowledges that this decision could be delayed... And such a decision would be a major mistake, as it is already priced in: "Such a decision could prove to be a serious mistake, because a
significant part of the recent easing in financial conditions is
probably due to market expectations of a more expansionary monetary
policy.  Indeed, if a disappointment on Tuesday results in a significant
renewed tightening of conditions, the decision might ultimately hasten
the transition to further easing steps." In other words, it is pretty much QE or bust for stocks.

1. The July employment report was weak.  All three main sources of US labor market information now show a reversal of the prior trend toward improvement.   In the establishment survey, the 3-month average of nonfarm payroll gains excluding the impact of the Census has slowed from +143,000 in April to +13,000 in July.  In the household survey, the 3-month average of private employment growth has slowed from +234,000 in April to -12,000 in July.   And even in the initial jobless claims data, which never showed as much of an improvement in the first place, the pace of applications has drifted up over the past few weeks to a 3-month high of 479,000.

2. Other recent numbers have been more mixed relative to expectations, but are consistent with slowing growth as well.  This is most obvious in the manufacturing sector, where Monday’s ISM showed only a slight decline in the composite but a 5-point drop in the new orders index.  Most indicators of final demand—including durable goods and retail sales—have also come in on the softer side, although the nonmanufacturing ISM provided a ray of light last week.  On balance, we expect final demand growth in the second half of 2010 to stay at around 1½%, the average pace of the past three quarters.  With inventory investment stabilizing, GDP growth is likely to converge to this pace as well.

3. Some forecasters who have been holding onto a more optimistic view are blaming the weaker recent data on the shock from the European sovereign debt crisis.  But it is difficult to reconcile this view with the fact that the drop in US net exports in the second quarter occurred entirely because of a rise in imports rather than a fall in exports, and that there has so far been no slowdown in US export growth to the euro zone.  And while the tightening of financial conditions in the second quarter undoubtedly weighed on confidence, there is little sign that it had a big impact on the hard economic data.  Our view remains that the impact of the debt crisis on US growth has been minor and the real reasons for the slowdown are the loss of domestic inventory and fiscal stimulus.

4. On Friday, we revised down our forecast for 2011 and now expect a more gradual acceleration to a 2¼% pace on a Q4/Q4 basis, versus about 3% previously.  (We also made a corresponding upward revision to our unemployment forecast and a largely technical upward revision to our core inflation forecast, although we still expect significant further core disinflation to ½% year-on-year by late next year.)  The reason for the growth downgrade is that the deterioration in the economic data has coincided with a deterioration in the fiscal policy outlook.  By our estimates, fiscal policy—federal, state, and local—added an average of 1.3 percentage points to growth from early 2009 to early 2010 but will subtract an average of 1.7 points in 2011.  This number is based on the assumption that the upper-income income tax cuts passed in 2001-2003 expire on schedule and emergency unemployment benefits end in late 2010, but that all other tax cuts including the Making Work Pay program passed in early 2009 are extended.  These assumptions are subject to risk in both directions.  Depending on the outcome of the November election, it is possible that Congress will decide to extend all of the tax cuts, which would modestly boost the growth outlook, but it is also possible that stalemate ensues and all tax rates rise on January 1, which would substantially hit growth.

5. The risk of a double-dip recession is material, but ultimately the more likely outcome is that we will manage to avoid it.  This is partly because the cyclical parts of the economy, which typically account for “more than all” of the decline in real GDP in a recession, are already very beaten down.  The most obvious example is homebuilding, where another drop of the magnitude typically seen in recessions is almost mathematically impossible.  But auto sales, equipment spending, and nonresidential construction are also at levels implying that the capital stock in these areas, after depreciation, is either shrinking outright or growing at a very slow pace.  In our view, this means that a further sizable drop in spending (i.e. a further slowdown in the growth of the capital stock) would require a sizable negative shock, probably of a financial nature.  This could happen, but it is not our expectation.

6. In addition, we are counting on another push from monetary policy to ease financial conditions via further another round of large-scale asset purchases and/or a more forceful commitment to a long period of near-zero short-term rates.  If our growth, employment, and inflation forecasts are on the mark—and in particular, if the unemployment rate rises back to 10% as we expect—we are reasonably confident that Fed officials will indeed decide to do significantly more.

7. So what will happen at Tuesday’s FOMC meeting?  It’s a close call, but we expect an announcement that the proceeds from maturing or prepaid MBS will be reinvested in the bond market (most likely Treasuries).  In our view, the gradual tightening of the policy stance that is implied by the current policy of letting the balance sheet shrink is inconsistent with what we expect will be a significant downward revision in the forecasts of the FOMC as well as the Board staff since the last meeting.  We have little direct information about any forecast changes, but some insights are available from public documents and speeches by officials and staff at the San Francisco Fed (arguably the most open part of the system in this regard).  On May 13—the last available date before the June 22-23 FOMC meeting—the SF Fed expected real GDP growth of 3¾% in 2010 on a Q4/Q4 basis.  On July 8—the first available date after the meeting—the forecast had fallen to 3.1%.  And on July 28—the most recent update—it had fallen further to 2½%.  These numbers require some interpretation since they are affected by a changing picture of H1, and we have no information on any further changes in the wake of the GDP, ISM, and employment data released since July 28.  But our interpretation is that the SF Fed has probably revised down its view of H2 growth from about 3½% (clearly above trend) at the June 22-23 FOMC meeting to 2%-2½% (slightly below trend) at the upcoming meeting.  If other officials have made similar changes, this would probably be enough to trigger a meaningful shift.  And the most obvious meaningful (but not yet radical) shift would be a decision to reinvest MBS paydowns.

8. However, it is also very possible that the committee will require more time for a shift.  One reason to think so was Chairman Bernanke’s speech last Tuesday.  This was before the employment data, but it was noteworthy that the chairman sounded relatively upbeat, specifically on consumer spending.  Undoubtedly, Fed officials are also encouraged by the recent, broad easing in financial conditions.  But while this might argue for a decision to do nothing much on Tuesday, such a decision could prove to be a serious mistake, because a significant part of the recent easing in financial conditions is probably due to market expectations of a more expansionary monetary policy.  Indeed, if a disappointment on Tuesday results in a significant renewed tightening of conditions, the decision might ultimately hasten the transition to further easing steps.

And just to reiterate, here is Goldman's Dominic Wilson, head of Global Markets, who pounds on this point as well, while noting that the market continues to be stuck in a mode which accentuates good news, and ignores bad news:

August is only a week old, but so far things look different to either
June or July. We have had three major US data days (Monday, Wednesday
and Friday). The average gain on those three days is substantially
positive, while the market pulled back a little on the other two days.
And for the month as a whole, we are up considerably still. Of course,
this is heavily influenced by Monday’s 25 point gain. But while these
are early days, in a sense that is the point. Monday’s rally was by far
the largest on a day where major US data was released in over two
months. And we have managed to pass through the period of the ISM and
payrolls with equities moving significantly higher, something we did not
manage in either June or July.

Full report:

•     Payrolls disappointment sees fresh lows in yields and USD…
•     ….and an easing in our FCI to new record lows.
•     We downgrade our 2011 US GDP forecast and forecast fresh easing.
•     US data has been the major headwind through June and July as we show.
•     But despite Friday, August has proved friendlier so far.
•     This is partly because data has been more mixed than before.
•     But market also seems to be taking credit for easing ahead.
•     Tomorrow’s FOMC meeting is the most important for some time
•     We expect a move to reinvest MBS proceeds, but a close call.

1. Financial Conditions Ease as Payrolls Disappoint

Friday’s payrolls came in weaker than expected both on private and ex-census payrolls and the market reacted strongly to the numbers. While equities made up of the sharp losses that they saw earlier in the day, the bond market held onto significant gains and the dollar weakened broadly. This combination saw our US Financial Conditions Index hit its easiest level on record. It has also generally helped our current tactical trades and we are raising our stop on our recommended long AUD/CAD position to 0.93.

Bond yields took out new lows along the curve in the process with the 2-year yield hitting new cycle lows intraday below 50bp, the 5-year yield trading below 1.50% before closing a little above and the 10-year yield closing at 2.82%. The dollar trend is also impressive, with fresh local highs in EUR/$ and lows in $/JPY. The USD TWI has now reversed almost all of the appreciation it saw in the first few months of the year when upward revisions to the US growth picture dominated. Without much fanfare, USD/CNY has also drifted to new lows, though market focus seems to have left that cross.

2. A downward revision to our US forecast

Revisions to our US forecasts on Friday, something our US economists had flagged as imminent for a while, suggest that several of these trends can ultimately run further.  We continue to expect 2010H2 to show growth of around 1.5%. But with resistance to renewed fiscal stimulus, we now forecast a more gradual pick up in GDP growth through 2011 than before. The result is that the year-over-year growth rate in 2011Q4 has dropped to 2.25% (around 90bp lower than before) and our year-average forecast has fallen to 1.9% from 2.4%. We continue to see disinflation, though given recent upward revisions to core PCE data and signs that rent disinflation may be ending, at a slower pace than before.

With the unemployment rate rising, we now expect the FOMC to re-engage in unconventional easing through asset purchases (USTs) and/or a more ironclad commitment to lower short rates. And we now expect 5-year yields to trade around 1% and the 10-year yield to around 2.5% by year end. The market has been very focused on a potential shift in this direction. And tomorrow’s FOMC meeting has become the most significant in some time for that reason. While a close call, we think the FOMC will announce that they will reinvest the paydown of MBS in the bond market. This would probably be packaged as ‘preventing a tightening’ but the market is likely to see it as a step – albeit a baby one – towards renewed easing. In fact, the market already appears to be taking credit for some fresh support from policy ahead, as we describe below. As a result any step in that direction from the Fed will probably be welcomed, but it also points to some vulnerability to a decision to leave things as they are.

On the back of our US revisions, we have also lowered our Japanese GDP forecasts (to 3.3% from 3.4% in 2010 and to 1.4% from 1.7% in 2011) and though we have made no changes to our Euro-zone growth forecasts or our view that the first ECB rate hike will in Q2 2011, we now think that the normalisation of money market rates – i.e. the convergence of money market and policy rates – will take slightly longer.

3. US growth risks offset by better news on system risk and global growth

Our own trading stance continues to operate around three themes: a) US growth is likely to disappoint; b) non-US growth is likely to hold up better than expected at least relative to the US and China to back off its tightening policy and Europe suffers less from the sovereign fall-out than feared; c) sovereign and systemic risks have been overpriced at least in the near-term. This has left us with a relatively neutral view on equity markets (US growth problems need to be balanced against better non-US news and excessive risk premia), but a preference instead to trade relative views of the slowdown in the US (and a more positive relative view of China) and to position for further compression of risk premia directly through credit and credit-like areas.

In the first bucket, we remain short the USD (vs SGD and CNY); we have two risk-neutral trades designed to capture relative growth exposures to the US and China (long AUD/CAD and a fresher short MXN/CLP trade); we continue recommending paying Swiss 5-yr nominal rates, and 5-yr UK real rates and we are short consumer cyclicals vs other cyclicals in the US market and have added a similar relative consumer short in credit on Friday. In the second bucket, we are short September VIX futures, exploiting the steepness of the curve there and remain long European financial credits on a relative basis (iTtraxx Financials vs Main). In this context, as published on Friday, our Financial Stress Index (FSI) has also eased over the month. The latest reading is 0.42, down from 0.93 in June. The FSI stood at 0.07 in April, suggesting that we have corrected roughly half of the dislocations opened up by the European turmoil. To remind readers, the FSI is standardized to have a mean of zero and a standard deviation of 1, and controls for economic fluctuations.

4. US data days the drag in June/July, not so far in August

Perhaps the most surprising feature of Friday’s price action was the eventual resilience of equities which remain firmly above their 200-day average. Our US growth view remains the major headwind for the equity market. But as David Kostin and team have pointed out, with a strong earnings season, undemanding valuations and better non-US performance there is much that is still positive about the equity outlook and shorting US stocks on the growth slowdown has so far been a losing trade.

The daily price action makes it clear just how significant an obstacle the US data has been even in the face of other more positive forces. A simple exercise that we described in last week’s Global Market Views, but update and elaborate on here, shows that point clearly. Through June and July, we examined the days on which a major US data release occurred (measuring its importance using our new US-MAP rankings, choosing a ranking of 3 or higher). On those days where major US data was released (around 40% of the total), the SPX fell on average by 8.8 points. On those days without US data, the SPX rose on average by 6.2 points.

The market on average performed much more strongly in July than June (up 70 points versus down 60 points). But the difference between US data days and other days remained remarkably similar. Even in July, US data days were on average 14 points worse than non-data days and the largest gain on a major US data day that month was barely more than 5 points. What changed in July is not that US growth news did not affect the market – the net drag seems to have been large as in June. Instead, other forces overwhelmed that. In particular, better earnings news which kicked off that month, better data in the rest of the world and the sharp relaxation in sovereign fears overwhelmed US growth news. It is on the basis of these forces that we have argued not to translate our negative US growth views into a simple negative view on US stocks.

August is only a week old, but so far things look different to either June or July. We have had three major US data days (Monday, Wednesday and Friday). The average gain on those three days is substantially positive, while the market pulled back a little on the other two days. And for the month as a whole, we are up considerably still. Of course, this is heavily influenced by Monday’s 25 point gain. But while these are early days, in a sense that is the point. Monday’s rally was by far the largest on a day where major US data was released in over two months. And we have managed to pass through the period of the ISM and payrolls with equities moving significantly higher, something we did not manage in either June or July.

5. Watch growth surprises and the FCI

Why the shift? The simplest reason is that the surprises to the US data, Friday notwithstanding, have so far been a bit less brutal in August. Monday’s ISM and Wednesday’s services ISM were both positive surprises on the headline (though we mark down the ISM result given the rise in inventories and drop in orders). And Friday’s payrolls, while negative, was arguably not as large a shock as in some prior releases. This suggests that the market may have adjusted its expectations enough that it has become a little less vulnerable to negative US data news.

But part of the answer also likely comes from a growing anticipation that softer growth news will bring some policy response. Recall that the last major market decline (on 21st July) occurred in response to a more hawkish-than-expected statement from Chairman Bernanke. But since then, the market has shifted footing. Bonds have rallied sharply, the part of the yield curve that still capture views on the effectiveness of policy (5s-10s now or 5s-30s) has steepened and the dollar has weakened. Alongside rising equities and falling volatility and increased market speculation about potential shifts towards quantitative easing, this looks less like a simple disconnect between equities and bonds and more like a market pricing a policy easing ahead. The result has been that our US Financial Conditions Index has already eased, hitting its easiest level ever on Friday.

On both fronts, the critical question is whether the market is right. On growth, our own forecasts suggest that – at some point in the coming months at least – the market will face fresh disappointments. This is because we think that US growth views are still too high. But we still think the implications of that for stocks may be offset by likely better global growth news, a shift away from tightening in China and still elevated risk premia.

On the second, we now do forecast a clearer return to unconventional policy easing. But we also think that this is likely to come in the face of more challenging economic outcomes. And our own view is that a significant move in this direction is most likely not until late 2010 or early 2011, unless there is an even sharper deterioration in growth momentum. So the market may be in danger of expecting too much too soon.

These two issues also highlight the two upcoming tests this week – one on each front. Tuesday’s FOMC is likely to be important to the near-term outlook since the market has started to rely on the notion of a Fed response and may be disappointed if it does not get a firm signal. Friday is the key data day to navigate with the US retail sales release and Michigan consumer sentiment reading (though after a surprising spike last week, Thursday’s claims numbers may be more important than usual)

6. Current Trading Views

The following trading ideas from the Global Markets Group reflect shorter-term views, which may differ from the longer-term "structural" positions included in our "Top Trades" list further below.

In FX:

1. Stay short $/CNY via 1-yr NDFs, opened at 6.7550 on 10 June 2010, with a target of 6.50, and a 1-day stop of 6.83, now at 6.6875.
2. Stay long AUD/CAD, opened at 0.9112 on 8 July 2010, with a target of 0.9500 and a 1-day stop below 0.8850, now at 0.9452.
3. Stay short $/SGD, opened at 1.3825 on 13 July, with a target of 1.34 and a stop on a 1-day close above 1.41, now at 1.3460.
4. Go short GBP/SEK, opened at 11.30 on 03 August, with a target of 10.80 and a stop set at a one-day close above 11.50, now at 11.2914.

On Rates:

1. Stay short 5yr credit protection in Mexico vs. long 5yr credit protection in Colombia, opened at a spread of -3 bp on 16 Nov 2009, with a target of -150 bp, and a stop of 75 bp, now at -5.1 bp.
2. Close short 5-yr JPY swaps vs. a combination of 2s and 10s, opened at -41 bp on 24 Mar 2010, with a target of -20 bp, and a stop on a close below -50 bp, for a potential profit of 1.4bp.
3. Stay short 5-yr UK real rates through swaps, opened at -78 bp on 21 May 2010, with an initial target of -25 bp, and a stop on a close below -95 bp, now at -70.4 bp.
4. Stay short an equally weighted basket of 5y CDS spreads in Poland, Korea, China and Czech, opened at an average spread of 115 bp, with an initial target of 75 bp and a stop-loss of 140 bp, now at 100.8 bp.
5. Stay short UK inflation vs. long Euro-zone inflation through 5-yr zero coupon swaps, opened on 09 July10 at 1.63%, for a target of 1.2% and a close set at 1.85%, now at 1.56%.
6. Pay 5-yr Swiss swaps vs. 3-months, opened on 30July’2010 at 1.10%, for a target of 1.50%, and a close set 0.95%, now at 1.08%.

Equity Trading Strategies:
1. Stay short GS Wavefront Consumer Rotation Basket (GSWBCONA), opened at 100.7, on 02 July 2010, with a target of 95 and a stop of 103.25, now at 99.21.
2. Stay short September 2010 VIX contract, opened at 27.60, on 02 August 2010, with a target of 22 and a stop of 30, now at 27.75.

7. Recommended Top Trades for 2010 (opened on 02 Dec 2009 unless otherwise stated)

1. Stay short S&P 500 Dec10/Dec11 Forward Starting Variance Swap, opened at 28.20, with a target of 21, now at 30.61.
2. Stay long Russian Equities (RDXUSD), opened at 1645.9 for a target of 2050, now at 1683.0.
3. Stay long GBP/NZD, opened at 2.29, with a target of 2.60, now at 2.1837.
4. Close short 2-yr GBP swap rates vs. long 2yr AUD swap rates on a 1yr forward basis, opened at -268.5 bp, for a potential loss of 24 bp (inclusive of carry).
5. Close short 2-yr TRY rates through cross-currency swaps, opened at 8.77%, with a target of 12.0%, for a potential loss of 168 bp (inclusive of carry).
6. Close long 5yr credit protection in Spain vs. short 5yr credit protection in Ireland at 13 bp, opened at 70 bp, with a target of 20 bp, for a potential profit of 2.9% (inclusive of carry).
7. Stay long the GS FX Growth Current, opened at 103.5, with a target of 111.8, now at 103.84.
8. Stay long PLN/JPY, opened at 32.1, with a target of 37.5, now at 28.5295.
9. Stay long Chinese Equities (HSCEI), opened at 12616.01 on 01 Apr 2010, with a target of 15000, now at 12183.07.

Comments

[primefool]

The Squid to the Fed. Easy or we blow da joint,

[chinaguy]

+1

[unwashedmass]

i don't think that's it at all. they are covering the bases. they are short, and now, warning the world (to provide their own air cover) that its coming down.....

i mean, come on, the peasants have almost nothing left to steal, and what pennies they've got they aren't getting into the "Phenomenal stock market rebound"...

so....GS is now completely short and ...at the risk of being accused of knowing what's going to happen before it happens -- as one who dictates the action tends to know -- they are now building up their air cover....

[primefool]

I seriously doubt there will be any stock market pullback - hey the elctions are coming up.
Moreover - to put it in academic terms - with all other policy levers maxed out - goosing the stock market is one of the few ways left to get an easing of "monetary conditions".

[unwashedmass]

dude...the greed is astronomical here. O passed the bare minimum of financial reform, but...the point is...he got it passed, and that can not go unpunished.

you are making the huge assumption that the folks really running this country want the current crew to stay in charge.

i wouldn't count on that. not at all...... they are noisy and hardly as compliant as one would wish......i mean, we're talking complete obedience now is the goal....

[primefool]

Great point!! Sure - a republican clean sweep in Nov - and a fractious congress that does nothing for the next 2 years - might be the best outcome for Our Masters.

[firstdivision]

Wait til the big boys return to trade by next month.  Possible 2008 part deux in the works.  I do not understand this idea that just becuase the elections will be coming up that the market will stay up.  2008 was a major election year, and the markets were imploding like dying stars. 

[Tense INDIAN]

Wait til the big boys return to trade by next month.

Dont tell me that those guys just left for vacation without worrying about the stocks....

i bet they r always keeping an eye on the markets....and is it necessary for these people to return for stocks to crash

[packman]

"I seriously doubt there will be any stock market pullback - hey the elctions are coming up."

October 2008 is calling - it wants its insanity back.

[Young]

Ol' prop trading desks aren't aligned with the sell side guys. Ackording to my intel, they've been short a long time... Of course, wtf do I know, I don't have a PHD

[gmrpeabody]

Since when does GS NOT talk their book. Makes more sense they are long and awaiting QE2 announcement, and just trying to get the rest of us on the other side of that one. Of course, they will be ready to dump just before we realize the dupe.

[docj]

Good one - +1.

That said, I can't believe they're actually gonna trigger this nuke until and unless Turbo Timmy starts having trouble rolling debt.  So maybe The Squid knows something about that the rest of us are simply not privy to, eh?

[johngaltfla]

Uh, the Squid IS the FED; at least 13-15% of it in stock ownership.

[SheepDog-One]

'Q/E or bust for stocks'

But then what? Because we know Q/e does absolutely nothing to fix any underlying collapsed issue, Q/E may provide a couple more crack hits for the market but fools no one and just adds a trillion in unrepayable debt.

GO to hell, 'Shalom' Bernanke.

[primefool]

Ive got "cuckoos Nest" on the brain. Look did subjecting Nicolson to eltroshock or lobotomizing the "Indian" solve any "Underlying Issue" - No. But it preserves Nurse Ratchet's control over the asylum.

[SheepDog-One]

Seems to me after the electroshocks, things actually got far worse leading to drunken whore parties and marble bathroom thing thru the window and escapees.

[primefool]

Yes in that particular case the electroshock was not a success - although it did'nt prevent the "Institution" from lobotomizing Mr "Indian Chief".
So - next time they try something else. The point is - their actions are not designed to lead to a happier more fulfilling life for the inmates. No sir. Their actions only have one purpose - to maintain control over the Institution and its Inmates.

[Young]

We'll get another 70 points in the /ES for the cost of a trillion, that's the only thing that's gonna happen, if even that...

[snowball777]

"Come on mama, baby needs a new pair of shoes!"

[Cognitive Dissonance]

Brings to mind so many great Hollywood movies, including "Casino".

because a significant part of the recent easing in financial conditions is probably due to market expectations of a more expansionary monetary policy.

Speaking of gambling, if QE 2.0 is already priced into the market, then are they telling us that another $1Trillion of QE was (as is past tense) only worth a bit less than a 10% rise in the markets? Really?

WOW! Talk about shrinkage. George Costanza would have died for "only" a 10% shrinkage after being in the pool.

http://www.youtube.com/watch?v=1cUNNKzj_Nc

[HEHEHE]

Precisely my point re QE, you get way less bang for you buck on a percentage basis doing that at this point.

[MarketTruth]

QE is already getting less and less output from the input. Look up a chart showing the past few years concerning the velocity of money.

[wang]

CR has an interesting comment on this

http://www.calculatedriskblog.com/2010/08/fomc-meeting-on-tuesday.html

[packman]

Hmmm.  Couple of weird things:

"[The Fed might make] ... a decision to reinvest proceeds from maturing mortgage-backed securities held by the US central bank"

Proceeds?  Is the Fed seriously making a profit on their MBS purchases?  I find that extremely difficult to believe.  The whole purpose of buying those was to take the bad loans off the banks books, and thus the Fed should be losing money - hand over fist - on these MBS, not generating proceeds.

"It is possible that the Fed could announce they will reinvest the proceeds from maturing MBS (some people put this at $200 billion through 2011, but other analysts expect it might be closer to $400 billion with lower mortgage rates and more refinance activity)."

Wouldn't such refinancing at lower rates actually result in less profit for MBS holders instead of more? 

[Cognitive Dissonance]

Proceeds?  Is the Fed seriously making a profit on their MBS purchases? 

I think what they're talking about is the principal amount being paid back with each monthly payment made by the homeowner. These aren't bonds, where only interest is paid. These are mortgages, where interest and some principal is being paid back monthly. Thus the Fed could justify (in their mind) this program by saying that since some of the principal is being paid back, to reinvest it in "other" things (meaning monetizing the debt) would simply be maintaining the original total amount the Fed has "invested" overall.

At least that's what I'm hearing.

[packman]

Figured that might be the case.

[RockyRacoon]

It's called taking the meager income from a crappy "investment" and buying more of the same crappy "investment".   I wouldn't want the Fed managing my money -- averaging down to zero.

[assumptionblindness]

Queasing 2.0 or market bust?  'gotta love the threats. 

"There will be riots in the streets and martial law if the Fed doesn't buy treasuries!" - GS

[King_of_simpletons]

A third threat comes from the potential social backlash. To use Rawls-ian analysis, the invisible hand stops working. Perhaps one reason that societies allow plutonomy, is because enough of the electorate believe they have a chance of becoming a Plutoparticipant. Why kill it off, if you can join it? In a sense this is the embodiment of the “American dream”.

From 'the leaked citibank memo'

http://www.infowars.com/financial-disaster-will-lead-to-civil-disorder-in-2009-or-2010-says-secret-citibank-memo/

[papaswamp]

The sheeple won't riot as long as the bailout checks keep flowing and cable tv keeps them mesmerized. All they have to go is keep people distracted until opening day of football season, then just like the roman games, the masses will be distracted from their troubles. They buy themselves time until January at least.....wow am I feeling pessimistic today.

[wang]

the memo was from 2008 and predicted $2000 gold in 2009

[Johnny Bravo]

Where are all the ZH'ers that predicted gold to 2000 by June 2010?

Selling their gold for 1160?  LOL

[-Michelle-]

I'm beginning to think you have a fundamental misunderstanding of why many posters here buy gold.

[RockyRacoon]

If he can't understand that, imagine the other simple things that he can't understand.  Mr. Bravo is an aurophobe.  The latest dip was a pure and simple gift from the boyz.  A buying opportunity extraordinaire... and I did.  Sell?  Ha!

[firstdivision]

I would put more money on the ZH'ers that were saying +$2000 AU are buying even more at these prices.  So I doubt they are selling. 

[papaswamp]

Silver jumps 1% and Gold crosses the $1200 mark...guess QE2 and 3 are coming.

[primefool]

But ben "Ratchet" has a few cars up his sleeve too . Over the weekend he got some old pals some guy called "Rubin" and anudder one calling hisself "Mohammed" - stated firmly that the Fed should NOT ease..
Hahahahahahahah!!!!

[LeBalance]

Queaslings.

[RockyRacoon]

Makes me queasy, too.  I think they are simply traitors who serve as the puppet of the enemy occupying his or her country.

[assumptionblindness]

Remember, the last Fed statement?   The market anticipated that the Fed would change the language about Fed rates from "extended period" to "forever and always."  I bet that we will see a change this time to "forever and always" regarding the Fed funds rates, however, there will NOT any announcement about a new Queasing program to start ASAP.  Any mention of Queasing will be as an 'option' for future policy response. 

[primefool]

Its kinda like when you are on a desert island and down to your last cigarette. You want to make it last - so you cut into 4 pieces - smoke t a bit at a time - that kida thing,
But - Iam betting theat cigarette will be gone soon.

[ivant]

i feel bad constantly putting forward a link to my site here, but its just that it actually is relevant to the conversation and saves me writing it out again. i wrote a piece about debt after a political debate, where some economists were talking about how australia has been so great at ending the recession. i think we are far from over in this recession.

There is the link:

http://thedailycable.com/?p=377

I can't believe nobel piece prize winners are so blatantly stupid.

[kridkrid]

Good stuff.  It's always been about debt.  I like to use an image (google:public and private debt US)... to show the fairly smooth and exponential drive towards increased debt since the early 70's.  The need for credit/debt to always expand is built into our system.  When that collapses, the whole thing collapses.  R's like to bitch about the increases in the deficit under Obama... all that's really happening here: Gov't is filling the void... it's just math... and it's just kicking a can.  It's the same can we've been kicking for some 40+ years.  The previous administration was able to kick the can via homeowners and a housing bubble.  The next bubble had to be bigger... sovereign bubble.  Is there anything left?  Is it over?

[Chump]

It's all over but the crying.

[RockyRacoon]

There has been a lot of discussion about how different countries have went about coming out of this deep recession...

Sorry.  I sort of gave up at this point.  You might want to have your work edited before posting.

[Real Estate Geek]

Yeah, I gave up as well. 

FYI (i.e. Ivan, not Rocky), it's Peace Prize, not Piece Prize.

And it's moneyfactory.gov, not .org

[firstdivision]

The Baltic Dry got the memo...."To the Moon, Alice".

http://www.bloomberg.com/apps/quote?ticker=BDIY:IND

[Cognitive Dissonance]

You can't have more than a 50% drop nearly straight down without some kind over oversold rebound. Dead cat or not, this was expected.

[firstdivision]

Que inflection in t-minus 12 hours.......

[Cognitive Dissonance]

BTW my tired older eyes can't quite make out what's on the t-shirt in your avatar. Care to clue an older man in on what's so hot? Looks like some flames I had on my old stingray. :>)

[firstdivision]

LOL!  The shirt says "That's What She Said"..ala The Office and fratboy jokes. 

[Moonrajah]

I must've missed something. When did GS turn into a smalltime hoodlum telling the terrified shopowner Timmy: "I don't care that your family doesn't have any more means. Just pay up, or our bear will chew your bones"?

[SteveNYC]

Commodities market is cornering Ben.....

Baltic Dry saying world trade has fallen off a cliff, yet oil is in the $80's and wheat is getting near prices that may wipe out a few third-world countries' populations and steal the remaining pennies that the average Yank still has.

If Ben prints, and commodity prices explode, he'll be lynched.

[firstdivision]

I say commodities is bubbling again, like 2008 when all economic indicators were heading south and commodities decided to go north.  Prep for sub-$60 oil in a couple of months.

[SteveNYC]

I held this view earlier in the year and actually made some coin (could have made much more coin if I was quicker on the exit, such is life) on a short commodities play.

Now, I'm thinking this baby is about to blow if Shalom pulls the trigger. But I would vouch that yes, we should see them come down again later in the year....I think we get our Bernanke-blow-off first though.

[A Man without Q...]

The vampire squid is trying to convince the doctor that the patient needs a blood transfusion....

[SheepDog-One]

No consideration of how we're on the eve of the Messiahs midterm elections which are already showing to be a bloodbath?

[bada boom]

What else is goldman going to say.  Where else are they going to find profit if not from govt debt creation on the people's behalf.

Question is, how stupid, or should I say desperate, are the people in government.

Whats that old saying...

"fool me once, shame on, [pause], shame on you. Fool me, [pause], You can't get fooled again."

[Jason T]

Fisher said in April.. Fed is NOT going to monetize deficits.  What part of that does GS not understand?

[Sudden Debt]

they also planned to lower taxes and make everybody rich enough so they would have at least 1 house... You can figure out yourself how that turned out... I guess that's why they called it "the american dream"

[Oswald Spengler]

I have some toe nail cheese to sell.

[johngaltfla]

There will be announcement of easing.

The Fed is following the same inept policy it did in 2007 when the problems first appeared. They could have monetized the issue and prevented the "Great Recession" or at least mitigated it. Instead, they engaged in what I called "The Blunder" and failed to enact an easing policy nor acquire deficient assets in the summer of 2007 which led first to the implosion at Bear and then the rest is history.

This is GS way of saying "don't blames us" when the markets eventually do crater. I think we'll see a sudden 100 point or so drop, recovery and then a basically flat day tomorrow UNLESS the Fed includes in the language of the statement something along the lines of "the potential for further actions to insure a steady supply of liquidity to the mortgage markets and financial system....blah, blah, blah."

Tomorrow is a nothingburger. Everyone is on vacation. Come September and a failure to reverse the punitive tax programs being restored on January 1, this market is going to leave a crater the size of Jupiter's red spot.

[dan22]

If They Can’t Afford Wheat Let Them Buy Real Estate? Why the Price of Food Will Guarantee a Chinese Real Estate Crash

China's money and credit supply is growing at an annual rate of 30%. Credit growth of 30% in China is equivalent to a 10% growth rate in the United States (Since China's economy is a 1/3 of the size of the U.S economy).

China's money supply (M2) is about the size of the equivalent number in the U.S(north of 8 trillion U.S$) So, the affect of the 20% growth rate in China's money supply is affecting the world's economy as if the United States M2 was growing at the same rate.

They must tighten now, like bernanke did in July 2008

If They Can’t Afford Wheat Let Them Buy Real Estate? Why the Price of Food Will Guarantee a Chinese Real Estate Crash 

[HEHEHE]

I still don't quite understand the point of QEII at this juncture.  QE allows the banks who have first access to capital to buy depreciated assets on the cheap and prop them up.  At this point it would be hard to say that stocks are cheap.  You get better bang for your buck on a percentage basis with QE when stocks etc are far cheaper.

Having said that, the people running the FED are a bunch of morons so anything they do tomorrow would not surprise me.

[primefool]

Actually - Stocks are pretty cheap and there is a window of opportunity to actually be able to buy big blue chips with 3-5% dividend yields trading at 10-15PEs.
Imagine what the world would look like if stocks doubled from here - and bond yields stayed low.
There will literally be NO WHERE to go with your dollars. Everything will be nosebleed expensive. And you will have a choice of buying 10 yr bonds with a 2% yield ( and risk of losing 50% of capital) or stocks at PE of 40 ( with a risk of losing 70%) of your capital.
cash yielding zero will provide a real return of Minus 5%.
What do you do then??

[HEHEHE]

Stocks are anything but cheap; forward PE's at this point are a fantasy.  Earnings have been manufactured by firing employees.  There's only so much more of that companies can do and still function. 

Moreover, hyperinflation is way down the road my friend.  The amount of bad debt outstanding absolutely dwarfs anything the central banks can do at this point.  Look at how much money they printed/bad debts they've absorbed in the past two years and all its bought is a year of modest artificial growth.  They'd need to print $100T to get this broken system moving again. 

If they want to pretend and extend a trillion dollars of printing goes much further when stocks are back in the 600-700 range.

[primefool]

Sure its hard to generalize about "stocks". There are some that look reasonably priced. It would be lovely if the SPX got back to 700 - and too convenient. Is the market so merciful as to offer such obvious opportunities. Is exxon mobil going to trade at 30 and yield 6%? maybe- one can dream. But - my point is the greater risk to investors right now is a 50% rise in stocks while they sit out. Then you may be faced wiyth a long long period of negtive real returns and nowhere to hide.

[Bankster T Cubed]

oh please

[RockyRacoon]

There will literally be NO WHERE to go with your dollars.

Where have you been on the discussions about precious metals?  I'm not talking about ETFs either.  "primefool", eh?

[Young]

They can ease my ass with aloe vera... Ain't nothing but a bounce coming from this... Can anyone say "sayonara"?

[Paper CRUSHer]

Screw this shit.......

MISSION STATUS UPDATE 8:

"Sergeant Tyler the new artillery shells have arrived sir."

http://ginnowequipment.com/images/200_7000_Demo_ball_4.JPG

http://www.ginnowequipment.com/Frame-1-ginnowequipmentspecialtycompanypa...

"OK soldiers,i want this 7000 lbs baby cleaned,shined,polished and ready by 18:00hrs so  don't disappoint me people or i'll be shining my boot with ya'ass.NOW MOVE IT MEN"

"Corporal unload the howitzer off the truck dammit"

"Sir,we were almost out polishing wax sir"

"Trooper,can't you see i don't give a shit"

"HEY PRIVATE....you missed a spot.......spit here soldier."

"DAMMIT NOT ON MY GOD DAMN BOOT YOU IDIOT"

"Leuitenant...LEUITENANT,order the men to load up the howitzer as soon as they finished shining my baby"

"YES SIR"

"Lock on to these coordinates........"

"......200 West Street....Battery Park City.....................New York"

"Sgt.Tyler,........TARGET POSITION FIXED SIR"

"You mean the Goldman Sachs New World H.Q."

"Damn right Leuitenant"

"On my signal........................FIRE"

[Young]

Tonights headline on CNBC: Blog makes terrorist threats aimed at financial institutions...

[New_Meat]

-0811

[dcb]

post should read: since we can no longer front run the treasury and garuntee profits our bonus may suffer.

[Zero Debt]

Could QE2 make USD into a carry trade currency?

[Borat]

If QE 2.0 is already priced into stocks, the announcement tomorrow will lead to a downturn (Buy the rumor and sell the news)
If QE 2.0 is already priced into stocks, the NON announcement tomorrwo will lead to a downtrun (Double Dip will start to be priced in)

QED

[Bankster T Cubed]

to hell with goldman f**king sachs

[ivant]

Actually in terms of the comments before, the Baltic Dry index is a little deceiving. I wrote about this a while back. There are a load of new ships as well. Can't find it on my website at the moment, ill post it later. But yea generally its important to note that there are supply issues, ie its increasing. Also China is slowing, and the BDI feels it. In any case, we are all fucked.

[Catullus]

Brilliant arguementation by the squid. It's preemptive blame. "failure to inflate was the cause the crisis. Markets expected the result, the fed is causing the uncertainty." It fits in nicely with the fed independece idiocy and the global risk regulator.

Get ready for another financial terrorist event (thanks, max keiser).

[Cheyenne]

Reporting from Chicago:

Went to Tannu's carwash at Ashland and 17th Friday for ground-level info. Two interesting developments.

1. Cook County Deeds Office no longer takes credit cards or checks, only cash.

2. People on the south side are without food. Tannu had one job applicant show up 4 days' hungry. Apparently entire families live in apartment buildings with no electricity or water. Building basements are littered with dog bones, and the rats are gone. Policemen have been robbed.

I shot the shit with Tannu about the economy and how we might see food riots.

"Don't take it lightly, man," he said. "It's working its way up."

[tom]

Interesting, but this "QE2" won't make much difference in my opinion. It's only maintaining the current level of excess reserves while (possibly) slowly but slowly shifting mortgage holdings to Treasuries. It amounts to a promise by the Fed to not drain excess reserves anytime soon, which hasn't been happening yet anyway. The reason excess reserves are down by nearly $200 bil since February is that Treasury drained them by refilling its supplementary account.

This is completely consistent with a zero to negative growth, zero to negative inflation climate.

http://keynesianfailure.wordpress.com/