Guest Post: QE3 - Just A Matter Of Time

Tyler Durden's picture

Submitted by Lance Roberts of Streettalk Advisors

QE3 - Just A Matter Of Time

QE3 - Just A Matter Of Time

media has been replete lately with a variety of different government
officials saying that there will not be a third round of Quantitative
Easing.  Even the great Ben Bernanke himself on April 27th spoke against
the possibility of QE 3.  This isn't surprising, of course, because in
order for something like QE to have the most effect it needs to be,
well, a surprise.

However, I am throwing down the gauntlet and making the call - there
will be Quantitative Easing, and a big one most likely, by the end of
summer.  There I said it; of course, I have actually been saying this
for the last couple of months and it doesn't take much of a real genius
to figure it out considering that we are heading into a presidential
election year.  However, it most likely won't be called QE 3 since the
term QE is now politically and socially almost taboo.

The Whitehouse Effect

So why does QE play such an important role for Obama going into an
election?   No president has ever been reelected to office when
unemployment is above 8%, much less 9%.   With the unemployed labor pool
at very high levels, poor sales being the biggest concern for small
business owners (according to the most recent NFIB survey) and wages
failing to keep up with a rising cost of living there is no incremental
demand on businesses to create new jobs.    Since small businesses have 6
applicants for every 1 job opening, are are the primary creators of 70%
of the jobs in the country, there is no pressure for wage increases.  
Without rising incremental demand from consumers, because 1 in 5 are
underwater or delinquent on their mortgage, are unemployed or on food
stamps, there is no reason for small business to expand production or
manufacturing.   While the Federal Reserve has been worried lately about
commodity price inflation - the real threat to the economy is wage
deflation as it bites into the basic economic cycle of a supply/demand

However, it isn't just the unemployed that will kill Obama at the
polls.   Without another round of QE, and most likely soon, the economy
will be headed for extremely low or potentially even negative growth.  
When round one of QE finished in the summer of 2010 the economy slid
form 3.1% annualized growth to 1.7%.    This shock to the system
immediately launched the Fed into overdrive to start QE 2.    Today we
are heading into the summer with a 1.8% annualized growth rate, likely
to be revised down a notch, and as QE 2 winds up entirely at the end of
June we are likely to see a slide to below 1%.   This will most likely
get a very late night phone call placed to Mr. Bernanke from the
Whitehouse as the average American votes psychological and emotionally. 

In the last election the average American overwhelmingly voted an
inexperienced and unproven individual with great oratory skills and
personality into the highest office in the country on the back of a
Pepsi slogan - "Hope and Change".    Unfortunately today, 70% of the
population, according to a recent Gallop poll, have lost the "Hope" part
of the equation as they still "feel" like we are in a recession or
depression.    That's right, they "feel" like things are not good which
is an emotional bias; and they will vote the same way.

Furthermore, as the economy slides, so does the stock market as
prices are adjusted to reflect what the future profitability of
companies may look like.   With the market currently expensively valued
and analysts still predicting higher profit margins in the coming months
- anything that creates stress on corporate profitability, like a
weakening economy, will cause a correction in asset prices to reflect
new estimations.    As always, the market, because it is driven by human
psychology (fear and greed) in the short term will overshoot on the
upside as well as on the downside.   Therefore, another nail in Obama's
reelection coffin will be if the stock market has declined by 20% going
into campaign mode.   Remember, it was just earlier this year during his
State of the Union address that he specifically stated that under his
watch the economy had recovered along with the stock market.   People
are emotionally affected by the value of the stock market - the "wealth
effect" is a driver of consumer behavior.   When Ben Bernanke launched
QE 2 he even added a third mandate to the Fed to include not only full
employment and price stability but also asset inflation to create a
wealth effect.   Without that wealth effect going into the polls -
voters are very likely to pull the lever for "Change".

How To Play It

Beginning back on April 25th we began writing about reducing
allocations to risk based assets (read: equities and commodities) going
into the summer months and the end of QE 2.   As shown in the chart when
QE 1 ended last year there was a fairly substantial decline in the
markets of almost 20% as the economy began to slow down.   Having only
that precedent to work off of we should remain cautious and reduce
allocations of invested dollars in all risk based categories rather than
rotate sectors.    I say this because rotating from Technology to
Utilities may provide outperformance in the portfolio - during a market
correction it will only mean that you will lose less money.   Moving
into cash and fixed income for the summer months as QE ends has yielded a
net positive return to date.

Furthermore, this strategy now sets up the individual investor for
part two of the strategy which is having dry powder available to buy
back into equity exposure when QE 3 is announced.   The market has now
been trained, like Pavlov's dogs, to respond to the QE call.    When Ben
Bernanke and friends ring the dinner bell the dogs will come running
and having cash on the sidelines protected from the summer sell off
certainly provides an opportunity to be the "strong hand" buying from
"weak hands" at that point.  

Remember, being cautious is more important than losing money.   The
media is constantly telling people to chase stocks which have been one
of the, if not the, poorest performing asset class over the last
decade.   You can always make up a lost opportunity - it is nearly
impossible to make up lost capital.

How Much And When?

So, now we know that the Whitehouse needs QE 3 the most right now but
how big might it be.   QE 1 was $1.25 Trillion coming off the lows of
the market in 2009.   QE 2 was $600 Billion in the 3rd quarter of 2010
but really had very little effect relative to the effects received from
QE 1.   I have spoken in the past about the "Diminishing Return"
syndrome that would come with each successive QE program.   In order for
QE to have any real "bang for the buck" this time around it will have
to be big, really big, like $2 Trillion in total.    However, not only
that, but it will also prove ineffective unless it is combined with a
serious attempt at mortgage equity write downs, which will have to be
combined with guarantees for the second lien holders, mortgage fraud
forgiveness for the banks, further tax cuts and credits for small
businesses and some real regulation for the banking industry to restore
faith in the stability of the financial system.    (As a side note -
I am really against bailing out homeowners and banks as it is a process
fraught with peril and another article for another day.)

This is what it will take to kick start the markets again and boost
asset prices, jolt the economy back to 2.5% growth and keep the big "O"
in office for another four years - maybe, and that is a big maybe at
this point.   It will also just "kick the can" down the street for
another brief period in time until we all realize that we are in a
balance sheet recession and until the total amount of debt, which the
majority of it belongs to households, is reduced to a sustainable level,
savings rise to historical levels which can sustain growth and the
consumer is able to start creating the incremental demand needed for
businesses to grow - we are going to be stuck in this cycle for quite a
long and frustrating time.

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Winston Were Wolf's picture

No worries though... I know the wieners story is much more important, bitchez.

NoBull1994's picture

Hard to take anyone seriously who thinks White House is one word:  "Whitehouse".


Spalding_Smailes's picture

Your the moron that told me XOM Exxon Mobil Corporation was a bad buy at $59 ....


Tejano's picture

'Whitehouse' works.  So does 'presidential palace' - it has a nice banana republic feel.

I am a Man I am Forty's picture

hard to take seriously anyone who gives a fuck if there is a space between whitehouse


Michael's picture

So what do we call QE3? I think the ZH community should get the honors of naming it.

My vote is for DM3(Debt Monetization 3)

wandstrasse's picture

Ah, no no no, the word 'debt' is too negative, what about:

AI - Asset Internalisation

QQ - Qualitative Quantification

WR - Wealth Restructurization

YHC-FTSE's picture

PRP: Proactive Recovery Paradigm 

or Proactive Recovery Program

Sounds just dumb enough to be convincing to stupid people who want to feel important.

(Copyright 2011. All rights reserved). I dare them to use it.

Ryman1075's picture

Please give us the address for your blog, we would love to read it...

Oh? You don't have a blog? Maybe you should start one and write stories about the "White House".

Your post and my response just stole 2 minutes of my life that I will never get back...thanks man.

Yen Cross's picture

  I think that Tyler and the fantastic staff of Z/H put the point in(on) the HEAD.  QE-#3 is the antimatter of QE-2  

Vampyroteuthis infernalis's picture

QE 3 Schmuee 3, it doesn't matter at the rate the real economy is collapsing at. QE 3 will hit when it has the most impact, around the end of Sept to Oct when the market is in full crash mode.

Fukushima Sam's picture

QE, the Fukushima of monetary policy!

kito's picture

all the analysis in the world does not foretell the future.

serotonindumptruck's picture

And if it did, the game would be even more rigged than it already is.

Whalley World's picture

Jim Sinclair has been saying QE to infinity for years.  His track record has been "almost"  precise since 2001

benkei54's picture

It's not about Obama - Ben has to bail out Lloyd.  They were college buddies at Winthrop House  - Harvard Class of '75.  Check the yearbook.

LongBalls's picture

I would not count on the old friendship as a lock to future bets. Ben does have a Rothchild as a boss.

TheJudge2012's picture

Obama is used up & done far as I can see, and there will be a fake Republican to take his place. Can't let the dollar collapse too soon when they want war, more war, MORE WAR!!!

augie's picture

FInally, the elephant is out of the closet. Or is it the gorilla in the kitchen?

duncecap rack's picture

The bull in the china shop

augie's picture

The chicken is in the pot.

serotonindumptruck's picture

The fox is in the henhouse.

RunningMan's picture

Like finding a diamond in a haystack. 

mee-mee-mee's picture

off like dads pants on pay day.

hamurobby's picture

The snake is in the grass.

augie's picture

My balls in Bernanke's mouth...... too far?

tawdzilla's picture

...And monkeys will fly out my butt.

sabra1's picture

weiner in someones buns!

StychoKiller's picture

Colonel Mustard in the Study (with the candlestick!)

tired1's picture

The elephant is going to take another dump. Brace yourself.

Shameful's picture

QE3 will happen because I have yet to hear who on Earth will line up to buy 1.6 trillion in Fed Gov paper every year from here to eternity.  It's about what 3% in world GDP, and it's not like the other world govs aren't struggling right now (Name me one major not mired in problems).  Unless space aliens show up and get sucked into the ponzi I can't see any way but QE3.  Well ok there could be an honest default , restructuring, and cutting of spending...but I think the space aliens showing up is more likely.

But I'll admit I could be wrong, someone show me the deep pockets that will fund this debt with something other then funny money.  China has problems, Japan is a basket case, Europe is mired in their own problems with debt, Oil Exporters have a little revolt risk on them.  Don't think the BRICs got enough juice in them to keep blood in the US corpse even if they really wanted to.  Only thing I can see is "Caribbean Banks and Hedge Funds" aka the Fed funny money rolling this turd forward.

Medea's picture

I think we should all scrap the phrase "kicking the can" in favor of "rolling the turd."

duncecap rack's picture

One of these days they are going to kick the turd and it will be a fresh, wet one.

tamboo's picture

forget about a pot to piss in,

qe til you wont even be able to dig a hole to shit in.

dwdollar's picture

All money is real until it isn't.  We all use the USD in our daily activities.  It's real.  It will only become funny when everyone collectively agrees to stop using it.  The FED will buy most of the debt it issues with QE3 and the money that's created will be real because we will keep using it... for now.  The cracks are being to show and faith in the system will continue to deteoriate.  Someday the USD will be funny.

Cdad's picture

The "when" is truly the question...not so much the "how much" because, as the author states, it will fail anyway.  If they announced QE3 today, there would be massively negative implications for the US dollar.  The Dixie is still sitting in a precarious position, and a disorderly decline in the US dollar right here would undermine the attempt to stabilize things per the central bank planner's wildest dreams.

As such, I rather think a big bounce in the US dollar is necessary in order for them to attempt to maintain order with their pathalogical money printing schemes. [I cannot believe I wrote that sentence]

Then again, setting aside the "when" and the "how much", we're screwed anyway you slice this thing.  Sure would be nice if old Ben just faced up to the fact that the market [especially in housing] needs to clear, which means decline...and yes, the equity market would need to follow housing down.

Who knows in this freak show anymore?


Shameful's picture

Decline against what?  Really all they need to do is take the Euro down a few pegs and then unleash QE so Euro goes back up and dollar goes down.  If they can sawtooth the Euro/Dollar down in a somewhat orderly fashion the indexes will look alright.  Sure commodity prices may be through the roof but they can try a couple of exchange tricks on them to at random to slap the longs around.  And with controlled indexes it's easier to spin the narrative that commodities and stuff like gold and silver are in a bubble.  Perception management at it's finest.  There is still wealth to extract, so they aren't going to leave this much wealth on the table.

Cdad's picture

Decline against what?


Really all they need to do is take the Euro down a few pegs and then unleash QE so Euro goes back up and dollar goes down.

I think that was my suggestion.  The Euro/USD is the primary "risk on/off" cross.  Others would follow, and this would put a bid into the the Dixie and move it away from its all time low...which is not far beneath where it is sitting just now.  Not far enough, anyway, to graceful receive the news that QE3 is on.

The Fed cannot risk a disorderly decline into new all time low territory on the dollar basket.  The commodities bid would resume, and the conversations about hyperinflation would resume, inflation expectations would resume.  As such, it MUST bounce.

Get ready for the totally pissed off USD studman, with his tube of lube in hand, having recently had his way with Lloyd Blankfien, now ready to move on to other classes of folk...whose portfolios are about to receive a thorough going over by risk managers.

Reese Bobby's picture

The Fed can expand its balance sheet without permission from any entity except the Banking Cartel that owns and controls them.  As ZH has pointed out before, the Fed can even use swaps/derivatives as hyper-leverage and hide it in "Other" on their B/S; just like AIG without any Goldman to margin call them into insolvency!  QE3 starts July 1, 2011 whether announced or not, IMO, (and that of many, many long-time readers).

Cdad's picture

The Fed can expand its balance sheet without permission from any entity except the Banking Cartel that owns and controls them. 

Strictly speaking, you are correct.  However, to suggest that the Fed has zero political liabilities is not at all correct.

In any event, if the Fed does as you suggest, and does not allow the markets to function for even ONE DAY without its printing machine, that would send an incredibly weak signal to the markets and to the public at large.  I fail to see why you are confident that July 1 is the launch day.  Bernanke would look a fool and a failure [which he is...but...he's been pretty good at not announcing this fact publicly].

I don't agree with your calendar analysis.

Reese Bobby's picture

My point was/is that no outsider will be able to tell what the Fed is doing until they decide to tell us.  We all are familiar with accounting tricks.  Think about what they can do without an auditor!


You allude to political influence?  First of all, nobody of consequence in our corrupt federal Government is not bought and paid for by the Banking Cartel and the lawyers who serve them.  Secondly, the Fed may have Government appointed figure heads but even if that process was not corrupt, which it is, the composition of the Fed Committees that decide on the action menus report directly to the Fed owners, the Banking Cartel.  Look it up...

Cdad's picture

Fed audits, the issue of the debt ceiling, rationalizing current monetary policy to the public...all of these things fall into the category of political risk.  The Fed requires political cooperation.  Up until now, the point is granted that they have had that.  Going forward, however, I'm not sure the carte blanche will necessarily remain intact.  

You say, "No outsider will be able to tell what the Fed is doing until they decide to tell us."  This statement is contradicted by the Fed data release of a last a result of an outsider who pressed back at the Fed with the rule of law.  It was this data release that allowed the American public to learn, among other things, that the Fed bailed out the Bank of Libya.  You are ignoring this precedent.  This historical precedent could easily be seen as a stepping stone to a Fed audit.

The status quo is a seductive thing.  This particular form of status quo is a tough nut to crack.  However, and as Ron Paul suggested, it is likely that the Fed will blow itself up before he ever gets a chance to shut it down.  This is likely true.  I think that is what is actually happening right now at the Federal Reserve.

Anyway, I am simply trying to tell you that if the Fed sends the dollar into a disorderly decline by prematurely announcing the next money printing scheme, and inflation intensifies or goes hyper, well, then the political liabilities of this Fed will become critical, the logical and last immovable object encountering the previously unstoppable force.

Whether or not you want it, I think you should prepare for the nasty, immoral USD studman to appear, bottle of lube in hand.  Whatever that means for your positioning, and no matter how improbable you might think it...I'd prepare were I you.