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Jan Hatzius Presents His List Of Anticipated Fed Action Items Through November 2-3: None; Time To Sell On No Imminent QE2?
Goldman's Jan Hatzius explains why while he is still convinced that the Fed will ultimately have to undergo QE2, he presents the case why the Fed's hands are now most likely tied through its November 2-3 meeting (and why the J-Hole meeting will be a snoozer), at which point it will be too late for the market to benefit from monetary stimulus. The implication: very bearish for stocks, as Obama's only option for pumping up stocks in advance of the elections (monetary easing) is eliminated. With no means to implement a stock run up into the election (which would become a prompt self-fulfilling prophecy), the market is likely about to tumble.
Dissension in the FOMC Sets a High Hurdle for QE2 in the Near Term
An article in today’s Wall Street Journal reveals a deep split within the Federal Open Market Committee (FOMC), with no fewer than seven (of 17) participants at the August 10 meeting voicing reservations about the decision ultimately taken to reinvest repayments of principal of agency debt and mortgage-backed securities. So the decision was indeed a much closer call than suggested by the ultimate 9-1 vote of the 10-member voting rotation.
- The article has two implications for the near term. First, Chairman Bernanke’s speech on Friday, opening the annual Jackson Hole symposium, is apt to be more backward-looking than it might otherwise have been. Second, the hurdle for further easing at the September 21 FOMC meeting is quite high, as many FOMC members are clearly not ready to embrace such a move.
- Ultimately, however, we continue to expect that QE2 will be forthcoming later this year or early next year, as slow growth and rising unemployment raise concerns about a potential double dip.
Today’s edition of the Wall Street Journal (WSJ) contains a remarkable article by Jon Hilsenrath on the split of opinion within the Federal Open Market Committee (FOMC). According to Mr. Hilsenrath, no fewer than seven “participants” at the August 10 FOMC meeting voiced reservations about the decision ultimately taken to reinvest repayments of principal on agency debt and agency-sponsored mortgage-backed securities (MBS) now being held by the central bank. (In FOMC lingo, a committee “member” is one who can vote at that meeting; “participants” include all governors and regional bank presidents, a list that currently numbers 17 given the two vacancies that remain unfilled on the Board of Governors.)
The remarkable aspect of this article is its identification of numerous individuals on both sides of the debate about whether to take this step. Spearheading the argument to act, according to Mr. Hilsenrath: Presidents Dudley (New York), Rosengren (Boston), and Yellen (San Francisco). Beyond its ongoing concern that the FOMC’s ultimate goals of “maximum employment” and inflation between 1½% and 2% seemed out of reach, this group was increasingly worried that faster-than-expected refinancing of mortgages underlying the Fed’s vast portfolio of MBS would cause its balance sheet to shrink almost twice as fast as had been estimated as recently as March. In essence, the implicit modest tightening implied by the policy not to reinvest these proceeds was turning out to be a larger than previously thought. On the other side, the list of those expressing reservations included (again per Mr. Hilsenrath): Presidents Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis), Jeffrey Lacker (Richmond), and Charles Plosser (Philadelphia), and Washington-based Governors Elizabeth Duke and Kevin Warsh in addition to Thomas Hoenig, the president of the Kansas City Federal Reserve Bank who has dissented consistently through the first five meetings of the year.
As we already knew from the policy statement released just after the meeting, the 10 members currently voting on the FOMC ultimately approved the reinvestment decision by a 9-1 vote, as Governors Duke and Warsh voted with the majority despite their concerns. But the article confirms that the decision was a much closer call than implied by this near-unanimous result, as we had thought it would be in the days leading up to it. This is the just latest example of an aspect of FOMC decision-making that has long been apparent: the hurdle for dissent by a governor is higher than for a regional president. The last time a governor dissented was in September 2005, when Governor Mark Olson objected to a 25-basis-point rate hike a few weeks after Hurricane Katrina created uncertainty about the economic outlook.
In terms of implications for events in the days and weeks immediately ahead, we draw two conclusions from this article:
1. Chairman Bernanke’s speech on Friday will be more backward-looking than it might otherwise have been. As is customary, the chairman will open the annual Kansas City Fed symposium at Jackson Hole, Wyoming, this Friday at 10:00 am EDT. For some time, the Fed’s website has listed the title as “The Economic Outlook and the Federal Reserve’s Policy Response,” a topic that would lend itself nicely to sketching out the broad parameters of what it might take to elicit another step from the FOMC to support economic growth. However, the FOMC is far from any consensus on this matter; moreover, the reported split is now a matter of public record. Under these circumstances, it would be premature for Chairman Bernanke to provide a set of guideposts for future policy moves, as helpful as that would be for the markets and as much as we believe that additional easing will ultimately be needed. Instead, we expect him to concentrate on how the economy and the Fed have come to where they are now, with at best just a general sense of economic risks in the months ahead.
2. The hurdle for renewed unconventional easing is quite high for the September 21 FOMC meeting. Two aspects of the WSJ article suggest this. First, in a one-day meeting the committee did not have time to discuss any of the options Chairman Bernanke mentioned at the monetary policy hearings in mid-July when asked what the FOMC could do to help bolster growth. His list included: (a) strengthening the commitment to keep the federal funds rate low, (b) reducing the interest rate now being paid on excess reserves (IOER), and/or (c) initiating a new program of asset purchases. Second, the resistance to the more limited option of reinvesting principal repayments was evidently significant despite the fact that this merely removed a tightening bias in the existing policy stance. This tightening bias would have been very significant, as New York Fed’s Open Market Desk had in the run-up to the meeting sharply increased its estimates of how much MBS principal would be paid down over the next year under an unchanged reinvestment policy. We conclude from these points that many FOMC participants are far from ready to embrace new easing steps.
In combination, these two points imply that quite a bit has to happen, both in terms of further deterioration of the economic data and discussion within the committee, before additional decisions are taken. Note in this regard that the September meeting is another one-day affair; unless the meeting is extended to two days, it will probably be difficult to pull together a consensus by the end of that session. Thus, whereas we previously were tempted to think that any significant disappointment in the employment report (e.g., shrinkage in nonfarm payrolls) might elicit further action in September, it now appears that downside surprises in the data—however and wherever they show up—would have to be quite large. Otherwise the committee will be inclined to wait until at least the November 2-3 meeting, when it has more time to deliberate and will also be revising its formal forecasts for growth and inflation following publication of the government’s preliminary estimate of growth in the current quarter.
Over time, however, we continue to expect sluggish growth, rising unemployment, and further reductions in an already low inflation rate to prompt a new round of unconventional easing, widely known as QE2. The behavior of the unemployment rate will be especially important, as this provides the best summary of how the risks of renewed recession are evolving. As we have noted many times in the past, whenever the 3-month average of the jobless rate has risen more than 0.3 percentage points from a newly established trough, the US economy has either just entered an NBER-designated recession or been on the threshold of one. This rule has a perfect 11-for-11 record in the post World War II era. However, it was never tested during the “jobless” recovery phases of the last two business expansions, when the unemployment rate continued to rise instead of edging down, as it has in this one. While it is conceivable that the rule might not work this time, Fed officials will not want to wait to find out. Thus, we expect renewed monetary easing as the unemployment rate approaches 10%, later in 2010 or early in 2011.
Alas, the market does not care for what happens in early 2011, as half the hedge fund managers will be fighting for the lives post the horrendous performance they will record in 2010.
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What Goldman say,
go the other way ?
When it comes to GS clients, BOHICA.
Not all the time - the public would catch on too quick. The timeline is the only thing in question. QE2 is coming.
http://www.newmoney.gov/equipman.htm
"
Resources for Banknote Equipment Manufacturers
A new $100 will be issued on February 10, 2011. Businesses that make cash-handling equipment, or Banknote Equipment Manufacturers (BEM), are encouraged to begin taking steps to ensure machines will accept the new design when it begins circulating. BEMs include companies that produce bill acceptors, develop firmware and build systems, such as bill payment kiosks and self-checkout systems.
"
Are there machines that handle bill's over $20 today ?
Or is "1:5 split" on the dollar in the works ?
If you were the gov, would you let things slip out of control with [de|in]flation ?
Wouldn't you rather introduce a monetary reform- like say, "new money". Everything gets
multiplied by 5 overnight- the bread you buy, your wage, your house, everything ! For both
have's and havenot's no change in standard (in theory)- same buying power. But notice the
effect on assets on bank's balance sheets- for example- your house is no longer under water
(5x!), dare I say you may be able to turn it into an ATM again ? The "new money" is 5 for an
Euro so our exports flourish ? Europe and Japan bite the dust, they are going to hate us (cose
we are free), but I guess with the most powerful military you can get away with that ?
Hell, Nixon unilateraly withdrew from the gold standard once.
I remember someone high in gov said back then "It may
be our currency, but it is your problem". Why not again ?
I dont think I am going to keep my shorts over the weekend anymore...
(yes, I posted this already, but I think its too important so posting it again)
I mean this in a helpful way: your writing is gibberish. I'm just letting you know so you understand why you're not getting the reaction you expect from it.
I dont get it. True, english is neither my first nor my second language, but "gibberish" ?
Now, if the idea is "gibberish", I've seen it done. When one eastern european currency
reached level of 3000/$ 12 years ago, thats exactly what the gov did- a monetary reform-
"new money", 1000 old for 1 new, i.e. 3new/$, bank accounts converted automatically overnight.
So why not instead of 1000 for 1, 1 for 5 ? And BTW, thats a very good way for the tax
man to ask you where you got all these money from, when you bring your mattress to the bank...
?????
In all seriousness, I thought Obama was going to go the "auto refi" route when he comes back from vacation. Isn't that still the plan?
Can't and won't happen. Look how efficiently HAMP was run. Could the gov't pull it off?
How convenient that the November FOMC meeting takes place the day of and the day after the midterm election.
No QE2?
Isn't the Fed buying up T's with money they created out of thin air?
What is the def. of QE?
Quickly, it is Evaporating...
QE requires an expansion of the Fed's balance sheet.
The Fed is buying up T's with money that was created out of thin air previously (QE1) to purchase MBS that have arrived to maturity. So it's recycling it, not creating new one.
Reading tea leaves. I need a second opinion. I am going to Madame Rue...you know that gypsy with the gold-capped tooth. She's got a pad down on Thirty-Fourth and Vine
Sellin' little bottles of Love Potion Number Nine.
http://www.youtube.com/watch?v=TpaL8yIMV6M&feature=fvst
Who you gonna call: Goldman Sachs Hatzius or Madame Rue?
the part i liked best was how these meetings are all one day events until november. wouldn't want these guys to have to work too hard. it's not like there's any pressing need for a policy response to the nation's economic situation (maybe get a blister on their bum)..
Subject: From Jim Willie
A highly reliable sage source from the gold banking world and international consulting is loaded with deep insight, vast experience, solid connections, ongoing relationships, privileged insider information, and diverse industries tied to banking. He tipped the Jackass off in early August 2008 as to the weekend of September 15th being one to mark in history as three great failures would occur. He gave one month advanced notice of a locus of failure in three places, with great urgency. My guesses of Lehman Brothers and Fannie Mae were correct, but a blank came on the third which turned out to be AIG. He has frequently shared a viewpoint on the inevitable USTreasury default in the coming years. He first enlightened me as to the USFed resignation pathway to default, after it was loaded to the gills in toxic irredeemable impaired assets that no banks wanted. As buyers of last resort, the USFed would choke to death. Rather than a citation of path to default, he shared a great risk of a major event. He said, "The USGovt will devaluate the US$ by 50% overnight in the not too distant future. They need 11 days to do this. If they push it, they can do it in 6 days. So look for a long holiday weekend as an opportunity. The best time to do this is the Christmas / New Year time window. They tried to do it in 2005/2006, but the Chinese put a gun to their heads in Washington and they backed down. You can slice and dice it as you like, but the USDollar is dead and so is the Euro. The systemic change will be a cataclysmic and traumatic event for the West, since all it stands for will go into the toilet in a blink of an eye. The period immediately following the collapse will be filled with violence and total breakdown of law & order. Keep an eye on Greece. It is the guinea pig and incubator for what is coming to Western societies." He went on to mention some positive regenerative power left in the US people to reclaim their country and to restore its legal framework. Soberly, he warned it will be ugly, but loaded with great opportunity. So he sees a sudden massive USDollar devaluation with grand shock waves from vengeful reaction.
Man, you arent making that up, are you ?
Nope. Jim Wille might be but he is a well respected writer and for him to stick his neck out this far means he is deadly serious and sane or completely off his rocker. You decide.
interesting, but that is just repeating an open-ended scenario that could happen at any time as opposed to any new info on the timing of it (USD Devaluation)...
stocks would surge as cash would truly be known to be trash. treasuries would crash too
"cash would truly be known to be trash"
It has been known for quite some time by the ZH
readers and the like insightful people, but the
sheeple will cheer ! Which is all that matters !
"treasuries would crash too"
They do not want that because it would mean
sharply higher interest rates. I think they will
negotiate them treasuries not crashing- case in
point- GM bond holders...
trips i think you are sadly mistaken here mate, "stocks would surge as cash would be trash" That does not make any sense whatsoever.
Stocks (companies) are going to be earning that "trash" so what sort of multiple do you apply to stocks whos future "trash" flows are denominated in trash?
think about it. if their earnings are "trash" and therefore have no value why on earth would stocks surge? stocks will fall in line with the decline in the value of their earnings. if their earnings are trash so to will be their share prices.
I follow Jim Willie also and have found him to be very accurate with most of his observations and predictions. Through some discussions with him, I began to buy more silver than gold a couple of years ago. I believe this will prove very profitable in the future.
Jim left the USA and moved to Costa Rica several years ago. He is definitely ahead of the curve in both his analysis and insight. I recommend his newsletter "The Golden Jackass" to anyone that owns PM's or intends to ever own them.
Devalue the USD 50% against what???? It is already devalued. As world reserve currency all you need to do is debase through QE. Easy and predictable. No need for theatrics.
When the FED monetizes as a matter of policy regardless of T market conditions, then the politicians will try and salvage the USD. It will soon occur to them that there is no way to pay, so the US will have to default on debt obligations owed to the people. Outside holders of Ts will still be serviced with much greater devalued relative returns.
Mark Beck
I know! I know!
Pick me! Pick me!
Gold Bitchez!
Sorry had to be said :)
Will wait until the Sept. & Nov. FOMC meetings to either just keep going regular short long term (7-10 & 30 year) US treasuries or ultra short.
I don't think the market will make it to early 2011. Bank holiday's and stock exchange closures coming soon...IMHO.
Can someone post a link to the Jim Willie article that beastie is reference?
http://harveyorgan.blogspot.com/
""The USGovt will devaluate the US$ by 50% overnight in the not too distant future. They need 11 days to do this."
It would be nice if the author could explain how the US Govt can achieve this in a floating exchange rate system...
The US Govt can only cause the USD to depreciate against other reserve currencies via another massive round of QE. But it doesn't control in any way shape or form the level of the depreciation, nor the time it takes, nor the reactions of the other Govts following suit in this "beggar thy neighbour policy".
For example the first round of QE which started in March 09 partly caused the USD index to fall 15% by Dec 09 (from 89 to 76) and back to 88 by June 10...
So how do they get to 50% depreciation in 11 days ? And how do they make sure it stops there ? We're dealing with psychological phenomenas here which are highly non linear.
Oh, so you think you are so smart just because you use logic and reasoning........
Just asking how the Govt can achieve a 50% devaluation in 11 days in a floating exchange rate system...
I don't think it's possible, but maybe you have an answer?
Im quite sure that was sarcasm and imapop was agreeing with you.
I dont see it happening that way either, a massive Qe2 will have the same effect without disrupting the forex.
I hear you chrisina...
From what I am hearing, it is more likely not possible as the Chinese are now more powerful and less likely to go along which they must or it is game over for the Anglo-American block. The US is trying to wait out the EuroZone in hopes EZ will collapse first and make US bonds more attrative to the Chinese and Oil States who are the necessary marginal buyers needed by both sides. Nationalism is rising in Germany, and may well prevent the EZ plans to fund the ClubMed countries, Hungary etc. with German's Euro savings, and thus assure the ECB fails in its plan to 'save the euro'. Unfortunately for us in the US, that will probably not be enough to save us from our own problems, we will just have kicked the can down the road by a few months.
There are few good answers for us then, but a couple for sure:
PMs and a good self contained place to grow a victory garden, bitchez!! [with some buckshot to feed the 'crows']
The answer is the U.S. will not act alone. Most likely via the G20, a new monetary system. The world would devalue simultaneously. Most likely three or four new currencies, a new dollar,new euro, new "pan asian, & Yuan. Implemented ny the IMF. Please see the following link.
http://www.moneyandmarkets.com/the-g-20s-secret-debt-solution-27996
I agree that a new Bretton Woods type pegged rate system seems more plausible than a unilateral US "overnight 50% devaluation". In any case a massive coordinated devaluation would only benefit debtors at the cost of creditors and I have my doubts on the ability of the G20 to agree on something that substantial before a mega socio-economic shock.
Christina, it's baked in the cake. Put the puzzle pieces together. Start with the collapse, why Lehman was allowed to fail, who was elected, whose agenda is the President implementing? Why massive entitlement shoved down the throats of America, who benefits knowing the debt will be monetized and therefore not paid? Which creditor nations have amassed commodities and gold knowing its coming? What are the largest positions of funds owned by the elite marionettes? When is the question. I think soon, Korea G20 ?
"It would be nice if the author could explain how the US Govt can achieve this in a floating exchange rate system..."
You aren't naive enough to believe that our currency "Floats" without Central Bank intervention do you?
All they have to do is get the G20 together for a Bretton Woods Weekend and voila, your currency has been devalued by %50, no questions asked.
So, would S&P shorting ETFs be any protection?
Thanks for such a great post and the review, I am totally impressed! Keep stuff like this coming!...
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