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A Pros And Cons Analysis Of QE3

Tyler Durden's picture


From Peter Tchir of TF Market Advisors

To QE or not to QE, that is the question.

So here is what I expect to happen and why. 

The Fed will continue to re-invest proceeds from repayments. 

The Fed will use proceeds from pre-payments and redemptions to buy new assets.  If they don’t purchase new assets, they are effectively tightening.  Any time one of their treasuries matures, they will receive payment from the treasury.  This money has to be reinvested or else the Fed will have to remove some 1’s and 0’s from somewhere in the system, effectively, unprinting money.  So using the proceeds merely keeps the status quo. 
As part of this, they will also announce that they tend to purchase longer dated assets with these redemption proceeds.  They will argue that they want to add additional support to the long end of the curve specifically to help the mortgage market.  They may even go back to purchasing mortgages and not just treasuries.  The rationale of using the money to lend as much support to the mortgage market as possible is the most politically acceptable reason.  An unspoken reason for extending maturities will be growing concern within the Fed that this tool will be taken away, so to ensure the most control of their balance sheet they will want to extend their portfolio and reduce roll off going forward.

I believe the market has almost completely priced this in.  Any sign that they will not re-invest proceeds would be a negative for the market.  I’m not sure the market is pricing in any extension out the curve or into mortgages so those could provide mild upside.  I’m a little concerned that much of what I read and hear tends to view re-investment as a continuation of QE2.  I don’t see it that way.  Any re-investment of proceeds from a treasury redemption is merely keeping the status quo.  No new money is being created nor being pumped into the system, its no different than if the Fed had originally purchased this longer dated bond. 

QE3 will differ from QE2 and has only a 50/50 probability of being announced

On a basic level, the hawks within the Fed would like to pause the QE program at the end of June.  The doves are far more likely to be pushing for another round, but they seem less aggressive right now.  The economic data is much stronger than when QE2 was first announced, although it has been weakening of late, and the sovereign debt crisis in Europe has taken another leg down.  In an ideal world for the Fed, they would allow QE2 expire in June, but talk up the potential for QE3 in the event it is needed.  There are two problems with this approach.  One problem is that the Fed is well aware of the growing criticism of the policy.  Somewhere in the back of his mind, Ben, must be concerned that if he does not proceed with QE2 now, there will be too much pressure on the voting members to launch QE3 later.  If they don’t launch QE3 in June but the data deteriorates to the point they want to launch in September, the outcry might just be too strong.  The government as a whole is already against it.  Certainly the argument that ‘it worked’ would be difficult to make, the reality would be that just like so many other programs is that it increased current economic activity at the expense of future economic activity.  Also, since Ben is constantly trying to manage expectations, what would the market reaction be to a Fed that does not proceed with QE3 in June but tries to do it only a short while later?

So I think they might be pressured into launching a version of QE3 in June, but I think it will look very different from QE2.  I expect that it would target longer dated treasuries and possibly even mortgages, in an effort to create the most political support.  I also believe it will be more open ended.  Rather than saying we will spend $X billion in 6 months and here is our purchase schedule and target portfolio, he will create a ‘war chest’. QE3 will be positioned as we have $X billion that we are prepared to use to purchase longer dated treasuries and mortgages if and when we see the need to add support.  This would be a true compromise.  It does not force the Fed to create a schedule of auctions like QE2, in fact if the data remains stable they don’t have to do anything.  That should appease the hawks.  By targeting maturities that directly impact mortgage rates, its more palatable to the average American, and by keeping the activity less obvious they can deflect any links to inflation more easily.  It also keeps the purchases open at a time when there must be some real concern that this alternative tool could be restricted in the future.

I believe that the market is set up for some disappointment.  It feels like a lot of investors are saying they don’t expect QE3 but deep down think it’s likely and are positioned for the positive surprise.  Another group of investors seems convinced that no QE3 is priced in so are comfortable being long since only a positive surprise could happen.  In the end, I think a full QE3 announcement is mildly positive, a version of QE3 lite as described above is a minor negative, and no QE3 would be negative for the markets.

What the interested parties are pushing for

Ultimately Ben and the board will determine whether to pursue QE3 based on its merits, but there are a lot of interested parties that are pushing their agenda and likely have some influence on the outcome.  In the end, for all these reasons, believe that it is only 50% chance that QE3 is implemented, and if it is implemented it will have more flexibility than QE2 and a more concentrated effort to help mortgage rates.

Wall Street is for QE3

The QE program is great for Wall Street.  They will want to see it continue.  At the most basic level, the treasury is purchasing about $120 billion a month in treasuries from them.  If the street is making 1/8 on each trade with the government, that is $150 million of profit for the street every month.  For a product like treasuries, maybe an 1/8 is too much, but since the Fed doesn’t disclose the purchase price, just the quantity, it’s not a horrible assumption.  Asides from the direct bid/offer income made from the sale, the Fed is a dream client.  They are big, and tell you what they want to do.  If the street isn’t able to scrape out another 1/8 or 1/4, I would be surprised.  So I think we can assume that the treasury desks make another $200 million a month from trading ahead of the POMO schedule.  That is over $1 billion of additional profits for the street every quarter.  That is hard to give up.  From the earnings announcements so far, most of Wall street had strong revenues in their fixed income departments.  A part was certainly coming from corporate new issues, but with secondary volumes light across the board in corporates, it makes sense that a portion of that performance came from treasury trading related to QE2.

That $1 billion a quarter is just an estimate of the direct impact for the banks.  The extra $300 billion a quarter in money the Fed is printing has helped increase asset values and likely enhanced trading revenues on other desks as the money had to go somewhere.

So Wall Street would certainly prefer to see a QE3.  They would never tell the Fed these are the reasons, but its certainly in their interest to push for more QE.

New York Fed is for QE3

I am going to treat the New York Fed separately from the other Fed members.  First, their district benefits the most from QE.  Keeping Wall Street happy is particularly important for the New York Fed.  But I also believe that they like buying $120 billion of treasuries every month.  They are an important player in the market.  Wall Street traders who make multiples of what they do are finally at their beck and call.  Maybe its all subconscious but its hard not to believe that Dudley enjoys having Wall Street ‘need’ him.  The New York Fed gains prestige and the employees enjoy the power of wielding so much money, so they have a strong bias to maintain POMO.  They won’t say it, but buying bonds and dealing with the street all day, is a lot more fun than writing two year plans that no one will ever read or follow.

The Average American is against QE3

The average American cares about jobs, mortgage rates, and how much it costs to make it through a day.  The ‘success’ of QE2 has always mystified them.  They heard about job creation but never really knew anyone who got a job from QE2.  They heard it helped mortgage rates, but most had already refinanced, or are so underwater it doesn’t matter, so they assumed it must be working.  They have some stocks in their 401k, so that’s been good, but their company is threatening their pensions which is what they were really relying on anyways.  Nothing they heard about QE2 seemed to match what they were experiencing, but they let it go.  Suddenly the cost of making it through the day has been sky rocketing.  Their paycheck is the same, but gas, coffee, and food are all getting more expensive.  They are nervous about the prices they are paying for things and are starting to blame this QE thing for it.  They are also doubting it really did any of the good things people said it did.  This message is becoming louder and congress is hearing it loud and clear. 

Foreign Governments are against QE3

Regardless of what Ben says, other countries see QE as inflationary.  Regardless of Obama’s contention that speculators are pushing up the price of oil (in dollars) other countries see the QE policy as partly responsible.  China and other countries closely tied to the dollar as seeing inflation as a result and are not happy.  The U.S. is also not the only country experiencing minimal growth.  Other countries are too and the devaluation of the dollar is not helping their recovery.  Even strong countries like Germany must occasionally look up from the task of bailing out the PIGS and wonder what the consequences of a strong Euro will have on their economy down the road.  We have annoyed the world before, but usually we do that when we feel that we have the moral high ground.  With QE, I’m not sure that anyone can really hold their head high and argue with foreign governments that what we are doing isn’t short sighted and selfish.  This would be less of a concern if we didn’t need them to buy our debt and weren’t hoping that they won’t retaliate on the trade front.

Corporations are mixed on QE3

The impact to corporations has been mixed. 

The immediate impact to any company with overseas income has been positive as they translate those earnings back into weak dollars.  This is good so far, but may be temporary as other countries implement policies to fight the weak dollar.

Those that can sell overseas are benefitting from the weakness in the dollar as their products are more competitive.  The commodity companies are benefitting directly as prices of their selling prices spike.  Companies that have relatively low costs of input (technology) are also doing well; whereas, some manufacturing companies with intensive raw material usage are seeing pressure on margins in spite of increased opportunities overseas. 

So in general, corporations are slightly positive on QE as beneficiaries of the weak dollar but are growing concerned as they see margin pressure building.

The Fed is pro QE3

The Fed still feels like it is leaning towards QE3 but is being held back by fear of backlash from the average American, government, and foreign pressure.  Maybe they are even a little afraid they have unleashed inflation in spite of their denials that QE2 could in any way cause inflation – it merely caused the expectation of inflation which reduced the risk of deflation and made the whole world better.  If they knew for certain that they would be able to launch QE3 anytime they wanted to, they would definitely hold off, but I think they feel it would be prudent to put QE3 in place right now, even if on a limited basis, rather than having to restart the program – which could be very unpopular, and may cause us more harm then good if that flip-flopping behavior spooked the markets.


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Mon, 04/25/2011 - 16:56 | 1205216 King_of_simpletons
King_of_simpletons's picture

The pros: Rich will get richer.

The cons: Main street will get a fatter rod up their arses.

Mon, 04/25/2011 - 17:07 | 1205263 thames222
thames222's picture

and the rich getting richer is a pro how???  and main street getting rammed up the arse is a con?  hmmm

Mon, 04/25/2011 - 19:39 | 1205809 Bicycle Repairman
Bicycle Repairman's picture

Hmmmm.  Looks like there will be more QE.  If they have to make the people beg for it, they will.

Mon, 04/25/2011 - 16:55 | 1205223 Henry Chinaski
Henry Chinaski's picture

Painted into a corner.

It will be QE3.  Good point, though: It won't be announced so much.

Mon, 04/25/2011 - 17:40 | 1205378 Rainman
Rainman's picture the grease fart nobody heard coming. SBD

Mon, 04/25/2011 - 23:39 | 1206551 RoRoTrader
RoRoTrader's picture


Mon, 04/25/2011 - 16:58 | 1205224 Dejean Splicer
Dejean Splicer's picture

Of course Wall Street is for QE3.

"A Pros And Cons Analysis Of QE3"

Some might argue that it's all about the con.....

Mon, 04/25/2011 - 21:35 | 1206257 disabledvet
disabledvet's picture

i would argue "Wall Street is schizoid" on QE.  It both loves (secretly) and loathes it (secretly as well? the "no comment" is the scream of silence, no?) Clearly "the average American" is FOR QE 3 as he will not have to pay the true price of those goods he receives.  To be honest from "our commoner side of the coin" we must also agree that should QE 3 end then "prices must rise in order to reflect the reality of actually having to pay for the good."

Mon, 04/25/2011 - 16:56 | 1205226 LawsofPhysics
LawsofPhysics's picture

If enough corporations see more QE impacting their margins, there will be no more QE.  However, since we have a GDP that is not based on actually manufacturing anything of real value, well, you get the idea.  More jawboning to come I'm sure.

Mon, 04/25/2011 - 16:58 | 1205232 Dr. No
Dr. No's picture

They may even go back to purchasing mortgages and not just treasuries

TBTF et al are out of treasuries.  There is no more need for the FED to buy them.  Infact TBTF wants treasurie prices to increase.  Do any TBTF still own mortgages?  If so, this would provde some support to the theory they will buy MBS.

Mon, 04/25/2011 - 17:02 | 1205243 Cleanclog
Cleanclog's picture

I think they'll buy sov. debt and munis.

Mon, 04/25/2011 - 17:12 | 1205268 Dr. No
Dr. No's picture

Potentially.  We have seen this movie before.  The FED buys what the TBTF want to dump.  First it was toxic MBS.  Next, the FED surveyed the primary dealers on the amount needed for QE2.  My guess is the amount of QE2 was exactly the amount the TBTF need to realign their portfolios out of treasuries.  Next?  Just look at a TBTF balance sheet.  What is most toxic?  Could even be CC debt if TBT screams loud enough.  If there are no toxic crap on TBTF balance sheets, there will be no QE3. 

Mon, 04/25/2011 - 18:01 | 1205455 ZackAttack
ZackAttack's picture

It's actually in the Fed's charter that it can't purchase munis with more than a 6 month duration.

I'm sure some kind of indirect Maiden's Hymen-type structure can be setup to workaround this pesky limitation, though.

Mon, 04/25/2011 - 17:18 | 1205305 Dr. No
Dr. No's picture

treasurie prices to increase

EDIT: treasury prices to DECREASE. 

Mon, 04/25/2011 - 17:00 | 1205233 Cleanclog
Cleanclog's picture

And don't forget that Obama wants to be re-elected (and Bernanke wants to be re-appointed). QE3 or whatever the continued monetization program is called, enables more spending than austerity or inflation would - not to mention trying to prevent the rising costs of servicing government debt if interest rates rise.  

I concur that no specific program is likely to be announced.  But the Wall Street powers will know what's up and run the markets accordingly.  Fed will try to "slip" it past Main St minions.

Mon, 04/25/2011 - 17:00 | 1205245 SheepDog-One
SheepDog-One's picture

Lets see if they can slip it past China, who is now actively dumping dollar debt.

Mon, 04/25/2011 - 18:22 | 1205515 divide_by_zero
divide_by_zero's picture

+1 At some point China will likely rather take a virtual haircut now via the weaker dollar than wait until they need to make change for $10T dollar bill.

Mon, 04/25/2011 - 17:01 | 1205235 Cassandra Syndrome
Cassandra Syndrome's picture

QE3: Hyperinflationary Depression

No QE3: Financial System Collapses

No QE3 would be less painful and quicker.


Mon, 04/25/2011 - 17:56 | 1205439 LawsofPhysics
LawsofPhysics's picture

I agree.  Especially if China keeps buying our agricultural products.

Mon, 04/25/2011 - 18:11 | 1205476 SheepDog-One
SheepDog-One's picture

YES we're such a strong exporter of agricultural products....oh wait its not the 1980's anymore we're now a net importer.

Mon, 04/25/2011 - 16:58 | 1205236 SheepDog-One
SheepDog-One's picture

Economic data stronger yet weaker, build a 'war chest' of imaginary dollars....hmm yes I see. Well lets see how many are fooled by the now childish FED antics of doing QE3 but not announcing it, and how the toxic dollar reacts. Im sure the Chinese will be bamboozled by that super cunning move.

WTF why cant these people admit the FED is stuck and theyre at the end of the line? This shit isnt fooling anyone except the very dumbest people among us.

Mon, 04/25/2011 - 17:01 | 1205238 ghostfaceinvestah
ghostfaceinvestah's picture

Oil at $140 will put an end to any further QE.

In fact oil at $110 will see that QE2 ends as scheduled imho.

Mon, 04/25/2011 - 17:04 | 1205254 ZeroPower
ZeroPower's picture


However, will have to see if any sort of MENA peace (an oxymoron if ever there was one) would take it down to under $100.

At that point, still a chance for more stimulus.

Mon, 04/25/2011 - 17:18 | 1205291 equity_momo
equity_momo's picture

MENA violence is barely responsible for pushing the price of oil up. If the entire region sat down for tea and cupcakes tomorrow , oil might dip to 100 for a nanosecond - the only thing taking oil down hard for any significant length of time is an end to money printing or a global depression caused by higher oil prices resulting in demand destruction.  I believe we clearly have an oil supply problem but just see what taking Emerging Market growth out of the equation does to it : it'll push peak oil concerns out another decade or two.

Mon, 04/25/2011 - 17:43 | 1205386 ZeroPower
ZeroPower's picture

If by barely responsible you mean $10-$20 then i'll agree. But whats $10 among friends right.

Oil already had its nice run from the ~$40 lows making it was back up to the 90s. But then its just flew up to where it is now, if you'll remember, only based on those very MENA troubles.

So again, depends on what you mean by barely responsible. In a world where $200+ oil is inevitable, this MENA situation won't even be spotted on the longer term chart. But until we get to those new highs, we must focus on the issues at hand surrounding the prices before getting ahead of ourselves.

Mon, 04/25/2011 - 17:50 | 1205418 equity_momo
equity_momo's picture

Just look at an oil chart since QE2 was announced : the trajectory was pointing towards where we are now regardless of MENA unrest. Its been a steady grind - the spike in Jan then went sideways until the relentless trend caused by money printing caught up.  Anyway , its semantics.

Mon, 04/25/2011 - 17:02 | 1205242 AR15AU
AR15AU's picture

This is rubbish. QE3 in any form will break the USD below 70 and unleash a panic... They need one more deflationary plunge before they can do this.

Mon, 04/25/2011 - 17:04 | 1205247 SheepDog-One
SheepDog-One's picture

Exactly. This idea of 'stealth QE' is for simpletons...China sees.

Mon, 04/25/2011 - 17:04 | 1205253 Bazooka
Bazooka's picture

i have not seen any comments here ar ZH about the fact S&P dividend yield being less than 2%...!!!

QE1, QE2 have not increased this to above 2% which would be bullish. Rather, despite these QE efforts, dividend yield has persistently remained under 2%.

Also, Mutual Fund cash holdings are near record

So, QE3 will only have harmful effects.

Mon, 04/25/2011 - 17:08 | 1205259 tomster0126
tomster0126's picture

What about oil at $150?  Peak is our biggest concern....also, as long as oil goes up, the dollar goes down.



Mon, 04/25/2011 - 17:14 | 1205278 ZeroPower
ZeroPower's picture

as long as oil goes up, the dollar goes down. 


Depends on America's monetary stance at that point, as well as whether we're in a liquidty providing (QE) environment. Hint: look at 07-08 run in the dollar coupled with the oil run.

Mon, 04/25/2011 - 18:07 | 1205473 SheepDog-One
SheepDog-One's picture

Right, and we're in such a stronger position now than in 08 with the dollar.

Mon, 04/25/2011 - 18:26 | 1205550 ZeroPower
ZeroPower's picture

Indeed, weaker situation with dollar and oil is thus priced higher. If it was due to such high demand as in 07-08, then we'd already be through that $147 high. The demand simply isn't there as we all know the recovery is not in full effect... thus the negative correlation now btw crude and DXY.

Am confident this correlation will switch (as it has many times before) to positive once the printing madness stops.

Mon, 04/25/2011 - 17:20 | 1205302 Cassandra Syndrome
Cassandra Syndrome's picture

Imo, peak oil happened when more oil was being produced than was being discovered about 30 years ago. That spread has widened substantially in the past 10 years.

Also, maybe coincidentally, the international petroleum exchange was founded in 1980. Did that help to keep prices artificially low as the divergence grew over that past 30 years? Are we upon the day of reckoning? Have the chickens come home to roost?

Mon, 04/25/2011 - 17:06 | 1205261 treemagnet
treemagnet's picture

Still doesn't matter - extensions of QE simply goose the carry trade and finally crush margins.  Same deal, it ain't sexy but when our debt is repriced for risk (now real), the jig is up.

Mon, 04/25/2011 - 17:13 | 1205266 slewie the pi-rat
slewie the pi-rat's picture

OMG!!! I'm Channeling Chairzelbub!!!

1/4% increase.  inflation is now vanquished!  goobermint must get spending under control.  we continue to see green shoots in spite of the fact that there are none.  b-bye!

Mon, 04/25/2011 - 17:08 | 1205267 equity_momo
equity_momo's picture

At the end of the day it doesn't matter who is for or against QE , the only metric that matters will be the market. The cost of international and domestic business priced in dollars against the purchasing power of the American consumer will decide how far QE goes.  Infinite QE is not a possibility with the correlation commodities have shown to money printing in the past 1 to 2 years.

Mon, 04/25/2011 - 17:09 | 1205270 ivars
ivars's picture

A little bit on a sad note:

I wonder what is Krugman writing now? On other hand, coming middle class Reich of the USA also sounds chilling. Within 10-15 years , Anschluss of Canada ( resources) , Mexico ( resources plus cheap labour/manpower). The Greater USA to counter the Great China.

Its a pity theories like Keynesian do not work long term and when they are needed they are finally disproved, especially if You are dealing in world reserve currency. Life would be much easier and nicer if they did work. But for some f.. reason they don't . And then we have nationalists coming to power, and neo-fascism as life saver for the USA, and neo-stalinism for China.

Why should it be so inevitable? Can it not be changed, somehow. Life tells it can not, as history repeats, and humans do not change, but if there was knowledge beyond this that would predict the ugly outcomes accurately and convincingly, would not people change their behaviour?

Anyway, the Reich of the USA ( by the way, there is also nationalist 4th Reich in Germany and surrounding regions coming as another superpower-again ) and neo-stalinist China will be.... Who knows if they will be worse of better than previous, its relative, but the numbers killed in potential confrontation will dwarf all previous wars.

How to stop that and still maintain some reasonable distribution of resources with every one happy. NO WAY, i do not see, so far.


Mon, 04/25/2011 - 17:13 | 1205274 GOSPLAN HERO
GOSPLAN HERO's picture

A clandestine QE 3 is impossible.

Mon, 04/25/2011 - 17:13 | 1205276 Robslob
Robslob's picture

Or just think like a rich person, therefore QE3 in our face...let them eat iPad2's!

Mon, 04/25/2011 - 17:13 | 1205281 treemagnet
treemagnet's picture

How does a drug dealer make his clients understand how important he is?  Answer: Cut 'em off briefly, let them experience "cold turkey", and they'll never question his dominance again.

Mon, 04/25/2011 - 17:17 | 1205285 Sudden Debt
Sudden Debt's picture

There is also the stealth option. Just create money and don't disclose the amount or maybe a small amount.

In the short end that would be bullish untill the sceme is uncovered. But that would take a few years.

We'd see the effects like inflation but they could blame in on the QE2 and of course the evil speculators and that would fit in with the words of Obama.


Mon, 04/25/2011 - 17:17 | 1205288 Robslob
Robslob's picture

I get the reference but weed never really had that direct impact on me like QE does for bankers...

Mon, 04/25/2011 - 17:21 | 1205292 plocequ1
plocequ1's picture

Just bring it on already. Jesus H! This phony left -  right, Pro and con, right and wrong bullshit is bullshit. QE will continue. Done. 

Mon, 04/25/2011 - 17:22 | 1205311 AC_Doctor
AC_Doctor's picture

Ben can print more Bens and the US citizen gets bent over.

Mon, 04/25/2011 - 17:20 | 1205314 Financial_Guard...
Financial_Guardian_Angel's picture

Let's not forget who is making the decision and what their interests are. These big boys need to take care of each other and their wallets first and foremost.

First, they need the QE3 to accomplish that. Secondly, they want to stay in power so must disguise QE as much as possible, not from the Chinese or other countries but from good 'ole dumbass JoeSixPack. So it will be hidden to prevent any backlash. They are quite vulnerable now because of the obvious correlation between QE and oil. Hey, the Dems need to keep Obummer in his seat and $6 gas won't git er done. If they pull back, equities tank and their Wall Street buddies scream bloody murder. So they will tell China to go pound sand (or perhaps rice), brace their own portfolios for what they know will eventually come, and hope they are on a tropical island with a trunkfull of gold before someone starts pointing the finger at them.

Sounds easy enough to sell to: Wall Street, top Dems and GOPers for that matter, TPTB, the TBTF, and anyone else with the golden rolodex.

Mon, 04/25/2011 - 17:26 | 1205324 ivars
ivars's picture

QE3 will not happen. USA is not alone in USD market. There will be warnigns of retaliation or retaliation from China, Oil producers, even Japan  ( but they are selling anyway under the disquise of quake funding needs) . UK?

I think FED will conclude that QE2 has achieved its targets ( spin, but with inflation they are correct) and increase the rates. It is not USA currency, its world reserve, and USA military has proven to be overstretched to take care of financial issues other than oil supply.


Mon, 04/25/2011 - 17:38 | 1205373 SilverRhino
SilverRhino's picture

>> QE3 will not happen. USA is not alone in USD market. There will be warnigns of retaliation or retaliation from China, Oil producers, even Japan 


It's not the foreign devil that has them worried.   QE2 stops and all assets go into a nosedive until people are screaming and begging for QEIII ...

Meanwhile Asia will continue to lay hands on as much oil, PM's, food, resources to ride out this storm.    BTFD

Mon, 04/25/2011 - 17:42 | 1205388 ivars
ivars's picture

Except oil and chinese imports. That will not nosedive but grow faster and anyway take the economy, gdp, stocks with it. QE3 will not solve growth or stock market issues for more than 1 month since inception. so why start it?

Mon, 04/25/2011 - 17:25 | 1205331 slaughterer
slaughterer's picture

What the author proposes as the most likely outcome is a stealth QE3-lite targeting longer dated treasuries to support the mortgage market, with funds taken from re-investing old Treasury holdings or from a "war chest."  He thinks it will be a "minor negative" for the market.   He does not talk about the consequences of this on the market (PM, equity, bond, etc.), but the attitudes of various interested parties towards QE measures as they exist now, neglecting to go into detail about how counter-parties adverse to QE might react to QE3-lite.  This article seems a little too simplistic for me, but accurate and even ingenious in devising a stealth model that is the most likely compromise, if indeed the Fed compromises, which is not a given.    

Mon, 04/25/2011 - 17:28 | 1205343 treemagnet
treemagnet's picture

Doves or hawks, its all the same to Ben.  The "chairsatan" is an army of one.

Mon, 04/25/2011 - 17:40 | 1205379 Prof Gulliver
Prof Gulliver's picture

"Wall Street is for QE3"

"The NY Fed is for QE3"

"The Fed is for QE3"

"The average American is against QE3"

It's unanimous! QE3 approved by a vote of 3-to-nothing.

Mon, 04/25/2011 - 18:00 | 1205445 slewie the pi-rat
slewie the pi-rat's picture

OMG! I'm Channeling Benzelbub, Again!

greetings, puny earthlings!  the FED has a new mandate:  to ensure that the bankster-cabal-controlled NWO begins to siphon your wealth and energy to the uber-elite, leaving them with all the goodies, and you with all the debt.  you'll be in a wonder-bankster-nanny-world of complete interlocking fascist murdering psychos.  like me!

this will be transmitted to earth only on zHedge.  no one else will know!  Hahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahah

Mon, 04/25/2011 - 17:59 | 1205446 JR
JR's picture

“Banks have created…and now own all the money in circulation in England (and the U.S.A.) as a debt against the community.” – Jeffrey Mark, The Modern Idolatry, 1934

And, when depression hits, economic law requires that people either have to economize and pay what they  owe or surrender their property.

It’s hard to pretend that a zero interest rate policy is good for America when its destruction is nothing short, in David Stockman’s words, of “the exploitation of middle class savers; the current severe food and energy squeeze on lower income households; the illusion in Washington that Uncle Sam can comfortably manage $14 trillion in debt because the interest carry is close enough to zero for government purposes; and the next round of bursting bubbles building up among the risk asset classes.

Says Stockman, “the Fed soldiers on with its serial bubble-making, even though it is evident that the hallowed doctrines of modern monetary theory and the inherently dubious math of Taylor rules have failed completely.

“Indeed, the evidence that the Fed no longer has any clue about the transmission pathways which connect the base money it is emitting with reckless abandon (e.g. Federal Reserve credit) to the millions of everyday pricing, hiring, investing and financing outcomes on Main Street sits right on its own balance sheet. Specifically, if the Fed actually knew how to thread the needle to the real economy with printing press money it wouldn’t have needed to manufacture $1 trillion in excess bank reserves — indolent entries on its own books for which it is now paying interest.

“So in the present circumstances, ZIRP and QE2 amount to a monetary Hail Mary. There is no monetary tradition whatsoever that says the way back to U.S. economic health and sustainable growth is through herding Grandma into junk bonds and speculators into the Russell 2000 (NASDAQ:RUT).”

Anyone who knows what’s good for him should try to protect sound money and economic stability, for in the end, without a strong middle class, America becomes no more than a plantation and no entity is safe.

Mon, 04/25/2011 - 21:11 | 1206196 Yen Cross
Yen Cross's picture

Jr. Some one told me that ( Slewie ) Still lives in (her Mothers Pouch). I keep track of your posts. Keep it simple and short! Best wishes!

Mon, 04/25/2011 - 18:02 | 1205447 AndrewJackson
AndrewJackson's picture

No matter what happens in the next 3-4 months, we all know the 800 lb gorilla in the room is the US treasury. Lets summarize how the treasury has been able to pass on 1 trillion + budgets onto the market without having interest rates going up (and to a large extent) decreasing. When this ponzi began in 2008, the market was in a frenzy over the recent crisis and saw the us treasury as the only way out. By march of 2009, this effect started to wear off and the fed was required to come into the market in order to take up the slack of private demand. When QE1 had run its course and private demand was still far below supply, the fed introduced QE2. If QE were to end (no additional increases), the treasury would have to figure out a way to unload 1.2 trillion of new supply. Face it, there is no way that private demand can handle + trillion in new issuance / year without having interest rates baloon. This is why QE3 is inevitable. Whether it happens in June or August is inconsequential. What we need to prepare for is QE3, QE4, QE5, QE6, ..... QE Infinite! The fed is to weak and morally bankrupt to do the right thing. Buy metals and prepare accordingly.

Mon, 04/25/2011 - 18:12 | 1205487 slaughterer
slaughterer's picture

I am always impressed by how much non-PD takedown there is still on Treasury auctions.  I think Treasury will be able to find a sucker to buy its debt if there is still the propagandistic illusion of a responsible fiscal policy in the future.     

Mon, 04/25/2011 - 19:40 | 1205795 sschu
sschu's picture

how much non-PD takedown there is still on Treasury auctions

This is the real question, who has been buying our debt, how have they been buying it and by who/how do we expect it to be bought over the next 2+ years?  It is clear that we can expect little action on the fiscal front from the federal government, so this $3T has to come from somewhere.

Someday we will hopefully be able to find out just exactly how the Fed is pulling this off, because it just does not make any sense for a foreign/local country/entity to lend USD to the treasury at 2% for 5 years in a declining $$ market with commodities on fire. 

This is the stuff of guillotines.  Let's hope we do not get there, but it looks more likely that is our future.


Tue, 04/26/2011 - 10:19 | 1207651 havingfun
havingfun's picture

Just a newbie here, but maybe the answer to your question, "who has been buying our debt?"----there was an article here at zh a few days ago, saying that China wants to "diversify", and in that article it said that the amount that China had recently bought in US Treasuries coincidently happened to be about the same amount as the total of QE2.

Maybe China? 

Mon, 04/25/2011 - 18:04 | 1205461 TruthInSunshine
TruthInSunshine's picture

Bernanke's filthy, diseased hands are fine with ZIRP even if QE gets throttled back materially.

ZIRP is the cause of the speculative fever that's leading to some pretty damaging (to the organic economy) inflation now threatening to kick into overdrive, if the Fed doesn't get a lot more aggressive (as in implement rate hikes, aka anti-ZIRP).

Mon, 04/25/2011 - 18:09 | 1205468 TruthInSunshine
TruthInSunshine's picture

There's a glitch in the Matrix. Deja Vu. Bitchez.

Mon, 04/25/2011 - 18:09 | 1205475 TruthInSunshine
TruthInSunshine's picture


Mon, 04/25/2011 - 18:13 | 1205481 SheepDog-One
SheepDog-One's picture

Rock, meet hard place.

Mon, 04/25/2011 - 18:27 | 1205556 slewie the pi-rat
slewie the pi-rat's picture

ok, now, in the Fiat Race To The Bottom, does anyone else sense the euro getting a little toppy, here?

Mon, 04/25/2011 - 21:56 | 1206199 Yen Cross
Yen Cross's picture

SLEWIE!!!! it's  (sovereign debt.)  Not fiat. Your 80's fixation?

Mon, 04/25/2011 - 21:56 | 1206309 Yen Cross
Yen Cross's picture

I called 146 3 weeks ago! Barrier options, and a consolidation!

Mon, 04/25/2011 - 18:34 | 1205578 Rainman
Rainman's picture

I always pay attention to the big miss. CBO is $10 Trillion off its 2008 debt projection for 2018.....and not a creature is stirring.


Mon, 04/25/2011 - 18:38 | 1205590 Everybodys All ...
Everybodys All American's picture

QE3 will lead to social unrest...right here in America. God help us.

Mon, 04/25/2011 - 19:03 | 1205653 nah
nah's picture

is the US government stuffed with debt from banks to the point its so stupid they cant hardly raise taxes or find buyers for for the junk they sell... you could tell everyone were going to create a slave world running out of cheap energy or



Mon, 04/25/2011 - 19:25 | 1205714 lawton
lawton's picture

Wouldn't collapsing stock and commodity values drive people into treasuries so the rates wouldn't have to go up that much to get people there ? Kind of what happened in Japan with their stagnant stock market ?

Tue, 04/26/2011 - 01:50 | 1206760 BDB8
BDB8's picture

what happened in 08? i don't see people going Treasuries at low rates, especially when the biggest holders just sold. they might jump in when rates rise, but when rates rise are debt becomes unpayable. qe to infinity. 

Mon, 04/25/2011 - 19:24 | 1205726 Strategery
Strategery's picture

QE1 went into place with most educated Americans not having a clue what it meant or how it worked. By the time QE2 was announced, very few understood, but those were starting their campaign of education. During QE2, the educated population in this country has grown to understand what is going on, and the Fed is under more scrutiny every day. No one is buying the Fed's attempted propaganda. The treasury and administration are in this knee-deep. Congress is 'seeing no evil' and it's omission is being noted. By now, it is clear that the Fed with government ratification is still bailing out Wall Street and the bankers by decreasing the value of the dollars in the pockets of working Americans. Any covert attempt at QE3 will be seen as proof of theft, although no more is needed. An announcement of QE3 will mark the beginning of the end of a central bank in this country. This administration and Congress's failure to side with Americans over Wall Street/bankers will be the catalyst of things to come.
The American people are due significant restitution from the Fed and our government. No tax was passed, but we have inasmuch been horrifically taxed by the devaluation of our currency. The amount of these trillions in restitution should be paid back to the American people. In the meantime, we need our government to change course and protect us from the Fed, and when the Federal Reserve Act is repealed, the government needs to recover this stolen money from the banks and begin the long road to restitution.

Mon, 04/25/2011 - 19:56 | 1205894 sschu
sschu's picture

All of this is true, but it is becoming clear the only way out of this is a reset, that means confiscation of your 401K/retirement benefits and repudiation of the currency after this theft is complete.

The Fed will do ANYTHING to maintain its power, the federal government is likewise driven by maintaining their own power, these two are symbiotic in their incestuous relationship.  Therefore, after they take all you have, they will crash the dollar and re-issue a new currency to start the game over again.  Only then everyone will work for the federal government and only a small number of rich/powerful people will enjoy any freedom and will own all the assets.

It is the only way they will not face the fate of Marie Antoinette and the wrath of the people.


Mon, 04/25/2011 - 20:18 | 1206014 New_Meat
New_Meat's picture

"I expect that it would target longer dated treasuries and possibly even mortgages, in an effort to create the most political support. "

in the later 1940s, when Debt/GDP ~= 1.0 in the U.S., the Fed manipulated the longer bonds down this way.  The path out was growth of the numerator.

With the crowd in power these days, growthiness is not a policy option, let alone Trav777's well taken observations on reality.

So, no path out observable, at least so far.

- Ned

Mon, 04/25/2011 - 20:44 | 1206117 malek
malek's picture

So many words, so little enlightment.
Without QEx, how exactly will the ongoing federal budget deficit be financed? (or eliminated, muahahaha!!!)

Mon, 04/25/2011 - 20:53 | 1206135 Everybodys All ...
Everybodys All American's picture

I'm not certain QE3 can or will occur because QE3 means we are in for QE infinity and the bond market and or the dollar will implode. Does Ben Bernanke want to be known as the Federal Reserve chairman who presided over the loss of our reserve currency status? Think about that for a minute.

Now I believe the Fed can use any number of back doors to virtually continue QE in some form or another if they wish. I believe this will be the option chosen as to hide their intentions from the market.

Bear in mind the fact that rates will have to go higher with or without QE and this could collapse what little recovery can be claimed. So in escense the trap is set. No winners when this Fed leaves the room.

Also, I might add if the Federal Reserve continues to debase our currency their will be a second American revolution and the Federal Reserve and those presiding in it will be burned to the ground literally and figuratively.

Mon, 04/25/2011 - 21:38 | 1206260 malek
malek's picture

So if they only "virtually continue QE in some form or another" then it will not happen that "the bond market and or the dollar will implode"?

Mon, 04/25/2011 - 22:50 | 1206454 Everybodys All ...
Everybodys All American's picture

No ... my point being they can buy themselves more time. Same result likely. The whole situation rests on whether they can somehow buy enough time to see housing prices recover. I don't see it happening ... it is that simple. Without housing prices recovering banks face huge losses and or US tax payers.

Mon, 04/25/2011 - 23:50 | 1206574 malek
malek's picture

I agree, except that house prices would need to start rising quite fast again continously to keep the system from imploding. Which will happen, in line with all other things... it's called high inflation.

Tue, 04/26/2011 - 01:42 | 1206750 BDB8
BDB8's picture

housing will be the last thing inflation touches. 

Mon, 04/25/2011 - 22:30 | 1206404 Shooting Shark
Shooting Shark's picture

So what happens if, with the dollar hanging out at ridiculous lows, folks like China graciously allow us to repatriate those dollars, and then bulldoze physical dollars into real furnaces?

I'm not suggesting it as a cure (it sounds awful) , but as a thought experiment.  Perhaps this has been covered (it does seem an obvious question), but I'm new to these things.

Mon, 04/25/2011 - 22:48 | 1206431 Everybodys All ...
Everybodys All American's picture

How about not ripping off the tax payers any more? How about declaring banks that have failed to live up to certain standards bankrupt? Why do we have bankruptcy, if not for times like today? I'm so sick of the Bernanke apologist's it drives me crazy. None of his QE has even remotely fixed the economy. In fact we are far worse off right now than in the whole of our American history.

Mon, 04/25/2011 - 23:04 | 1206487 BDB8
BDB8's picture

who buys US debt when the federal reserve stops????  the fed wont let the debt go unfunded, causing a crises. they will print print print and cause a bigger crises! 

Tue, 04/26/2011 - 01:33 | 1206730 Tabarnaque
Tabarnaque's picture

I agree with you. There’s a big point missing in this analysis. QE2 exists because of the need to finance the huge government deficit. If QE2 stops, then who will buy treasuries to finance next years’ deficits? The Chinese? The Japanese? The PIGGs? The Venezuelans? Who will show up to buy another trillion+ of newly issued debt? Recycling the proceeds is not the answer to coming years’ deficits. The question from the government’s perspective is not: To QE or Not To QE. The question is: To QE or Not To BE. And since we are dealing with rotten politicians that are unlikely to start any significant austerity measures before an incoming election, we can bet that they will choose the money printing option. The rest will be window dressing.


Tue, 04/26/2011 - 01:40 | 1206745 BDB8
BDB8's picture

ya i think qe3 is a lock. the big question is, will it completely kill the dollar? 

Tue, 04/26/2011 - 07:56 | 1207186 MadeOfQuarks
MadeOfQuarks's picture

If they do go that way there is no question.

QE3 would be an admission that 1.QE doesn't solve the fundamental problem, 2. The FED doesn't know what the fudge it's doing 3. The FED is powerless to effect any real difference and 4. The printing can't stop.

If that doesn't kill the dollar then fiats never die, and we know they do.

Tue, 04/26/2011 - 01:39 | 1206743 AldoHux_IV
AldoHux_IV's picture

Either way, the end of the fed is necessary for any real economic prosperity to begin-- actually we will also need to replace all the corporate sponsored idiots in congress and the white house as well.

Tue, 04/26/2011 - 08:49 | 1207314 sporb
sporb's picture

You guys should switch to Roman Numerals: QE III, QE IV...

Then when the numbers get real big

you'll look more pseudo-imperial!

Imagine  QE XL!!!  Like the Superbowl!

Tue, 04/26/2011 - 09:04 | 1207357 Welfareisfraud
Welfareisfraud's picture

I am sure there's many pros to connected, elite banks and the government itself. For the rest of us, it is a con, a massive con.

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