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To QE Or Not To QE?
You thought you knew everything there is to know about the implications, consequences, and ways to frontrun the government's QE2? You were wrong. For everything you always wanted to know about Quantitative Easing, and about 100 pages more, here is Morgan Stanley's Jim Caron with the definitive presentation deck on everything wicked that this way comes.
QE summary highlights from Morgan Stanley:
- QE - whether or not the Fed engages in it, how big, how long and does it include a mortgage stimulus plan? Will this reduce the tail risk in risky assets?
- How might QE impact yields? Much depends on the point above. Our estimates are as follows:
- Level: UST 10y 2.20%
- Curve: UST 2s10s 175bps
- Belly (5-10yr sector) to Outperform
- Maintain longs on front-end forward rates
- Spreads: modestly overweight spread product to earn carry. But we recommend spending some of that carry to hedge tail risks.
- Swap spreads: we expect swap spreads to widen particularly in the 5-10yr sector, which is where we think the majority of UST purchases will take place in QE.
- Volatility: we expect great economic and political uncertainty in Q4. Market moves may be exacerbated due to looming QE concerns.
- Real rates vs. inflation: falling real rates near term to discount slowing real growth concerns. But inflation risk premiums to rise as QE, debt monetization risk and fiscal stimulus up the ante for inflation later on.
- Increased risk profile: the market is exposed to long duration, i.e., interest rate risk now more than ever.
The correlation of performance across asset classes in closely tied to changes in rate levels. But the expectation of QE allows some investors to look past this risk. We think that's a mistake.
And here is how Morgan Stanley sees the event risk calendar into the first month of 2011:
To QE or not to QE: That is the Question
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We know from history that Danegeld payments went on for many years by many different actors in power during the Anglo Saxon and Norman eras. QE is no different. There will be as many iterations as necessary until the rich and powerful are satiated enough to never fear that their power can be usurped or their influence diminished. In other words as long as the weakling currency can withstand such graft and then and only then until the replacement currency can withstand such graft and then and only then...
But theres no 'there' there. Pay with what? Decimal points on a screen?
I think the markets have basically backed the Fed into a corner to push for QE2 by having such high prices. If there is no QE announced, the markets will tank. So it is not a question of whether or not to have it, but more of a when will it happen question.
Good thing the Feds supported this moral hazard that is rampant in the entire system now.
Good thing the Feds supported this moral hazard that is rampant in the entire system now.
+10 Agreed. Allan Meltzer had a great piece in the Journal this morning in regards to Fed stupidity at our expense. He also brought up the rumor last week of them moving their inflation target higher... (This while risk assets climb, commodities climb yet CPI goes nowhere) How much more obvious does it have to become that the Fed is only playing for the Banks and when the hell does the international market wake up to this reality and speak with their sell orders?
'Stocks Rise on Continued Hope FED Does Something'...I've never seen a more ridiculous world ever. Who exactly bought stocks due to reassurance the FED would 'ease'? Ease what, WITH what? Just massive stupidity, I'm outta this crap forever.
BB QE2 will get you another step out into space.
http://4.bp.blogspot.com/_CXVtm97fWDo/S8ZAzHXLe7I/AAAAAAAABjg/3eozW-2QMk...
They'll attempt to do it low and slow (in their eyes, of course) and that may be our only saving grace.
Great Karnak says: "$100B bundles which will push up oil beyond comfortable levels before six such disbursements can be made"
The astute will note that this is not enough to be useful for asset reflation, but will do wonders for crushing the dollar and corporate margins.
"Increased risk profile: the market is exposed to long duration, i.e., interest rate risk now more than ever."
Well, at least one of the big houses sees it. But I doubt this will stop the market from piling up more of the same.
Boring... QE2 is getting so fuckin boring I'd rather watch fuckin Oprah than read another article on QE2. A typical Hollywood happy ending is more uncertain than QE2.
Why doesn't Bearwanke just fuckin do it and get over it.
Or maybe he's getting kicks out of playing "how to keep 10 million idiot pundits in suspense". I probably would... except that there's nobody left in suspense, apart from CNBC and other complete fuckwits.
Right Andrew, Q/E2 hype has been the lone market driving hype for how long now, 8 months and 1.500 DOW points? Did everyone forget that the Q/E2 was to sail into port on the Sept FOMC, where they kicked the can further down the road again instead? Highly suspicious! I think now the Q/E2 hype is nothing BUT hype, as the FED has nothing!
Well, QE / POMO seems to be ongoing without any formal announcements from the Fed... It's not like the extra $1T or so would even make much of a difference, which is why it's boring me to death.
Back to Oprah. Wake me up when gold is $2000 or when there's rioting on the streets, whichever comes first.
The end game is coming: the DOW and Gold reach an equilibrium at 5000.
The Fed will not announce QE2 the day after the mid-term elections when the Democrats get crushed. Think about it, a crushing defeat in the mid-terms followed by a 500pt rally in the Dow due to QE2. Never going to happen. Already priced in and what would be Dem's/Obama's goal? For a market sell-off after the mid-terms with Fed NOT announcing QE2!
I agree. Its a total bluff, we may as well be watching 'The Sting' as the pot has been ante'd up and is all in and the FED holds a pair of 2's.
Your theory is the rug is pulled after the election ass-kicking, I still believe they avoid an election humiliation and do it before, due to whatever 'totaly unforeseen disaster', where the markets, FED, incompetent politicians and crooked banksters suddenly become the last thing on anyones mind.
The Dems execute (or promise) QE2 or something that sounds like it in 2 weeks, before elections.
Tax cuts are for after the election -- whoever wins -- to stimulate seasonal spending. Simple smoke+mirrors.
The first measure will have no impact at all. The second will hardly matter, the US consumer is dead.
The wheels come off in early 2011. Then, no floor and down the rabbit hole for 5 years. It's our event horizon, where everything changes. Nothing you know today will exist in the same context afterwards.
Thanks ZH.
Any news on QE II is welcome even if the Fed is the one getting tedious with all the posturing and talk. Looks like they're playing a big game of chicken with China to get them to raise their currency and will crush our own if they don't.
So, what if China cries Uncle and signals they'll raise their currency? That would not be small thing. What will BB do then? That's why I keep tabs on this.
When Morgan Stanley starts using clip art, does it mean that we're all going to die?
Ha.
That's actually original...From the fine graphic art professionals at HyderBaDesign
Just FYI. Bernanke gave a speech October 4th that hasn't been covered much:
"Today I have highlighted our nation's fiscal challenges. In the past few years, the recession and the financial crisis, along with the policy actions taken to buffer their effects, have eroded our fiscal situation. An improving economy should reduce near-term deficits, but our public finances are nevertheless on an unsustainable path in the longer term, reflecting in large part our aging population and the continual rise in health-care costs. We should not underestimate these fiscal challenges; failing to respond to them would endanger our economic future."
This is the first time I've heard him say we're on an unsustainable path. Interesting?
Something for the historians, is all. He'll be remembered as an early visionary by his biographers on the basis of that single speech. BB knew, they'll say. But his hands were tied, they'll say. It was all baked into the cake, they'll say. Recorded history is propaganda, too.
Sorry, forgot to mention the link to speech.
http://www.federalreserve.gov/newsevents/speech/bernanke20101004a.htm
Our stupid Fed chief has painted himself into a corner: His yapping about QE2 has caused a mini stock bubble he can't afford to pop now. And he has to do something dramatic in November. He cannot do it slowly in $100B increments because next year, a few of the new Fed voting members who will be on the FOMC voting committee have indicated they are doubtful about QE. Ben will face more no votes each month he tries to open his (OUR!) wallet in 2011.
What a disaster this idiot is.
Could it be a corner he wanted to paint himself into?
with a massive rally in treasuries the Fed is really going all in on "smell the glove" enomics. no return on savings, no worth to the dollar relative to commodities, no hint of even containing the deficit or spending--only the Fed can "make it right." If you're not loading up on particular equities here you're missiing the greatest transfer of wealth in American history. Ford, GE, Boeing, Wal Mart the Oil majors, intel, oracle, blah blah blah. too big to fail has become "you need to be bigger because we in DC have failed" and "we talk too much, too." Since we are already at war the only quesiton is "when do we get the blowback causing an expansion in that space." Still--you could be a Continental European--or a Palestinian!
Events in Europe could prove ... interesting. I'd expect a brutal resurgence of something-like-Marxism (though a movement K. Marx himself might not recognize.) But I don't think anyone is going to get out of this unscathed. While it may start in Europe, it will end in America -- and in spades. Our penchant for vigilant violence will shock future historians. They will run out of superlatives, trying to describe what happened in America.
Emperors, kings, dictators and tyrants would enjoy power still if massively monetizing debt solves economic problems. It’s unworkable, period! The QE2 threat is driving up food and energy prices which hits Americans hard, slowing down the real economy, causing a disastrous double-dip recession. Having a private company control the US money supply is unsound. Expect the Fed to lose this valuable franchise when their failed QE2 causes the second, and much worse, recession. Our leaders are either idiots, or Machiavellian villains.
I'll still stick with Marc Faber,he predicted all this years ago AND insisted then as he is now that Bernanke would print and print and print until prices stopped falling.And he even recently went as far as to say that in the unlikely event of the SP500 falling below support at 1040 to 950-1000 say, there would be another massive stimulus package announced,and more QE produced.So no,there is no question of "if" its just a matter of when and by how much.To quote Pisani: "Battam line",he is going to burn everything to the ground to start all over again,anybody with money in cash or bonds will be totally wiped out.
S&P500 Financials index has not been bullish for some time. This is a warning.
http://stockmarket618.wordpress.com/2010/09/27/mon-sept-27
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