QE3 Has Already Started

madhedgefundtrader's picture

Most analysts have missed the fact that QE3 has already started in earnest. Of course, it would have been easy to miss. Ben Bernanke has not made any grand pronouncements. He hasn’t done some public thinking out loud, as he did among friends at Jackson Hole, Wyoming last August. It is not even called “QE3”. Think of it as a “stealth QE3”. But make no mistake. A new variety of quantitative easing has already begun in a big way, and is generating its desired effect.

The new QE3 is the “RISK OFF” trade. QE2 ended up pouring $600 billion into stocks, commodities, oil, gold, and silver. Since April 29, the prospect of slowing economic growth has prompted this hot money to take flight and bail from these assets classes. Think of it as the same $600 billion stampeding into risky markets, doing a 180, and then stampeding right back out again.

Where is all this money going? Into the Treasury bond market. We have in fact been in new bull market for bonds since February, taking the yield on the ten year Treasury down from 4.10% to 3.10%. If the current “RISK OFF” trade continues, or even accelerates, we could see ten year yields down to 2.0%-2.5% by the end of the summer.

In the ultimate irony, we might even see bonds peak and risk assets bottom on June 30, the day QE2 ends. Given the way that events compress and accelerate these days, I would not be surprised to see things unfold this way. This is why I have been selling short puts on the long bond ETF (TLT), and avoiding bearish bets on bonds, like the plague, such as the (TBT). It is also why I have been piling on shorts in oil and stock at every opportunity.

There is no doubt that this is Ben Bernanke and Treasury Secretary Tim Geithner’s plan, and they have voiced as much to Washington confidents in recent weeks. The beauty of this plan is that it has no government fingerprints on it. They are getting private investors to do the heavy lifting for them. That will make them immune from attacks from anti-interventionists, like the Tea Party, and anti-Federal Reservists, like Ron Paul. Bernanke can just sit back and let natural market forces do his handiwork for him.

Clever Ben, clever.

Of course Bernanke cannot employ this strategy forever. Eventually the expiration of Obama’s many stimulus programs, the end of the Bush tax cuts, a growing drag by the state and municipal sector, and a worsening structural unemployment problem, will slow economic growth enough to where the Fed will have to take real action. Then they will have to launch a real QE3, or face another Great Recession, something the administration would rather not see in an election year.

Keep in mind that the next Recession will be far worse than the last one. None of the problems of the 2008-2009 debacle, like too big to fail, the real estate collapse, and the burgeoning bad debts on bank balance sheets, have really been solved. The can has merely been kicked forward. The only difference will be that there will be no TARP and no bail outs next time. The chips will fall where they want.

This all means that you better keep running your shorts and make some serious coin from the unfolding “RISK OFF” trade while you can. Look out below.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

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Wampeter's picture

Basically nice comment but its about 3 months behind the curve.  Smart money pulled out of risk assets March till May (note the silver take down).  This is decision time for risk assets which may be undervalued.


Feel the flow's picture
"Max Keiser rips the financial markets apart like a hand grenade in a house made of peaches" - Resonance FM

He's been talking about QE3 for ages now...

Buy Silver.  http://www.guidetosilver.com/max-keiser.html  Feel the Flow...

LookingWithAmazement's picture

So the question who will buy the T-bonds after QE2, is now asnwered: the same investors/speculators that ran panically into commodities because of the Fed money printing and so bubbling the bonds. Now they run back!

pupton's picture

TBT Bitchez!!! 

SilverDosed's picture

One thing glares at me:

The can has merely been kicked forward. The only difference will be that there will be no TARP and no bail outs next time. The chips will fall where they want.

What makes you think there will be no TARP and no bail outs? We may not see them as public as before (kind of like your stealth QE3 theory) but they are happening right now and will continue to happen until the ship finally sinks. QEn is the ultimate bailout, we just have to remember that the left hand handing money to the right hand isnt very different from the right hand handing money to the left. They're both attached to the same body. They will continue to shuffle money (or debt really) and shitty holdings back and forth because they work for each other. In a system where we can systematically export inflation to the rest of the world to keep consumer prices low, manipulate the price of commodities downwards at will through the derivatives markets, and let real estate remain stagnant, it is very difficult for the public to even see inflation happening. Keep acting like the bad debt on your books is actually something of value and nobody cares as long as you put your play money into the markets to make it look like things are just fine. How long can we hide our inflation is the only real question. The best/worst part is that nobody can call them out on it. We like to use china as a scapegoat but their cards are leaning on our house as well, the whole world is drinking the kool-aid. There's really no way to crack it as Saddam is a good example of what happens when you try to throw a wrench into the fiat scheme. The biggest hole in their armour I believe is the commodities and derivatives markets. As inflation progresses it is becoming increasingly difficult to hold the prices of commodities down and an event like a silver shortage could send the derivatives beast with numbers of notional dollars so high I dont even know the right word for them into rage mode.

Hannibal's picture

(Un) employment, living wages and (affordable) housing rebound is key. Everything else is just noise.

DavidC's picture

The Dow high this year is around 12,910 (yes, I know, I'm not being exact) and is currently at around 12,500. That's only off 3 percent or so.

S & P 1375-ish, now 1340-ish, off about the same.

1 - We are still WELL above the HIGH of 18th April when S & P put the USA on negative watch.
2 - We are still WELL above the highs of Fukushima (remember that? It's gone away completely now) in March.
3 - We're nowhere near the area of August 2010 when QE2 was announced.

Hmm, seems to me that we're still very much in 'Risk On' mode for the stock indices...


White.Star.Line's picture

Graft is so very, very, very hard to stop once started.

Bartanist's picture

Actually read one of your articles to see if it had anything other than the normal pompous name dropping.

It does, but alas it seems to be wrong again. There does seem to be a QE3 force and it may be a rotation from commodities to something else (although there does not appear to be a commensurate drop in price if there is a commodity exit).

What seems to be happening is that the M&A & IPO arenas are awash with stupid money that is paying astronomical amounts for crappy assets. This smells of "gee, we were given all of this free money from someone else and since it costs us nothing, we have no obligation to efficiently manage it".

Hence I just saw a publicly traded (supposedly manufacturing) company that has $2.5 billion in annual revenue, $1.5 billion in debt and over $1 billion in Goodwill pay 12X proforma forward EBITDA (and use essentially 100% of the cash on its books) for a PE owned company that was not growing and had looked to have essentially no GAAP profits.... Of course, the previous owner of the company is a PE firm, so it was OK to pay them off Ponzi style. They are one of the insiders.

... and that is where the next QE seems to be coming from. A re-leveraging for stupid cash transfers to insiders... Ponzi style.

alwaystoolate's picture

Dear John, aka TheMadHedgeFundTrader,

I remember that during your Paris "Strategy Luncheon" on April 8 you stated firmly that QE2 will end and there could not be possibly any further QE.

What made you change your mind?

Or is this just a Version B for the ZeroHedge community?

alwaystoolate's picture

Dear John, aka TheMadHedgeFundTrader,

I remember that during your Paris "Strategy Luncheon" on April 8 you stated firmly that QE2 will end and there could not be possibly any further QE.

What made you change your mind?

Or is this just a Version B for the ZeroHedge community?

anony's picture

Indeed, it has never stopped, and only when all the derivatives that have been perpetrated are fully compensated for by REAL life fiat, will it truly slow down, provided other derivatives haven' been aborning throughout the last several and coming future years.

The world be awash in many hundreds of trillions fiats more before we see an end to it, which means not in our lifetimes. 

apberusdisvet's picture

This guy is sounding more and more like a Treasury shill these days. Hmmm.  The only thing I would agree with him on is that stocks will tumble.  Margin compression is a bitch.  It may not show up in Q2 reports due to creative accounting, but Q3 will be a doozie.  And BTW, the Japanese situation is really a game changer, although many are saying it's only a 3-6 month problem.

rubearish10's picture

"This is why I have been selling short puts on the long bond ETF (TLT), and avoiding bearish bets on bonds, like the plague, such as the (TBT). It is also why I have been piling on shorts in oil and stock at every opportunity".

He needs to go back to school on trade speak...and really??? There's no plan other than for the demise of the USD, period. That's it, game over, plan accordingly.


earnulf's picture

I would have to disagree with MHT in that once the Fed finishes it's monetizing of the monthly Treasury sales, who is left to buy?    Who picks up the 70 billion dollars per month, plus continues to purchase what they have in the past each month?

China has it's own problems, trying to shore up Greece and Portugal.

Japan, well, it's glowing brighter at night....

So on our Independence Day, the US has to find someone(s) to step up and buy 70 billion dollars per month of US debt at interest rates that are falling?

Given the way the market is performing, I guess gravity can be overcome.

But when they raise the debt limit, they still have to pay back the billions they are borrowing from the pension funds, and that is in addition to the 70 billion per month for those as-yet-to-be-discovered buyers.

Sow the wind....

anony's picture

Don't worry about an entity being thoughtfully created to buy our debt.  The FED will invent a country, or a new Special Purpose Vehicle, to buy our debt. 

Problem solved.

Economics is proving to be a genuine Art and not the least bit a science.

Who Knew?

Ars longa, Vita brevis.


Boston's picture

Here's an idea of "who picks up the 70 billion per month, plus..."

How much paper "wealth" did the 600 billin QE2 create in the equities, commods, and corporate bond markets over the last 8 months?

Hint--a lot MORE than 600 billion.  Think trillions.

So if only SOME (say 1-2 trillion) of that newly created paper wealth runs out of these risk markets and flows into Treasuries, then THAT's who will buy, and in boku amounts, sufficient to drive yields down far more than they've already fallen.


earnulf's picture

 You still didn't answer "who", mearly postulated that some unnamed rich folks will save the day.    People who make money don't squander it buying the insufficient interest debt of a bankrupt country.

Boston's picture

Hoo boy.

WHO do you suppose owns the SPX, the QQQQ, the RUT, IG, HY, etc........insurance co's, pension funds, endowments, hedge funds, your 401k, etc.

XitSam's picture

"The only difference will be that there will be no TARP and no bail outs next time."

Why? Won't the administration be motivated to kick the can even farther down the road?

mfoste1's picture

MHFT, your post makes no coherent sense whatsoever. You make no sense in terms of interest rates continuing to fall for "QE3". Ok so if it is truly a "risk off" trade, then that means that markets will be a function of RISING interest rates and DECLINING bond prices. You need to go back to uni and take intermediate macro one more time just so that basic economics sinks in....

Rollerball's picture

I think MHFT is right (on bonds).  CB of Russia is the new carry.

Life of Illusion's picture


Fed’s not going to stop so soon. Fed just got their Dodd- Frank asset liquidation powers and that means more debt to be processed.  

So eventually when Fed pulls liquidity assets will be liquidated and controlled.

ATG's picture

A fool and his money are soon parted

MHFT outdid himself this time

Right up there with his bearish calls on bonds since June 2009

Hope he has a lot of money in case those naked Treasury puts are exercised against him

Boston's picture

Exactly right, but lets' be honest, a big chunk of the move (from ~3.65 to ~3.05) has already occurred.  So this "call" by MHFT is a little late.

That said, the big catalyst for the remaining move has not yet happened---QE2 must completely shut down for the Risk Off trade tio get going in earnest.

Also, there could be a lot of support around 2.50.  Take a chart of the 10 year (yield) over the last 3 years, and you can draw a very neat (and gradual) wedge starting in 2008.

The bottom of that wedge (and thus support) is around 2.50.  So to get down to 2.0, we'd have to see a hell of a Risk Off phase later this summer or fall.  Possible, but not necessarily highly probable.


roymunnson's picture

I agree with almost everything..Commodities being the exception, with the dxy tanking I would not be shorting commodities right now

As far as Ben is concerned ..its all about the bond market...

interest rates can never be allowed to rise!!!!!!


The Equities pattern is now clear    crash then QE then boom then crash then QE then boom then crash then QE.....



SheepDog-One's picture

Yes, its all about worthless bonds which pay out in doomed US Dollar FRN's. Its a gamble I'll never come close to ever considering.

Re-Discovery's picture

What color is the sky in your world?

Mercury's picture

Maybe.  But more and more market participants are viewing a gold to UST trade as a "risk on" situation, not "risk off".

SheepDog-One's picture

I dont care about 'serious coin' that may or may not be made from gambling with the Maniacal Monetizers at their rigged casino tables, it will all be worthless soon anyway so who gives a shit.

steve from virginia's picture

Ummm ... I'm not sure this article makes sense.

End of a flow of funds cannot be 'priced in' when funds are still flowing. The 'risk- wary market participants have been out of the market for months. So is the smart money, which has been 'cashing out' since 2008.

The markets are part of 'Benny's Money Laundry'. They have to go up or the laundry doesn't work.

End of Fed easing on June 30th will be the end of the Fed's public relations influence on the markets.

ZIRP and moral hazard -- 'Greek (German bank) bailout 2.0' -- is what is propelling markets. These things won't end July 1, (they will end inevitably, when bailouts stop bouncing the market rubble).

Fed will 're-invest' its interest earnings from its engorged balance sheet in new debt. (MBS, anyone?) Not $50b/month but close. Fed won't tighten by way of repo nor will it mop up liquidity or shrink reserves: these latter aren't going anywhere but to tax havens

A better question is what are rate consequences of no agreement on Capital Hill about debt ceiling?

el Gallinazo's picture

I remember reading somewhere that the Fed gives back all the interest that it makes on treasuries to the treasury. Is this true? Fed rolling over maturing debt does not increase credit supply - just keeps it even. Since the Fed purchase of MBS is probably the most toxic of the toxic waste (to move the worst crap to the taxpayer ASAP), interest on them could be pretty small, if the underlying mortgage holders are spending their defaulted bank payments on plasmas and Caribbean vacations. How do you get $50B/mo? I don't think so. As to the premise of the article itself, kind of stupid as usual for this contributor. The Risk Off trade will funnel other people's money into treasuries (as opposed to funny money that the Fed invented), but covering the deficit was not the only reason that the Fed did QE 1 and 2. Assuming hypothetically that the Fed won't start printing and that the interest on its bloated balance sheet will be a pale shadow of the QE POMO, then the Fed has decided to pull the pin. Collapse of equities and commodities. Accelerating collapse of RE. Since the Fed is owned and controlled by the banking cartel, what's their game plan? Maybe their last big meal before the famine, eating the pension funds and the 401-k's for lunch. Maybe buying up real assets for pennies on the dollar like in Great Depression v. 1.0? No one can argue that if the Fed doesn't keep expanding the money/credit supply, then we are headed for hyperdeflation. The real debate is whether the Fed could expand the money/credit supply fast enough to stave off hyperdeflation and create hyperinflation if it chooses to do so, or will it be like King Canute's tide rolling in?

stewie's picture

the prospect of slowing economic growth has prompted this hot money to take flight and bail from these assets classes.


So all the QEs didn't work and that makes Ben clever? 

I am a Man I am Forty's picture

his main objective is to steal from the taxpayer and savers and give to the banks, that's it, once u understand this he is doing a phenomenal job

Ponzi Unit's picture

Worked fine.

For banksters.

System still shattered, but self-dealing oligarchy intact for the time being.

SheepDog-One's picture

I dont think Ben or any of the rest are very 'clever' at all, their actions are like the slow kid at the birthday party who 'hides' by covering his eyes with his hands and we're supposed to play along and pretend we cant see him and call him a clever little kid? All rubbish.

alexwest's picture

QE2 ended up pouring $600 billion into stocks, commodities, oil, gold, and silver. S

Treasury bond market. We have in fact been in new bull market for bonds since February

could you put some proof of that? you know inflow/outflow of mutual funds /etc..

what I know each time Mr Biderman (of Trimtabs ) who in reality counts money flow says : I CANT UNDERSTAND HOW MARKET RISE WHEN MONEY FLOW OUT OF funds...

so please publish junk.. people here are not stupid as you seems is..


Ponzi Unit's picture

Dark pools? Just sayin'...

alien-IQ's picture

QE 1 and QE 2 failed to improve the horrendous unemployment situation or the economic decline the country is in, the only benefit that has come from them was to create an equity bubble that now has triple digit PE's as the norm. And what solution does MHT offer up?...QE 3 of course because if QE 1 and 2 failed...surely QE 3 will get it right...right?

Utterly idiotic psychobabble bullshit as usual.

SheepDog-One's picture

Yea I dont really care about which side of the sinking boat everyone will do a mad dash to next. Just get off the boat, grab a life preserver while you still can and let the maniacs fight it out.

Hugh G Rection's picture

fuck the life preserver.


I'm building a silver ark, adorned with golden fixtures, and loaded down with weapons and ammo... for any zombies trying to clim aboard.

SheepDog-One's picture

'None of the underlying problems have really been solved'? Hell, none of it has been addressed at all. The rotting corpses of economic sectors lay stinking up the place, yet people believe theyll soon jump up and run the NYC marathon. 

New American Revolution's picture

I don't disagree, but I think your too far out ahead of this thing on your front-run.   The sky isn't falling,... yet!

Noah Vail's picture

Interesting pretzel logic: not doing QE3 IS QE3. I guess in times like these we all feel empowered to say just about anything, depending on what the meaning of anything is.


Ah, well, back down the rabbit hole we go.

ebworthen's picture

Is fellatio sex?


Imminent Crucible's picture

Depends on which end you're on.  Bill.

knukles's picture

We've yet to decide upon the meaning of is, is.