What Happens If There Is No QE3? David Rosenberg Responds

Tyler Durden's picture

Should the US approach June 30 and end up with the highly improbable scenario where there is no follow through monetization, which following Bill Gross' commentary from yesterday (which in turn piggy backs on what we have been saying for months - monetizing of gross issuance and all that) appears unlikely, what would happen to risk, and other, assets? Providing empirical color to that eventuality, which with every passing day is ever more urgent, is David Rosenberg who answers the question: "What happens if there is no QE3?"

From Gluskin Sheff's David Rosenberg:

We are now being asked this constantly and the follow-up is “who picks up the slack if the Fed stops its bond-buying program”?

The answer(s) is hardly complicated since we have a template for this in 2010. It is a very simple guidepost.

Last year, from April 23rd through to August 27th, the Fed allowed its balance sheet to shrink from $1.207 trillion to $1.057 trillion for a 12% contraction as QE1 drew to a close. Go back a year to the Federal Open Market Committee minutes and you will see a Federal Reserve consumed with forecasts of sustainable growth and exit strategy plans. A sizeable equity correction coupled with double-dip fears were nowhere to be found.

Now over that interval ...

  • S&P 500 sagged from 1,217 to 1,064.
  • S&P 600 small caps fell from 394 to 330.
  • The best performing equity sectors were telecom services, utilities, consumer staples, and health care. In other words — the defensives. The worst performers were financials, tech, energy, and consumer discretionary.
  • Baa spreads widened +56bps from 237bps to 296bps
  • CRB futures dropped from 279 to 267.
  • Oil went from $84.30 a barrel to $75.20.
  • The VIX index jumped from 16.6 to 24.5.
  • The trade-weighted dollar index (major currencies) firmed to 76.5 from 75.5.
  • Gold was the commodity that bucked the trend as it acted as a refuge at a time of intensifying economic and financial uncertainty — to $1,235 an ounce from $1,140 and even with a more stable-to-strong U.S. dollar too.
  • The yield on the 10-year U.S. Treasury note plunged to 2.66% from 3.84%.

So you see, the bond market actually does better (same was true during QE1) without the Fed balance sheet expansion than with it. Why? Because the Fed’s real goal is to ignite investor risk appetite. Bernanke et all have not kept it a secret that the real aim of the QEs is to generate a liquidity-induced rally in the equity market. If bond yields end up rising as they have for most of the past six months but occurs with a rising stock market and greater economic strength, then the Fed is totally cool with that and again Mr. Bernanke has stated that very bluntly (even if the higher mortgage rates that ensue drive another knife into the heart of the housing market). When the Fed stops QE, as we saw last year, risk appetite fades and the economy sputters — a development that will likely be even more acute this time around given the accelerating fiscal restraint at all levels of government that is just around the corner.

So who buys the bonds when Ben leaves the building?

The same folks who were the buyers last year from April to August. The ones who were switching out of equities, commodities, and other risk-assets.

Now you know how to play the second half of the year!


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falak pema's picture

June 31??? lol...we are in alice in wonderland! TY. TD. So the deadline is...for knowing if QE-3 is officially on or off as per BB forward plan??...

Ray1968's picture

ES put options!

emsolý's picture

Somewhat related:

John P. Hussman: Cash and Credit - Implications for the Financial Markets


buzzsaw99's picture

Whatever happens JPM & GS will profit.


1) They will know in advance what the fed is going to do.

2) They used all the loss reserves and income for bonuses so if somehow they do lose they will get another bailout.

101 years and counting's picture

"What happens if there is no QE3?"

The US defaults.

Sudden Debt's picture

I propose in anticipation of the US default, you all ship you good looking woman to Europe.

They can serve the Europeans as cleaning ladies and in return they can send a part of their paycheck back home to support the family.

The cost of living will be kept as low as possible for them. They can sleep in the bed of their masters, and if they produce babies they'll also get a bonus for the donation to the stem-cell clinics.


Sudden Debt's picture

I'm just trying to help out...


I can house 4 "cleaning ladies" because I'VE GOT A LOT OF CLEANING THAT NEEDS TO BE DONE!! THE WOOD NEEDS TO SHINE!!


I am more equal than others's picture

Only 4... should be at least 7 ... one a day will keep the player at play... rinse then repeat


MachoMan's picture

The proposal is inherently flawed...  you expect a good looking american woman to lift a finger in the home?  You'd have more luck just printing an ad looking for prostitutes/escorts...  at least there isn't any misconception...

Head for the Hills's picture

Funny coming from someone who lives where

swinging dicks from USA have been occupying

the place since 1944.

Miles Kendig's picture

Which is why he suggested it.  Just wait until Ukies start dropping Hryvnia on BL American imports

Eternal Student's picture

Naw. We just ship the ugly ones, stamp them with a AAA rating, and the European's will be delighted. After all, it worked so well before. And it's a win-win all around.

augmister's picture

Not to Europe, CHINA!  Send those milk-jug blond CA Valley Girls over to China to be auctioned off to the highest bidders (gold only).   That way we export both inflation and drama!

malek's picture

Hahaha, you got the hang of it!

Spastica Rex's picture

>THFFPTF!< Milk just went out my nose.

Confused's picture

Looks to me like europe has all the beautiful women.




How about we swap. You can keep the money they would send home. Sound fair? 

66Sexy's picture

Europeans? LAWL they are in worse shape than we are. At least we wll go down fighting; europeans are already conquered.

doggings's picture

go down fighting? only once the TVs go off.

serotonindumptruck's picture

We will send you Madeleine Albright.

trav7777's picture


You want AMERICAN women?  These are the most self-absorbed and delusional women on the planet and you think they will clean for you when most prefer to outsource their own chores to illegals?

American women are toxic...you can have them

naughtius maximus's picture

Agree! total toxic assets the lot of them

Vampyroteuthis infernalis's picture

This is coming from a Belgian whose country is about to be torn in two and default. It is more like ship the Belgian ladies to us Americans. Ohhh la la!

Silver Super Bull Market's picture

If the US defaults what exactly will happen?

gmak's picture

The June 31st date must be the limit for an asymptotic curve. We approach but never fully arrive (except in ancient greek stadiae).

Bob's picture

Zeno disagrees, but you may be right--the Chairsatan is on a train of printers that is inching closer and c-l-o-s-e-r to the speed of light.

TradingJoe's picture

They cannot and will not stop printing, if they do.....Total Collapse! Rosie just stated the obvious but only very mild! The FEDs put themselves into a corner from which there is no escape, the only way is DONW and B(D)UST!

Vampyroteuthis infernalis's picture

Two results can come from this:
1) Continue printing. Inflation will collapse margins sending companies into a tailspin.
2) Stop printing. Debt deflation occurs along with a default. Pick your poison Chairsatan.

John Wilmot's picture

I think we've got a few more months before the likely summer stagnation/correction when QE2 ends and before QE3 is officially announced. Summer 2011 shall be one great BTFD.

Azannoth's picture

The FED is like a Whore with rabies spreading it's legs and offering a 'no interest' service financing

Quintus's picture

I hope  "The ones who were switching out of equities, commodities, and other risk-assets." have a lot of money, 'cos Ben has quite a few trillions in new issues he needs to find buyers for over the next few years.  Personally, I think Rosie is being overly optimistic in assuming that there's enough free cash on the planet, absent the Chairsatan and his printing press, to soak up the supply.  There will be more QE because there has to be.

Sudden Debt's picture



it will be called the MSD 1.0 (The Money Shitting Donkey)

Goldbugger's picture

They won't call it QE3, they will just do it and hide it like they did with M3.You don't need to know the man behind the curtain...

falak pema's picture

Hardly. It has to grow through POMO circuit. Or it's not on FED books. Which other way is there. Those primary dealers will never do it w/o official FED cover. No way.

Captain Kink's picture

They will simply extend QE2, First by slowing their purchases in the last 2 months to 50 or 75 Billion and stretching the original 600 bil for an extra couple of months, then by continuing at that rate through the end of the year...Unless equities get cracked this spring--due to MENA, European Sov Debt, or some other issue--which I would put at 50% minimum probabililty.

mcguire's picture

wrong question..  the real question is how will the markets and the fed respond to ww3..

falak pema's picture

WW3 is already on! It's the monetary war raging. You're referring to WW4 the military hardware war when WW3 is over, and presumably the US/FED the loser.

Yardfarmer's picture

there is simply no feasible alternative to monetization. the die is cast. the Fed's real goal? no, not the ignition of investor risk appetite, but the devaluation of the dollar, hyper-inflation and with it the implosion of the US economy and unprecedented massive social chaos upon the ash heap and rubble of which to build the Novus Ordo Saeclorum.

ElvisDog's picture

Ugh, not the New World Order again. Remind me who would be on the governing council of the New World Order. The reason there will be no global New World Order is that presumably it would not be an efficient way to run the world. Economic output would decline, right? The world is already on the brink of global revolution because there are too many poor people who can't afford food and energy. And you suppose that when the New World Order makes people more poor, more hungry, and colder that they will just sit around passively? No fucking way. Your New World Order would last about two months and then be followed by New World Peasant Revolt.

SilverBaron's picture

The New World Order comes after the revolts and WW3.  It is after the mass die off.  See the Georgia Guidestones.  Maintain world population under 550 million!  That means over 6 billion must die.  Ten thousand will fall at your left and ten thousand at your right.

EscapeKey's picture

1. Buy treasuries.

2. Pledge treasuries as repo collateral.

3. Goto 1.

No QE necessary. John Law engaged in a similar scheme.

Horatio Beanblower's picture

Good old, John.  He was simply misunderstood.

Non Passaran's picture

Now I see why usign GOTO is not a good practice!

FunkyMonkeyBoy's picture

Major war before June even comes, to distract the masses... it was the plan all along. The same scam played on the masses time and time again, they never learn! Why else do you think the Bernank was printing and wall street has been pillaging faster than anyone could imagine? Because they know the end is nigh.

Get a new script elite, for those of us awake, it's getting boring seeing the same old plays played out.