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A Whiff of a “Mini” QE-2?

Submitted by Bruce Krasting on 10/21/2010 21:02 -0400

The 100% certain sure thing in the market today is that QE-2 will come
on November 3rd and that it will be decisive in its scope. Well I am not
so sure any more.

-The Fed’s Beige Book from yesterday did not make a case for an economy
that needed emergency measures. Yes there was some discussion about the
weak housing market and soft loan demand. But we know that QE-2 is not
going to fix those problems.

-It is of significance to me (and should be to all) that Zero Hedge was featured in a Time/CNN article titled, Will the Federal Reserve Start a Civil War?

I am certain that the Fed reads Zero Hedge. But how much influence they
have is a question. When it gets up to Time magazine however, it is
another matter altogether. It is not possible for the Fed to avoid the
collective roar that is coming from across the country at this point. If
the Fed blunders with an unpopular QE-2 the results will be disastrous.
Not only will the economy tank but the Fed will have lost a good chunk
of its remaining credibility. The downside risks to Bernanke are
enormous. I don’t think he believes he is in a popularity contest, but
he does know he can’t run monetary policy with protesters outside his
door. How much is he prepared to gamble given that he clearly does not
have a consensus amongst his own board? He is an academic, not a
gambler.

-Today St. Louis Fed Bullard made remarks to reporters that were a
warning sign to me (and the market). He talked a much different game
than what has been dished out of late. He made reference to a smaller
program. Maybe less than $500billion (about half what is now in the
street). He also threw out something that blew me away. He suggested
that the 11/3 decision was in someway dependant on the Q3 GDP numbers
that come out before the Fed meets. Bullard even “spun” the numbers on
the hot side:

"it may come in a little stronger than the second quarter." So we have to keep our eye on that."

Bond traders shit in their pants and hit bids on long coupons. I like
that read. Bullard gave us a hint that maybe this QE-2 is not such a
slam-dunk. (See ZH story on Bullard)

-The WSJ had a market story about Bullard’s comments but their big gun
on QE, Jon Hilsenrath, has been quiet. Should the press follow with the
new question mark on the timing and scope of QE2 we may have an
October surprise that is bigger than a SF-Texas series.

I started this with; “The 100% certain sure thing in the market today
is that QE-2 will come on November 3rd and that it will be decisive in
its scope.” If that certainty factor falls to 50% the S&P is
going to take a big dump. That possibility is simply not in the print at
the close.

- advertisements -

Wed, 11/10/2010 - 06:39 | 715713 cheap uggs for sale

Fri, 10/22/2010 - 06:32 | 669236 Spirit Of Truth

If Wall Street doesn't get its dope offered up by Bumbling Ben at this point there will be a collective nervous breakdown.

Fri, 10/22/2010 - 03:56 | 669166 Miles Kendig

The money will be big. The fed will just trickle it out "depending on market conditions". If the chairman and vice of vice can get a consensus to do 500 now with a six-nine month run rate that would be success. The extend and pretend feedback loop remains in place.

- Layne ..There is this new drug, it's called crystal dream ... Cheers and back to bk .. keep on ridin' strong Harley

http://www.youtube.com/watch?v=nKqW5o4idt8

Fri, 10/22/2010 - 02:33 | 669149 deez nutz

The FED may have been checkmated on an overt QE2, but that will not stop the covert QE. Look for UK T-bond buying to quadruple in 2011.

Fri, 10/22/2010 - 03:05 | 669168 Orly

You mean like they mysteriously did in August?

http://www.zerohedge.com/article/foreign-holdings-us-treasuries-surge-driven-record-uk-purchases

Fri, 10/22/2010 - 03:48 | 669181 Miles Kendig

thpinggg

Fri, 10/22/2010 - 00:36 | 669055 FischerBlack

QE2 will happen because it never actually stopped, and it will be big. They want to support asset prices, but they don't want to blow a bubble, which is basically what's happening. They're trying to jawbone the market to take a breather. Otherwise, stocks will keep running past the QE2 discount level and then will almost certainly sell off big when the Fed makes its announcement. The Fed knows that the mass of Americans and the media are going to link the sell-off to the Fed's announcement, and thereby, stocks going down becomes the Fed's fault. They don't want this, obviously. I think it was Bullard today who was saying that they aren't going to let the market force a QE2 that's bigger than what they deem necessary, i.e., yes, there is a Bernanke put on stocks, but it isn't always going to be at the money.

Fri, 10/22/2010 - 00:32 | 669051 doolittlegeorge

the Chinese have boxed the Fed in. I say "their interest rate increase equals ours." In my view "they're saving American civilization" but we'll have to wait for events to transpire. "The debt bomb must go off first."

Fri, 10/22/2010 - 00:22 | 669027 GoldmanSux

Bernanke has much more cover to do this after a stock market selloff. The market is up 13% since Sept. 1 due to Wall St. frontrunning. I think they'll wait for a further meeting, a 15-20% selloff, which takes us back to where we were in the summer, and the 4th 10% or more correction this calendar year.

Thu, 10/21/2010 - 23:53 | 669000 DonutBoy

I think this is the headfake - the talk about waiting for GDP numbers - ambiguity about QE2 - serves the purpose of having us look like we're bargaining at the G20 summit.

PIMCO is front-running Fed MBS purchases. Any uptick in interest rate kills what little is left of the housing market. I think what's changing for the Fed is the allocation, they have to go straight back into the MBS market to buy all the put-backs before the banks get killed. The Fed had given up on the concept of a housing-led recovery but now they must go back into the MBS business to save these zombies one more time. Absent the put-backs I think they would have stayed in treasuries.

Lacking a housing bubble to float us up where is the recovery to come from? It can only be export-led if they continue to devalue the dollar. We can only pay our debt if they continue to devalue the dollar. Don't short treasuries, the Fed will kill you.

Fri, 10/22/2010 - 01:02 | 669084 Orly

"I think what's changing for the Fed is the allocation, they have to go straight back into the MBS market to buy all the put-backs before the banks get killed."

That's exactly what will happen. Then, the Fed can conveniently offload all that waste over to Fannie and Freddie...and, ooops! They're bankrupt. Gee, hope no one important owned any of this stuff, huh?

Fri, 10/22/2010 - 03:32 | 669177 taraxias

The issue is not that this is likely to happen, the issue being debated is will it happen on Nov.3?

I've been posting from the beginning that this is a head fake and I've seen nothing lately to make me change my mind.

Yes, some kind of QEII Mini will be announced to prevent the markets from tanking now that they priced in QEII Massive and no more. What happens 6 months later is a different story.

Thu, 10/21/2010 - 23:48 | 668995 umop episdn

1) All fiat money has failed in the past. It is not different this time.

2) Smoke and mirrors is what TPTB do best, as it enables their parasitism. Didn't Glodman just come out with a 'gold will go to 1650$' call? Expect more of the same.

Q2easing is not an option-it is necessary if the can is going down the road even a short ways. However, Clowngress does not have to do anything TARPlike. The FED can and will do something stealthy, if they haven't already. Alternatively, they could squeeeeeze us sheeple economically so that Q2easing actually sounds like a good idea. Disaster capitalism at it's finest. Who knows? But whatever happens, it won't be good.

Fri, 10/22/2010 - 00:29 | 669048 doolittlegeorge

dollar tanks today? maybe they can hold it 'till monday. it is "bank failure friday." stinkin' media still not letting a peep out about that other than here, are they? what a joke.

Thu, 10/21/2010 - 23:28 | 668954 Bankster T Cubed

"OH HELL YEAH WE ARE GONNA CAUSE SOME INFLATION, BITCHEZ!"

if these fucktards at the fed actually follow thru with this monetization scheme when the markets are hot and the yield curve prices in zero inflation for a decade +, then the national economy WILL TOTALLY COLLAPSE

in a very short time only the one tenth of one percent of us who make more than the lower 120 million of us will be able to by gas, food, water, etc.

I do not doubt that the fed is out to kill the United States, but it seems a bit totally fucking insane to expect this QE2 bullshit to happen, at least without a market crisis to excuse it

Fri, 10/22/2010 - 00:27 | 669047 doolittlegeorge

you make it sound like this is a bad thing.

Thu, 10/21/2010 - 23:20 | 668934 Problem Is

"-It is of significance to me (and should be to all) that Zero Hedge was featured in a Time/CNN article..."

Time/CNN HAS TO Start Covering ZH
Their sales and ratings are in the toilet. Those Amerikans who can read are not reading propaganda bullshit like Time.

They are reading the renegade financial blogs like ZH where information and fact are to be had...

The next thing you know the idiot Howard Fineman will take on the moniker "The Narrator"...

Thu, 10/21/2010 - 22:50 | 668877 prophet

Yes, even the fed hedges.

Thu, 10/21/2010 - 22:43 | 668862 itiswhatitis

I don't believe the Fed will allow rates to rise. It will be the death knell for the nations fiscal health with skyrocketing interest costs. Won't they simply buy up all the debt if they have too? God this is scary...I'm too chicken shit right now to take cash earning zilch and put anything into an equity market that just doesn't make any sense to me and is ready to kick my ass with another flash crash.

Fri, 10/22/2010 - 00:26 | 669046 doolittlegeorge

100 billion next week there big boy.

Thu, 10/21/2010 - 22:40 | 668856 checkessential

Watmann, agreed. Everyone "knows" gold will keep rocketing higher, the dollar will continue to crash, and QE2 is going to happen keeping the market up. B.S. Since when did everyone know what was going to happen next in the financial world? Probably since 2005 when everyone "knew" real estate never goes down.

Thu, 10/21/2010 - 22:34 | 668848 SloSquez

To me you hit the point Bruce, is the point of the Fed to instill a fear for the other side of the trade or are they telling the truth? I don't know anymore. I used to think I knew...not so sure anymore. They seem more inclined to confuse the issue enough to balance the boat. Lord knows what happens when everyone gets on the same side of the boat.

Thu, 10/21/2010 - 22:34 | 668847 mcguire

that is how i read today too... the bond and gold markets felt 'deflationary'... i also think the spread between front month and back month vol is about to collapse... interesting.

Fri, 10/22/2010 - 00:23 | 669040 doolittlegeorge

sauce for the goose.

Thu, 10/21/2010 - 22:33 | 668846 essence

It's amazing that so many (even Tyler) use the name "the fed" so often..
yet never ponder as to who the fuck the fed exactly is.

Let's review sheeple.

The "fed" is a private concern.
That means it has owners (nevermind Ben....he is just the hired help).

Doesn't it trouble anyone that the CENTRAL BANK OF THE US is owned by unknown enties.

We don't know. We don't know if the Fed is in actuality owned by a handful of families that reside in the hamptons, outside london,outside brussels ...in estates that rival versailles. We don't friggin know who sets the agenda for the PRIVATE

enity that controls the credit & money supply of the US!

And pray tell, how & why do they have this position ...becasue back in 1913
they BRIBED their way into it ... via those whores in Congress.

This is like the 3rd rising of Dracula.

END the FED ... it is the root of evil & injustice.

Fri, 10/22/2010 - 00:23 | 669038 doolittlegeorge

yeah, well "your private Fed is suing a public bank right now." if that dollar collapses vis a vis the yen come Friday "gonna see some fireworks." as i've said before "a military governor residing in Sacramento does constitute as a bailout, too." now how about that character singin' the national anthem at the World Series? Guy or girl? What say all of you?

Thu, 10/21/2010 - 22:48 | 668840 Terra-Firma

Debts are like the bubbles under linoleum; if your old enough to remember that, then 8 percent inflation and 12% interest on bank deposits are well within my memory.

Cheers.

Thu, 10/21/2010 - 23:41 | 668976 Problem Is

Formica...
And it was 12% inflation and 8% on your savings at your S&L...

And it was the last time we had an idiot Wall Street puppet 1 term Carter in the White House...

Double Cheers ; )

Fri, 10/22/2010 - 04:08 | 669187 StychoKiller

Formica = countertops, Linoleum = flooring

Thu, 10/21/2010 - 23:19 | 668929 Bruce Krasting

Linoleum? You must be old.....

Thu, 10/21/2010 - 22:15 | 668806 watmann

Too much talk about new easing. this is all a set up. The Numbers are going to come in above expectation and then the Fed is going to say no easing required. This is the best signal to the people that the economy is recovered. Interest rates will rise; bonds will sink.

The Fed couldnt achieve what they wanted with easing so now they will put everyone on a head trip of acid to make everyone think things are better.

Not much different then a sick person convincing themself they are better. Sometimes that works and if all of the wonder drugs you took failed maybe some positive attitude will work.

I personally doubt that it will work as I believe that the issues are globally structural and not cyclical in nature.

This is the last arrow the Fed has. They have broadcast the easing too widely for it to be a secret and they know the internal destructive power of adding all of that liquidity to the market. This is a real Fed hoax.

Play the contrarian side of this bet. If I am wrong its all priced into the market regardless.

Go long the Dollar and short treasuries as interest rates are about to rise signifincatly.

This is all a Broadway play. All of the old economic team has left the White House so this card can be played.

Watch and you will see. It will be the opposite of what everyone expects. Too bad the economy is really much worse than these DC idiots realize.

Fri, 10/22/2010 - 05:30 | 669202 Chappaquiddick

They can't raise rates - that would be completely contrary to all the statistics we can see regards economic health. To site just one Unemployment: stats are reported then revised always to the up side. Unemployment is going to get worse not better if they raise rates and besides which they're in the ZIRP trap - they can't afford to raise rates.

Assuming that the above bears some semblance to the actual workings of the economy (the economy of late seems to be behaving rather strangely) then it would seems improbable in the extreme for them to be able to or to want to raise rates.

Personally I'm long physical silver and sticking with it come what may. I have an 8-10 yr investment time horizon and based on the information I can find and looking past these current psycho-turbulent moves, this looks like a high probability winning trade. Better still no flash crash worries for me and I think I'm hedged well for numerous senarios including economic Armageddon, fiat destruction/(hyper)inflation, stagflation, deflation and (if a miracle should occur and a recover happen) strong growth. I challenge anyone of you to find something else out there that covers for all that!

A final word on the Fed: they've stated that deflation is absolutely something that must be avoided at all costs. Obviously that's the medicine we actually need. They could have changed their minds and realised that we have to take our medicine as intervention is not working. Volker did it when the economy was strong - if they follow the same path then it surely must result in a mega slump and default. Do we collectively really have the stomach to voluntarily take that path? The path of least resistance is still available to us - surely they'll keep heading down that path until we're forced to face reality in a few months or at most a few 10s of months hence?

Thu, 10/21/2010 - 23:06 | 668903 whatsinaname

For once, I think DC realizes how bad it is - hence the pretend talk about QE2. They even know QE2 will make it bad to worse, hence there will be no real QE2 after the election and Congress will take the blame for it.

Thu, 10/21/2010 - 22:11 | 668798 MiningJunkie

This is not a "Bear Market Rally"; it is a Weirmar/Zimbabwe bull market in anything counter-positioned to the more important MASSIVE BEAR MARKET in the purchasing power of the U.S. dollar (cash).

Fri, 10/22/2010 - 03:17 | 669173 Popo

Exactly.

As was posted here earlier: "The entire SPX is now basically an inverse-USD ETF".

A very succinct description, imho.

Fri, 10/22/2010 - 05:36 | 669209 Escapeclaws

Yes, it pays to look at correlations. Also look at the dollar vs gold. Interestingly, for a while there, gold was trading inverse to the euro, but now that correlation is over and gold has been trading inverse to the dollar. We seem to be at a turning point where gold is dropping as the dollar rises. Meanwhile, the euro is holding steady, more or less.

Thu, 10/21/2010 - 22:04 | 668787 twittering as s...

"The 100% certain sure thing in the market today is that QE-2 will come on November 3rd and that it will be decisive in its scope. Well I am not so sure any more. "

"The 100% certain sure thing in the market today is" a trader trading a complete trading plan will continuously make more money than one loses.

"... I am not so sure any more. " a trader without a complete trading plan is sure to loses money.

"If the Fed blunders with an unpopular QE-2 the results will be disastrous."

disastrous to whom?

looks like a trading opportuntity to a trader.

"Not only will the economy tank but the Fed will have lost a good chunk of its remaining credibility. "

a tanking economy. a growing economy. who cares.

a trader cares about one's own economy.

a trader can only control one's own economy.

twittering as stocktradr

Fri, 10/22/2010 - 03:16 | 669175 taraxias

You could have saved us a lot of time reading your drivel by just posting "I'm a trader and I'm omnipotent"

Get a grip........and yes, I junked you.

Thu, 10/21/2010 - 21:49 | 668756 Brokenarrow

Do you really think they are going to let the equity market puke?

Fri, 10/22/2010 - 00:08 | 669019 LowProfile

I have heard they would, if it might save the bond market.

Thu, 10/21/2010 - 21:47 | 668753 asteroids

I don't get it. How is QE2 going to create jobs and fix the housing market when QE1 didn't. Yeah, that's what I thought.

Thu, 10/21/2010 - 22:47 | 668873 BobWatNorCal

Wait.
QE-1 was supposed to _fix_ some problems? Who knew?

Thu, 10/21/2010 - 22:56 | 668888 Fox Moulder

It fixed the Wall $treet bonus problem last year.

QEII will be just in time for this year's bonuses.

Thu, 10/21/2010 - 21:40 | 668740 RobotTrader

Hard to believe that QE2 is even necessary when so many Dow stocks like CAT, KO, MCD rocketing to 2-year highs and NFLX, BIDU, AMZN trading at 80 P/E levels.

I mean really, does this look like we are in a recession?

Fri, 10/22/2010 - 01:01 | 669083 equity_momo

Duh, you think those 2 year highs have nothing to do with QE2 expectations?.....

Thu, 10/21/2010 - 22:32 | 668845 RockyRacoon

Ever heard of buying on the rumor?

Thu, 10/21/2010 - 22:14 | 668781 RoRoTrader

Hard to believe that QE2 is even necessary when so many Dow stocks like CAT, KO, MCD rocketing to 2-year highs and NFLX, BIDU, AMZN trading at 80 P/E levels.

I mean really, does this look like we are in a recession?

Is all or most of that the result of the promise of QE?.......with some help from POMOs.

Marc Faber thinks QE is for real and that equities will rise and the dollar will strengthen and rates start to rise.

Thu, 10/21/2010 - 23:02 | 668895 Itsalie

Did Faber say whether it would be US stocks or emerging market? And was he talking about the US dollar getting stronger or some other dollar? If he is unsure, ask him to walk across the street from his mansion in Bangkok to his favourite massage parlour and there, ask what they think about paying with his US dollars.

Fri, 10/22/2010 - 07:47 | 668957 RoRoTrader

Dow is back above the weekly 200 MA and if Faber is right then 11,625 area looks like the next reasonable target higher.

Maybe the FED can have its cake and eat it too. Who knows? So until then, keep it simple and trade price.

Or, just follow RobotTrader.

Thu, 10/21/2010 - 21:50 | 668757 Minion

That's why it's called a bear market rally. :)

A Whiff of a “Mini” QE-2?

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