Why QE 3 is Guaranteed (the Alternative is Something Four Times Bigger than 2008)

Phoenix Capital Research's picture

financial world is awash with a debate as to whether the Fed will engage in QE
3 in the future. To me this debate is pointless.


Indeed, the
Fed HAS to engage in more QE 3 if it doesn’t want the entire market to
collapse. Given the breakdown in Europe, the IMPLOSION in the Middle East, and
the ongoing nuclear disaster in Japan, the removal of Fed liquidity would kick
off a MASSIVE systemic Crisis.


Remember, we
had a full-scale market breakdown when QE 1 ended and that was because of
Greece: a country with a GDP of $329 billion. Removing liquidity from the
markets when Japan, the fourth largest economy in the world (if you count
Europe as one economy), the largest Oil exporting region in the world (the
Middle East), and Spain and Portugal are all breaking down would lead to an
absolute market DISASTER.


The Fed will
not risk this. Besides it HAS to keep the liquidity going if it’s to continue
supporting the TBTF banks in the US. Remember, 99% of what the Fed’s done in
the last two years has been aimed at supporting the large, Too Big To Fail
(TBTF) Wall Street banks. The reasons for this are:


1)   The
Fed is in fact CONTROLLED by these banks via the Primary Dealer network

2)   Fed
leaders are all front-men for Wall Street



In order to
understand these, you need to know that the REAL power of the Fed lies in its
primary dealer network, NOT stooges like Ben Bernanke.


If you’re
unfamiliar with the Primary Dealers, these are the 18 banks at the top of the
US private banking system. They’re in charge of handling US Treasury Debt
auctions and as such they have unprecedented access to US debt both in terms of
pricing and monetary control.


The Primary
Dealers are:


1.     Bank
of America

2.     Barclays
Capital Inc.

3.     BNP
Paribas Securities Corp.

4.     Cantor
Fitzgerald & Co.

5.     Citigroup
Global Markets Inc.

6.     Credit
Suisse Securities (USA) LLC

7.     Daiwa
Securities America Inc.

8.     Deutsche
Bank Securities Inc.

9.     Goldman,
Sachs & Co.

10. HSBC
Securities (USA) Inc.

11. J. P.
Morgan Securities Inc.

12. Jefferies
& Company Inc.

13. Mizuho
Securities USA Inc.

14. Morgan
Stanley & Co. Incorporated

15. Nomura
Securities International Inc.

16. RBC
Capital Markets

17. RBS
Securities Inc.

18. UBS
Securities LLC.


Of this group four banks in particular receive unprecedented
favoritism of the US Federal Reserve. They are:


1.     JP

2.     Bank
of America

3.     Citibank

4.     Goldman


You’ll note
that these are the firms deemed “Too Big To Fail.” The Fed not only insured
that they didn’t go under during 2008, but in fact allowed these firms to
INCREASE their control of the US financial system.


Consider that JP Morgan took over Bear Stears. Bank of America
took over CountryWide Financial and Merrill Lynch. Citibank and Bank of America
were the only two banks to have their liabilities directly backed by the Fed
($280 billion for Citi and $180 billion for BofA).


Then there’s Goldman Sachs which was made whole from all AIG
liabilities, received $13 billion in direct funding from the Fed, and was
supported while ALL of its investment bank competitors either went under or
were consumed by other entities, granting Goldman a virtual monopoly over the
investment banking business (the firms that were merged with larger firms all
laid off large portions of their employees and closed down whole segments of
their business).


My point with all of this is that we NEED to ignore what the Fed
says and instead focus on what it does. And in the last two years, the Fed has
done everything it can to support these four firms. Indeed QE’s 1, 2, and the
coming 3 are nothing but an attempt to funnel TRILLIONS into these firms (and the
other primary dealers).


The reasons the Fed is engaging in QE rather than simply dishing
out the funds are:


1.     Political
outrage would be EXTREME if the Fed just gave the money away

2.     The
Fed needs to support those firms with the largest derivative exposure


The reason that the 2008 debacle happened was very simple. The
derivatives market, the largest, most leveraged market in the world.


Today, the notional value of the derivatives sitting on US banks’s
balance sheets is in the ballpark of $234 TRILLION. That's 16 times US GDP and more than four times WORLD GDP.


Of this $234 trillion, 95% is controlled by just four banks.  Those four banks and their derivatives
exposure (in $ TRILLIONS) are charted below:



The above picture summates two things:


Who REALLY controls the US financial system

Why QE 3, 4, etc are guaranteed


The Fed HAS to continue pumping money into the system to support
these firms’ gargantuan derivative exposure. Failing to do so would mean a
disaster on the scale of four to five times that of 2008.


Remember 2008 was caused by the credit default swap market which
was $50-60 trillion in size. The interest-rate derivate market is $200+
TRILLION in size.


So I am certain QE 3 will be coming. If it doesn’t come in June
we’ll get hints of it until it’s finally announced. The Fed cannot and will not
stop the money printing. Bernanke will be forced to resign long before he takes
the paperweight off the print button.


So if you’re
not preparing for mega-inflation already, you need to start doing so NOW. The
Fed WILL continue to pump money into the system 24/7 and it’s going to result
in the death of the US Dollar.


If you’ve
yet to take steps to prepare your portfolio for the coming inflationary
disaster, our FREE Special Report, The
Inflationary Disaster
explains not only why inflation is here now, why the
Fed is powerless to stop it, and three investments that absolutely EXPLODE as a
result of this.


All in all
its 14 pages contain a literal treasure trove of information on how to take
steps to prepare AND profit from what’s to come. And it’s all 100% FREE.


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and click on FREE REPORTS.










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agNau's picture

What this comes down to is "Who will blink"? All the talk of END of QE is just talk and an attempt to deflate and remove the "speculation". Watch for a concerted move to scare that money off the trade. Another huge deflation event will open the door. I believe we are close to that event. QE is here to stay. Without it rates must rise, debt must rise, the interest rate derivatives will blow up! Game over.

top_shot's picture

JMP is gona fall hard when silver blows up on their face

Soul Train's picture

True - the exposure of previous gluttonly of gambling losses on derivitives by the elitist Fed Reserve affiliated banksters is not taken care of.

see http://ObamaDollar.com

Great insights and right on target about gold and commodities back two years ago. Missed the mark a bit on XOM, but nobody is perfect.

I like the IRS one year tax holiday.

FlyPaper's picture

The possible scenarios are not just "QE3" vs "not QE3".

Last April the markets were up, banks were in bad shape, and they let QE1 expire.  Things are different this year (exogenous shocks), but I'm not sure that the Fed is quite as worried about the stock market as the author suggests, based on the Fed's 2010 behavior.

While the Fed as been inconsistent of late (QE or not to QE) - depending on the Fed-head speaking, what they have not changed their tune on is they believe the spike in commodities is a temporary situation.  That statement is just as important as their inconsistent QE comments, and could be an indicative of their QE3 intentions.

If you believe that the Commodity and Stock assets are over-inflated by QE, then the Fed could pop this bubble in both asset classes, leading to risk off. 

If risk off, then where does the money that comes out of stocks and commodities, where does this money go?   My guess is the bulk would flow to bonds, but PMs could also benefit.  In fact, the stock/bond action in the last 3 days may be an example of this.

But let's say that the Fed decides that a cold-turkey stop of QE is not good for the bankers, er, economy, I don't see why a "light" continuation of QE isn't an option for the Fed.  E.g., something that more slowly lets the air out of the Risk assets, brings rates down, tames inflation that is negative for the economy - but still is "inflationary" - vs. "deflationary" ...

There are a ton of "yeah, buts" to expound upon (Japan buying drying up, China shifting...) and the US will clearly need to borrow more ... the question is whether the Fed needs to do as much buying, or whether they can force risk-off and try to send capital into the bond markets - letting the markets carry more of the load.

The Fed is there for the bankers - and highly devalued dollars do not make lenders happy, so at some point the Fed is going to have to prop up USD (rate hike, no QE3 should firm the dollar.)

I have no idea how this is going to play out, but clearly this is more than one possible outcome.



hardcleareye's picture

Considering the exposure the Federal Reserve has to an increase in interest rates, via Treasury Puts.


Interest rates will NOT increase. 

Might they be setting the stage for a deflationary period? 

AldousHuxley's picture

US needs QE3 to finance war in middle east so that they can back up debt with oil.

US will then bring about QE4 so that wall st. banksters can justify existence

QE5 because Janet Yellen will get to press the magic button

QE6 because people have started wiping their asses with the dollar and there is always a need for toilet paper

QE7 just because Americans like to take it up their ass despite their homophobia

QE8 to just kill off the dollar while oligarchs cash out and retire out of country

QE9 because the highfrequency computers have taken over the money press so that they can print money directly into the exchanges faster than any other machines

QE10 to buy some time for politicians to say "US does not need IMF and is not bankrupted"

Then US will either be invaded directly by China or forced to restructure debt (cancel all promised pensions, social security, medicare,etc.)



aerial view's picture

Special status is afforded the U.S. due to it's reserve currency and military might. Of course our oscar winning politicians will jump up and down and scream about deficits and national debt so that the rest of the world thinks they are serious about it; however, the currency will continually be devalued (slowly they hope), services will be cut, taxes raised, QE will continue (perhaps under a different name), more deceptive accounting procedures will be used, the TBTF banks will continue to be bailed out and the MSM will continually feed us with false hope that things are improving until it all collapses. It may take years if the U.S. can keep interest rates low and still force others to buy treasuries but the way the elites look at it is when it all crashes, would you rather be the middle class with less than a hundred thousand in savings or the elites with billions-for you see as in everything- it's all relative.

faithfulwatchman's picture

Your article presumes that the Fed wants to PREVENT a crash.

  But they DO want to crash the system and press the RESTART BUTTON with a new monitary system.    Gold, Silver, Guns, and Goods!

Bartanist's picture

But they must also limit/control energy for it to have maximum effect. Personally I believe they will pull the trigger (eventually) by claiming a massive shortage of oil/energy.

... everything up to that point is simple resource hoarding.... enslaving the people and trading fiat Bennies for goods and making it seem as if they have no choice. Just a show. 

RockyRacoon's picture

...and Grub, and Gardens.   Or does that fall under "Goods"?

bmwm395's picture

I agree that the Fed at some point may well want a crash. I also believe we will see QE3. However I think that the Fed will try and disguise it, some how. So if anyone out their has some insight into how this could be done. I would really like to hear your thoughts.

steve2241's picture

The question is who has the other side of this $234 trillion trade? My guess is it's a near total wash between the gang of four, though.

Bartanist's picture

Of course, but going under the assumption that they all used the derivatives to book 30 years of future profits today, how can you possibly unwind future profit guarantees that are actually guarateed to be future losses if the circle jerk fails?

markar's picture

I would bet my PMs the world will not come rushing back into treasuries this time if QE ends and the market tanks. At least not without a min. of 6-8% on the 10 year. And that would blow up the banks and what's left of the economy.

hardcleareye's picture

If the markets tanks(including commodities), wouldn't you by defination have a huge destruction of wealth/liquidity? It would seem that the there would be very little excess liquidity to come "rushing back" into treasuries.

Bartanist's picture

Sure... and that is required. Somebody needs to take the loss so that the re-set button can be hit ... and justice would be served by the parasitic Wall Street criminals taking the entire loss because their excess, fraud and theft created the imbalanced system, where they benefit disproportinately, to start.

There is no valid reason for parasites to benefit disproportionately to the productive... but they just keep printing fiat and trading it for real wealth.

boeing747's picture

So we shall have 1970'S all over again

alien-IQ's picture

QE 3 would be catastrophic for the dollar. It will send commodity prices soaring even higher and kill any "market pump" that QE provides by the margin crush that will come with the higher costs and the inability to pass along the costs to the already tapped out and unemployed consumer.

In short...this thing is fucked ten ways to Sunday.

Bartanist's picture

Food and oil were actually holding steady until Goldman and friends one day decided to simple raise the price ... and they used their free Benny bucks to buy everything they could at prices ABOVE the market.

So, what happened to deleveraging the banks ... guess that was just a sham. What we have is the Fed taking the deleveraging hit on treasuries and toxic crap and the banks and shadow banking system once again leveraged to the hilt any buying every econonomically bad deal available.

Mr pain's picture

I’m trying to think how to play this.

No QE3 and:

A.      Equities tank, people rush to treasuries.  Treasury rates don’t have to go up.  PMs down.  Eventually this fails as we pile on more debt and people start moving back into equities since they need more than 1% return. PMs recover and gain Treasury rates have to go up or no buyers.   Rate increase massively increases deficit, faster death spiral for dollar.

B.      Equities tank, people rush PMs as people lose faith in dollar.  Treasury rates have to go up or no buyers.   Rate increase massively increases deficit, faster death spiral for dollar.

 QE3 happens and:

a.       Equities rise, Treasury rates don’t have to go up as the Fed is monetizing debt.  PMs up as dollar is diluted.   Eventual Weimar Scenario – slower death spiral for dollar as near 0% rates extend and pretend.  

It seems like all roads lead to PMs even though there may be dips in the short term road.  I thing QE3 holds the ship together longer but political pressure in Washington forces the issue.

Thoughts?  Faulty logic?

Fancy Bear's picture


+1. I have a similar mental flow chart, but I also have a pet endgame.

Treasuries cannot rise since the cost to the gov would push it closer to default--arguably the worst possible scenario.

If no QE3, commodities would fall, which would be good for the economy in the short term, but the deficit, trade imbalance and proximity to default would remain. 

QEn accomplishes what I believe many ultimately want, a weaker dollar relative to the yuan and balanced trade. Commodities will rise until they induce another recession and demand for them (read: oil) declines. Then a new price is established in the lower value dollar, the economy gains traction and demand resumes. Painfully, this may have to repeat until an acceptable new value for the dollar is reached. The result will be a US economy that must provide more for itself (can you spell ANWR?) since the dollar will be closer to the yuan.

For our purposes, PMs are currencies that rise in every scenario given their universal scarcity. The magnitude of rise in gold may well equal the drop in the dollar relative to the yuan, so it may have 6x to go.


Peak Everything's picture

I subscribe to the theory that they intend to tap the brakes before resuming QE3, and that QE3 is a given because there is no alternative.

The big question for me is, will tapping the brakes cause a controlled temporary drop in equities and PMs? Or, because the system is so unstable, will it cause an out of control deflationary spiral with PMs rising due to the ensuing panic. I don't know.

What I do know is that there is much much more paper wealth than there is physical wealth available to buy with it. And with net energy declining there is no chance of growing physical wealth fast enough to get out of this predicament. This means that most people are going to get a lot poorer thru a combination of having less money and being able to buy less with the same money.

MadeOfQuarks's picture

I second this, I feel pretty sure they're not going to implement QE3 back to back with QE2, but instead let equities drop and yields rise first, just to get the public on board with QE3 and let the banks use their now bloated reserves to buy equities on the cheap. Why else would banks increase their cash? With immediate QE3 that would be a very bad move.

Also with immediate QE3 the FED would clearly not make sense, they are already talking about a self sustaining recovery, why would they need a QE3, how would they spin that one? Plus they would get all the blame for the inevitable collapse if they don't let go of the steering wheel for a bit to show us just how bad it can get without them. 

Bringin It's picture

If you remember, they "tapped the brake"s before QE2.

PulauHantu29's picture

Where your tax dollars go (via the Fed's POMO):


Have fun on the tour!

Bartanist's picture

I thought he sold the Chicago mansion. Anyway, except for the kitchen and the terrace it looks like a random collection of uncomfortable eclectic trash. I would prefer not to live there.

essence's picture

Isn't it now in-your-face apparent that the U.S. goverment has been hijacked and is now controlled by these banksters. There are no 'free' markets, there is no 'price discovery' .... everything has been compromised as these banking entities became the 'US government'.

The leverage of derivatives allows the control of markets.

The first step in combating ones enemies is understanding their strengths.
The Fed and the forces behind it gain strength from the leverage of their faux paper

RockyRacoon's picture

...the U.S. government has been hijacked and is now controlled by these banksters.

I say we give 'em a Bill of Sale and they can have the damned thing.  We (the unwashed masses) will just stop paying taxes, etc.   Let's see how that works for 'em.

RNC's picture

So all along, "BTFD" has been the right call..lol

If we do see QE3, it will prevent the cliff drop and allow for a controlled burn of the markets.  



treemagnet's picture

So what, with or without QE3+ the whole thing folds up like a cheap tent anyway.  Without, duh.  With it, you'll get margin compression slashing forward P/E's alone outta do it but throw in our debt being unattractive (requiring lots more interest) its a crash.  How many things did I leave out - hell, there's plenty more.  But what good does it do the elites to have hyperinflation?  Think of the unknown variables - global uncertainties not the least of which are pissed off mobs capable of storming all four of an elites castles both here, there, there, and there.  Now imagine no QE3 with subsequent crash, predictable.  Think of the money and power to garner with predictability. Lambs to the slaughter is nice, but what if 'ya can learn to breed 'em?!  Think of the possibilities!  Either way, they'll get you - and your little dog too!  (thats wizard of oz for you young people) 

*Don't drink and post, its the law.

RockyRacoon's picture

Yep.  Without QE+ the whole shebang folds like a $2 lawn chair.

Not pretty.

It will be done but will be called something else.   You know: The proverbial wolf in sheep's clothing thingy.

rufusbird's picture

Right on! ...."It will be done but will be called something else...."


RockyRacoon's picture

Or hidden from view like the foreign banks lining up at the discount window.

StychoKiller's picture

As long as present trends (i.e., Housing down, unemployment up, PIIGS imploding, Au/Ag ^, etc) continue, we'll know that QE^n is still in effect...

ThePhysicist's picture

If four TBTFs hold 95% of derivatives, in relatively equal share, why doesn't the Fed just force them to unwind them amongst themselves?

RockyRacoon's picture

You're assuming that the 4 biggies don't hold a substantial amount of derivatives with any other financial institution (or government).   The 4 unwinding what they interconnect with would help, but the rest would make Medusa blush.

Bartanist's picture

UNWIND THEM? My guess is that they have already booked all forward profits that the derivatives guarantee.

In simple terms: Make a 30 year loan, buy insurance (a derivative) on the loan and then book all of the profits today.

Our ridiculous paradigm that growth, above the market growth rate, must occur at any cost through innovation and the elimination of competition is what destined the economy to fail from the start. There is only so much juice in any one orange and when you squeeze it dry, you can imagine juice or fake its existence, but it does not really exist.

RockyRacoon's picture

The fact that I can buy "insurance" on your orange (in which I have no fiduciary interest) is the big problem here.  I'm gonna look into buying health, life and fire insurance on my neighbor and his house.   He is old, fat, and smokes in bed.  Think Aetna will go for it?

Matto's picture
Why not indeeeeedddddd!!!!!!
SwingForce's picture

To quote Naomi Prins from "IT TAKES A PILLAGE": "...The Federal Reserve, The Treasury, and The FDIC forked out more than $13 Trillion...With that money, the government could have bought up every residential mortgage in the country- there were about $11.9 Trillion worth at the end of December 2008- and still have had a trillion left over to buy homes for every single American who couldn't afford them, and pay their health care to boot".

How long do we let this go on? Foreclosures are only 25% worked through, and The Banks are not solvent now. If they've sucked in $13 Trillion so far, how much will they need in total? And who does Washington think will pay that money back? Not me, that's for sure. Not unless Bernanke, Paulson, Geithner et al. are in jail.



StychoKiller's picture

With that money, the government could have bought up every residential mortgage in the country- there were about $11.9 Trillion worth at the end of December 2008- and still have had a trillion left over to buy homes for every single American who couldn't afford them, and pay their health care to boot".


Ah, but how many FOREIGN housing market(s) would that have covered as well?  Sorry to pop your bubble, but the USA is NOT the center of the Universe...

RockyRacoon's picture

Yeah, but....   That mortgage-buying money would have "leaked into the real economy" and caused massive inflation -- doncha know.  I say "real economy" like your pocket and mine.  Can't have that.   Since the money has been sequestered by the Fed's reserves (doing us a favor, of course), there is not the usual suspect of hot money to cause the dreaded inflation.   Ooops, looks like it's causing the even more dreaded deflation.   Well, hell.  We just can't win this game.

disabledvet's picture

I feel like i've just seen Wormtongue set alight and is now running off the top of the castle.   Interesting because your name is "Phoenix Capital." Perhaps what we need is some "QE-pre"--kind of like "pre-crime" only with money--where we "dodge the invetible disaster by in fact creating it" since "we know what you're going to do before you do it."

web bot's picture

Can you elaborate on the comments being proffered by Nenner and Gundlach? They are predicting a rally in the bond market, being fed by a declining stock market? I'd bet this also has an impact on PMs.

Rogerwilco's picture

QE3 will tank the dollar. Why would Bernanke want that outcome? Unless you have a coherent explanation for why intentional dollar devaluation makes sense to the central bank, you can't assume QE3 is a certainty.

Bringin It's picture

Unless you have a coherent explanation for why intentional dollar devaluation makes sense to the central bank ...

The nominal value of underwater assets will improve.

StychoKiller's picture

I view the falling $FRN as a side-effect -- the Banksters are hoping no one will notice...

steve2241's picture

And Standard and Poor's can always push forward their threat of a AA rating to 2012 instead of 2013. That surely would induce a hand tremor in the paperweight holder. QE3 is NOT a given. Bernanke is more likely to take a bullet in this game of Russian Roulette!