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

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Wed, 04/20/2011 - 10:29 | 1187946 agNau
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.

Wed, 04/20/2011 - 05:50 | 1187240 top_shot
top_shot's picture

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

Wed, 04/20/2011 - 03:33 | 1187161 Soul Train
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.

Wed, 04/20/2011 - 01:46 | 1187070 FlyPaper
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.



Wed, 04/20/2011 - 05:42 | 1187233 hardcleareye
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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? 

Wed, 04/20/2011 - 01:24 | 1187041 AldousHuxley
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.)



Wed, 04/20/2011 - 00:55 | 1187011 aerial view
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.

Wed, 04/20/2011 - 00:03 | 1186897 faithfulwatchman
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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!

Wed, 04/20/2011 - 07:37 | 1187394 Bartanist
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. 

Wed, 04/20/2011 - 01:30 | 1187052 RockyRacoon
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...and Grub, and Gardens.   Or does that fall under "Goods"?

Wed, 04/20/2011 - 01:07 | 1187020 bmwm395
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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.

Wed, 04/20/2011 - 00:02 | 1186886 steve2241
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.

Wed, 04/20/2011 - 07:35 | 1187389 Bartanist
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?

Tue, 04/19/2011 - 23:26 | 1186786 markar
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.

Wed, 04/20/2011 - 06:01 | 1187252 hardcleareye
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.

Wed, 04/20/2011 - 07:29 | 1187383 Bartanist
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.

Tue, 04/19/2011 - 23:24 | 1186769 boeing747
boeing747's picture

So we shall have 1970'S all over again

Tue, 04/19/2011 - 23:38 | 1186835 Matto
Matto's picture

1970 x 1,000,000,000

Tue, 04/19/2011 - 23:10 | 1186732 alien-IQ
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.

Wed, 04/20/2011 - 07:27 | 1187372 Bartanist
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.

Tue, 04/19/2011 - 23:08 | 1186727 Mr pain
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?

Wed, 04/20/2011 - 00:22 | 1186943 Fancy Bear
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.


Wed, 04/20/2011 - 00:08 | 1186914 Peak Everything
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.

Wed, 04/20/2011 - 03:29 | 1187152 MadeOfQuarks
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. 

Wed, 04/20/2011 - 01:37 | 1187063 Bringin It
Bringin It's picture

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

Tue, 04/19/2011 - 22:56 | 1186698 PulauHantu29
PulauHantu29's picture

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


Have fun on the tour!

Wed, 04/20/2011 - 07:17 | 1187345 Bartanist
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.

Tue, 04/19/2011 - 22:39 | 1186664 essence
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

Wed, 04/20/2011 - 01:25 | 1187047 RockyRacoon
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.

Tue, 04/19/2011 - 22:35 | 1186651 RNC
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.  



Tue, 04/19/2011 - 22:23 | 1186626 treemagnet
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.

Wed, 04/20/2011 - 01:23 | 1187042 RockyRacoon
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.

Wed, 04/20/2011 - 06:52 | 1187294 rufusbird
rufusbird's picture

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


Thu, 04/21/2011 - 22:04 | 1195031 RockyRacoon
RockyRacoon's picture

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

Wed, 04/20/2011 - 04:56 | 1187192 StychoKiller
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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...

Tue, 04/19/2011 - 22:24 | 1186623 ThePhysicist
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If four TBTFs hold 95% of derivatives, in relatively equal share, why doesn't the Fed just force them to unwind them amongst themselves?

Wed, 04/20/2011 - 01:21 | 1187037 RockyRacoon
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.

Wed, 04/20/2011 - 07:10 | 1187329 Bartanist
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.

Thu, 04/21/2011 - 22:05 | 1195027 RockyRacoon
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?

Tue, 04/19/2011 - 23:39 | 1186826 Matto
Matto's picture
Why not indeeeeedddddd!!!!!!
Tue, 04/19/2011 - 22:19 | 1186614 SwingForce
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.



Wed, 04/20/2011 - 04:53 | 1187191 StychoKiller
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...

Wed, 04/20/2011 - 01:18 | 1187032 RockyRacoon
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.

Tue, 04/19/2011 - 22:18 | 1186611 disabledvet
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."

Tue, 04/19/2011 - 22:25 | 1186607 web bot
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.

Tue, 04/19/2011 - 22:13 | 1186597 tickhound
tickhound's picture

Ray Charles

Tue, 04/19/2011 - 22:12 | 1186588 Rogerwilco
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.

Wed, 04/20/2011 - 01:31 | 1187058 Bringin It
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.

Wed, 04/20/2011 - 04:50 | 1187190 StychoKiller
StychoKiller's picture

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

Wed, 04/20/2011 - 00:35 | 1186983 steve2241
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!

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