During his presentation to the Senate yesterday (to be followed promptly by another presentation before Congress shortly), Bernanke discussed the impact of the $61 billion spending cut on GDP. In doing so he referenced a report published by Goldman strategists Jan Hatzius and Alec Phillips. He did so incorrectly. And the first thing Hatzius did this morning is to correct the Chairman: "Some have wondered—e.g. in the Q&A portion of Fed Chairman Bernanke’s monetary policy testimony on Tuesday—how such seemingly small cuts could have such a noticeable impact. But it is important to remember that we are talking about a hit to the quarter-on-quarter annualized growth rate of spending here, not about a hit to the level of GDP. For illustration, it is useful to go through a simplified version of the calculation underlying our estimates for the House-passed spending cut." Hatzius clarifies further: "We estimate that the $25bn cut in our budget projections reduces growth in Q2 by around 1 percentage point (annualized); this effect is already incorporated in our forecast that real GDP will grow 4% (annualized). In addition, we estimated that the $61bn cut passed by the House would reduce growth in Q2 and Q3 by 1½-2 percentage point (annualized) in Q2 and Q3. (In other words, relative to the assumptions currently embedded in our forecast, the House-passed package would imply an additional ½-1 percentage point drag on growth in Q2 and an additional 1½-2 percentage point drag in Q3.) Spending would then be maintained at that lower level thereafter, and the effect on GDP growth would dissipate quickly in Q4 and would be essentially neutral by 2012 Q1." So perhaps the Chairman will keep this in mind as this report is surely reference once again today.
Jan Hatzius is the bellwether of the sellside economist crowd. When he was bearish (2009), most were bearish, when he turned bullish (early half of 2010), everyone else followed suit. Then he turned bearish again (early August 2010) and convinced his friend and former co-worker Bill Dudley to launch QE2. Then, in December, he turned very bullish again. And now we are here. We expect Hatzius to be fake bullish for another 3 months max, at which point he will have no choice than to start telegraphing to Jon Hilsenrath that it is time for QE3. In the meantime, for those who are not too familiar with his work, here is an extended interview with Bloomberg TV, in which the GS head economist talks about Goldman's call for 18% gain in stocks this year as well as trends in jobs, inflation and other data indicators.
Ever since his transition from a critical, respected and objective economist to the third coming of A Joseph Cohen, Goldman's Jan Hatzius has become an increasingly irrelevant second fiddle-cum-broken record, and as such his observations have merited less and less attention. His latest spin piece on why the centrally planned US economy will grow within the parameters of "perfection pricing" is merely more confirmation of this sad transition. To wit: "2012 is still a long way off, and the uncertainty surrounding any forecast is large. But if we are right, the implications of this forecast are reasonably benign for the US Treasury market and very benign for the equity market. Indeed, our strategists expect only a moderate increase in 10-year Treasury note yields to 3¾% at the end of 2011 and 4¼% at the end of 2012, as well as an increase in the S&P 500 index to 1500 by the end of 2011." In other words: the debt-fueled Frankenstein of a Goldilocks monster, currently rampaging around on government-funded steroids, is really completely under control. It appears that all the gloves have come off in this last attempt to reflate the global ponzi, and sadly credibility once relevant, is now completely out of the window.
Jan Hatzius, whose recent conversion to an economic bull forced all the Wall Street sell side lemmings to follow suit (just like they did in August when he downgraded the GDP only to start pushing Bill Dudley's buttons for QE2 and ultimately getting it), disclosed earlier that QE 2.1, or an extension to QE2's $600 billion (excluding the $300 billion from QE Lite), is all but certain. After all Jan's calls for QE Lite in January 2010 are precisely what happened. It was also Jan who first demanded QE2 in September, and got that too. Which means that as we expected, the total amount of debt to be monetized this year (between QE lite, QE2 and QE2.1) will be about $1.6 trillion, or more than the entire budget deficit. Now what bond investors are wondering is what happens when the Fed starts unwinding: by now everyone knows how POMO works - buying USTs in the open market. Well, at some point in the next 2 years the Fed, which by then will have about $4 trillion in Treasury securities (assuming all MBS have been prepaid) will have to start selling this paper. Couple that with the $1.5 trillion in debt issuance by the Treasury, and soon America will be faced with the brick wall of such a supply deluge in paper that there will be no way to sell it without hiking rates into double digit figures. This, much more than any unfounded speculation of capital flows from equities to bonds, is what is starting to awake the US bond vigilantes.
It was only two days ago that Goldman upgraded its own bonus pool by saying the economy is now going nowhere but up, up, up. That lasted for 72 hours. Below is Hatzius' (first of many) mea culpa for finaly selling out: "A clearly disappointing report all around, with payrolls up much less than expected and the unemployment rate up. Although hours worked rose only 0.1% in November, this rough proxy for real GDP less productivity changes is tracking at roughly a 2½% annual rate. Flat wages coupled with the small increase in payrolls suggests very little wage and salary growth in November." We give the Goldman "strategist" 3 months before he starts beating the QE 3-666 drums again.
Goldman's Jan Hatzius, who after flipping his view on the economy in early August, and taking all of the street with him, has recently flopped back to a semi-optimistic outlook. What is amusing is that despite his suddenly far more bullish outlook, he, as well as the entire Goldman team, continue to call for $2 trillion in total QE2. Of course the two are completely at odds with each other, but hey - if it means 2011 will be another record bonus year, why leave something as irrelevant as logic stand in the way of that 3rd French Polynesian island. On the other hand, Hatzius is certainly not stupid, so in continuing with his rhetorical device of an hypothetical interrogation, today Hatzius releases his latest Q&A, this time focusing on the future of Quantitative Easing. What is most notable, is that as of today, the Dutch strategist sees the possibility for less QE2 post June, contrary to his recent missives which expected QE2 to continue until the full $2 trillion of expected monetary base "printing" was fulfilled. Then again, as Ireland has so aptly demonstrated today, at this point it is no longer a question of whether any economic policy is viable in the long-run. All that matters is for putting enough lipstick on the bankrupt global pig for another few months at a time, so that yet another sovereign constituency can foot the bills in what has become a rolling global bailout of country after country.
Here is Jan Hatzius' initial read on Bernanke speech. In a nutshell, Hatzius seems to believe that reading between the lines may mean Bernanke will not do QE2, and preserve some of the Fed's mystique, so that all those massive bond managers who get the Fed's data early appear to have a competitive advantage. Alas, they don't. And all those who believe the Fed at this point, now that fiscal stimulus is no longer an option and all out FX war has broken out, has any other option but to buy anything not nailed down, well, we would like to point them to the 9 upcoming POMO monetizations over the next 4 weeks. What is most troubling is that the market has now priced in not only that, excluding some intraday volatility especially on OpEx days, but the expansion of Fed proxy buying of AAPL to $25 billion a week. Hatzius better hope that his attempt to restore some credibility to the Phantom of the Fed is grounded in reality. Because in the off chance he is right, buying a boatload of far OTM broad market puts on November 2 may well end up being the most profitable trade of the year, if not decade.
From Tungstenman Sachs: "Our view remains that the Federal Open Market Committee (FOMC) will once again ease monetary policy via unconventional measures in late 2010 or early 2011. Our views have not changed, and today’s comment discusses them in Q&A form. We believe that purchases of US Treasury securities cumulating to $1 trillion or more are the most likely cornerstone of the program; that the September 21 FOMC meeting is probably too early for a big announcement, but that November 2-3 is a possibility; and that it would likely “work” to a limited degree, perhaps boosting real GDP growth by a little under ½ percentage point per $1 trillion in purchases."
Jan Hatzius Presents His List Of Anticipated Fed Action Items Through November 2-3: None; Time To Sell On No Imminent QE2?Submitted by Tyler Durden on 08/24/2010 22:11 -0400
Goldman's Jan Hatzius explains why while he is still convinced that the Fed will ultimately have to undergo QE2, he presents the case why the Fed's hands are now most likely tied through its November 2-3 meeting (and why the J-Hole meeting will be a snoozer), at which point it will be too late for the market to benefit from monetary stimulus. The implication: very bearish for stocks, as Obama's only option for pumping up stocks in advance of the elections (monetary easing) is eliminated. With no means to implement a stock run up into the election (which would become a prompt self-fulfilling prophecy), the market is likely about to tumble.