Jan Hatzius

Here comes the kitchen sink: just in case there was a chance the Fed's historic disclosure had a chance of pushing the market lower, almost to the dot at noon Goldman has completely sold out and has released a surprising (in its own words) report, changing its outlook on the US economy from bearish to bullish. Goldman's take on the dramatic nature of its perception shift: "This outlook represents a fundamental shift in the thinking that has
governed our forecast for at least the last five years... Five years ago, we became very pessimistic about the US economic
outlook.  This was because we expected downturns in the housing and
mortgage markets to trigger a substantial increase in the private sector
financial balance—the gap between the total income and total spending
of US households and businesses.  In turn, we thought this weakening in
private-sector demand would cause an economic slowdown as the government
and foreign sectors failed to take up the slack. So why do we now expect growth to pick up?  In a nutshell, it is because
underlying demand has strengthened significantly, as shown in Exhibit
3.  This chart plots the growth rate of real GDP (dark line) alongside
the growth rate of underlying demand (light line).  After a deep
downturn from 2007 to mid-2009 and near-stagnation from mid-2009 to
mid-2010, underlying demand is now accelerating sharply.  Currently, it
is on track for a 5% (annualized) growth rate in the fourth quarter." Much more hopium inside. This is unfortunate. Jan Hatzius used to have credibility.

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.

BOTTOM LINE: Fed Chairman Bernanke delivers a) a strong defense of the Fed’s renewed monetary easing, b) a fairly explicit endorsement of near-term fiscal expansion (coupled with longer-term consolidation) in the United States, and c) a fairly explicit plea to reduce current account imbalances via exchange rate appreciation in emerging market economies.

What's the deal with Goldman? First they said QE2 would be bad. That we needed $500b or $1T or even $2-$4T to achieve inflation. Now they are defending it. More confusion. They are both wrong.

Goldman: "In practice, QE2 is likely to continue well beyond June 2011—at least well into 2012—if our forecasts for unemployment and inflation are close to the mark. We believe that purchases could ultimately cumulate to around $2 trillion...Under our longer-term projections it is easy to come up with models that show no tightening until 2015 or later." In other news, the economy will not recover for the next five years, but under the Centrally Planned Feudal State of Bernanke, the economy is irrelevant. Incidentally, Zero Hedge now believes a $5 trillion QE3 program will be announced by July 2011, when gold is trading at $10,000, the entire Treasury curve is at zero, and stock prices are meaningless courtesy of a DXY sub 50, and every commodity opening limit up daily.

So much for the Fed's two mythical mandates of promoting "maximum employment" and maintaining "price stability." First, we had Bernanke's predecessor Greenspan confirming in late July on Meet the Press what everyone knows: namely that the primary goal of the Fed is merely to encourage higher stock prices: "if the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here." And now, courtesy of an Op-Ed by the current chairman, we get confirmation, again, just three months later, from the current chairman, that the Fed cares mostly about stimulating high stock prices, solely to create the completely artificial illusion of "wealth" for the few, the proud, the shareholders, and the banking oligarchy.

With just over a week left to the QE2 announcement, discussion over the amount, implications and effectiveness of QE2 are almost as prevalent (and moot) as those over the imminent collapse of the MBS system. Although whereas the latter is exclusively the provenance of legal interpretation of various contractual terms, and as such most who opine either way will soon be proven wrong to quite wrong, as in America contracts no longer are enforced (did nobody learn anything from the GM/Chrysler fiasco for pete's sake), when it comes to printing money the ultimate outcome will certainly have an impact. And the more the printing, the better. One of the amusing debates on the topic has been how much debt will the Fed print. Those who continue to refuse to acknowledge that the economy is in a near-comatose state, of course, hold on to the hope that the amount will be negligible: something like $500 billion (there was a time when half a trillion was a lot of money). A month ago we stated that the full amount will be much larger, and that the Fed will be a marginal buyer of up to $3 trillion. Turns out, even we were optimistic. A brand new analysis by Jan Hatzius, which performs a top down look at how much monetary stimulus is needed to fill the estimated 300 bps hole between the -7% Taylor Implied Funds Rate (of which, Hatzius believes, various other Federal interventions have already filled roughly 400 bps of differential) and the existing 0.2% FF rate. Using some back of the envelope math, the Goldman strategist concludes that every $1 trillion in new LSAP (large scale asset purchases) is the equivalent of a 75 bps rate cut (much less than comparable estimates by Dudley, 100-150bps, and Rudebusch, 130bps). In other words: the Fed will need to print $4 trillion in new money to close the Taylor gap. And here we were thinking the economy is in shambles. Incidentally, $4 trillion in crisp new dollar bills (stored in bank excess reserve vaults) will create just a tad of buying interest in commodities such as gold and oil...

"Philly Fed factory survey improves slightly in October; both it and Conf Board's leading indicators index in line with expectations." Translation: more free money.

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.

Goldman Sachs' response to the FOMC: "Minutes of Sep 21 meeting confirm that FOMC was dissatisfied with the performance of the US economy even though most did not expect either renewed recession or deflation. The committee considered a range of options, focusing on Treasury purchases but including the possibility of adopting target paths for either prices or nominal GDP. Most participants appear to have thought that the status quo would justify renewed easing relatively soon, but a few thought more weakening would be required." Spot on Jan - now please ask the Spear Leeds boys if they can please invert every single input function in REDI, so that Buy is Sell, and people can at least pretend they are Selling on bad news, and vice versa...

Jan Hatzius pretty much slams the door on any possibility for a liquidity moderation (let alone exit): "We found that under our own economic forecasts it might take until 2015 or longer before a rate hike became appropriate." In other words, the US economy will very likely just go down in flames, as the Fed makes sure that each and every American is infinitely "rich" courtesy of zero cost debt denominated in worthless dollars. The only salvation from this outcome is for the rest of the world to stage a Fed intervention before it all burns down.

The Fed is very worried about the economy and deflation. You can tell by all the recent speeches from Fed chiefs about the need for quantitative easing. They will do it soon. And they get the inflation they want, but it won't be modest. This policy will make things much worse. It confirms my belief that they don't know what they are doing. This article explains why.

Jan Hatzius is on a roll these past two days: after first debunking any myths that QE2 will be less than $1.5 trillion in total, thereby confirming the dollar's days as a reserve currency are numbered, now he is out to prove to Obama and his incoming chief economic advisor whichever Mark Zandi that may be, that there is no Santa Claus. To wit: "We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession. There is not much probability of a significantly better outcome. The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping GDP growth very sluggish." That pretty much sums up why stocks will continue being completely irrelevant as an indicator of reality for about a year longer.

Jan Hatzius, who has been spot on in every prediction so far this year, provides the following rhetorical Q&A on what is now a definitive QE2 announcement in less than 30 days (and if one doesn't come, the mid-term elections will be accompanied by a whole host of flash crashes). In a nutshell: "we continue to believe that these purchases will ultimately involve at least $1trn, possibly quite a lot more...more importantly, QE2 works on other elements of financial conditions, including equity prices and the exchange rate." In other words, look for gasoline at $10 at a gas station near you within 6 months, promptly to be followed by complete economic collapse and a 25% chance of revolution on the side.

As argued over the past few weeks and first introduced in my piece "Catfight: it's on!" central banks are now engaged in modern monetary warfare. This was acknowledged just about that bluntly by the Brazilian central bank yesterday. There are two ways to play the game. The Swiss way, meaning traders front-run the central bank when their favorite FX dealer tells them the SNB is checking offers in EURCHF at which point you buy ahead of them and sell 2 hours later, leaving sell stops below the indicated support level the SNB is defending to get short when they give up. That's the easy one. What will the BCB be like? Should people buy 1.7050 banking on them being tenacious and waiting for a return of risk aversion to squeeze the shorts? Should they leave stop sells at 1.6900 to get short on a break? Probably a bit of both. As for the BOJ I reiterate my conviction that it should not be messed with at this point and I would much rather play alongside their bid. Indeed they have not only committed to an open period of intervention and have quite a few bullets left, but more importantly they have not sterilized their interventions. That to me means business: they print and they buy, they make the rules, don't challenge them under those conditions. In that environment, my belief is that relative monetary policies will drive FX moves. Currently there is 98% dollar bears based on the assumption the Fed will print at will. That to me is a simplistic view and I will be looking for mispricing to take the other side of the bet. The reason is that this argument does not factor in what other central banks are doing. Sellers beware: there is more to the picture than just selling the USD to play the Fed. I will send out a detailed analysis of my findings as I make progress in this domain. - Nic Lenoir