An Open Letter to the MSM: QE 3 Is Not Coming. Stop the Propaganda

Phoenix Capital Research's picture

 

Listen up Mainstream Financial Media, the Fed is not going to announce QE 3. You’ve been running the same tired stupid story after every single FOMC meeting since May 2011, desperately trying to spin everything the Fed says into a call for more QE.

 

The fact of the matter is that only a handful of Fed members have called for more QE. They are Charles Evans and Bill Dudley, both of whom represent financial centers (Chicago and New York). These guys want QE Infinity because they represent the banks and could care less about the average American. Heck, Dudley even went so far as to suggest inflation was under control because iPads are getting cheaper… at a time when food prices were at all time highs!

 

Those folks have been clamoring for QE all along. This is nothing new.

 

Let me explain why QE 3 is not coming and why your desperate feeble attempts to spin every Fed statement into a call for more QE is going to bite you in the tail.

 

The Fed cannot announce QE 3 because:

 

  1. Food prices are already exploding higher towards records
  2. Gas prices are sharply up
  3. Inflation is actually much much higher than CPI claims
  4. The stock market is at or near four year highs

 

Those are the obvious reasons that anyone with a working brain could figure out. Now let’s explain the more significant reasons that someone who actually grasps how the financial system works knows about.

 

If the Fed announced QE 3, or decided to monetize everything in sight, the bond market would implode. Every time we’ve had QE, interest rates have risen. More QE now after we’ve already had QE 1, QE lite, and QE 2 would signal that the Fed is willing to monetize everything under the sun. The end result would be an absolute catastrophe (the bond market dwarfs the stock market in size) as bonds would collapse, sending interest rates through the roof.

 

This in turn would take down many corporations as they’d be forced to default on their debt payments. It would also destroy the US economy as credit card defaults, mortgages, student loans, etc would be defaulted upon.

 

So no QE, guaranteed.

 

There’s another reason QE isn’t coming. QE sucks Treasuries out of the financial system. Treasuries are the senior most assets against which banks make their trades. Consider that the top four banks in the US (JP Morgan, Goldman Sachs, Bank of America, and Citirgroup) only have $7.12 trillion in assets backstopping over $200 TRILLION in derivatives.

 

When the Fed “monetizes” debt it is in fact pulling assets out of the system (swapping out Treasuries and other assets for cash). With over $224 TRILLION in derivatives outstanding this is the LAST thing the Fed wants.

 

Indeed, Bernanke has all but admitted this recently, saying "I assume there is a theoretical limit on QE as the Fed can only buy TSYs and Agencies… If the Fed owned too much TSYs and Agencies it would hurt the market."

 

Why would it hurt the market? Because the banks NEED these assets . And QE takes them out of the system.

 

Trust me… Bernanke knows about this situation in the financial system. This is why he propped up the four TBTFs as well as Fannie/ Freddie and AIG while letting just about everyone else go under: if these firms collapsed it would implode the system.

 

So QE is not coming. That’s a fact. You can spin the Fed’s language however you want but you’re just making stuff up. You’ve been wrong about QE 3 for over a year now. And you will remain wrong. All you’re doing is propping up stocks with your propaganda.

 

For more insights and market commentary visit us at www.gainspainscapital.com

 

Graham Summers