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The Fed Cannot and Will Not Be Unleashing QE 3 Next Week...
QE 3 isn’t coming folks. The Hilsenrath article a few days ago was just a leak to prop the market higher. And it falls well within the Fed’s latest scheme: to prop the market up verbally rather than actually engaging in monetary policy.
Going back to July 2011, the Fed has largely resorted to verbal or symbolic intervention rather actual monetary action. In terms of actual actions, since that time the Fed has:
- Promised to extend its Zero Interest Rate Policy (ZIRP) through late 2014.
- Had various Fed officials promise that the Fed was ready to “act” anytime the market took a dive.
#1 is completely and totally meaningless. ZIRP is a trap and it’s a trap that the Fed cannot escape for three reasons:
- US commercial banks are sitting on over $200 TRILLION in interest rate based derivatives.
- In 2011, the US made $454 BILLION in interest payments. And that’s with interest rates at or near 0%. According to the Congressional Budget Office, the estimated interest that will be due on the US’s debt load by 2015 will be $533 billion: an amount equal to 1/3 of all federal income taxes collected that year (assuming the economy grows). Imagine what happens if rates rise.
- US Corporations currently owe $7.3 trillion in debt (an amount equal to roughly half of the US’s GDP). Any rise in interest rates means corporate payouts increasing dramatically and corporate profits shrinking.
So promising to extend ZIRP is ultimately pointless. It’s the same thing as saying “I promise to keep breathing until I die.” The Fed has to and will maintain ZIRP until the financial system implodes and interest rates soar as investors demand reasonable rates of return in exchange for the risk they take for investing in various bonds.
As for the Fed’s secondary policy (verbal intervention whenever the markets roll over) it is Chicago Fed President Charles Evans who clamors most for more easing.
Is QE3 Right Around The Corner?
(August 30 2011)
So much for no QE3, at least if Charles Evans gets his way.
Chicago Federal Reserve President Charles Evans was on CNBC just a few minutes ago, and comments from Evans made it sure seem like an additional round of quantitative easing is on its way.
http://www.benzinga.com/media/cnbc/11/08/1890663/is-qe3-right-around-the-corner#ixzz1oHCdaaE2
Bernanke Managed Expectations Like A Champ: QE3 Is Around The Corner
(November 2 2011)
Dissent, though, jumped from hawks to doves as Chicago Fed President Charles Evans wanted more accommodation; along with a reference to lower inflation, these two suggest Bernanke has managed to save his last bullet, and will probably bring out the quantitative easing in coming months.
Federal Reserve Could be Laying the Groundwork for QE3
(December 6 2011)
Chicago Fed President Charles Evans gave a speech at Ball State on December 5, and within it he detailed some of the actions that the Fed could take to support its dual mandate of promoting maximum employment and fostering price stability. Although Evans did not specifically mention asset purchases, he said that without action the Fed could fail both parts of its dual mandate.
Evans is the President for the Chicago Fed. Chicago is the second largest financial center in the US (after NY). So this guy is simply pushing for his “constituents” in calling for more monetary accommodations from the Fed. He is, in a sense, playing “good cop” for his cronies in the financial industry while other more rural based Fed Presidents (Kansas, Dallas) play “bad cop” saying there should be no more easing and that the Fed might even need to raise rates.
Indeed, compare Evans’ statements with those of Dallas Fed President Ken Fisher from a recent speech in Texas.
I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation—the so-called QE3, or third round of quantitative easing. The Federal Reserve has over $1.6 trillion of U.S. Treasury securities and almost $848 billion in mortgage-backed securities on its balance sheet. When we purchased those securities, we injected money into the system. Most of that money and more has accumulated on the sidelines: More than $1.5 trillion in excess reserves sit on deposit at the 12 Federal Reserve banks, including the Dallas Fed, for which we pay private banks a measly 25 basis points in interest. A copious amount is being harbored by nondepository financial institutions, and another $2 trillion is sitting in the cash coffers of nonfinancial businesses.
Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery, rescuing the economy from the Financial Panic of 2008–09, and then kept the medication in the financial bloodstream to ensure recovery. I personally see no need to administer additional doses unless the patient goes into postoperative decline. I would suggest to you that, if the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage.
http://www.dallasfed.org/news/speeches/fisher/2012/fs120305.cfm
It’s clear here that Evans, a financial center Fed President is the Wall Street “good cop” while Fisher, a Dallas based Fed President is the “bad cop.” One pushes for the market to rally, the other tries to cool inflationary expectations.
And yet, for all this talk and hype, QE 3 is nowhere to be found. And it won’t be showing up anytime soon unless a full-scale Crisis hits. The reason for this is that the political landscape in the US has changed dramatically with the Fed becoming more and more politically toxic: GOP Presidential candidates began taking swipes at the Fed early on in the candidacy race and it became increasingly clear that the Fed would be one of the primary political issues for the 2012 Presidential election.
As a result of this, the Fed (with the exception of those Presidents who represent financial centers, namely Evans for Chicago and Dudley for New York) began to shift into damage control mode.
This included:
- Suing Goldman Sachs (the firm considered to have the closest ties to the Fed) so as to distance itself from its Wall Street darlings
- Shifting the blame for the Financial Crisis as well as the terrible state of the US’s finances onto Congress’s shoulders
- Launching a PR campaign to portray Ben Bernanke as an all around good guy (opening the Fed to Q&A sessions with the press, staging town hall meetings with the public, and getting editorials written in the Wall Street Journal on how Bernanke is just an ordinary guy like the rest of us).
In light of this, it is clear that that the bar for QE 3 had been raised dramatically. As a result, since early autumn 2011, I’ve been writing that the Fed would NOT unleash QE 3 without a Crisis hitting first.
So don’t bank on QE hitting next week. Which means… the Fed will disappoint, and we will get a market correction. All the macro and technical signs point towards something bad coming this way. The red flags are literally everywhere. And judging by the significance of them, we could very well be heading into a full-scale Crisis.
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Popo.....AMEN, this guy has been getting it 100% wrong for the past 3 years.
But his Proprietary Crash Indicator was saying to sell back at S&P 1075.
Listen to his advice at your own peril.
Every week it's the same story. The market is going to tank, Be prepared....Buy my crisis survival kit...2011 was supposed to be the end of the world. Ths crisis is going to take years to unfold....it is an election year rememeber...I would be betting on a small correction this year to end flat and possibly a larger dip next year...this could take 10-15 more years...Do not underestimate the dark side...
the kondratieff wave suggests 8-10 more years from now.
The Fed will do what it is told and the orders will come from the Obama administration. No one should expect sound policy or reasonable plans for economic stability from Obama, when in fact, one should expect the very opposite.
'Borrowin' that interest payment, Boss!'
The Fed can and IMHO will institute a policy aimed at maintaining interest rates. They can do it by buying enough treasuries to keep rates low. In other words they will monetize the debt. In large amounts this will put a stake through the dollar's heart but they will do it as a last resort because the government will never be able to vote itself into a sustainable budget. Too many sacred cows are grazing on the train tracks. No one can touch Medicare, Defence or Social Security and live. The only way to a balanced budget is to let the train get rid of them. I don't know when the train is due to come whizzing by so we may have a bit of a wait.
We are accumulating $100B in new debt each month. Operation Twist is converting short term debt to long term debt increasing the borrowing costs. By 2015, the actual interest cost on US debt will far exceed $533B as we will be likely looking at $20T of "balance sheet" debt. (The $533B is based upon .0025% which is wrong).
I see the rubber hitting the road late this year or 1st qtr 2013. Bush tax cuts expire, the mandatory spending cuts because of the gutless politicans, Obamacare taxes, etc will all hit at the same time. The entire system is corrupt but we really don't know how the magnitude of the manipulation.
China, for all their short comings, is doing it right. They are gardually reducing their exposure to US gov debt, purchasing gold by the truckload, and increasing their miliatary strength.
I think we all agree that this can not go on forever. So the real question is how does it end. I can not see a positive outcome. Frankly, my fuzzy math along with the complacency and lack of financial understanding by the average American tells me it is going to be very very ugly.
So....here's the plan Stan....The Central Valley of Costa Rica has one of the best 5 climates in the world according to National Geographic and a bottle of beer is still $1.25.
"I see the rubber hitting the road late this year or 1st qtr 2013."
I see yuo're an optimist.
No QE? What is $500B in swaps to ECB? What is Zirp to eternity? Who's going to buy our bonds since the Chinese and other are cutting down? QE in one form or another is guaranteed for a long time.
no QE3 in a bullmarket
spot on
+5
I doubt that the Fed will around long enough to matter.
Learned an interesting piece of info last night...the majority of the Feds collateral is in CDOs backed by promissory notes stripped from MBS. this practice has apparently been going on since 2003. Hence the majority of mortgages created since 2003 lack promissory notes and are null and void!
Source please ?
Mr research shows promissory notes stripped from MBS's because
the banks had to use them as collatral for thr REPO market.
Either way none of the mortgages are enforcable as note and
mortgage are bifurcated and these loans are unsecured.
Sorry,not enough coffee yet.
Mortgages are NOT enforcible.
Not bad except
Interest rates CANNOT rise (that will totally kill real estate, crush indebted corporations, drive the amount paid in interest on the debt to the moon, etc.), so they WILL NOT.
Instead, the Fed will print to cover every last scrap of debt in the system.
So the system will implode... But not from rising rates, but from a loss of faith in the currency.
The consumers are broke and getting worse, thus downward spiral and without demand, Bernanke is going nowhere fast. Just a matter of time for a full and visible depression.
I was surprised to see this 'no QE' angle in the story because I figure QE3 is ongoing, and has been since QE2 ended. I learned about it here.
Somebody is providing massive funding for the PPT to cover any net losses buying equities, to cover (sometimes) massive, possibly naked shorting of PMs, to swap for other currencies and even direct 'loans' to foreign banks great and small. IOW, QE3 isn't like the first two at all.
It's stealthy (edit:) and global. I've read this many times on this board, haven't I?
I agree. It is unlikely after such good job numbers posted by the government that the Fed would decide on more easing in the immediate future.
Right, no QE needed. It is now an indisputable fact of the new normal that the parabolic US federal budget deficit, or any troublesome sovereign debt for that matter, will be completely paid for with bullshit.
Great article graham -as always.
This "FED ,the Criminal Terrorist Organization you speak of, lie as well as they steal.
Terorist running the world.....
what else is new.???
He's exactly right, our banks and financial institutions are sitting on 200 Trillion of CDS's which they issued and are counterparty too and thats just us. And you mean to tell me they fought like cats and dogs to not have a credit event (and finally saying one has happened) for a measely 3.2 billion of CDS's in Greece, yea right. I bet it's alot more than that, alot more. And ZIRP will continue until the economy implodes.
Outstanding post.
It's been few months already that I am trying to find out why do they want to talk the market up whereas there is no market, just primary dealers selling and buying from each other.
Two options:
- Either a Lehman is triggered (that's right it war triggered)
- Or NYSE goes out of business, since no volume traders in the market.
If the second, is NYSE to big too fail?
I gave the article a 5 because well, I felt like it.
As a holder of the gold and silver, I am beginning to believe those markets are every bit as rigged as the rest of this bullshit and that we are confined to some sort of financial matrix. You can't talk your way out of the coming disaster. You can't lie indefinitely. You can't promise forever. Sooner or later somebody is going to have to deal with that 16T on balance, and the 9T off the balance sheet debt of Freddie, Fannie, and Sallie.
That's a 25T sized DEBTZILLA! Nobody paying taxes. Nearly 200% debt to GDP. Hello samurai. Bring on the spacerock! http://www.zerohedge.com/contributed/2012-10-09/theres-nothing-fair-abou...
Given what we've already seen with Operation Twist and the talk behind sterilized asset purchases, the Fed will continue to purchase as much as needed beyond the ZIRP timeline to kick that can down the road. ZIRP provides as zero base expectation and a cheap funding source for banks, if needed.
If investors are suckered into believing these types are operations are actually "QE", well... so be it.
For now, there's a whole lot of liquidity sloshing around due to the Fed's currency swap operations. That won't end until there is an "all clear" from the Greek/CDS crisis-- or unless inflation surprises way on the upside. Once the liquidity starts draining out the banking system, then it's time to get risk off the table.
We ain't there yet.
Did you not watch the markets today?
The dollar SURGED along with GOLD and SILVER. It is very rare you see this.
We dont' need an official QE3, but if they ever do announce it, I bet you see $200 move in gold that very day.
There are so many strange things which took place in the markets in the past 3 years that nothing seems rare or surprises me anymore.
The fact that I and many others are anticipating a possible event of currency collapse is strange enough on its own.
I voted this fed sponsored article on ZH 1 star, though i would have prefered 0 stars.
I have nothing else to say, because neither the article, nor it's author, deserves any more attention. Actually, he should get his contributor rights revoked.
Chicago Fed Evans is a Retard.
The fed uses the PD's as a conduit to funnel in money to the market. Since it's against the law to give money to the banks directly, the fed allows them to borrow at virtually 0% and redeposit back to the fed for a profit.
Where is the FBI, the SEC and the DOJ?
This is the bigest in your face theft in the world history during daylight hours and everyone is silent.
What a country! Who deserves that?
It'll be over the day you see Burnanki fully shaven, with dark glasses and very heavy luggage like lead, standing at the El Al ticket counter. Until then the looting of America will soldier on.
What do you mean? They are doing it stealthily!
Have a nice day.
If Graham says it's not coming, it probably is coming. Fade this idiot.