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"We Will Soon Learn How Strong The QE Trap Has Become"
Submitted by Derrick Wulf via NoEasyTrade blog,
Reading between the lines of recent Fed communications, it’s becoming increasingly clear to me that the Fed wants to exit its quantitative easing policies as soon as possible. Though they’re loath to admit it, the architects of quantitative easing now recognize that their efforts are achieving diminishing marginal returns while at the same time building up massive imbalances, distortions, and speculative excesses in the capital markets. Moreover, they’re realizing that the eventual exit costs are also likely much higher than they had previously thought, and continue to rise with each new asset purchase. Never was this more clear than when the Fed first hinted at tapering its large scale asset purchases over the summer: equity prices fell, interest rates rose, volatility increased, and huge sums of hot money were repatriated from various emerging markets, causing significant disruptions to local overseas economies and currencies in the process.
The market’s strong reaction to the mere hint of a taper also threw cold water on the widely held belief among Fed officials that the primary impact of their asset purchases comes through the accumulated “stock” of their holdings rather than the ongoing “flow” of purchases. This sudden and unexpected realization among policymakers has forced a complete rethink of their strategy. Indeed, one of the most basic premises of their monetary policy assumptions has been shown to be false. Markets are, in fact, forward looking.
Fearing the economic impact of an unwanted tightening of financial conditions, the Fed quickly stepped back from the tapering abyss in September. Since then, FOMC officials, along with their staff researchers and economists, have been working diligently on devising a new strategy, floating numerous trial balloons along the way. Their primary objective is to allow for a taper and ultimate exit from QE while somehow minimizing the flow impacts of such a shift in policy. There has been a renewed focus on the Fed’s other policy tools – namely the overnight lending rates and forward guidance – as a means to that end. There have been active discussions about lowering unemployment thresholds, increasing inflation tolerances through “optimal control,” and cutting interest on excess reserves to help guide market expectations towards a lower future path of interest rates.
It is my belief that one or more of these options is likely to be adopted alongside a modest tapering of asset purchases, perhaps even as early as December. While central bank officials don’t want to disrupt the fragile economic recovery through a premature tightening of monetary policy, they are also well aware that the longer they wait, the more difficult it will become later on. In a word, they’re starting to feel trapped. They want to wriggle themselves free of this as soon as conditions will possibly allow.
I expect to see more public comments and newspaper articles indicating as much in the coming days and weeks. Economic data – namely the November employment report – will clearly play a very important role in shaping expectations as well, but barring a material deterioration in the employment and growth outlook, I expect a tapering announcement, coupled perhaps with an IOER cut or more aggressive forward guidance, to come sooner rather than later.
Implications for the markets, which may not yet be fully prepared for this outcome, are likely to be significant. In short, I would expect yield curves to steepen, the dollar to strengthen, equities to fall, credit spreads to widen, commodities to weaken (the metals in particular), and volatility to rise. How the Fed will then respond to these developments will be very telling indeed. Their hand will be forced, and we may all soon learn how strong the QE trap has become.
My preferred strategy until then is to buy inexpensive volatility, either directly or indirectly through longer-dated options, and to continue to trade the Euro and Yen from the short side.
I also like maintaining a core curve steepener, preferably in 5s / 30s (or long FVZ against a duration-neutral USZ short), and establishing some equity shorts near trend resistance around 1810 in ESZ (see yesterday’s note for charts). On the curve, with 5s / 30s now having cleared resistance at 240, I expect to see 300 tested again before much longer, with new wides to follow.
The first two major episodes of the current multi-year steepening trend – the crisis and the response – both widened the 5s / 30s curve by 200 basis points. If the third episode, the exit, follows a similar trajectory, we could see eventually see 5s / 30s hit 390.
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PhD, the great, great majority, are COWARDS. Bernanke and company blinked in September. Yellen has no balls. The Fed will do everything in their power to keep from being perceived as the match that broke the camels back. They want to position themselves as the institution that did everthing possible, so the collapse is someone elses fault.
Volcker was a PhD with courage.
The FED will not blink until the market forces it to.
In the late 70's / early 80's the market finally forced the FED to blink. This is why Volcker was brought in.
Until the market takes rates to +10% on its own and foriegners genuinly threaten to abandon the dollar, there is nothing forcing the FED to stop
Friday humor, Tyler? The idea that the Fed is desperate to exit, since they're finally aware that QE isn't working, is quite the joke.
Author sounds young. Very young.
Pension Funds are already massively underwater, esp the municipal funds. Any cut to QE would cause even more serious problems. You'll see hundreds of detroits and san bernadinos.
Sorry. There'll be no QE in myt lifetime. If anything, they'll need to double down.
Ask Japan how long they have been doing QE....
Wake this guy up, it was moved up from Feb to Dec, of 2030. He must be lonely to still be talking about tapering.
It is time to increase the QE, not taper it. We have come this far. Let's ensure the work gets done.
Now is not the time to relent on a couple of trillion dollars.
What will likely happen is that they will taper their purchases from MBS in favor of municipal bonds. They may begin by decreasing their MBS purchases slightly more than their Municipal bond purchases... this is the closest thing to a taper that we are likely to see. As pointed out by another commenter above, a small increase in interest rates is disastrous. They cannot taper; they will not taper; and any attempt to do so will be very short-lived.
Volker did not face a true Game Over situation from his tightening. There was a recession and a strong recovery. This time the Fed is really trapped. They know that when the global Central Bank Bubble ends, the whole financial system as we know it today comes to a very sudden end. They know that with a divided legislature and a totally incompetent socialist as President, there will be no help from their political masters. They know they have to keep the bubble going until it blows, just like the bomb-rigged bus on Speed.
1. Gold/silver have been crushed throughout the massive QE so I doubt pulling back modestly is going to impact much. In fact increasing volatility in other assets may cause a safe haven bid to the metals.
2. Pulling back QE is unlikely to cause the yield curve to steepen because it would conceivably lead to slower economic growth. If anything the yield curve would flatten.
3. I doubt pulling back QE a modest $5 to $10 billion per month does anything material to the burgeoning stock market bubble. It may cause a 5% pullback in anticipation and then rally hard on the news. Historically the market does very well as the fed tightens. The stock market climbed all the into the teeth of the fed's rate hikes throughout 2006-8.
there is no historical precedent to compare with the fed unwinding this balance sheet. Hence any article that assumes it will be tried is a waste of time.
Yeah. Talk of unwind is more than a little premature when you consider they are still in process of winding it up as fast as they ever have.
Yea, you try to unwind that sucker, and then come back and tell me there aint hell to pay.
Which is why they won't do it until they literally falling off the cliff. And it won't be them unwinding, but the market (reality) - finally.
But they will Taper QE. And then create a new asset program JFBSBWHNC (Just fucking buy shit because we have no clue) and say that is open ended.
If you like your Federal Reserve asset goosing program, you can keep it. Wait, that's another story ...
Diversify before it's too late. Foreign currency, stocks, bonds, cash, gold, and don't waste your money on bitcoins - just get some free: http://freebitco.in/?r=25727
Sidenote:
For those of you that have asked about my son, he's doing well. Thank you for asking. He just got his real estate license last week.
Oh good. Thanks for the update.
I think Robo was the only one here that made money from 666 up to 1800 he just kept buying. And everyone was like, 'you dummy, don't buy stocks!".
It's a bear market rally.... It's going to crash. 3 years later, It's going to, I just feel it.... lol
Over.
Not the only one. Plenty here have whipped this rented mule for all it's worth.
You say that now. But when Robo was highlighting trades during the ramp up, if you had agreed you would have been the laughing stock for the ankle biters.
I didn't hear you then bro.
Over.
And you never will, bro. I have no intention of opening what I do to public scrutiny for exactly those reasons.
And I wasn't on ZH back then anyway.
Over.
Gotta say, Robo did better with his momo's than I did with gold over the last two years. Haven't seen him on here for a year- either got the boot or run over by his own dirt bike?
You really can't get the boot around here, perhaps he threw a spoke at 70 mph and messed himself up that way.
LOL - did you take the test for him?
I'm with Schiff and Jim Willie. They cannot taper, they can only pretend to with empty talk. The markets will wise up sooner or later. Fed has zero credibility.
QEInfinity
"The markets will wise up sooner or later."
Yeah, you would think so. Some of us here will probably be cursing and saying the same damn thing in 50 years, pecking on a keyboard with a drool rag in our lap after our sponge bath.
Looking at a chart of the S&P this year, I think it's safe to say the markets have already started to come around to the idea it's never going to end.
I like looking at that chart and trying to figure out what people mean by "diminishing returns"
http://www.europac.net/media/video_blog/while_fed_talks_taper_china_prepares_actually_do_it
he is making way too much sense; i can hardly take it anymore.
insanity by definition...
Definitely diminishing, probably negative returns to the real economy from additional debt creation/enablement.
Yes the correlation between higher rates and conterfeiting is now verifiable.
Hope they can pull it off until the weather gets warmer.
QE is zero sum game. With QE interest rates decline, home buyers win but savers lose. When home prices increase buyers increase spending but savers have less money to spend. Maybe initially there is some positive impact. Now when QE stops interest rates will increase and home prices drop 20%+. we will be back to 2008 again, maybe worse. QE only pull forward economic activity but when it stops the economic hardship will be amplified because equities and bond prices will now drop 20%+. Obviously the FED and wall street know exactly what will happen is QE stops and interest rate go back to the level before QE, about 4%. The FED may want to stop but disclosing the lies is unacceptable. So QE probably will continue until there is an external event where the .001% and powerful can transfer blame for the cost of this policy.
"QE will only pull forward economic activity"
And by the looks of things, there wasn't that much to pull forward to begin with.
not to mention the transfer of vast sums to the markets. so these vast sums are in play.
like nas 5k, where does that money end up? the sellers will be the winners.
in vegas they call it the house. on the street they call it the insiders.
whooooosh, before ya know it market is lock limit down, trades on hold only to fill
at dramatically lower prices; total helplessness and jump out the window feeling.
dispair is a coming...
the fed already tried to taper three different times. the fourth effort will be no different. zirp 4 evah, qe infinity.
This week China fired off a flare to the rest of the world that it no longer would be accumulating foreign reserves. This is the signal for other countries with U.S. dollar reserves to dump them if they don't want to take the loses. So, who is going to buy the debt at low rates if not the Fed? No one.
http://theeconomiccollapseblog.com
China, Russia and others know the best way to defeat the US is economically.
The US Federal Reserve is already helping to destroy the dollar. The key kicking out one of the Fed's legs is to take away the petrodollar.
Who is going to buy the debt at low rates if not the Fed?
They will end up forcing pensions and 401Ks to buy them.
This guy must work for the Fed. The first 2 sentences are filled with lies. I stopped reading.
Put simply, the Fed will stop QE when it serves its owners.
OK i lied. I kept reading. This article is written by a Fed Reserve owned personage. Perhaps it is humor.
I couldn't read it either, Ned. Anyone (Yellen) who would want to follow Ben has to be an idiot or a shill, and will do GE to infinity and beyond either way.
Politicians who win are the ones who promise more free shit.
Those who win Fed Chainmanship are the ones who promise more free money.
I don't like to disagree with you on this point but politicians routinely promise the moon and change their mind instantly when they get voted in. So what is the real reason for them deciding to deliver?
They don't deliver. Just the promise is made. If pressed, they say "if only you give me MORE power, I would be able to fully deliver on that promise".
No. They actually did deliver lots to the Free Shit Army. Why? Some of it is obvious. eg the FSA fails to figure out that "more debt" and "affordable" are not the same thing. But what about everything else?
QEx is serf-cheese. If you are un-lucky, you get it? Save your buttons.
which is why the fed is out talking about other measures to thwart the taper
Fed looks at treasury purchases to keep rates low
Qe reinvented as treasury purchases. Fed Alchemy
I see dead people.
Hold on to your powder boys and girls. The rippple effect in Japan will cause their the currency to collapse and the interest rates on the JGB to rise significantly. Japan will be toast. the 10 year US treasury will fall to sub 1% as they and other nations look for a place to presevre their wealth. Bernanke is about to hand Yellen the biggest shit ball ever.
Yellen either watches sovereign nations defaults or restarts the mother load of all QE's. Either way gold goes to $5000-10,000, after a prior major retracement. Just be cool when the shit hits the fan and buy when things look bleakest, traders are jumping out of windows.
Fuck you federal reserve dick heads.
You got a lot of moving parts in there. Some of them may happen without others.
And windows on Wall St skyscrapers do not open. You have to break very thick glass to jump out. Climbing the stairs to the roof is probably easier.
Defaults are deflationary, just like the fed buying up every scrap of non performing asset paper. The fed is THE bad bank where all shit paper goes to die and why you keep scratching your noggin wondering when hyperinflation is going to manifest itself. As long as the fed is willing to remove the shit from circulation and keep it from blowing up and causing a chain reaction nothing is going to affect the market. Local Taxes will go hyper before your bread will.
Deflationary depression or hyperinflationary depression. And we may get 'em both at different times thanks to the criminal behavior of the bankstas/FED.
THE LITTLE BEARD WHO CRIED WOLF.
Forgive my ignorance, but is FX currently risk off?
Namely AUDxxx & NZDxxx pairs (commodity currencies) are going down this week and USDxxx is going up (except USDCHF due to strong swissy), so why is SP500 making all time highs?
I'm confused by this disparity, how can dollar stengthen and SP500 make new highs?
Thanks in advance.
This guy is a mainstream type. As such he probably thinks gold is a "commodity". Wait for it: gold will eventually strengthen after a taper.
when the crash comes, gold will crash like everything else. but it will still be exchangable worthy for at least something, and if hyperinflation does occur after the huge deflation, it will do very well. gold won't ever go bankrupt the way 'one's' lehman stock did. do me a favor. run up a 10 year chart for citibank and tell me that anybody that bought in 2006-7 will EVER get their money back. that's the 'recovery' right there in $85billion words a month. yeah. it's recovered. sure. no - what hasn't done for$85 billion a month is gone totally to zero. and bank of america and fannie and freddie and a few more are right behind it.
run up a 10 year chart for 'respected' companies like MSFT or CSCO or INTC or GM. if you bought 'long term'. you ain't getting your money back. ever. even ignoring inflation adjusted.
in my own mind, i've been fairly unsuccessful at the game of life. sure, i've had lots of fun, but so many other people have acculumated so much more wealth over time. and i've rubbed elbows with a bunch of top top 001% people here in nyc (and elsewhere). and the funny thing is, it's very difficult for them to ever admit they made a mistake. from my point as a relative loser, i think they would have done 'better' to cut the loses. but the bottom line is, very few people can possibly do better. so by not cutting the loses, they have still done better than a few billion other people on the planet.
bernake knows he got played by paulson, he knows he's getting played by lloyd and jamie now. in his stupid little mind, he probably gets some kick out of the power at this point that when he said taper, they all shit their pants. that's the best he can do, because he is their bitch. it's his only consolation, that he still holds the hammer on the runaway train. but - he also knows that if he uses it, he's going to have a heart attack in a hotel bathtub.
so until jamie and lloyd decide that they are better off going short assets, asset purchases will continue.
from the positioning i've seen, the bankers will get their bonus in record sums this year and q2 will be the end of qe and the collapse.
but it will happen. sooner than later. lloyd and jamie are playing huggie right now, but at some point, at that point, that one of them decides to take the chips off the table and cash out, game over for all of us.
The Fed is H. R. Fukkin Stuck!
Wow, that's an old reference point!
As am I.
Can't print a little cause he can't do enough...
Note: Even as a kid, I hated all the stupid puppet shows...
QE is something they can only control at full throttle. ..reduce speed. .steering control lost...then any chaos is likely. .
There will be NO taper until Tyler capitulates and becomes bullish on equities.
If anything the Fed will need to increase QE and purchase debt China just opted out of.
Countries are starting to realize the US cannot pay it's obligations. It will just keep piling on the debt, borrowing money and having the Fed monetize it.
Janet Yellen, just over a week ago:
http://www.forbes.com/sites/afontevecchia/2013/11/14/janet-yellen-no-equ...
No equity bubble, no real estate bubble, no QE tapering yet.
Yellen is not going to taper until it is absolutely obvious that things are getting out of control. Yes, equities and housing have done well in 2013. But inflation (according to the Fed) is low, and unemployment is still very high. Why, why, why does everyone say she is going to taper?
Things that might cause Yellen to taper:
1. Inflation rises into the 4-5% range.
2. Unemployment drops into the 5% range.
3. Markets go parabolic (e.g. 50% rise in 6 months)
Unless one or more of these things happens, forget about tapering.
But the question is...what is "absolutely obvious" to Yellen. To date, nothing has ever been obvious to her. She has never seen anything coming, much like the "bearded potato".
Fate the Magnificent
"Push the Button, Max"
"it’s becoming increasingly clear to me that the Fed wants to exit its quantitative easing policies as soon as possible"
WRONG
The mathematics are indicating they will keep up the appearance of good books even if it takes moar.
I've been saying for a long time that QE never ends until they destroy the dollar or collapse the economy (and fill FEMA camps).
However, if I'm wrong, and there is anything at all to this article, look for the fed to keep (or increase?) its monthly purchases on the visible surface, but have some flunky more than compensate somehow (for a net reduction in asset purchases).
This would be the reverse of the usual approach, which is "talk to manipulate, so you don't have to act" (that's what the taper talk was IMO). So this time... IF... this article is correct (which I don't believe), the next step will be "no talk but hidden action".
In the end, they're all a bunch of predators, and the fundamental clue is... no fiat in history ever survived. I wonder why (the predators-that-be).
If the people who run the FEMA camps are anything like the people who run Obamacare I wouldn't worry about being put in one.
Disinformation has become one of the policy tools of the central bank.
There will be no tapering of QE.
There can be no tapering of QE.
I think they will print until there is a black swan and a war that they can blame the financial carnage on.
and if "they" win that war,
then "they" get to put the blame in black-and-white (in "their" history book).
but if "they" lose the war,
then someone else will write the history book.
Those idiots should have taken their medicine when the first reactions to taper took place, and followed through with a 5b a month reduction, which would have taken about 3 years to reduce QE to zero.
Instead they panicked at the first sign of the 10 year treasury rate rising and put their foot back down on the QE pedal. Now the bubbles have just gotten bigger so the stock, treasury rate and real estate market reactions will just be that much more dramatic when the QE plug gets pulled (taper). I hope for the Feds sake they have the brains to slowly taper.
I have a feeling this next year is going to be payback time for all these radical Fed strategies. Sure, those guys will still be smoking big stogies, but most people will scramble their asses off to try and stay in the game.
well here it is " I AGREE" with the above.
why? because of this - http://www.bloomberg.com/news/2013-11-20/pboc-says-no-longer-in-china-s-...
Peoples bank of china (their central bank) stated it is no longer in their interest to "boost reserves" - [another way of saying expand their balance sheet]. in other words - the chinese announced the taper. they will no longer expand the balance sheet [ buy treasuries] as it no longer serves the interests of the bank.
what will they do instead? they will let the yuan rise in value instead - making the purchasing price of their money much higher. what does this mean in a big picture? that inflation the fed is creating by printing 125 billion per month [was going to china, making it a chinese problem] is now being shipped back to the usa. you marry together the settlement of oil in yuan on the shanghai futures exchange - and the fed is backed into a corner. the pboc just announced the taper!Forex Kong from some months ago.
http://forexkong.com/2013/08/26/there-will-be-no-taper-stop-listening/
The guy has nailed forex markets this past year....and is "as well" a firm believer in QE doubling moving forward.
Kiddo, your Bberg serial # is visible....
It seems obvious the end game is in motion: Ben makes his exit, Yellen takes over and she gets blamed when TSHTF.
that's why so many others turned down the job
Simply watch the news for a change in tone of their overall message. They will prepare the masses for a change in QE
What "Recovery?"
There has been nothing but a downhill slide since 2008.
Every number issued by the USG is Fake, except for probably the amount of ammo they bought to shoot us with.
In fact, at this point, everything from the "president" at the top to the bottom of the Hill is Fake.
I would plan like an old Pioneer in the early 1800s, you are On Your Own!
Look at Obamacare: it is nothing more than a fake website where you sign on and have all your personal information stolen by a Nigerian Prince. There is no access to healthcare. If that does not wake up people, you can forget it. I can't see this place existing in another 12 months.
I think the article oversimplifies the issue and arrives at a huge steepener conclusion without going through how we would get there.
In early 2008, steepening occurred as short term yields collapsed - the long end stayed within its trading range (nominal GDP expectations). When SHTF, the long term yield collapsed. Since then, with QE1 and 2, as soon as the Fed indicated an end to those programs long term yields resume their downward path (again, pointing towards the reality of declining GDP growth prospects and disinflation).
To conclude a steepening of 400bps, you need 5yr yields to go back below 1% and 30yr yields to approach 5%. I highly doubt that you can sustain the 30yr yield at those levels for long, as that would drive junk bond yields north of 7.5%, mortgage rates of 6%+, not to mention that European sovereign yields would reprice higher and kill the periphery or our yields would be on par with Italy...
If I'm a responsible japanese instituional investor, in a world devoid of real growth I would jump on a 30yr treasury yielding 4%, when theirs yiled 1.65%. If they hit 5%, you buy every issue out there.
5% on a 30yr would be the best deal around for the next 15 years, much like 15% yields in the 80s.
I suspect the 30yr yield will go the opposite way and be sub 2% within 3 years.
Similarly, you hear everyone talking about "normalizing interest rates" - that is silly talk - in the lines of "we are punishing savers with zero interest rates".
To put it bluntly, in a world where debt burdens have crushed the potential to generate growth, interest rates will migrate to zero regardless of FED policy or FED speak. Should short term rates or long term rates rise 1-2% from current levels, the system short circuits. If debts worldwide total 180 trillion, absent derivatives, 1% equals roughly 2 trillion. How are you going to find 2 trillion when global GDP growth won't even grow by that amount?
Bankers should be hoarding US treasuries to brace for the upcoming storm, not giving them to the FED. Upside down logic.
None of this matters at all. I keep reading:"Though they’re loath to admit it, the architects of quantitative easing now recognize that their efforts are achieving diminishing marginal returns while at the same time building up massive imbalances, distortions, and speculative excesses in the capital markets." SO WHAT! The facts are these: A.} Each year, more debt MUST be created than the last, if not, the whole financial system begins to unwind. Wrap your mind around that truth. B.} If they taper, bond yields surge, and should they get anywhere near early 1980s levels the gubmint will have to slash spending to the bone, as they will have serious problems managing the debt, and high rates guarantee a depression unlike we have ever seen. So there you have it. The two reasons why the Fed will either never taper {my bet}, or if they do, it is quickly reversed and increased. ALL HAIL DR.MARK FABER!!
Jim Sinclair was,has been, still is yelling QE to Infinity since day one.Why he gets no respect here is beyond me.
Here's your answer: It's because much like Martin Armstrong, though admittedly to a lesser degree, Sinclair has made the mistake of making dogmatic predictions about price levels and timing related to gold. When those predictions fail to prove accurate, as some of them invariably have, his broader message, which does arguably have significant value, is degraded as a result.
Its rather funny and ironic that the "capitalists" here continue to argue a "solution" for this bastardized hobgoblin called a "system" in order to maintain some semblance of status quo, are just providing more and stronger data for the Maxists to make the point of tearing it all down. Most here are not in the 1% or even near it. It is not in your interest to favor corrupt methods over skill and knowledge. Stats show most Americans want a "free market"...does one even exist? Has it ever? Its becoming a tough sell, given the Fed Act of 1913 in all of its splendor....
Wait? Deflation is going to be result of a taper?
Shouldn't we be sitting in cash then? o_O?
Deflation - A decrease in the general price level of goods and services.
We know that they will taper and control that taper by purchasing short term treasuries. I mean we haven't seen hyperinflation yet, so maybe the Bernanke guy is doing an okay job...
After all, didn't Japan do QE in the 1990s and straight after there was a deflationary spiral. Everyone sitting in cash afterwards could buy more items just by holding onto their money.