An Earlier End To QE?

Tyler Durden's picture

Via Scotiabank's Guy Haselmann,

Adieu, Sweet QE, Adieu

The FOMC should (and might) accelerate the pace of QE reductions to $15 billion on Wednesday (June 18th).  Furthermore, at its meeting on July 30th, the FOMC could – and should -announce a similar-sized reduction for the subsequent two months.   Hence, the Fed would not have to wait until its September 17th meeting to announce the final leg. QE would then end two months earlier at the end of August rather than the end of October as markets currently expect.  Such a path would generally afford the FOMC more freedoms, particularly at the September17th press conference meeting.

There are of plenty of reasons to justify such a move:  global interest rates are near historical lows levels; equity markets are at record high levels; the FTSE All-World index closing at an all-time high yesterday; the decade-low in volatility indices; the 6.3% Unemployment Rate; employment gains averaging 250K over the last two months; GDP forecasts for the remaining three quarters of 2014 fluctuating around 3% following the ‘transitory’ Q1 weather-induced slow down; the current lull (or temporary decline) in Ukrainian and Geo-political tensions; and lastly, the ECB accepting the stimulus baton.

Remember, FOMC guidance last year prophesied that QE was expected to come to an end when the unemployment rate hit 7% and the first hike would occur when the rate hit 6.5%.  In regards to this measurement, even the most dovish members have surprised themselves.

The Fed has indicated that it is “not of a pre-set course”.   There are advantages of keeping investors on their toes and having them believe that the FOMC is nimble and flexible.  In addition, it is likely that the Fed does not want to make the same mistakes made from 2004-2006 when it had become too predictable.

The Fed should accelerate the QE withdrawal not just because it is currently being provided with the economic, geo- political, and market cover to do so, but also because the risks to financial stability are intensifying with the rise in the size of its balance sheet. Central bank-induced moral hazard continues to motivate risk-seekers and fuel asset inflation. Even the uber-doves on the FOMC are beginning to discuss with greater frequency the potential risks from Fed policy and the ‘froth’ in financial markets.

One trouble with the FOMC trying to replace QE with forward guidance is that promises of future accommodation, implies that the economy will still be weak enough to require accommodative monetary conditions.  This perception saps market confidence.   Therefore, it is possible that ending QE sooner results in a boost to market confidence, as it might show more confidence in the FOMC’s outlook.  Personally, I do not think the market reaction will be this simple or binary, but will rather lead to an un-wind of the trades that have worked under QE.

Back in April, I wrote and explained why the Treasury market has almost become three different markets: the front end, the back end and the belly.  This will be abundantly clear if the FOMC decides to implement the plan above.  The front end would almost assuredly price in ‘earlier’ tightenings by the FOMC, while the back end will attempt to hold tight driven by concerns about a slip in future growth and inflation.   The curve would flatten materially.

I remain steadfast in my bullish view on long end Treasuries, as well as the belief that active traders can leg into and out of the front end shorts as Fed policy gets recalibrated.  Investors trying to set up for several ‘earlier’ interest rate hikes are likely to find some success, but I suspect the success will only be temporary, simply because the FOMC has no idea as to when the first rate hike is likely to occur.  Committee members are anxious to first witness the market’s reaction to the end of QE and how the economy performs afterward.   

I am confident that FOMC members want to end QE ASAP.  If true, then there is strong merit in the plan above.  However, is it also possible that the small change suggested above would act as a low-beta source of information as to how markets would react toward a more dramatic change in policy, such as a hike in rates.

“Though this be madness, yet there is method in it” – Shakespeare (Hamlet)

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FOFOA's picture

get ready for freegold

nopalito's picture

I thought there was no "end" to infinity.

Tabarnaque's picture

Infinity is temporarily transferred into the Belgium black hole department

SoilMyselfRotten's picture

And a ramping of Belgium purchases

svayambhu108's picture

To the gold crowd: is there a scenario in your mind where gold might be accepted too late to make a difference

philipat's picture

Yes, of course, but then I think most sensible "Gold crowd" members see Gold as the ultimate insurance and as a small part of a portfolio. Perhaps the question might be re-phrased as "To the non-Gold crowd, is there a scenario in your mind where the CB's lose control and the financial system collapses"?

Agnosticism avoids having to look stupid after the event, irrespective of the catalysts?

asking4it2k's picture

The FEDs "primary dealers" buying bonds via Euroclear in Belgium will fill the void.


Its all one big scam anyways.

philipat's picture

Freegold=Intellectual masturbation. Gold is money, everything else is just currency. Period.

CHX's picture

True, but then what is paper gold ? Is it also "money"? No, it's a form of fiat gold, a paper claim for the real thing, leveraged  ~ 100:1. Only when the paper gold ponzi scheme falls will gold show it's real value again as money, as a store of value. Until then, live and let live, even the i-masturbators :-)

philipat's picture

I agree. So long as the paper tail continues to wag the physical dog, the true value of PM's will not be realised. But with the lack of physical Gold and the advent of the new Asian physical exchanges, plus the rise of Platinum and Palladium (Non-futures denominated but the rise of which makes it more difficult to manipulate Gold and Silver) it is unlikely that the Comex/CB/BB scam can continue indefinitely. As evidenced by the Comex itself pushing to open a physical delivery market in Asia.


In the meantime, it's a sensible insurance policy to have some position in physical PM's.

F0ster's picture

Paper gold is what Wall Street traders and hedge funds play with to avoid straining their girly muscles because they can't handle and don't want to messa round with storing the real physical asset. Much easier to trade an ETF before lunch then go to the bar and shag some prositutues than to figure out storage, insurance etc. 99% of Wall Street are pussys. Real men (and women) buy the physical.

anarchitect's picture

Surely the end of QE would hit the gold price and prolong the fiat system.  Until, of course, QE has to be resurrected with a vengeance.  The timing of that, however, is anyone's guess.

philipat's picture

Not necessarily, especially if a REAL end to QE (Not money laundering via Belgium) results in a collapse of equity markets. But that isn't the point. You need to understand the concept of "Freegold" as something other than Gold being money before you can discuss this.You will find that the "Freegold" types see themselves as being intellectually superior to all others, especially those who are so primitive as to see Gold as money. Repeat, IMHO, Freegold = Intellectual masturbation. Gold IS money. Period.

yrbmegr's picture

Getting the end of QE out of October is a good move for market stability.

Sisyphus's picture

So they will be able to land this ship without triggering a crash as envisaged by all experts on ZH. Man, have we all been so wrong. Take a bow 'dimeshowmanthatwove' or whatever your moniker was. 'No end to QE'; 'QEForevah'; 'They will print like a motherfucker' have all been proven wrong.

Long live the Bernank, you motherfucker. Also, long live not Yellen in bed.

buzzsaw99's picture

the fed should do this that and the other blah blah blah. the fed sucks ass. it was barzini all along...

RaceToTheBottom's picture

Calling all Belgiums

philipat's picture

And, of course, there remains the PPT and the ESF with "Infinity" slush funds available, so does it really make much difference?

youngman's picture

seems that there is enough demand now to end it faster.....but I still think it will come back at some time....interest rates cannot go up....the world will fall apart if they do.....

yrbmegr's picture

I'm not so sure the world falling apart would be such a bad thing.

moneybots's picture

".interest rates cannot go up....the world will fall apart if they do....."


The world is going to fall apart anyway.  There is no preventing the final collapse of a debt fueled boom.  math always wins.

Last of the Middle Class's picture

I am confident that FOMC members want to end QE ASAP. This just means average joe knows what QE really is and the gig is up. It's time to inject life into a different orifice of the alread brain dead patient. SSDD.

Bro of the Sorrowful Figure's picture

we need longer and more complex acronyms stat!-- yellen



destruction and confiscation of middle class wealth through inflation version 1.0!

anonnn's picture

And more insanity via redefinition : 





Neo-containment ([e Fukushima]



[Neo-, a prefix meaning new, recent, latest]

Cunnial's picture

Nah, marginal benefit of tightetning the free money teat by $5bn doesn't outweight the psychological impact this will have on these free money force-fed market cry-baby mother fuckers.


Taper at your teats at your peril Yellen!

Cunnial's picture

Nah, marginal benefit of tightetning the free money teat by $5bn doesn't outweight the psychological impact this will have on these free money force-fed market cry-baby mother fuckers.


Taper at your teats at your peril Yellen!

philosophers bone's picture

The Fed is consistently misleading the market by giving or allowing the narrative without clarifying.  September 2013 was criminal.  Narrative was tapering 10M - 15M and then, shock of shocks, it didn't happen.  Now the narrative is that tapering is occurring, but they are not clarifying "Belgium's" ongoing commitment. 

philipat's picture

For sure, Russia and China are net sellers. So expect Luxembourg to be the next buyer. Followed by Virgin Islands, Cayman Island, Jersey, IOM etc. etc.. What a shit show this all is. Can we have our markets back please....

buzzsaw99's picture

<-- accelerated qe likely

<-- untaper qe moar likely

JPM Hater001's picture

Actually, the taper will continue until it doesnt.  Then QE qwillramp in and create the hyper inflationary event we have all been waiting for.

q99x2's picture

Time for Belgium to double down.

hobopants's picture

Meh, I think they will just create another bureaucracy to handle the QE under a different name "Department of economic safety". Fed can claim victory, government gets even more bloated, it's a win win.

AdvancingTime's picture

The term "the new normal" has not been used much as of late, but going forward it may be about to return. Many investors and the public at large may be about to realize that central banks can only do so much through printing money and lowering interest rates. Both these actions carry with them some very strong and nasty side effects.

Markets have become very distorted as money has flowed into risky assets in search of higher yields. It could be we are about to see the markets morph into a "realizing market", one that grinds slowly downward. Another possibility is that at some point the wisdom of buying every pullback changes and the market simply drops like a stone. More on what the future might hold in the article below.

canonball's picture

Don't worry Belgium/EuroClear will pick up the slack .... The Belgian new issuance treasury purchases started way before Crimea…..Fed’s overnight fixed-rate RRP operations which began in September has caused participants to park collateral with Euroclear…Investors are ramping up use of the Fed’s reverse-repurchase-agreement facility as reduced Treasury bill supply cuts securities available in the money market. What a joke

NoIdea's picture

Time to STFATH? And maybe even STFD?

theprofromdover's picture

As if anyone really believes that the reduction in QE money isn't going instead straight into QF, via the back door ....

SheepDog-One's picture

'Reduction and end of QE' fantasy in my opinion. If anything, they're ramping up QE. Maybe they're calling it different things, but they're piling money into banks more and faster.

Took Red Pill's picture

Gold and silver are already priced near their mining costs. How much lower could they go realistically?

MountainsRoam's picture

I guess we are gonna find out.. Keep some of those dollars around in case we get the big fire sale ..

Quinvarius's picture

I think we are already well below mining costs thanks to the empty vault space of trusting bank customers.  Bankers will sell other people's property until it is all gone.

dabronx199's picture

@$$wipe Liseman was just on CNBC saying America love affair with Gold is over its now Real Estate 

Quinvarius's picture

haha.  yeah because they can afford the property taxes and maintenance on a depreciating asset which provides no cash flow because it now competes with parental basements.  I hope he owns a lot of it.

JRobby's picture

Announcing the June 2014 poster boy for Euthanasia!

After years of waiting, his fans are finally fulfilled!

Ladies and gentlemen, I give you Steve Liseman!

CHX's picture

<<< They actually taper to the end

<<< They never tapered and continue(d) "stealth QE" 

khakuda's picture

As Nancy Pelosi will say within the next 3 years, "We had to end QE, so that we could begin it again".

JRobby's picture

Shoot that Witch into space.

thamnosma's picture

Isn't she in the top 5 of wealthy House members? 

kowalli's picture

They can't stop QE - they can only lie better about it...

Vin's picture

But hasn't the Fed just directed its QE via Belgium?