"Crunch Time" - Goldman's Confidence That QE Will Be Announced On June 20 "Has Grown"

Tyler Durden's picture

We all know that things are bad and getting worse. Goldman's Jan Hatzius take this opportunity to summarize all the various ways in which the global economy is floundering and once again floats the Goldman solution to everything: More QE, this time with a Bill Gross twist, pun and all, where the Fed again pulls a 2009 and goes for MBS: "Our confidence that the FOMC will ease policy once more at the June 19-20 meeting has also grown... Our baseline remains that Fed officials will purchase a mixture of mortgages and long-term Treasuries, financed via balance sheet expansion and possibly coupled with an extension of the forward guidance into 2015. This would be considerably more powerful than an extension of Operation Twist or other ways of changing the composition of the balance sheet, which are possible alternatives but are limited by the relatively modest amount ($200bn) of short-term paper that is still available for sale on the Fed's balance sheet." Well, if anything, global or Fed-based easing will most likely not come before the Greek June 17 elections - after all Greek confidence has to be crushed heading into the Euro referendum, and the only way to do this is by facilitating collapsing markets. So those hoping for a groundbreaking ECB announcement on June 6 will be disappointed. But June 20? That is fair game. We look forward to seeing PIMCO MBS holdings rise to a new all time high when the monthly TRF update is posted in a few days. Also look for something like this in the EURUSD if and when Bernanke "surprises" few at 2:15 pm on June 20.

From Goldman Sachs: Crunch Time

1. Friday’s jobs report for May capped three months of disappointing economic data, with a nonfarm payroll gain of just 69,000 and sizable downward revisions to prior months. This takes the 3-month average jobs gain down to 96,000, the weakest since August 2011, from a peak of 252,000 in February. The household survey showed a decent rebound in May, but on a 3-month average basis—probably a better measure given the noise in this series—employment has grown just 74,000 per month. More broadly, our CAI—a statistical summary of the underlying trend in the 25 most important US weekly and monthly activity indicators—has slowed to 1.7% in the last two months from 3% in early 2012.

2. What lies behind the slowdown? Part of it is clearly due to the reversal of temporary positives, as we had argued back in March. The unusually warm winter boosted the level of seasonally adjusted payrolls by perhaps 100,000 through February, and that boost has gradually reversed since then. There is also some possibility of residual seasonal adjustment distortions from the speed of the late 2008/early 2009 downturn. But temporary factors are not sufficient to explain all of the weakness. The broader point is that final domestic sales growth remains too sluggish, at just 1.5% (annualized) over the past two quarters, to support a healthy recovery.

3. Alongside the slowdown in the real economy, financial conditions have tightened. Our revamped GSFCI has climbed by nearly 50bp since March, as credit spreads have widened, equity prices have fallen, and the US dollar has appreciated. Some of this tightening is clearly a reflection of the weaker US economic numbers, so we should not “double-count” it as a negative impulse to growth. And some has been offset by the accompanying fall in oil prices, which has kept the “oil-adjusted” GSFCI from tightening nearly as much. But there is also a more exogenous factor, namely the intensification of the European crisis as concern about the Greek election and the Spanish banking system has risen. By our estimates, Europe accounts for up to half of the tightening in the GSFCI since April. We estimate that this could shave an additional 0.2-0.4 percentage points from US GDP growth over the next year. This is the main reason why we have pared our GDP estimates slightly and now expect growth to average slightly below 2% over the next year, with Q1 2013 the weakest quarter at just 1.5% due to the likely fiscal tightening then.

4. The hit from Europe could shrink or grow, but the risks are skewed to a worse outcome than our current baseline. Related to this, Huw Pill and team have sketched out three potential scenarios for the Greek exit discussion—(1) more of the same, (2) a proactive Greek exit, and (3) a decision by the ECB to squeeze Greece out gradually. Scenario (1) corresponds roughly to our baseline forecast, which our European team revised to a slightly bigger sequential contraction in the remainder of 2012 and a more shallow recovery in 2013 last Friday. Scenarios (2) and (3) would imply bigger declines in euro area GDP, and probably further tightening in US financial conditions.

5. Our conviction that the stickier inflation period of the past 1½ years is coming to an end has grown. This is not just because of the drop in commodity prices—including the $25/barrel plunge in crude oil prices—and the appreciation of the US dollar but also because labor cost pressures remain absent. Average hourly earnings are still decelerating, and a sharp downward revision to Q4 wage and salary income in last Thursday’s GDP report implies that unit labor costs will be revised down substantially. We expect inflation to be back below the Fed’s target by 2013.

6. Our confidence that the FOMC will ease policy once more at the June 19-20 meeting has also grown. At a time when Fed officials are far short of their dual mandate of maximum employment and 2% inflation, financial conditions should be accommodative and GDP growth should be well above trend in order to re-employ displaced workers and avoid a gradual transformation of cyclical into structural unemployment. Instead, financial conditions are only roughly at average levels according to our GSFCI, and GDP growth is below its long-term trend. Moreover, both financial conditions and growth have been moving in the wrong direction, to a degree that we think warrants action.

7. Assuming they do ease, what are Fed officials likely to do? It is a tricky call because there are many different options on the table. At the most basic level, they could increase the size of their balance sheet, change the composition of their balance sheet, and/or change their forward guidance in a way that pushes rate hike expectations even further into the future. If the easing comes via changes in the size or composition of the balance sheet, they could buy long-term Treasuries, mortgages, or both. If they decide to extend their balance sheet, they could add excess bank reserves or “sterilize” the reserve impact via reverse repos and/or term deposits. They would also need to decide whether to announce a balance sheet extension problem in one go or adopt a meeting-by-meeting strategy. And if they change the guidance, they could simply push out the date for the first rate hike in the statement or make the first hike conditional on an economic criterion such as a nominal GDP target or the Evans proposal (commit not to hike rates until the unemployment rate has fallen, or until inflation has risen, above a specific level).

8. Our baseline remains that Fed officials will purchase a mixture of mortgages and long-term Treasuries, financed via balance sheet expansion and possibly coupled with an extension of the forward guidance into 2015. This would be considerably more powerful than an extension of Operation Twist or other ways of changing the composition of the balance sheet, which are possible alternatives but are limited by the relatively modest amount ($200bn) of short-term paper that is still available for sale on the Fed's balance sheet. We still think that Fed officials might decide to “sterilize” balance sheet expansion via reverse repurchases or term deposits. We may get a better sense on all of these issues from Chairman Bernanke's testimony to the Joint Economic Committee of Congress on Thursday or other Fed speeches this week.

9. What about the objection that rates are already so low that additional asset purchases will either fail to push rates down further or that further rate declines will be ineffective in boosting economic activity? This concern looms a little less large if purchases are focused on the mortgage market, where the zero bound is still further away. It is also important to remember that the low current level of rates incorporates some expectation of further easing, so rates would presumably rise if the Fed decided to do nothing. All that being said, we do have sympathy with the idea that the liquidity trap is moving out the yield curve, and the Fed’s ability to provide support via “conventional unconventional” options—which we define as date-based forward guidance and changes in the size and composition of the balance sheet—is declining. Therefore, the “unconventional unconventional” options— the Evans proposal, a higher inflation target, or a nominal GDP or price level target—deserve another look. Amongst these, we continue to believe that a nominal GDP level target is the most promising. It would provide reassurance that Fed officials will keep monetary policy loose until nominal spending and income have recovered. Once that recovery has occurred, it would provide a natural “exit strategy” from a loose to a tighter monetary policy. However, we do not expect Fed officials to adopt a nominal GDP target or other unconventional unconventional policies anytime soon

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GetZeeGold's picture



QuE the rumors!

ITrustMyGut's picture

let them eat fiat, bitchez!

MonsterBox's picture

An early QE in June runs the risk that it's Market pumping influence could run out of steam just before the elections.  No, a huge July QE has far better odds keeping the muppet voters asleep in November.  Question is, can the EU banks hold it together until July?


Platinum_Investor's picture

I've read in the past that Stimulus in the economy takes 6 months to take effect.  QE is a bit different then direct stimulus but I'm sure their is a delay for its effectiveness.  June sounds like the perfect timing. 

gwar5's picture

The Squid has spoken

Popo's picture

Yes, the Squid has spoken.   And the accuracy of the Squid's publicly released analysis is uniformly 0% with no margin of error.   ie:  There will be no QE and they are short up to their eyeballs hoping for stupid muppets to take the other side of their trade.

JackT's picture

sooo...do/expect the opposite of publically released info?

DeadFred's picture

Goldman likely has access to up-to-the-minute info on the Fed, but what do they gain by telling you? If you can spin a scenario that they gain by telling the truth then you may want to bet on it. Don't bet on the premise that they are providing their inside take for altuistic reasons. My guess is they know June is a wash and want to offload positions to sheep that still think there's reason for hope. They can buy those positions back in July or in the fall at a discount.

Offthebeach's picture

In Amerika The Squid owns Fed!


Platinum_Investor's picture

Sadly this is true.  Goldman does the opposite of what they say publically.  It's Fact.  That's why I was upset to read this column this morning.  QE chances have just dropped by 25% in my eyes from 50% down to 25% chance of it happening. 

brooklynlou's picture

Yep. My take as well.

PS. AMEX across the street from GS here in NY just pulled off a very quiet layoff and a vicious round of budget cutting. The layoffs were just enough under the NYS mandated limit to avoid having to announce it as a layoff and file paperwork with the state. GS may publically announce that the sun will come out tomorrow, but AMEX that can actually see the pace of global transactions lessening knows what the deal is ...

Bananamerican's picture

"they are short up to their eyeballs hoping for stupid muppets to take the other side of their trade."

Watch Gross...

either he swims to the top of the fishtank for another hit or he doesn't...

LongSoupLine's picture

And on that note, CNBS is in full QE retard mode (do they have any other mode?). They are parading Nobel winners and Ivy league shitheads to the max. They even had Larry "ubertard" Summers on with his "borrow until you die" rhetoric.

We are soooo fucked.

Muppet Pimp's picture

Pavlov is getting the bell out

theMAXILOPEZpsycho's picture

When will all the Bernanke critics finally face up to facts and admit it: the guys a magician. Goldbugs and silver bugs are just stubborn losers; they'll never have the humility to admit they should've been buying treasuries, like I have for the last 5 years. My logic was simple; I asked my self: who's the smartest when it comes to economics? Why, Bernanke of course. So I did exactly what he was doing and have been richly rewarded. There's simply no reason for QE - why? - THE WHOLE WORLD CANT GET ENOUGH OF US DEBT! Thats all thanks to bernanke and thank god the good old us of a has someone who can ACT at the helm, or we'd be going down in a deflationary terror crash like you're seeing in europe.

Is anyone man enough to admit they got it wrong and he got it right? I doubt it

Hedgetard55's picture



     Your troll fu is nowhere near as strong as MDB.

GetZeeGold's picture



Blistered by the heat of the gold's rocket engines.....little Johnny stood his ground clutching his smoldering shares of FB.

BeetleBailey's picture

LOL. You've been buying Treasuries for the last five years?

Well, one thing about that is good; you'll not run out of butt wipe anytime soon.

Go suck Bernanke's wee-wee - if you can find it.

LongSoupLine's picture

Holy crap MAXILOPEZ, even robo is a better troll than you

Grade: F-

TWSceptic's picture

"Goldbugs and silver bugs are just stubborn losers"


Yeah, losers for over 10 years now, when will these losers finally give up and start joining the winning team?


Bad troll.

SheepDog-One's picture

So if GS says it more likely then its definitely not happening.

Rock the Casbah's picture

Looks like GS needs to sell!

JustObserving's picture

Debt in Western nations is just too large to be paid back (for example, debt and unfunded liabilities of $1,186,000 per taxpayer in US).  Banks, who control the Fed, will never allow debt repudiation.  So the solution will be to print money until inflation eats away the debt.

QE as far as the eye can see.  It is very bullish for gold and silver - so they must be attacked and kept in check.  That will only work for a while though.

Meanwhile we have a market completely controlled by Fed policy.  A crony, corrupt, controlled market will collapse.

Alex Kintner's picture

I'm short wallets and long wheelbarrows. QE Jubilee -- all debt is forgiven.

SheepDog-One's picture

GS thinks June 6 is a bit too hot....but June 20 is juuuuust right! LOL GIMME DA FREE MONEEZ!!

RaymondKHessel's picture

But but but Larry Summers has a plan !
MORE D E B T ! !

Boilermaker's picture

This shit literally never stops, does it?

mendolover's picture

ALERT! Joseph Gobbels, I mean Larry Summers coming up on Squawk Box.  I'll have to listen from the other room because Becky Quick and Summers on one TV screen is more than I can take on a Monday morning.

brooklynlou's picture

Just take it as the universe giving you permission to start drinking early

sudzee's picture

The productive efforts of the world can no longer support the trillions in debt created out of nothing even at ZIRP.

Sean7k's picture

Why aren't low interest rates encouraging expansion? No capital to expand with. 

Real reason for more QE, especially mortgages? Get the crap off the banker sheets and onto the taxpayer's back.

Just making the bankers more and more solvent for when ALL capital is withdrawn, the market crashes and debtors go belly up- all the better for the bankers to feast upon. Now that their derivative exposure is covered as too big to fail, the removal of the foreclosed albatross will put them in their best position ever.


ElvisDog's picture

Except the brilliant plan of putting all the debt on the taxpayer has one little flaw - the taxpayer doesn't have enough money to pay it off. So, the debt held by those greedy banks is going to be defaulted on at some point in the future anyway.

Alex Kintner's picture

Did someone say Goldman and Confidence in the same sentence?

Hell, Goldman owns the country, so yeah QE is assured.

DarkestPhoenix's picture

But........if Goldman is saying they WILL print on 6-20, then aren't we supposed to assume they know the opposite is true?

a growing concern's picture

UNLESS they know that we know that they're lying and will take the opposite side of the trade.  [dramatic music]

hazek's picture

"..that Fed officials will purchase a mixture of mortgages and long-term Treasuries, financed via balance sheet expansion.."

Nice propaganda, abstracting what they actually mean: electronically create more money out of thin air, robbing the savers through the inevitable rising prices



Fking psychopaths.

Sandmann's picture

Why don't they find The Philosopher's Stone and start turning Base Metals into Gold ?

It would be more practical than simply providing Investment Banks with more Debt to trade and leverage

vegas's picture

Well great - now Gartmann, who pronounced 100% QE3 on the money honey channel this AM, joins Vampire Squid. by the time the Fed meets the whole QE3 mantra will be baked into the cake.



GetZeeGold's picture



Oh good.....Gartmann showed up.


Should do a 180 reversal in.......3,2,1. Wait for it.



Quinvarius's picture

And just an hour ago Gartman was all about global panic.  The guy is a moron.  Tape up, things look great.  Tape down, things are grim.  No deeper undersatnding.  He is as annoying as robotrader. 

Sweet Chicken's picture

This means one thing.....GOLD BITCHEZ!!!!


Received 6 oz physical on Friday ready for the patch job on my boat.

a growing concern's picture

Not ANOTHER tragic fishing mishap with your gold on board?!?!?!?!

Sweet Chicken's picture

For some reason every time I weld with it I have problems????


Well if at first you don't succeed..........

flying dutchmen's picture

The FED should fuck off and let the market settle where it may..