By Frontrunning QE, Did The Market Make QE Impossible?

Tyler Durden's picture

Ever since the beginning of the year we have been saying that in order for the Fed to unleash QE, stocks have to drop by 20-30% to give political cover to the Fed (and/or ECB) to engage in another round of wanton currency destruction. Because while on one hand the temptation to boost stocks is so very high in an election year, the threat to one's presidential re-election chances that soaring gas prices late into the summer does, is simply far too big to be ignored. Yet here we are: stocks are just 4% off their 2012 highs, even as bonds are near all time low yields, and mortgages are at their all time lows. As such, even with the latest batch of economic data coming in simply atrocious, the Fed finds itself in a Catch 22 - it wants to help the stock market hoping that in itself will boost the "economy", yet it knows what more QE here will do to the priced of gold and inflation expectations: something which as Hilsenrath himself said yesterday does not compute, as it runs against everything "Economic textbooks" teach. What is more important, is that the market, like a true addict, is oblivious to any of these considerations, and has priced in a massive bout of Quantitative Easing to be announced tomorrow at 2:15 pm. There is one problem though: has the market, by pricing in QE on every down day - the only buying catalyst in the past month have been hopes of more QE - made QE impossible? Observe the following chart from SocGen which shows 6 month forward equity vol. What is obvious is that due to precisely being priced in, QE is now virtually unfeasible, irrelevant of what Goldman and its "FLOW QE" model tell us. As SocGen simply states: "More stress is needed to trigger ample policy response."

Naturally, SocGen is not the first to get this. Recall that this is precisely the logical espoused by both Citi a month ago which warned of XO crossing above 1000 bps first, and then Deutsche Bank this weekend saying a crash may well be needed to jar Europe out of inactivity like last fall. Not to Goldman though. Goldman is confident that the 4% drop in the S&P from its highs is enough to unleash an epic episode of monetization. Well, the chart below begs to differ.

Of course, if Goldman is right, and the Fed does indeed go ahead and launch some version of a Flow-based easing program, with a $50-$75 billion monthly monetization total, then kiss it all goodbye, as going forward the market will consider even a one tick drop in the ES a sufficient reason to kill the USD, and buy every ounce of physical gold available. In the process, of course, the Weimar wheels will start turning.

Furthermore, while stocks are always in their little world, and always, absolutely always wrong in the long-run, recall that the fixed income markets are saying something totally different: no bombastic LSAP program, but a very timid Op Twist expansion, where the 3 year selling threshold is extended by one year to include 4 year bond sales. An outcome such as this will send stocks plunging as it is merely more sterilized easing - the kind of intervention that has had no real impact on risk at all as all risk gains in the past 9 months have came solely from Europe's $1.3 trillion LTRO-based balance sheet expansion.

So what will it be? More QE, whereby the Fed admits defeat and hands over the monetary apparatus to an increasingly more petulant market, or no QE, and a wholesale risk crash in one day.

Tune in tomorrow at 2:15 pm to find out.

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francis_sawyer's picture

rogue trading algos harshing the 'Printer in Chief's' buzz...


barliman's picture


LOL! ... but no ...

Don Bernanke does not get pulled back in tomorrow ...

If Goldman Sachs says "This is going to happen ..." by now you should know the exact opposite is what is going to happen - and the Squid will make more money in the process.

Bernanke has only one QE left in the quiver - QEEND - the QE to rule ALL QE's which will occur when the EU/euro collapses.

EU/euro collapse to be triggered by GERMexit - Germany (with or without Frau Merkel) deciding to do the ONLY wise choice left - Get out of the Pauper's Society.

The foundering EU/euro then becomes the ChairSatan's Cat's Paw ... ANOTHER currency he can control and debase at will.


gdogus erectus's picture

Why do we have to keep reading these articles questioning QE?  How does anyone think that we close the $100 billion+ a month gap in our federal "budget"?  Every.  Single.  Month.  Sheesh.

SeattleBruce's picture

Budget cuts across the board?  hahahahahahahahahahahaha

boogerbently's picture

Catch 22 !!

Rising in anticipation of the only saving grace, prevented it.

OneTinSoldier66's picture

How about a take your country back Tea Party? Uhhh, nope.


Okay, I know, a debt ceiling debate! Oops, nope. That only proved there isn't any debt ceiling.


I got it! A Super Committee! Damn. DOA there.


What will 'we' do? Not sure, especially when I don't know who this 'we' is. Sounds like it might be a bunch of people that are on either the Government's or a Banker's dole.


Here's what I'll do. 'I' will buy Gold and Silver and stash it away. I have done so in the past and will continue to do so in the future. What will 'you' do?

Rich Bagg's picture

Shalom is feeling unappreciated lately and won't do another QE until Blankfein and Dimon both get on their knees and lick his balls.



Ned Zeppelin's picture

I think it is the other way around. Ben is The Help.

mcguire's picture

QE-Flow is methadone.  no true junky is stoked to be on methadone, but they dont crash either... 

i agree about QE-End... but there is also indirect QE via IMF arrangements (swap lines, etc)... 

europe will not crash until after the olypmics.  

barliman's picture


There is only one path forward for Europe.

They can either all commit fiscal suicide together trying reverse the Three Laws of ThermoGoddamics with respect to unbalanced economic flows and the euro:

  1. You can't win.
  2. You can't break even.
  3. You can't get out of the game.

Or ... they accept the inevitable Decline in Your Standard of Living Expectations (if you are already bankrupt or not big enough to bail out thy neighbors) ...

... which means everybody in the EU except for Germany.

If Germany does a clean, fast exit from the EU/euro - they can sit back and pick up once-in-a-lifetime deals around Europe.

What will the Germans do? 

Here is a live exercise for anyone who needs some perspective:

Fly to Mexico City. When you get off the plane speak English with a heavy German accent and get into the nearest taxi.

If you make it to your hotel alive ... you were not a very convincing German.  Rinse and repeat until you are dead.

Mexicans HATE Germans for a reason.  They are not fond of Americans but they truly HATE Germans for economically exploiting them for decades.


P.S. No offense, but the Olympics are not a factor in continuing the "extend and pretend" delusions. I like the British but they really should have realized hosting the Olympic Games was equivalent to painting a target on their collective foreheads. God willing, nothing bad happens but I have been there before when terrorism was just another form of free speech. I would not attend teh Olympics in London if you were giving me 10X my weight in physical gold.

Buck Johnson's picture

Your totally right, he has only one QE left in the quiver.  And that is the one for the collapse of the Euro and the implosion of the EU.  He knows that all this debt sloshing around Greece and Spain and Italy can't pay it back.  And all these games of trying to brow beat the market into going up and staying up isn't working as much.  When he uses the last QE, he wants to use it when people are screaming for it to be used and it will be big (even though it will delay the problem again for awhile).  Also Obama doesn't want a QE, not yet.  There are political ramifications also.  DThe last thing he wants is the republicans to point that more tax payer money is being used to staunch the bleeding of his economy.

boogerbently's picture

He needs to save his "QE/USA", in case they decide to "QE/EU".

jezzarayman's picture

Tune in at 2.15pm to find out??? The announcement is at 12.30pm yer? If there was to be QE it would be announced 12.30, not at the press conference? Sorry need some clarification as Do I need to say up till 3.30am or 5.15am? from Australia

sullymandias's picture

Just read the news when you wake up. Jeeeez.

camaro68ss's picture

this is all so much fun! what about a "simi" QE?

Sudden Debt's picture

Dude, my puts are killing me right now... Let's do a QE next quarter Okay?

HarryM's picture

There will be nothing definitive tomorrow , as usual.

boogerbently's picture

What I mean is....Let me be perfectly clear....that is to say....perhaps....let me say this about that....well, um, er....

And you may quote me !

LongBalls's picture

Hahahahah..... I just leaked in my diaper. The night time nurse is going to get real mad this time. But it's the only thing I can do to get her to look at my penis. P.S. No formal QE and gold n silver will take a dumpski. But alas, who cares....they can't and will never stop printing. Inflation is their game. gold is mine.

fonzannoon's picture

I don't follow this at all and I have not heard Bruce Krasting talk about it much. Anyone know if bitcoin is on to something in Europe?

?Joerg Platzer, a German who owns the Room 77 restaurant in Berlin's hip Kreuzberg section, has lost his appetite for euros. Instead, he has put a large fraction of his money into Bitcoin, an online currency.

"What the euro crisis and possible breakdown does is make people think about alternative [currencies] that can be used to maintain business and that cannot be manipulated by any central organization whatsoever," he told DailyFinance"

ThirdWorldDude's picture

Shmuck, he should've donated those moneys to charity

RiverRoad's picture

Well we have fake money; why not fake QE?  Cheaper and easier.

Skateboarder's picture

Dude FB is almost at 32 today. WTF!

Sudden Debt's picture

As expected, the groupon effect.
1 more week and it's shortable again :)

Skateboarder's picture

These pesky web startups need to go away. I want real companies again. =\

Sudden Debt's picture

Enron, Delorian motor company....

Skateboarder's picture

If it wasn't for the Delorean, we wouldn't have Back to the Future. I'm fine with the course of history as it is. =P

AmenRa's picture

The FOMC announcement is at 12:30PM EST. The Chairsatan press conference is at 2:15PM EST.

Raisuli's picture

Makes sense to me. But just who is selling tomorrow that will cause such a crash? Who will be buying?

I know, I don't know much...

Sudden Debt's picture

That's why your the smartest guy on the board ;)

mcguire's picture

who is the smartest guy?  ive been looking for someone to answer this for me, i dont get it... the citi reference  of "XO crossing above 1000 bps"   what does this mean???  thx..

slewie the pi-rat's picture

it is a link for people who don't know what it means to click on and read to find out?

you probably tried, but maybe didn't get it

i wouuld try to explain more but this is tyler's rant and i do not see the FED role as he does any longer

we are diverging!

i have even developed entire economic and market theories and quite simple ones, really, based upon the new role and job description of the FED under dodd/frank, 2300 pages signed abt 2 years ago

unfortunately, very few people know what's in it, yet

so they do not fully understand the FED's job description;  when billDudley's friends from the squid write volumes which show they have no fuking idea what the FED's s'posed to be doing either, then people may believe such things must happen b/c that is how it usta werk for the circle-jerks

it is like trying to order lunch in a joint where they changed the menu a year ago and the wait-staff hasn't noticed, yet

politically, the chairsatan & timmah have power that alanG and hankyPanky only dreamed of, imo;  i don't mean that as a criticism, but rather to indicate they can't be pushed around;  they can be taken out by taking out prez0. but they are trying to do something right here, imo, and they will not be politically negated;  this is old stuff, but it has new cajones in this law, imo

very much of the pro-mitten stuff i have seen that has been a cut above mindless stresses that mittens knows what is to be done and will make the personnel changes and the policy changes to fix what needs fixin

now, i'm not gonna get partisan here, ok? 

this does seem to be the main credibility issue of the election so far:  mittens can make this better economically, even if he can't do it fast (rosie)

peeps who believe that will probably vote R and change the whole dealy if they can

others (Dems) may say:  not so fast, please!  these gentlemen are doing much better than the last bunch (which ain't sayin much, but is true:  6 is much better than 2 even in a scale to 50) the argument might go, so don't stop them now;  this doesn't call for a crisis of confidence no matter how different prez0 is from who we thought he might be, whether we voted for him, or not

that carpet in the oval office does some strange thigs to people i think:  monica 101

anyhow, the FED has one or two new jobs that are real important for it to take care of before anything else; i'm not making this up;  slewie neither wrote the law, voted on it, nor signed it, either!  but the chairsatan (FED), timmah (T), dodd (senate) frank (house) and (prez)0 did;  they wrote it;  they passed it; and they signed it into law


i would say that nearly 100% of the writers and bloggers here "innocently forgets" these facts 24/7/366

as far as i know, very few people beside slewie have written about FED actions in the light of the FED's actual job description in the last six months

we see stuff about the old job description or the last one or the "dual" one;  but not about the new one

it is much more fun to pretend;  then, if the ideas catch on, people will get together and pretend they knew it all along...

win-win! L0L!!!  anyhow this is major financial legislation and summa daBoyz wanna take it down and this is their first & best shot, imo

the legislation was written to correct some of the problems, oversights, and uh, trillions of dollars in bubbled-up&out financial losses & frauds of copious pedigree and type just prior to 2010

so, politics!   there is no fuking LSAP QE b/c the FED's responsibility is to stabilty and the system isn't entirely stable, yet.  is it?  diminishing returns;  QE doesn't pay, it costs;  little things mean a lot, at times; shit like dat

the FED has slowed/stopped that 'fix' and it is all the talk of the junkie world

only the T  and sytemic cautery sites are getting the stuff;  forunately, for ponzienomics, there is no shortage of needs for decentralized QE and swaps;  and:  the checks are in the mail

next week:  $20 Tril N0W?  or: will fungibility win again?  Hahaha!

mcguire's picture

ok, i found it.  Crossover is in reference to the Crossover index, which is basically a CDS index of 50 companies... got it.  

slewie the pi-rat's picture

we can vote on FED policy this year, but nobody will talk about it for fear of pissing off their bagmen

b/c of dodd/frank and the fact that the FED is administering this law the political wave would break both ways as follows: 

democrats would like to give this law a bit more time simply b/c it was projected into what had become lawlessness and chaos and may actually function as a counterbalance so they can get their shares, too

republicans want it tossed or gutted and want theTreasury and the FED back along with capturing the flag @ 1600electricavenue

one of these guys will get the nod and it will be on this or something close to it since the truth is not allowed on TV;  we'll hafta see whom the justices want this time?  or will thePeople choose one form of can-kicking as morally superior to the other?

action junkies may like the G0P here while the young&old may simply want to beg, borrow, steal for 4 more years with smaller bonuses for wall street

either way, the economy is the apple that rolled under the passenger seat two sets of tires ago...


Rainman's picture

Fukkit I'm gonna go fishin should too. 

Raisuli's picture

Does your fish bite? No. <Chomp!> I thought you said your fish does not bite.

It is not my fish.

Savyindallas's picture

Fukkit Dude- let's go bowling.

deflator's picture

 The need to get ahead of the curve on the sovereign debt problems in Europe or some such nonsense. Any old excuse will do when infinity is at stake.

Dagny Taggart's picture

Perhaps a serving of unintended consequences Mr. Chairman?

Albertarocks's picture

I can't imagine any announcement about any more QE at this time.  I mean what could possibly warrant it?  More QE based on what?  It ain't gonna happen.  If it were, then the bastards would have tanked the market today rather than running another bull trap like they did.  I shorted the bitch just based on the fact that JPM's corrupt practices are so 100% guaranteed.  That's why the market blasted off today and that's why I shorted it.  Just one toe in yesterday and a bigger one today.  Still have 8 more toes too.

cranky-old-geezer's picture



QE never stopped.  It's what keeps the federal government going.  It just went incognito.

Hohum's picture


You sound logical, but I can see QE based on the fact that oil prices aren't that high, so let's go.

eclectic syncretist's picture

Yes.  BS bernank said in testimony less than two weeks ago that there was no reason to ease further at this time.  The Greek election outcome last week would only solidify that position.

The Fed must try to maintain it's own credibility as well.  The perception that there is too much or indiscriminant debt creation must be avoided. 

Finally, BS almost certainly feels the situation in Europe must be more resolved before a sound plan for US monetary policy can be implemented. 

Phat Stax's picture

agreed - this article makes complete sense to me.

midgetrannyporn's picture

the bernank can pay now or pay later. the stock market owns him.

Boilermaker's picture

They'll do whatever the fuck they want to do.

That's my thesis.

Skateboarder's picture

Quoted for truth. The headest of head honchos calling the shots from some tropical paradise with hella booze and women and stuff... we don't know what he's deciding. We're spectators to his game. Could it be Hugh Hefner?

Not Too Important's picture

The Ghost Of Cecil Rhodes and his KT fuckbuddies. No wonder they were accused of homosexuality and heresy - they'll fuck anything, then kill it.

If there is a merciful Horus, they're all fucked in the afterlife. It's a sad, sad time to know what they've done, after all they've been given.

It's a good thing they didn't make it into their redoubts before 3/11. We're all going to go at the same time, families and all. They can stockpile all the cancer drugs they want, it won't help. They killed off the human race, and will be accorded their due. Plutonium uber alles.

Aductor's picture

Surely, you must mean unpossible?