This page has been archived and commenting is disabled.

Goldman: The Ball Is Now In The Fed's Court

Tyler Durden's picture




 

What Zero Hedge has been saying for well over half a year has finally hit the mainstream, with pundit after pundit "suddenly" coming out of the closet and making the uber-bold proclamation that "QE3 is here." Yawn. That said, since Goldman's opinion is the only one that matters (see previous posts on this matter, especially those referencing the activities of one Bill Dudley at one "Pound and Pence"), here is Jan Hatzius explaining how the whole world now looks up to Bernanke to pick up the QE torch lit up in the past week by the SNB, the BOJ and the ECB, and take Central PlanningTM to escape velocity (which may well be needed if we hope to get Mars to bail out the Earth shortly). Specifically, when discussing what the Fed will announce on Tuesday, naturally follows Monday, or the day in which risk comes home to roost, Hatzius says the following: "First, we expect them to expand the scope of their “extended period” language to cover not just the exceptionally low funds rate but also the exceptionally large balance sheet. For example, they could rewrite the current forward-looking language in the statement to say that economic conditions “…are likely to warrant exceptionally low levels for the federal funds rate and exceptionally large asset holdings for an extended period” (our suggested change in italics). Indeed, our baseline expectation is that this change will occur at the August 9 FOMC meeting, although it is a relatively close call. Second, we expect the composition of the Fed’s balance sheet to shift toward longer maturities. This could happen via an increase in the average maturity of its reinvestment of MBS paydowns and/or a change in the reinvestment policy for its Treasury portfolio. However, we do not yet expect this for the August 9 meeting, although it is possible." Operation Twist 2 it is then, with unlimited purchases in the 2-7 year range to keep the yield at a sturdy 0%, and the 2s10s to surge record highs (alas, QE3 means inflation, inflation, inflation down the line) in a last ditch attempt to bailout America's financial system, which unfortunately has just entered wind-down mode.

From Goldman Sachs: 

Subpar Growth Brings the Fed Back into Play

The headlines from the July employment report beat market expectations, but the US economy is nevertheless struggling. Earlier today, we downgraded our growth and employment forecasts and shifted to a view of renewed (limited) moves in the direction of monetary easing by the Federal Reserve—more likely than not at next week’s meeting. Today’s article discusses our forecast changes in greater detail.

Disappointment in the First Half of 2011…

Following last Friday’s GDP release, the current cycle now has the sorry distinction of featuring both the largest decline and the smallest recovery in real GDP of any postwar business cycle. Over the eight quarters since the 2009 Q2 trough, real GDP has grown just 2.5% (annualized), about ½ point below the pace in the first eight quarters of either the 1991-1993 or 2001-2003 recovery. All of the underperformance relative to the prior two recoveries has occurred in the first half of 2011, when real GDP grew just 0.8% (annualized).

A key question for gauging the growth outlook in the second half of 2011 and in 2012 is how much of this weakness was due to temporary shocks and how much of it reflects the economy’s underlying fragility. To answer this question, we have taken another stab at estimating the impact of three identifiable shocks that have hit the economy in early 2011, namely the supply chain disruptions associated with the Japanese earthquake, the sharp increase in energy prices, and the turn to fiscal tightening:

1. Japan-related supply chain disruptions.

In past research, we estimated that the supply chain disruptions associated with the Japanese earthquake would shave about ½ percentage point from real GDP growth in the second quarter, or ¼ point from the first half. This estimate was based on an assumption that the shortage of key components would keep production across the motor vehicle supply chain about 7% (not annualized) below its counterfactual baseline level in the second quarter. While the Q2 industrial production numbers are roughly consistent with this estimate, motor vehicle production in the Q2 GDP accounts—a series that is estimated more indirectly from data on final sales, net exports, and inventories—showed no meaningful decline in the second quarter. This does not mean that there was no effect; after all, vehicle production seemed to be on track for a healthy gain at the start of the second quarter. Nevertheless, we would now view the ¼-point figure as an upper bound for the true effect.

2. Higher energy prices.

We have written a lot about the effects of the sharp increase in energy prices since the end of 2010. As shown in Exhibit 1, our analysis implies that the 30% increase in crude oil prices from December 2010 to April 2011 should take off ¾ percentage point (annualized) from the average growth pace through early 2013, with a peak effect of about 1½ percentage point in early 2012.

However, we believe that the effect may have been more front-loaded than suggested by Exhibit 2. The reason is that our econometric estimates are based on the economy’s average behavior over the past 25 years. For much of that period, US households probably had a greater ability to spread the adjustment to an adverse shock to their real income over time than they do now. If they are now less able to spread the adjustment over time, this would imply that the impact of an oil shock on consumption and GDP growth should be more front-loaded now than implied by our econometric results.

A more basic look at the recent consumption and income data also supports the idea of a more front-loaded impact. In the first half of 2011, the increase in retail energy prices has subtracted 1½ percentage points from real disposable income growth. We can calculate how much of the real income hit passed through into real consumer spending by looking at the change in the personal saving rate. If saving had declined, this would imply that households “absorbed” some of the real income loss via lower saving. In fact, however, the saving rate was basically unchanged in the first half of 2011, suggesting that the 1½-point hit to real income growth fully translated into a 1½-point hit to real consumption growth. This suggests a hit to real GDP growth of about 1 percentage point in the first half of 2011, a little more than suggested by our econometric results in Exhibit 1. However, it suggests less drag going forward.

3. Tighter fiscal policy.

Finally, fiscal policy seems to have exerted a much sharper drag on GDP growth than we had expected. Following the passage of the December 2010 bipartisan fiscal package, we thought that fiscal policy at the federal, state, and local level would be roughly neutral in the first half of 2011. However, based on the actual spending and tax data now in hand, we estimate that fiscal policy subtracted nearly 1 percentage point from growth (see Exhibit 2).
Some of this was because spending in both the federal and the state and local sector contracted more sharply than we expected. But some of it is because there is surprisingly little evidence for any offsetting boost from lower taxes as the 2% payroll tax cut seems to have been fully offset by the loss of the “Making Work Pay” tax cut at the end of 2010, higher final tax settlements, and tax increases at the state and local level. The net result is that there was essentially no change in the average effective income and payroll tax rate on personal income in early 2011, as shown in Exhibit 3.

…And a Subdued Outlook in the Second Half

Exhibit 4 summarizes the preceding discussion. The line labeled “2011H1” starts from the Commerce Department’s current estimate that real GDP grew 0.8% (annualized) in the first half. It then subtracts the estimated impact of the Japanese earthquake (-0.25%), the energy shock (-1%), and fiscal policy (-0.9%) to arrive at an estimate of the “underlying” growth pace excluding these factors of 3%. This is clearly better than the very weak “headline” GDP growth in the first half.

But better does not mean good. Suppose that the underlying growth pace stays at 3% in the second half of 2011, and adjust for the three factors discussed above. We expect a ¼-point boost from the unwinding of the Japanese shock, but still see a drag of ½ point from higher oil prices and another ¾ point from tighter fiscal policy. This would point to a real GDP growth rate in the second half of 2011 of only about 2%, i.e. still clearly below the US economy’s longer-term trend.

A growth pace of 2% in the second half would probably put at least a bit of additional upward pressure on the unemployment rate. As shown in Exhibit 5, the link between the growth rate of real GDP and the change in the unemployment rate, known as Okun’s law, continues to be very tight. If growth is ½ percentage point below its 2½% trend rate for half a year, that implies an increase in the unemployment rate by a tenth or two. In such an environment, the risk of a renewed recession is likely to remain elevated.

Going Sideways in 2012…

If the economy “muddles through” the next few quarters without falling back into recession, our baseline expectation is a modest pickup in growth back to a trend rate of 2½% by the spring of 2012. This implies a flat unemployment rate of about 9¼% at the end of 2012—a terrible outcome 3½ years after the official end of the 2007-2009 recession when measured against any standard other than a renewed recession.

What will prompt even such a modest improvement in 2012? Apart from the forces of mean reversion—i.e., the further away the time period, the harder it is to disagree with a forecast of trend growth—the main reason for expecting some improvement is that we still see a decent amount of evidence of private-sector “healing” in several areas.

In the long-suffering housing market, the flow of new housing starts has been running far below underlying demographic demand for the past 2½ years. Although the stock of excess supply is still substantial, we have recently revised down our excess supply estimates in light of newly released data from the decennial US Census. We expect housing starts to rise gradually in coming years, although the recovery will be slower than in past cycles and it is still likely to take several years until the sector is back to normal levels of activity. On the price side, our house price model points to a stabilization in nominal home values in 2012 (although this prediction would change if we saw a renewed sharp deterioration in the labor market).

More broadly, household balance sheets have improved over the past few years. Household debt service as a share of disposable income is now back within the range seen prior to the debt boom of the 2000s; household credit quality has continued to improve; and at least according to the Fed’s Q2 senior loan officers survey banks have been easing their lending standards for consumer loans (the next survey is due after the upcoming FOMC meeting).

…And Near-Term Risks Tilted to Recession

The risks around our baseline forecast are tilted toward a renewed recession. At this point, we believe that the probability of a renewed downturn is about one in three. Most of the risk is concentrated in the next 6-9 months.

We are concerned about three specific issues. First, a worsening of the European financial crisis, and a failure of European policymakers to respond adequately, could lead to a further tightening of financial conditions and credit availability not just in Europe but also elsewhere including the United States. Specifically, we will probably need to see the European Central Bank step in to buy Italian and Spanish government bonds in substantial size to stabilize markets.

Second, fiscal policy might tighten more sharply than we presently expect. Going back to Exhibit 2, even our baseline forecast implies fiscal restraint of about 1% of GDP in 2012. The reason is that we expect expiration of the extended unemployment benefits, some discretionary spending cuts in the wake of this week’s debt deal, and some modest further restraint from state and local budgets. This restraint is one important reason why we expect growth to stay relatively slow in 2012. But this 1% of GDP would climb to 1½% of GDP if the payroll tax cut expired as well. Although we expect another extension, the risk to this assumption has increased given the fact that Congress did not include it in this week’s debt deal.

Third, the US economy has historically had a relatively low threshold before deterioration in the labor market has started to feed on itself and culminated in a full-blown recession. Exhibit 6 illustrates this fact. It shows that except in periods of early recovery—when the unemployment rate was still rising from the lagged effects of prior GDP declines—there has never been an increase in the three-month moving average of the unemployment rate by 35 basis points (bp) or more in which the economy was not in recession six months later. As of today’s employment report for July, the unemployment rate had risen 21bp from the most recent low point (although the spot rate was down on the month).

There are some reasons to believe that the 35bp rule might not be quite as iron-clad in the current situation as it appears to have been in prior cycles. For one thing, we still are in a relatively early phase of the business cycle. Firms are still operating with exceptionally lean cost structures and might therefore be slower to respond to soft demand with labor cuts than they have been in past slowdowns. Moreover, cyclical sectors such as housing and vehicle manufacturing are already depressed and unlikely to contract much further. Nevertheless, we are mindful of the historical pattern and would be quite worried by any further meaningful increases in the unemployment rate in coming months.

A Return to Disinflation

Our inflation views have not changed much. We expect core CPI and PCE inflation to peak around 2% by yearend 2011 but then to fall back to 1¼% by yearend 2012. While these figures are only very slightly below our previous forecasts, our conviction has increased that the large-scale underutilization of resources will result in substantial renewed disinflation.

In our view, much of the recent acceleration in core inflation reflects temporary factors. These include “mechanical” pass-through from higher commodity prices into goods and services with high commodity content, such as pet food and airline tickets, as well as the impact of the Japanese supply chain disruptions on auto prices. Meanwhile, wage growth remains only around 2% year-on-year, and unit labor costs have been essentially flat.

Indeed, more statistically based measures of core inflation do show some signs of deceleration in recent months. As shown in Exhibit 7, the Dallas Fed’s “trimmed-mean” personal consumption price index—which eliminates the largest price increases and declines—has slowed from 2.4% (annualized) in April to 1.3% in June. Likewise, related measures such as the trimmed-mean CPI, the median CPI, and the “sticky” CPI—which includes only categories whose frequency of price adjustment is below average—have also slowed in recent months. These series can be noisy, so this is far from conclusive evidence. But there are now at least some signs that underlying inflation is starting to slow again.

Small Further Easing Steps from the Fed

On the monetary policy side, we retain our long-standing call for no hikes until 2013, and it could well be even later. We now also believe that Fed officials will continue reinvesting maturing and prepaid securities until 2013.

A more immediate question is whether Fed officials will restart their quantitative easing program and announce another big increase in the size of their balance sheet. Our answer is “probably not” unless the economy falls back into recession. However, we now think that Fed officials will take two smaller steps in the remainder of 2011.

First, we expect them to expand the scope of their “extended period” language to cover not just the exceptionally low funds rate but also the exceptionally large balance sheet. For example, they could rewrite the current forward-looking language in the statement to say that economic conditions “…are likely to warrant exceptionally low levels for the federal funds rate and exceptionally large asset holdings for an extended period” (our suggested change in italics). Indeed, our baseline expectation is that this change will occur at the August 9 FOMC meeting, although it is a relatively close call.

Second, we expect the composition of the Fed’s balance sheet to shift toward longer maturities. This could happen via an increase in the average maturity of its reinvestment of MBS paydowns and/or a change in the reinvestment policy for its Treasury portfolio. However, we do not yet expect this for the August 9 meeting, although it is possible.

How powerful are these measures likely to be? Probably not very powerful by themselves. Based on New York Fed estimates, pushing back expectations for the start of the decline in the balance sheet by one year—a very generous assumption for the likely impact—would be the equivalent of removing expectations for one 25bp rate hike. The effect of a shift in the reinvestment policy depends on how far out the curve the Fed would move, but is probably also not huge. However, market participants would probably view either of these measures as “another step on the road to QE3” which might make them somewhat more powerful as a signaling device.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 08/07/2011 - 12:26 | 1532812 The Count
The Count's picture

 

The cat is out of the freakin' bag, and neither the Bernank nor the Rompuystilzchen or Trashet will get it back in.

 

 

Sun, 08/07/2011 - 12:29 | 1532820 A Lunatic
A Lunatic's picture

Not only that but it went feral, mated, and had ten trillion identical twins.

Sun, 08/07/2011 - 13:35 | 1533074 tictawk
tictawk's picture

Humpty Dumpty fell off the wall, all of the Kings Men.... couldn't put humpty dumpty together again...

Japan and China are going to realize that holding bonds is a losing proposition and it could be a race to the exits.  This simply means long rates will skyrocket and if it becomes a stampede, lending will cease, unless the Fed assures the market that it will NOT monetize, which means that the dollar skyrockets, and defaults on unpayable debt will be the rule.

S&P stated the obvious, "the emporer has no clothes"

Sun, 08/07/2011 - 12:31 | 1532824 Temporalist
Temporalist's picture

Mars.  Needs.  Women.

Sun, 08/07/2011 - 13:04 | 1532957 Troll Magnet
Troll Magnet's picture

China needs women more than Mars.  

Sun, 08/07/2011 - 12:31 | 1532825 narapoiddyslexia
narapoiddyslexia's picture

As opined by Bandon Smith in the last post on this site, it seems reasonable to think that QE3 will be the end of the US. We are expendable.

http://www.zerohedge.com/news/guest-post-america-%E2%80%9Cmakes-cut%E2%80%9D-%E2%80%93-so-what-happens-next

Sun, 08/07/2011 - 13:01 | 1532948 spiral_eyes
Sun, 08/07/2011 - 13:54 | 1533176 tictawk
tictawk's picture

There is a lot of DENIAL because the status quo want to patsies to continue to LEND ad infinitum to a borrower who has no control on spending.  The first rule of HOLES, "when you find yourself in one, stop digging", similarly when you find yourself in too much DEBT, stop borrowing"...

The nation is living beyond its means and it is about to find out that "YOU CANNOT PRINT WEALTH"... you can print pieces of paper but WEALTH has to be EARNED.  Thus any attempt by Bernanke to PRINT, will be met with a pushback from all the lenders past and present in the form of a rush to the exits.  The jigs UP, and the unwind will not be pretty. 

What the markets do on Monday won't matter in the big picture.  Prices were inflated by PRINTING.  You cannot print VALUE.  Value is created via effort and hard work.  I expect the tumble in the markets and the wipeout to seek REAL value.

happy trading

Sun, 08/07/2011 - 12:38 | 1532828 tom a taxpayer
tom a taxpayer's picture

 

My "baseline expectation" is for Dudley and FOMC to continue to take dictation from Goldman Sachs.

My "baseline expectation" is for AG Holder and State AGs to continue to allow the Wall Street and Fed RICO criminal enterprise to rape and pillage taxpayers, pensions funds, widows and orphans.

 

Sun, 08/07/2011 - 12:35 | 1532833 Ahmeexnal
Ahmeexnal's picture

GS about to be listed as a terrorist organization, along with S&P.

 

Expect Tottenham inspired riots to erupt in Wall Street.

Sun, 08/07/2011 - 13:01 | 1532949 DeadFred
DeadFred's picture

We will have exciting times soon, there is no doubt.

Tyler I hope you have at least quadrupled your server capacity because you are about to become the go-to source for a lot more people than us core ZH groupies.

Sun, 08/07/2011 - 12:34 | 1532836 Caviar Emptor
Caviar Emptor's picture

Not only is it a tight spot for the Fed, caught between a rock (deflationary collapse) and a hard place (inflationary depression) but they only know how to print. PLaying games with the yeld curve, Operation Twist2 all involve more printing. But the benefit all goes to Wall Street and Corporate Welfare Queens and their politician buddies. None is going to trickle down, especially since it's abundantly clear now where this is all heading. Cash on the balance sheet at corporations will stay there. And cash in wealthy people's pockets will get hoarded and parked in Switzerland. 

Sun, 08/07/2011 - 12:44 | 1532873 chinaguy
chinaguy's picture

CE,

"But the benefit all goes to Wall Street and Corporate Welfare Queens and their politician buddies. None is going to trickle down"

Pretty much 100% correct, but it never has trickled down, it's always been lining the pockets of the plutocrats.

And, the Sheeple are not upset enough YET to stop the next QE...and China can bluster, but they need our market.

So, I'd say yeah, the plutocrats want QE3 & the masses are not going to stop them, this time.

 

 

Sun, 08/07/2011 - 12:51 | 1532899 Caviar Emptor
Caviar Emptor's picture

I agree. The coffee is brewing, the masses haven't woken up and smelled it yet. But it's inevitable now that the pot is on the boil. 

But the world the plutocrats built is slowly burning down: one country at a time (Syria, Egypt, Tunisia, Yemen...). The entire Mediterranean basin is a powder keg. So are the Balkans and Eastern Europe. So is South Asia. And yes, the Persian Gulf. We are nearing the point of no return for the plutocrats. Best they can hope for is to ride it out somewhere behind gates and barbed wire. 

Sun, 08/07/2011 - 12:59 | 1532936 kito
kito's picture

'the masses havent woken up and smelled it yet'---understatement of the day caviar---and for the daily google "hot trends" update:



       

1.elisha cuthbert2.maplestory3.vindictus4.deion sanders5.the girl next door
                                                 6. powerball 7. michael 8. valkyrie 9. man u 10. joel osteen

Sun, 08/07/2011 - 13:42 | 1533105 tictawk
tictawk's picture

Yeah the Fed is trapped because there is a $6 TRILLION counter in the form of overseas debt that has the potential to be DUMPED on the market should they decide to print.  We live in the age of instant information and Japan and China are not going to sit on their asses and pretend all is well.  There will be a race to the exits as they try to off load their stash of trash er... bonds. 

Printing is NOT a given.  All your hyperinflation expectations may be dashed and we in fact may have a spate of DEFAULTS. 

Sun, 08/07/2011 - 12:34 | 1532838 youngandhealthy
youngandhealthy's picture

The question is now: Is it ZH opinion that matters?

 

Well done ZH

Sun, 08/07/2011 - 12:34 | 1532839 Milton Waddams
Milton Waddams's picture

"FEDERAL RESERVE CHAIRMAN AND DEFACTO ACTING-PRESIDENT OF THE UNITED STATES, DOCTOR HAS-BEN BAREKNUCKLES,  HAS BY PROCLAMATION REPRICED ALL PAPER ASSETS 100000000000000% HIGHER; SAYS MOVE SHOULD SPUR CONSUMPTION, INCREASE UNDEREMPLOYMENT AND REVITALIZE THE SAGGING ART MARKET"

Sun, 08/07/2011 - 12:37 | 1532848 digalert
digalert's picture

.

Don't know what to think...

the Kenya born teleprompter/Barama hasn't spoken on S&P.

Sun, 08/07/2011 - 12:38 | 1532854 slaughterer
slaughterer's picture

ZH: all the news that is fit to frighten the fuck out of you.  Thanks, Tyler, for keeping it real.

Sun, 08/07/2011 - 12:39 | 1532855 Arch Duke Ferdinand
Arch Duke Ferdinand's picture

1/

Learn why America's younger generation has no Protesters!

Eight Reasons Young Americans Don't Fight Back: How the US Crushed Youth Resistance

"""The ruling elite has created social institutions that have subdued young Americans and broken their spirit of resistance....."""

http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/08/8-reasons-you...

2/

Experts: Fukushima 'off-scale' lethal radiation level infers hundreds of millions dying.

"""Fukushima nuclear power plant radiation recordings of external gamma radiation have been so high this week, they went off scale said veteran nuclear expert Arnie Gunderson on Thursday after the famous physicist, Dr. Chris Busby told the Japanese people this week that radioactive air contamination there now is 300 times that of Chernobyl and 1000 times the atomic bomb peak in 1963, possibly inferring that hundreds of millions of people are now dying from Fukushima radiation, including people in the United States...."""

http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/08/experts-fukus...

OT: hilarious 2 min video

upside down...

http://www.youtube.com/watch?v=W0Uju3tYS2s

Sun, 08/07/2011 - 12:45 | 1532879 Caviar Emptor
Caviar Emptor's picture

Buffet says America's rating is still  AAA in Omaha. Cramer says stay in the market. Wall Street guys say it don't matter a bit, because we knew. Politcians say we'll get AAA back fast. One financial site says this is 2004 all over again. 

:-)

 

Can you spell denial? It's how we slid down the shit-hole to start with. But now that so many powerful people gorged themselves on bailouts, QEx.x and other "gifts" from the taxpayer, they have very little incentive to fix things, and their personal level of concern is appropriate: what, me worry??

Sun, 08/07/2011 - 13:47 | 1533132 Hulk
Hulk's picture

Spot on Caviar, this is utterly amazing to behold...

Sun, 08/07/2011 - 17:20 | 1533926 The Count
The Count's picture

About time the Asshole of Omaha finally out himself as the greed, seedy bastard he really is.

Sun, 08/07/2011 - 12:49 | 1532894 Stuck on Zero
Stuck on Zero's picture

What a bunch of statist drivel from GS.  Inflation 2%.  Slightly reduced growth.  Supply disruptions.  Garbage.  What is GS doing secretly in the background?  Who are they paying in Washington to execute what marching orders?  All of this financial pontification is window dressing for the masses. 

Sun, 08/07/2011 - 12:50 | 1532895 buzzsaw99
buzzsaw99's picture

I love how they use their continuing impoverishment of the nation as an excuse to steal more.

Sun, 08/07/2011 - 13:14 | 1532991 teolawki
teolawki's picture

Prepare to be "gang banked" again.

Sun, 08/07/2011 - 12:51 | 1532897 Spitzer
Spitzer's picture

The list of reasons for the weakness is a list of bullshit.. The reason the economy is weak and will be many quaters to come is because no debt has been purged from the system and no creative distruction has taken place.

Raise rates and force some creative distruction, that is what Volker did. But its too late for Austrian style solutions. Now that the keynesians have blown the deficit through the roof, raising rates will bankrupt the US govt, the fed, everyone, so we are all doomed to destroy the currency.

Sun, 08/07/2011 - 13:39 | 1533090 Quinvarius
Quinvarius's picture

Volcker didn't do anything but wreck the economy.  The price of gold rose to where the US could have backed the dollar and our debt again.  That is what saved us, not Volcker.  The Fed and the government just really wanted to take credit for the end of a cycle their screw ups caused.  It is like the Nazi's claiming they won WW2 because they happened to be there when it finally ended.

Sun, 08/07/2011 - 13:46 | 1533130 disabledvet
disabledvet's picture

absolutely. i disagree with raising rates too. monetizing the debt is REALLY odd too! it's soaring in value of it's own accord and obviously no one now can claim "the Fed's doing it" as I had been doing for years but stopped saying that this spring after listening to Jimmy Cramer and his beautiful back and forths with the beautiful Erin Burnett oh those many years. Now that we KNOW this we can conclude "failure to clear markets" is the problem and not inflation at all. In effect asset prices are massively over-valued and until the market is allowed to "hit the reset button" the...liquidation...only grows more severe. We know this now and therefore have been warned since interest rates in the strong euro/no inflation european union have gone "cataclysmic." the key under the USA variant is not a drop in the dollar but a sudden SURGE in the dollar. that will be the signal of steep in preciptious decline in prices is in the offing and in particular real estate as well as some type of "credit event." the "delivery option" as the precious metals folks like to call it or as bankers like to call it "the check is in the mail" scenario. Congress can only move so fast--even if a value added tax were passed this December I would imagine getting such a complex system up an running would truly be a Herculean task. Methinks a little of the more "old fashioned type" repression might be in order here--just to keep the crazies in the media "under wraps" as they say.

Sun, 08/07/2011 - 12:55 | 1532905 Die Weiße Rose
Die Weiße Rose's picture

who cares ? QE2 never really finished

http://www.newyorkfed.org/markets/tot_operation_schedule.html

the Fed has been busy re-investing only last Thursday but the market still tanked:

Operation 1 - RESULTS   Operation Date:   08/04/2011 Operation Type:   Outright Coupon Purchase Release Time:   10:15 AM Close Time:   11:00 AM Settlement Date:   08/05/2011 Maturity/Call Date Range:   02/15/2017 - 07/31/2018 Total Par Amt Accepted (mlns) :   $3,317 Total Par Amt Submitted (mlns) :   $10,605
Sun, 08/07/2011 - 12:53 | 1532910 Wolferl
Wolferl's picture

AA+ means no QE3. Get it.

Sun, 08/07/2011 - 12:53 | 1532913 automato
automato's picture

The bottom line is if you subscribe to belief in "Animal Spirits", then WE ARE SCREWED! You can try and talk your way out but losing AAA is the absolute WORST thing that could ever happen in a Universe where "Animal Spirits" are the paradigm. It is the economic equivalent of a stockbroker jumping to his death from a Wall Street window. So everyone, everywhere better hope and pray that Keynes was an idiot.

Sun, 08/07/2011 - 12:57 | 1532927 lunar
Sun, 08/07/2011 - 12:57 | 1532928 Caviar Emptor
Caviar Emptor's picture

The imbalances created by reckless monetary policy for the last 30 years are now reaching critical (it's not just QE and the programs since 08) . There are ripple effects being felt all over the world. Like losing control of a nuclear power plant. The irony. 

Sun, 08/07/2011 - 12:58 | 1532931 Cult of Criminality
Cult of Criminality's picture

When financial markets are having a Epic Fail moment and all the screens are red with blood there is no better listening than to music of epic proportions like when dark metal meets symphony and opera.

 I call it symphonic operatic metal.

 Therion goes classic.The rise of Sodom and Gemorrah

http://www.youtube.com/watch?v=Gsx9mMtcfoM

or Blood of Kingu

http://www.youtube.com/watch?v=fMeqqj99ot4

I kinda like female violinists also

Therion kicks ass. They have had many female & male singers all of which do a fantastic performance.

Markets can tank all they want I,will not hear about it just watch the big show on the screen see whats up on ZH and Jam (after my regularly scheduled workday however.Our helpers pretty much stand around and text all day so staying updated will not be difficult.

Cheers and tidings of joy to all

Sun, 08/07/2011 - 12:58 | 1532934 Everybodys All ...
Everybodys All American's picture

QE3? The Fed will have their hands full with European swap lines.

Sun, 08/07/2011 - 13:06 | 1532963 A shaped recovery
A shaped recovery's picture

Steve Liesman and John HARDwood are foaming at the mouth to inform the masses of Helocopter Ben's next move.

Sun, 08/07/2011 - 13:10 | 1532977 gwar5
gwar5's picture

.

 

ZH is right again. 

Except for meaningless timing quibbles, I don't remember any wrong calls.  The ZH campfire continues to be the go to place to find out what the all important economic deciders are going to do. ZH Squatter, Bitchez!

Sun, 08/07/2011 - 13:11 | 1532980 digalert
digalert's picture

Hold the phone,

China’s top rating agencies says...

“international supervision over the issue of U.S. dollars”

Uh oh Ben, they think you need a supervisor.

http://www.cnbc.com/id/44050325

Sun, 08/07/2011 - 13:12 | 1532984 Cult of Criminality
Cult of Criminality's picture

IM DONATING TO ZEROHEDGE TODAY IN THE NEXT FIVE MINUTES

ZEROHEDGE KICKS ASS AND TAKES NAMES

HA HA HA HA HA

TAKE THAT BANKER PARASITES

Off to donate.................Fiat not body parts sorry guy`s got to keep the PMS

Sun, 08/07/2011 - 13:14 | 1532987 jmc8888
jmc8888's picture

Fed doesn't have political or social cover for this.  Everyone is still pissed off about QE1, 2, etc. If they do it, there will be a heavy price to pay.  What that is, who knows. 

So to me that means there is a possiblitiy that we'll see a rouge wave within the perfect storm, and no QE3 announcement August 9th.

The fed would obviously prefer to avoid a systemic move, but they don't have the cover.  They need to wait until the POLITICIANS, namely white house and congress, tell them to print.  Anyone think they are going to do that? 

Fire timmy calls aren't making it any easier. 

It will take a big downturn, unless someone convinces NERO between now and then.  I don't think a huge drop between now and the 9th is enough for the politicos to do it.  They aren't that bright.   When you use useful idiots, they sometimes screw up in other ways.  This I suspect will be one of them.  Even if the entire thing is stupid, fools aren't always down with the game, and it takes something big before they come back running and screaming.  

Goldman better hurry up and decide what they think, because the Nero and congress (as stupid as they are) only have a couple of days to digest it.

So if everyone is pricing in QE3, and it doesn't happen, along with downgrade, efsf,etc...say hi to Jack Dawson and the rest of the damned on the TItanic.

But who knows what will happen when the black swans are all around clusterfucking.  Anything can happen. 

Of course, what should happen, is Glass-Steagall

Sun, 08/07/2011 - 13:28 | 1533050 vast-dom
vast-dom's picture

jmc i concur with you, though for slightly different reasons. I suspect Bernank et al will allow the markets to tank hard and long(er) and when everyone is in panic mode (including the populace), then they will be under the cover of hysteria. If they do it on the 9th, then there is more room for massive dismay and the printed monies are in ineffectual in very short term Fed gets a double-whammy blame.

 

So I think end of August at Jackson Hole will be better timing. At that point the DOW should be flirting with 9,500 bogus accounting fraudulent jobs #s and fudged stats notwithstaning. 

 

(And if the jobs #'s of Friday weren't totally cooked we'd have DOW at 10,800 range.)

 

Sun, 08/07/2011 - 15:05 | 1533454 TruthInSunshine
TruthInSunshine's picture

jmc8888

Fed doesn't have political or social cover for this.  Everyone is still pissed off about QE1, 2, etc. If they do it, there will be a heavy price to pay.

 

I don't think it's much of a possibility that Bananas&BubblesBernank doesn't do more QE - as many have accurately (IMO) said, "print or die" is the choice of Bernankstain.

The real question now is what happens in the wake of more QE.

Will insiders sell the news (there's not much retail participation in equity markets, so maybe Bernank can buy all LULU and PCLN shares with the rest)?

Will the Fed be able to avoid self-implosion or will it get a U.S. Taxpayer bailout?

Will QE3 be a program that allows Bernankincide to buy up all underwater mortgages and donate them to the JP Morgue & Goldman Sachs?

Maybe Bernank will use QE3 to buy PIIGS+UK+French debt, and then he'll do something magical with it.

Any way you look at it, NerObama & CONgress now have 2.6 trillion worth of treasuries that Bernank-Whack-A-Mole can buy up, and the rusting, oxidizing, turning-to-dust tin can gets kicked, or someone's foot passes right through it, vaporizing it.

This could all be the big prelude before some large events take place.

One thing is for certain; whether by design or accident, faith and trust in the honesty, competency and/or sensibility of the U.S Government & The Private Federal Reserve Bank is being lost at a pace not seen in anything other than TSHTF types of times.

Sun, 08/07/2011 - 13:15 | 1532995 vast-dom
vast-dom's picture

Okay gentlemen let's discuss the following points:

 

1. will the Fed announce QE3 on Tues? 

2. when Fed does announce, will markets instantly (un)correct UP or will there be a lag until QE actually commences?

3. will QE be instantiously implemented?

4. what do you believe is the timeframe until QE runs out and we have massive market CRASH?

 

Of course all answers are to some extent speculative, but would love to read 0Hedgers thoughts.

Sun, 08/07/2011 - 14:22 | 1533297 tictawk
tictawk's picture

This is bullshit... you are making the ASSumption that the markets still believe that QE works and that you can print wealth.  Printing paper is not the same as creating wealth.

Sun, 08/07/2011 - 15:17 | 1533492 vast-dom
vast-dom's picture

Tick the ASS is precisely the Sheeple that WILL 110% go for the bait until it don't work. Not ASSumption but GIVen. If you don't believe, then YOUR ASSumption shall be proven wrong shortly.

Sun, 08/07/2011 - 13:17 | 1533003 silvertrain
silvertrain's picture

Any more QE will be an additional 2 notch downgrade on the US credit rating..Go for it...

Sun, 08/07/2011 - 13:18 | 1533010 vast-dom
vast-dom's picture

Yes but if you factor the previous 2 we are already in FFFF ratings category. SP is just legitimizing their fraud by finally seeming to do something, irrespective of how grossly off the revision is.

Sun, 08/07/2011 - 13:18 | 1533009 holdbuysell
holdbuysell's picture

Tyler, from the artice above (cut and paste):

“…are likely to warrant exceptionally low levels for the federal funds rate and exceptionally large asset holdings for an extended period” (our suggested change in italics). Indeed, our baseline expectation is that this change will occur at the August 9 FOMC meeting, although it is a relatively close call. Second, we expect the composition of the Fed’s balance sheet to shift toward longer maturities. This could happen via an increase in the average maturity of its reinvestment of MBS paydowns and/or a change in the reinvestment policy for its Treasury portfolio. However, we do not yet expect this for the August 9 meeting, although it is possible." Operation Twist 2 it is then, with unlimited purchases in the 2-7 year range to keep the yield at a sturdy 0%,...

I don't see in that statement from GS that the Fed is increasing the size of the balance sheet in the 2-7 years. I see a reinvestment in those areas. This doesn't sound like adding to the balance sheet, but merely shifting the mix and keeping the size stable. Please clarify.

Sun, 08/07/2011 - 13:29 | 1533042 slewie the pi-rat
slewie the pi-rat's picture

 

 

tyler d sez:   "What Zero Hedge has been saying for well over half a year has finally hit the mainstream, with pundit after pundit "suddenly" coming out of the closet and making the uber-bold proclamation that "QE3 is here." Yawn."

jan haZmat sez:  "A more immediate question is whether Fed officials will restart their quantitative easing program and announce another big increase in the size of their balance sheet. Our answer is “probably not"..."

janH seems to be aware that always and everywhere QE = FED expansion of Bal Sheet = print money.   

i don;t see any reason for them to print money right now either.  i don;t know what benzlebub is thinking and i don't know what things will look like later today, much less a week, month, or year from now, but once i grokked the recent FED bal sheet, i changed my call on "QE III" from "baked in" to "why? it does not seem to be needed, right now."

tyler brings up the international central bankster minuet and will the FED goto QE (n)  and take Central PlanningTM to escape velocity (which may well be needed if we hope to get Mars to bail out the Earth shortly)???

maybe.  maybe the FED will expand its balance sheet for the int'l CB mess.  we shall certainly see, and yes, in it does print for these reasons, that would be very inflationary.

many here on zH feel the "default" was a straw man for the USSAA over the past weeks/month.  so, we didn't avoid default b/c we would not have defaulted enyhow, just changed our priorities as to what we want to pay for.  but there are several nations involved in the euro which might really default.  greece in the next two weeks. for example.  and, if fraAAAnce gets downgraded, well, who knows? 

at home, we face the prospects of the military-industrial complex needing to siphon off social benefits , or the uber-rich might have a bad year, too! 

some of the "paper profits" are coming out of the paper markets.  people who weren't heavily into bonds got a lil haircut, and now we know how 'safe' those bonds can be!  L0L!  that's kinda funny, too!  i should add: ...safe, as long as the interest gets paid...and even if we havfta borrow the do-re-mi to pay vinnie & guido...that's is not quite the same as just printing it, now, is it? 

that is not meant as a rhetorical question; and the answer would be:  NOPE!

 

Sun, 08/07/2011 - 13:38 | 1533084 max2205
max2205's picture

What happens when the fed loses control of the 2 + year Ts?
Who could force them up?

Sun, 08/07/2011 - 13:45 | 1533121 MoneyWise
MoneyWise's picture

My question is: why Greece, Italy, Spain, cannot have their currencies back, and have 2 currencies circulated? Swiss does
3 currencies running Swiss Frank, EUR and US Dollar. Those Countries simply need devalue their currencies to re-balance
economy, they prices will drop dramatically and we all can eat
Italian product and drink their wine cheaper, that will boost
Economic growth in those countries by large margin.. Tourists,
cheaper product, higher competitiveness and on and on..
Who can afford roll over Debt at 6%? This is just crazy..
Maybe it's possible, but then currency must be devaluated by even
larger margin. EUR project sucks. IMHO.

Sun, 08/07/2011 - 13:59 | 1533196 Eireann go Brach
Eireann go Brach's picture

Tyler can you let us know just how much your site has spiked in traffic in the past week? I would venture to say it has increased by 400% at least as suddenly the sheeple and indeed pundits who of course will never admit it, are now all coming here to get the real news and story, as the MSM, Gubmint and O'robyomama have lost all remaining credibility!

Sun, 08/07/2011 - 14:16 | 1533256 mick_richfield
mick_richfield's picture
"...which may well be needed if we hope to get Mars to bail out the Earth shortly."


No one would have believed in the early years of the twenty-first century that this world was being watched keenly and closely by intelligences greater than man's and yet as fiscally irresponsible as his own...


Reporter shouting into TV microphone: "Once the tripods land, no further honest financial data comes out of that area!"
Sun, 08/07/2011 - 18:13 | 1534146 dbTX
dbTX's picture

When there is no option the prediction is made easier; the FED will print

Wed, 09/14/2011 - 04:50 | 1667414 chinawholesaler
chinawholesaler's picture

Home Appliances
Photo Frame

Wholesale Halloween Gift
Wholesale Swimming Products
Wholesale Clap Hands

Flash Gift
Sport Items
Lady Beauty Care

Wholesale Ashtray
Wholesale Socks
Wholesale Golf Products

Name Card Holder
Sport Support Products
Wholesale Helmet

Wholesale Speakers
Stuffed Animals
Heating Products

Digital Photo Frame
Digital Photo Frame
Tangle Puzzle

Beauty Equipment
Wholesale Vuvuzela
Wholesale Mug

Wine Set
Wholesale Clothing
Electroluminescent

Advertising Material
Promotional Items
Safety Products

Wholesale Apron
Wholesale T-Shirts
Wholesale Carabiner

Wholesale Calendar
Wholesale Stapler
Wholesale Calculator

Medicine Instrument
Lunch Box
China Wholesaler

Water Bottle
Flash Gift
Writing Instrument

Arts Crafts
Automotive Products
China Suppliers

Wholesale Cap

Do NOT follow this link or you will be banned from the site!