Here Are Wall Street's Expectations For Tomorrow, As Goldman Makes The Case For $1 Trillion In QE3

Tyler Durden's picture

After 3 months ago everyone was convinced there was no QE3 imminent ever, all it took for the lemming majority to scramble to the other side of the boat was a 20% drop in stocks. Since then, following a brief stabiliziation in stocks, based precisely on beliefs that Bernanke would once again pull something from this bag of goodies, the lemmingrati once again shifted back, and the majority now pretends it does not expect anything out of Jackson Hole tomorrow, even though it obviously does, as otherwise the market would resume its plunge. UBS earlier conducted a survey among money managers, finding that 50% of the 82 respondents expect Bernanke to limit Jackson Hole remarks only to reviewing the rationale for the Fed to pledge ZIRP until mid 2013. Then there are those who actually told the truth, such as Goldman which, in a note yesterday, says that $1 trillion in QE3 is an absolute minimum if the Fed wants to get GDP higher by at least 0.5%. To wit: "Taken together, our analysis suggests that QE3 is unlikely to be a panacea for growth. Nonetheless, our estimates suggests that $1trn of asset purchases–or an equivalent increase in the duration of the Fed's balance sheet–might increase GDP growth by up to 0.5 percentage point in the first year after any announcement of QE3." And since we are talking the truth here, why not stop pretending you care about GDP - just think of the marginal impact on Wall Street bonuses...

First, the UBS responses:

  • 18% expect Fed will extend average maturity of Treasury holdings, similar to “Operation Twist”
  • 3% expect either “QE3 Max” (purchases include risky assets or a 10-yr yeld target) or a QE3 along the lines of QE2
  • “We suspect that a reasonable chunk of the nearly 4% gain in the S&P 500 this week is built on the hope that the speech is friendly to risk assets. Hence they could suffer at least a bit if the Chairman does not pave the way for QE3”

One firm that is not shy about its "QE3 or bust" policy, er, recommendation is Goldman. Here is the firm's Sven Jari Stehn defending the firm's outlook why a $1 trillion boost in LSAP (or duration equivalent extension, because see, LSAP is the same as Operation Twist from a risk preference shift perspective, but unfortunately twitter-poll responding FX traders are unable to grasp this...). As a reminder, it was Goldman who was calling for $2 trillion in QE2 only to get $900 billion. Compromise? And does this mean that Bernanke will merely implement $500 billion in Operation Twist 2 then? We shall find out tomorrow. 

That said, if the Chairman disappoints, the market will not be happy.

From Goldman Sachs:

Following the sharp deterioration in the economic outlook, we now see a greater-than-even chance that the Federal Open Market Committee (FOMC) will resume quantitative easing later this year or in early 2012. We recently discussed that such a step might involve either another expansion of the balance sheet or an increase in the duration of the Fed's balance sheet without expanding it (see "For More Easing, Will Fed Go Big or Go Long?" US Daily, August 15, 2011.) But given the disappointing growth performance since the adoption of the second round of asset purchases ("QE2") late last year, many commentators question how effective QE3 would be in boosting the sluggish recovery. In today's comment we attempt to shed some light on this question in two steps.

First, we reexamine the link between quantitative easing and financial conditions. As discussed on many occasions in the past, we think that the Fed's unconventional policies work primarily through easing financial conditions via lower interest rates, higher equity prices and a weaker dollar. Specifically, we estimated in the run-up to QE2 last summer that $1trn of asset purchases would boost our financial conditions index (GSFCI) by around 80 bps. (This estimate was derived as the average effect from three models that ranged from 25-115bp. For details see Sven Jari Stehn, " Unconventional Fed Policies and Financial Conditions: How Tight a Link?" US Daily, August 17, 2010.)

Using our previous methodology, we update these estimates to include QE2. Specifically, we explain the level of the GSFCI with three components. First, we include the announced stock of the Fed's asset purchases (that is the announcements in November 2008, March 2009 and November 2011 to purchase $600bn, $1.15trn and $600bn of securities, respectively). Second, we include the target fed funds rate (as a measure of the current stance of conventional monetary policy) and the slope of the Eurodollar curve (to capture expectations for future monetary policy). Finally, we include a number of economic variables that capture other economic influences, including Reuters/University of Michigan long-term inflation expectations and initial jobless claims. We estimate this model using weekly data between January 2000 and August 2011. We find that the first two rounds of asset purchases, on average, eased financial conditions by 101bp per $1trn (see column 1 in the table below). This estimate is consistent with our previous range of estimates, but a bit higher than their average.

The Estimated Effect of Fed Asset Purchases

There is, however, reason to believe that QE3 might be less effective in easing financial conditions than the first two rounds of purchases. This is because Fed asset purchases are likely to have larger effects during times of extreme market stress, and particularly when they are targeted at a specific market dislocation, like the mortgage-related purchases during QE1. As a result, one would expect that QE1 had a more significant effect on financial conditions than the subsequent program. Unfortunately, it is difficult to test for this empirically as we only have two experiences to go by. That said, we find some tentative evidence that the effect of QE1 on financial conditions was larger than during QE2: the effect rises to 120bp per $1trn when we estimate the model only through the end of QE1 in March 2010 (see column 2 above). To the extent that this finding points to diminishing returns to quantitative easing, we might expect additional purchases to ease financial conditions by less than 100bp per $1trn of purchases (or an equivalent extension of the average duration of the balance sheet).

Moreover, the effects of further quantitative easing on financial conditions might well be dampened by the Treasury's debt management policies. This is because in an environment where the federal funds rate is near zero, asset purchases–whether financed by the creation of bank reserves or by selling short-maturity holdings–are essentially equivalent to a shortening of the average maturity of the government debt. (For details of this argument see Jan Hatzius, "QE2 as a Shortening of Treasury Debt Maturities," US Daily, October 26 2010.) The average maturity of the privately held Treasury debt, however, has recently been increasing despite QE2–up from 57 months in October 2010 to 58 months in March 2011 (the latest available figure). If this trend continues, the effects of QE3 on financial conditions may be at least partially offset by the Treasury’s debt management policies.

Having discussed the effect of quantitative easing on financial conditions, we turn to the link between financial conditions and growth. Our estimates–summarized in the chart below–suggest that a 100bp easing in financial conditions would boost growth by 0.8 percentage point in the first year and another 0.2 percentage point in the second–i.e., raise the level of real GDP by 1% after two years. (For details see Sven Jari Stehn, "Another Look at the Link Between Financial Conditions and Growth," US Daily, October 26, 2010.) The chart below furthermore breaks down the total effect into its components, suggesting that about half of the total effect of the easing in financial conditions on GDP can be explained by an increase in consumer spending. The response of fixed investment, housing and net exports to easier financial conditions also contributes significantly to GDP growth.

The Effect of Easier Financial Conditions on GDP

Again, we see a couple of reasons why this link might be weaker in the current context. First, the disappointing growth performance in 2011H1 suggests that the effect of the easing in financial conditions in 2010H2 might have been smaller than the above estimates imply. A possible explanation is that some of the normal transmission channels seen in the chart above might be "clogged" in the current environment. In particular, a significantly positive effect on housing construction seems unlikely given the large amount of unoccupied inventory that currently hangs over that market. Moreover, the response of consumption might well be more muted in light of households' inability to extract equity from homes through refinancing due to widespread negative equity. In a simple attempt to capture these effects, we fully exclude the contribution of residential investment to GDP growth implied from the chart. (An alternative approach would have been to exclude parts of both the housing and consumption response.) Doing so suggests that a 100bp easing in financial conditions might boost growth by only 0.5 percentage point in the first year (see dashed line). Second, it is possible that rising energy prices might offset some of the growth effects of any QE3-induced easing in financial conditions. Although we agree with the view expressed by Fed Vice Chair Janet Yellen–that commodity prices are best explained by the fundamentals of global supply and demand rather than by the stance of US monetary policy–the significant increase in crude oil prices before and after the QE2 announcement raises the question whether there might have been at least some offset to the easing in financial conditions. In support of this view, our "oil-adjusted" financial conditions index–which takes into account the price of crude oil–shows less easing in response to the Fed's purchase programs than the GSFCI.

Taken together, our analysis suggests that QE3 is unlikely to be a panacea for growth. Nonetheless, our estimates suggests that $1trn of asset purchases–or an equivalent increase in the duration of the Fed's balance sheet–might increase GDP growth by up to 0.5 percentage point in the first year after any announcement of QE3.

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digitlman's picture

Fuck you, GS.



President Palin's picture

Fuck you, GS.

You are being way too kind.

max2205's picture


zaphod's picture

So let me get this straight.

Increase M0 by 40%, get a one time 0.5% gdp bump, this is the best these guys got????? Seriously

Sudden Debt's picture

it makes sense.... increase the debt with 8% for a 0,5% economic growth...


vast-dom's picture

Fuck You GS +1


Add that to the 0H Fuck You list niggies!

TruthInSunshine's picture




Roubini is coming onto CNBS @ 4:40 pm est to argue for MORE QUANTITATIVE EASING/LUBING.

Get your Zero Hedge on.

A million bitch slaps for Roubini to be incoming, and rightly so.

(Just who has bought off Roubini, anyways, the pompous and vitriolic little spitfire...)

Thomas's picture

Hope he talks about the gold bubble. 

WarriorClass's picture

Break the fucking code, bitches:


Bring the house down!

slaughterer's picture

GS and JPM send Roubini a dozen 16-year-old girls a month.  Dr. Doom's fetishes and addictions are well known on the Street, and through them he is kept on a nice tight leash.

faustian bargain's picture

Roubini is a laughingstock with his juvenile Twitter tantrums.

theMAXILOPEZpsycho's picture

Woaa He's actually on twitter...I just said "Fuck off and die elitist SCUM!"

I suppose he'll block me or something, but I don't really know jack about twitter

SilverRhino's picture

If the economy is approximately 14 trillion dollars GDP, how the hell did these fuckheads conclude that spending 7% of GDP will pump up the economy by only 0.5% GDP?   Did someone at the Goldman (Ball)Sack fail basic fucking math??

QE3 will be the golden straw that breaks the USD.  But then TPTB don't care, they're just going into the final round of looting by passing paper to asset-holding dupes.

youngman's picture

"how the hell did these fuckheads conclude that spending 7% of GDP will pump up the economy by only 0.5% GDP? "


Because its government spending....

Sancho Ponzi's picture

Members of Congress hold most of their wealth in the form of real estate, so it's logical to assume Bubble Ben will continue handing out freshly printed FRNs in exchange for worthless RE related assets. The vast majority of CongressCritters would risk Armageddon to protect their net worth. It really is that simple.

slaughterer's picture

With $2.4 - 2.6 trillion in SOMA, $1 trillion in LSAP duration equivalent extension is too much to ask.  (I would expect however Goldman would happily settle for $500-600 billion in LSAP, and will probably get it--eventually.) 

Mactheknife's picture

I think the Fed is going to take that 1.7 trillion held on reserve and do a reverse repo on T-bonds and fred/fann MBS.  I think that's why they made sure to tank gold as hard as they could first. But hey, what the hell do I know.

slaughterer's picture

Reverse repo on agency holdings would dovetail nicely with Obama's planned homeowner equity bailout and make the Fed seem like it actually cares about something else than the Primary Dealers.  It would result in a temporary PR boost for Ben and O.   Could happen. 

Mactheknife's picture

The Bernank has stated before that he is not in favor of a Twist operation with ZIRP. With that much money just sitting there already....just sayin

narnia's picture

liquidiating the Fed balance sheet would be terribly bearish for gold. 

bottom line..  the Fed & Treasury know what yield curve they want.  that's the same curve the TBTF banks want, as well.  they'll do what it takes to achieve it, irrespective of its effects on the currency.

they'll try to sculpt it with twist or some synthetic bond using MBS (the pawns and knights).  if they don't accomplish it that way or they see some other move (chinese dump, unforseen auction weakness, other event), they'll employ the rooks & bishops (balance sheet expansion).  if that doesn't work, they'll bring out the queen (changing the rules of the game).  i don't see why anyone even cares what the beard says or why he would want to telegraph the moves.

Smiddywesson's picture

Makes sense to me.  The assault on gold was either the first of a one two punch that Jackson hole will hit gold with, OR it was to take some of the steam out of the ramp in gold prices Jackson Hole will offer. 

slaughterer's picture

I asked my 6-year-old daughter yesterday what she wanted to be when she grows up.

She said point blank without a second thought: "A Primary Dealer."

Johnny Lawrence's picture

Fuck. You. Goldman. Sachs.

DeathCabfoKulaks's picture

Eat the Kulaks and Monetize dat bitch

hedgeless_horseman's picture

Eat your Pasta Jay's stuffed shells. 

$1 trillion was my minimum QE number from 2 weeks ago...

slaughterer's picture

If we get only $500 billion, you only get 1 1/2 of those Manicotti-filled beauties.   

SheepDog-One's picture

Theres been no $1 trillion gift delivered at all...lets see it!

hedgeless_horseman's picture

It would certainly not be the first gift to bank shareholders paid for by all who earn/hold USD via the inflation tax.

TradingJoe's picture

Yeah, yeah, GS...! What a nice day it will be tomorrow :)))! And not to mention next week!

SheepDog-One's picture

Goldman blowing smoke, hoping for some $1 trillion gift....Bernank will say theyre standing by watching, there is no more stomach for more QE madness and its political suicide as well. Fuck off, Goldman.

Cognitive Dissonance's picture

Good thing I just bought more Gold and Silver.

The liars continue to lie so that they can continue to believe each other.

vast-dom's picture

Gold and Silver = the REAL GS!


And once again Fuck You CME!!!!

NoClueSneaker's picture

CD .... money goes to €u-Proxies... looting turbo

alien-IQ's picture

"might increase GDP growth"

Yes...just like Jessica Alba MIGHT just knock on my door, strip naked, drop to her knees and blow me.

The odds are about the same.

Doyle Hargraves's picture

No there is actually more of a chance of Jessica Alba showing up then QE working to increase REAL GDP.

StychoKiller's picture

Guess I better answer the doorbell, then! :>D

lolmao500's picture

Krugman and his followers would say that she's blowing you RIGHT NOW...

youngman's picture

She might in the future if you got GOLD....and a little food

SheepDog-One's picture

I MIGHT rise tomorrow and discover a new Ferrari Dino in my garage...but its not too likely.

This whole market is now based upon rainbow unicorns.

Henry Chinaski's picture

No QE 3.  Market crashes.  TOTUS drops the hammer on Wall St execs (see People vs GS) and gets reelected. 

whaletail's picture

The Poet Laureate of Skid Row speaketh the truth. 

bankruptcylawyer's picture

oh man...that 'sounds' good. but look at who he is surrounded by and what he's done for 3 years. 


you think he's switching horses mid stream so that wall street can back rick perry? i don't. you think obama cares about 'the people'. he is not a populist, he is conventional politician bought and sold by the banks and corporations.

seems unrealistic, especially in light of the ultimate insider buying 5 billion of bank stock only 1 day before the announcement. 


john39's picture

what time are the "remarks" tomorrow?

vast-dom's picture

<---- QE3 Tomorrow

<---- Market CRASHES Tomorrow



VOTE Biyatchez!


And Nigga Please this ain't no wish fulfillment vote this is your well researched and well informed survey.

caerus's picture

watching ES 1160 NQ 2100

slaughterer's picture

Look at that unanimous "MARKET CRASHES TOMORROW" vote above.  Do you think that the bots are not aware of this lopsided bearish sentiment?  

vast-dom's picture

wait till that vote hits 666 CRASH vs. 13 QE3 motherfuckers!


Long the Spam / Short Roubini 


//drool off/


Oh yeah let me add Roubini to our 0H Fuck You list.