With Just 4 Days Left Till Jackson Hole, Are The "Great Expectations For QE3" Too High?

Tyler Durden's picture

And so we return to that point when the most engaging, yet useless, topic of discussion is what Bernanke will say or the Fed will do, in this case this coming Friday at the 2011 edition of the Jackson Hole Fed meeting, and specifically Ben's keynote speech. By now we have seen endless iterations of what pundits expect will happen: from nothing to another round of QE. Today, we present SocGen's take which is that while an outright third round of monetization is unlikely for now, the Fed may well proceed with a lite version of QE in the form of "sterilized" operations, or curve targeting, aka Operation Twist, as was noted here some time ago. One thing we certainly agree with SocGen on: "If markets remain under pressure, Bernanke could be forced to commit to something next week." The market obviously knows this, in which case if the market case is for QE3 or bust (and remember: Wall Street is still stuck in beta levered world where the only P&L comes courtesy of the Fed this will be most welcome) today's latest vapor rally will be promptly nullified by Wall Street which has only 4 days left to send a very loud message to the Chairsatan.

From SocGen: Great Expectations For Jackson Hole

Bernanke’s Jackson Hole speech will be the highlight of the week. Expectations are high, but those looking for an outright commitment to QE3 are likely to be disappointed. QE3 may well happen eventually, but the Fed will likely use up more conventional and less controversial tools first. The most likely next step in our view is a duration extension of the Fed’s securities portfolio. Bernanke could refer to it as “sterilized QE,” giving the markets what they want to hear. Other options include broadening policy guidance to include the balance sheet. For example, the Fed could promise not to reduce its securities portfolio until 2013 or, better yet, promise to keep it “at least” at the current size until 2013. The latter would open the door to QE3 more formally, yet without committing to it outright. The Fed could also cut interest on reserves or shift to outright inflation targeting. Price level targeting would be the nuclear option, but it is probably too early for that.

Sentiment measures in the US have continued to slide last week. Early regional manufacturing surveys for the month of August suggest that the national ISM could print in the mid 40s. A 42 level has historically been consistent with flat GDP growth and therefore is a threshold for recessions. In this context, the risks are certainly growing. To be sure, hard activity data has held up well so far: retail sales, production and employment all increased in July, suggesting that Q3 will see positive, albeit slow GDP growth. Our real time recession probability model, based on the four coincident indicators used by the NBER in dating business cycles, suggests only a 2% chance that the economy was in a recession as of July (see the accompanying chart). However, if financial conditions and sentiment continue to deteriorate – and our view is that much of that depends on European policymakers – we could start seeing cracks in hard data in the fourth quarter. At the moment, we would peg recession risks around 40%.

If there is a recession in the next 12 months, it is not all that clear what it will look like. Given that the US economy is already operating well below capacity (nearly 7% by CBO estimates), it is hard to imagine another deep contraction. Instead, we would probably see flat or even slightly positive GDP growth, but below the pace needed to sustain employment gains. For example, 1.0% GDP growth, if sustained, would lead to a roughly 1% contraction in employment which is equivalent to 10k jobs lost per month. This would push the unemployment rate higher, toward the 9.5%-10% range over the course of one year. Inflation would likely ease, opening the door for further monetary and perhaps even fiscal accommodation.

Next week’s Jackson Hole meeting is awaited with much anticipation. Bernanke is due to speak on Friday and markets are looking for a commitment to further monetary support. The focus of the speech is likely to be on additional easing tools which were discussed extensively during the August 9 FOMC meeting. The tools include further language guidance (for example no balance sheet contraction until mid-2013), cutting interest on reserves, changing the composition of the Fed’s securities portfolio, or establishing an outright inflation target. A more controversial option would be price level targeting, but it is a long shot to expect Bernanke to endorse such a radical policy shift at this stage. Finally, there is of course the option of QE3.

We still think that it is too early for a QE3 commitment. For now, both inflation and inflation expectations remain quite high. The CPI report for July certainly did not make things easier for the Fed. It showed some evidence of pass-through and rising rents are also adding to upward pressure on core inflation. These could reverse eventually if the economy continues to grow at or below stall speed, but the Fed will have to wait. As for inflation expectations, they are finally moving in the right direction. The 5y5y forward breakeven dropped over 30bps last week to 2.52%. If this trend continues, an important hurdle to further quantitative easing could be lifted before year-end.

The political backdrop is another important consideration which complicates matters for the Fed. Conservatives remain firmly opposed to ‘printing money’ and have been very vocal about it. Though the Fed should in theory be independent from the political process, Bernanke surely does not want to put the central bank in the cross hairs of a presidential campaign. The bottom line is that the Fed will ultimately do what is right for the economy, but it will need to build a strong case first.

If markets remain under pressure, Bernanke could be forced to commit to something next week. If so, the most likely next step in our view will be duration extension of the Fed’s portfolio. Bernanke could even call it ‚sterilized QE,? giving the markets what they want to hear. The impact would be similar to outright QE with the curve likely flattening further and pushing yield-hungry investors into riskier assets. However, the impact on the dollar would be more limited as there is no outright increase in the money supply.

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SeverinSlade's picture

QE3 will not be rolled out the same way that QE2 was.  Equities are likely to be disappointed on Friday which could trigger the plunge necessary for QE3.

bankrupt JPM buy silver's picture

QE3 is already happening.  We just cant see it.  If it wasnt, MS, AIG, BAC etc, would already be at zero.



Taku's picture

QE3 will send gold to the moon, and it'll send half the planet's inflation there as well, destabilizing a few more sovereigns. But since it's exported, "it's OK", problem's gone and kicked down the...

jaffa's picture

In this case, the creditor hopes to regain something equivalent to the debt and interest in the form of dividends and capital gains of the borrower. The repayments are therefore proportional to what the borrower earns and so can not in themselves cause bankruptcy. Once debt is converted in this way, it is no longer known as debt. Thanks.

slaughterer's picture

This is the historical sentence from last year's BB Jackson Hole speech that set the markets on fire: 

I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions.

Read more: http://www.businessinsider.com/ben-bernanke-text-of-jackson-hole-speech-2010-8#ixzz1VlnayjNF


All that is needed is another statement like this, however qualified and cautious, for markets to rally. 

Snidley Whipsnae's picture

It did ease conditions... especially for the bankers

Look at the insider buy/sell ratio since then... a gazillion to one... and saps are still playing the paper games...

Herbert_guthrie's picture

Further QE is NOT a given.

Further monetization of debt IS......

SheepDog-One's picture

WHAT CASE for QE3? Im not seein it at all! 15% drop in the markets just aint it, most people arent even aware that markets are off their YTD bubbled-up highs...so wheres the case?

Im sensing a big let down from Jacksons Cornhole bankster orgy unless they tank the markets real quick. And I dont mean another -200 DOW drop either, I mean CNBS in full panic at the out of control drop, banksters running around yelling armageddon up and down Wall St.

SeverinSlade's picture

Agreed.  I think too many investors are jumping in on anticipation of QE3 and not wanting to miss the move to the upside.  What happens if QE3 isn't announced on Friday?  Those investors that were anticipating QE3 will almost surely panic and sell.

dracos_ghost's picture

I agree with you -- no QE3. I think the next "stimulus" push will be for repatration of 2.5+Trillion in offshore dollars. Hell, they even spoke about on "Meet the Press" this weekend from Obama's crew.


Bring the Gold's picture

Dracos, honest question here. By repatriation of dollars are you talking about CB's, Sovereign wealth funds etc., dumping dollars into US markets? That would certainly goose the markets but wouldn't it also be highly and I do mean HIGHLY inflationary? What impacts do you see and what interview are your referring to if I may ask?

Thanks in advance to any who can answer these Q's.

dracos_ghost's picture

Was referring to US corporation holdings offshore. There seems to be a meme in DC to do another repatriation bill to allow the offshore dollar to come back onshore at a reduced or 0% tax rate.

"Meet the Press" is a Sunday morning talk show here in the US primarily discussing politics. They usually have a round table discussing various current event topics and the repatriation of US corporation dollars was one of them.

It was the Aug 21 video: http://www.msnbc.msn.com/id/3032608/#44219240  at around 41:45 minute mark.

As far as the inflationary impact, I believe that is what is wanted by the Fed et al. By doing it the repatriation way, it would be a zero sum game I think in terms of new money supply ( the money is already in play) and they could get the value of propping up asset prices like last time without having a heavy hand in the game.

But again, like last time, it probably would be a short term phenomenon.

I just think it is suspicious that the needed injection, QE3 or otherwise, is being whispered at 2.5T and that's the amount of cash held offshore by Multinationals.

BandGap's picture

I don't see it, either.  Especially with the inflation numbers of late.  But it has been a long time since I gave a shit anyway.

Maybe the publication of where the $$$ went in the last bank bailout just as Bush was exiting (1.2T) will wake the thinking public up.  Those numbers are fucking stomach turning.  And no one bats an eye.

The Man in Room Five's picture

How about an orchestrated market crash this week, so the Fed can come to the rescue Friday? Pure speculation but it seems like a possibility

redpill's picture

It will be some form of stealth QE. Kind of like that stealth chopper. Let's just hope it doesn't crash and get shown to the Chinese.

And OT but I found this funny http://www.eatliver.com/img/2010/5775.jpg

SheepDog-One's picture

Stealth behind the scenes bond yield maintenance program QE? Something tells me that wont excite stocks to new bubble highs and float us along calmly till 2013 end....nah, nothings fitting here something big is coming up quick.

Snidley Whipsnae's picture

SD One... when push comes to shove stocks will be thrown under the bus to save bonds...

??'s picture


I was thinking more in the form of an MQ-1_Predator

oa92000's picture

 QE3 or not has nothing to do with

Jackson Hole? 

Quintus's picture

It does, in the sense that Wall St is being pretty blunt about what they want their placeman in the Fed to do at Jackson Hole.  If he disappoints, then they'll get nasty.

The only relationship between Jackson Hole and QE3 is the weight of expectation that has been placed upon The Bernank to announce something that will keep the bonuses flowing.

uno's picture

QE the Caribbean and UK edition

oa92000's picture

Obama is the winner in this mess, he can blame the whole thing on Tea Party???

SheepDog-One's picture

No ones a big enough idiot to believe it, except for a few of obamas lowest common denominator base maybe.....23% approval of obamas handling of the economy, case closed.

uno's picture

that 23% will defend him even if O puts them into Fema camps

StychoKiller's picture

Well, he's just tryin' to pertect us frum the zombeez!

papaswamp's picture

Any bets on todays short term debt aution? Since it is short term I expect it will sell fine...waiting for trouble to show up in longer term first, as uncetainty reins...but I could be wrong.



carbonmutant's picture

Our community organizer needs QE3 for his re-election campaign next year. Don’t want to waste the QE prematurely. The public doesn’t have that long an attention span.

BandGap's picture

Forget attention span, the way the bailout cycles are shortening, if the trigger is pulled too early it might go poof just when the soundbites start to hypnotize.

buzzsaw99's picture

Whatever is announced we know who will benefit for certain.

baby_BLYTHE's picture

one would think the price of Gold is too high and the dollar index too low for the great chaircreature to engage in another helicopter drop. But as usual, it is to be reminded the man has stated countless times in various papers and speeches that he will go to all the ends of the earth to prevent deflation and stoke the fires of assets appreciation and price inflation.

My prediction: he will bluff with QE 3 on Friday, but not outright announce it. As no stability in the markets becomes commonplace over the next several months, he will have no choice but to engage in more money printing tail end of 2011 or very early 2012.

SheepDog-One's picture

Go for it, Id love to see my gold at $4,000 while everyone has lost confidence in stocks and the dollar and we're paying thru the nose for hyperinflated prices. They have no way out now, so I'll enjoy watching them flail about for a while longer from the sidelines.

baby_BLYTHE's picture

I'm with ya sheepy, I got into arguments with some of the other students in my econ class last semester about how gold would preform post-QE. The entire class and even the professor ganged up on me telling me gold was a giant bubble set to burst once Benocide put the breaks on QE back in June of this year.

All I can say, I take the next level of that class with the same professor and many of the students starting this afternoon (First day of class!). Boy, today will be an easy day in class for me. ;)

Yardstick of Civilization's picture

Sounds like you should be teaching the class . . . .

baby_BLYTHE's picture

I am not an econ major, only taking it to fulfill general requirements. The book we are using is a Macro econ book penned by Gregory Mankiw- a Keynesian clown friends with Paul Krugman and adviser to Romney's Presidential campaign.

can't say I will be able to convert the professor, but some of the students are taking a liking to some of the things I have to say. A few even read ZH daily now!

theMAXILOPEZpsycho's picture

Drop out and make it on your own like a true zero heger!

baby_BLYTHE's picture

I do believe college is no longer a wise investment for many. I, however, go to school basically free via scholarships I received out of HS, my on campus job and tuition benefit from my Mom that worked for the University for twenty years. I also have a ton of friends that live around me and I love the city even if it will plunge further into ruin due to wrath Rahm Israel Emanuel's and the Chicago machine gun political regime

theMAXILOPEZpsycho's picture

yeh, if I had to go back I'd do something that might be useful in the coming shit storm: agriculture, engineering of some kind, or learn a straight trade like mechanic, plumber, nurse even

where to after you finish? an internship at the JP morgue to get a view of the working of the beast?

baby_BLYTHE's picture

no way would I ever work at any zombie bank nor hedge fund hyena club. I am not majoring in Econ, business or anything of the sort. I am actually studying Photography (my real passion) with a double-minor in Chinese and History.

I am having a lot of fun and enjoying life while school isn't too difficult for me. I am able to SAVE money (+ invest in PMs) unlike most others including my friends that are already in a good amount of debt with virtually no savings.

slewie the pi-rat's picture

...as, perhaps also the nation via the "chi-town 0'Bama" political machine

my last live-with romantic interest, with whom i spent the first 10 of the last 22 years, was a Bears fan and since i always been a "raider" we would sometmes have what was almost make-up sex after games, me coming onto her after her team won and she caring for me after a loss, to the point where i usta be able to tolerate, almost,  my team's 4th-quarter shenanigans, looking forward to the fifth quarter tailgate party

i don't know what our behated chairsatan will say or do, but here is what he should do: tell the pols, again, to get the damned budget under control, and that if they continue their porcine FAIL he will no longer be responsible for the "confidence" game...

baby_BLYTHE's picture

damn, Slewie. The only worse sports franchise than the Oakland Raiders are the Chicago Cubs. We Sox fans always give it to them good calling them members of the 'Century Club' (as in no World Series in over 100 years).

slewie the pi-rat's picture

she was a cubs fan, too!  she paid my way into a heluva lotta NL games, even in chi-town!  i would take her to the jokeland colisee-um, (where the whole place usta smell like burning rope in the 70's [yay]), and try to teach her why the DH was a good idea, since we could be home an hour earlier! 

sweetheart:  madden, the snake, the ghost, freddie b., et al usta have their "camp" in the same town in which i domiciled;  can you imagine how many drinks we bought them, trying to keep them from "upscaling" to freaking napa for their "training"...and failing?

oh...and...fuk the evil empire! 

Yardstick of Civilization's picture

Photography rocks!  Good for you!  One of my best friends is a really talented photographer.  He was roommates with a few law students while launching his career but now makes more money than all of them and only has to work a couple days per week.  Stick with what you love . . . we need more art, philosophy, agriculture, and engineering.  Less financial services.

Caviar Emptor's picture

Way to go, baby_B! 

Gold has transmutated from a relic, to a commodity and now full circle jerk back to real money. 

It's almost.....like......it's "as good as gold"?????

Snidley Whipsnae's picture

Your proff and classmates don't recognize that gold is being driven by inflation and FEAR.

BandGap's picture

Like trying to outrun an avalanche. 

The only question now is who goes first, the US or Europe.  Flip a coin.

TradingJoe's picture

As far as i'm concerned, there won't be nothing coming out of JH on Friday since the Obumer said HE WILL ANNOUNCE HIS STIMULUS right after Labour Day! IMHO Friday will be a blood bath and nothing else, hell we might even see that before Friday's 10AM "speech"! Fact is "markets" will go lower, much lower, as in S&P 875-950 ish! Then we might see things rolling!

SheepDog-One's picture

Obamas 'NEW' stimulus...yes he's kept this one in his pocket for 3 years, and after joking about his own 'shovel ready jobs' stimulus total failure, now hes got the 'real plan' and sure everyones going to believe him because we're all just fuktards. Whatever!

SheepDog-One's picture

I think if we were going to see the market implosion fear and panic for big star studded diamond encrusted QE announcement, we would have already seen it. I dont think the plan is a Friday -200 day and use that as call for $2.5 trillion QE3, I just dont see it coming at all. 

Stocks will get ZIRP, which in itself is just full out retard mode, I mean if someone 20 years ago told you we would be 0% for years on end, with the markets NEAR all time highs, you'd called called them a total lunatic! Thats where we are today, considering 0%, and semi-annual trillions in money printing just 'normal'.