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The One Chart To Explain The Real Effect Of QE3

Tyler Durden's picture





 

Much has been written over the course of the last few days/weeks about what Bernanke could do, has done, and the efficacy of said actions. Inflation, unintended 'energy' consequences, debasement, financial repression, scarcity transmission mechanisms all come to mind but realistically they are all just symptoms of what is really going on. As the following chart from Barclays shows, the real effect of LSAPs is to suppress the signaling effect of macro data from the real economy. During periods of extreme monetary policy, the stock market's beta to macro-economic data surprises is dampened massively - and hence the forced mal-investment and mis-allocation of funds occurs. However, given the now open-ended nature of QE3, this may change with the 'good news/bad news' logic leading to a stronger market (higher beta) response (since all bad news is automatically attenuated by QEternity and thus all the good news is out there).

 

Via Barclays:

An important driver of this attenuated market response to economic news was the sense that important elements of the monetary policy framework were ‘in play’, and that policy was likely to respond if the economy weakened sufficiently, but not otherwise. In this context, bad economic news may not seem so horrible, if it is perceived to raise the probability of a market-friendly monetary policy response. In the run-up to June 2011, the question facing investors was whether the Fed would allow QE2 to end in June, in accord with the Fed’s stated intention. More recently, the question has been whether the Fed would put a more aggressive policy in place. But the ‘good news/bad news’ logic was much the same.

 

It seems to us that this logic will not, however, remain operative in the months to come, since the policy frameworks recently announced by both the Fed and the ECB have no stated end date on which markets can focus (as did QE2), and are not likely to be materially adjusted in response to economic data for some months to come. Economic news may have been a ‘good news/bad news’ story in the recent past. But now that the monetary policy responses to economic weakness are in place, markets have had the good news.

In the future, bad economic data will be, well, just bad, and good news will be unambiguously positive. This should lead to a stronger market response to economic data in the weeks and months to come.

 


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Sun, 09/16/2012 - 16:06 | Link to Comment malikai
malikai's picture

They have made themselves impotent.

Rejoice, slaves!

Sun, 09/16/2012 - 16:21 | Link to Comment Cursive
Cursive's picture

@malikai

Like Wotan, waiting in Valhalla, sullen and carrying his broken spear around, waiting for the cleansing fire that will consume all of the gods.

Sun, 09/16/2012 - 16:30 | Link to Comment Hedgetard55
Hedgetard55's picture

Ragnarok, bitchez!  :~)

 

Yes, Ben has essentially cut the pricing transmission lines, it is like cutting off the nerves in your hands, now you can put them in a fire and not feel it. Insane and criminal.

Sun, 09/16/2012 - 16:42 | Link to Comment Urban Roman
Urban Roman's picture

It's transitory.

Sun, 09/16/2012 - 21:41 | Link to Comment markmotive
markmotive's picture

"Rates will start rising towards the middle of 2010"

 

http://seekingalpha.com/article/870071-qe-infinity-the-fire-hose-into-th...

Mon, 09/17/2012 - 09:39 | Link to Comment Diet Coke and F...
Diet Coke and Floozies's picture

So is humanity.

Sun, 09/16/2012 - 16:46 | Link to Comment SWRichmond
SWRichmond's picture

Mises explained all of this in 1920 (that is, what happens when price mechanisms are thwarted).

Economic Calculation In The Socialist Commonwealth

http://mises.org/econcalc.asp

 

Sun, 09/16/2012 - 19:16 | Link to Comment trebuchet
trebuchet's picture

bollox that beta curve is not real effect that is BArcap trying to sell hedging products and ETFs; the beta correlated with a lot of stuff

 

"oh look  QE3 relates to BETA  (very badly deifined beta) roll up and hedge now."

Fink and Blackrock- BCG trying to dump ishares on the public before banks flog a new round of mortgages....

Sun, 09/16/2012 - 20:14 | Link to Comment Dead Canary
Dead Canary's picture

Götterdämmerung (Twilight of the Gods)


http://www.youtube.com/watch?v=jC-pA81QxGs&feature=related

 

Sun, 09/16/2012 - 16:07 | Link to Comment DUNTHAT
DUNTHAT's picture

ASSET Manager LONGS is where the manipulators are classified bt the CFTC.  Interesting.  Too Bad we couldn't get daily/hourly quantities on these Bastards.

 

https://docs.google.com/open?id=0B16Nxp5pgJBzWHM0NG4wRDlOVW8

Sun, 09/16/2012 - 16:07 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Stabiliteeeee!

Sun, 09/16/2012 - 16:14 | Link to Comment Black Forest
Black Forest's picture

Transienceeeee!

Sun, 09/16/2012 - 16:11 | Link to Comment The Shootist
The Shootist's picture

New all time highs for gold?

Sun, 09/16/2012 - 17:23 | Link to Comment Think for yourself
Think for yourself's picture

Well, I don't know about that, but in due time, definitely.

However I feel bad about the USD. And as I live in Panama without a bank account, I get paid in USD cash. I hate holding it,  but I haven't been able to find a PM dealer lately, so I'm over 70% cash (USD)... not even 30% PM. Tomorrow I'm making a border run to convert at least 50% of my USD in Costa Rica Colones, diversify a bit.

Now, I'll probably do it either way (can't be worse than being 100% USD, and as it is my neighbour country it is the best option aside from PM), but since my understanding of economics is still very cursory compared to any trader, I'd like to do something I don't do often, that is, to ask this board for reference. How you feel about the CRC as a currency - I've heard talk of it being considered as undervalued - and how do you feel about Costa Rica as an economy in the current environment?

Thanks in advance!

Sun, 09/16/2012 - 17:41 | Link to Comment Freebird
Freebird's picture

Wrong border...

Sun, 09/16/2012 - 18:00 | Link to Comment Think for yourself
Think for yourself's picture

I'd definitely do it with Colombia, but it is over 10 hours on the road plus a day in a speedboat away, each way (or 2 flights whose cost will eat most of the money I want to convert anyway). On the other hand I can get to Costa Rica in 2 hours and for a less than 4$.

Considering my time, money and work constraints, the choice is to either sit on a wad of USD or convert part of it in Colones.

Are you implying that it is a bad idea to convert USD in CRC? Why? Or just stating that it would be a better idea to convert into colombian pesos? 

Sun, 09/16/2012 - 18:23 | Link to Comment flacon
flacon's picture

Could you buy PM jewelery?

 

 

Sun, 09/16/2012 - 18:32 | Link to Comment Think for yourself
Think for yourself's picture

Yes but no... Premiums are just too high, at least at the scales I'm working with (converting about 1 grand). It's quite hard to buy PM jewelry for less than 3x price of materials, and 2x price of materials is a really good deal. It needs to be from a trustable source and/or quality needs to be verified, yet it when pressed to sell it it will be hard to get 1x materials price. ..

Given more time, I'd just keep looking for another bullion dealer, but shit is destabilizing quickly and October is right around the corner. That's why I felt the need to get out of USD, fast. I don't want a process that takes weeks or more and just wake up with my dick in my hand - my ressources are very limited, which is why I must ensure to allocate them wisely.

Sun, 09/16/2012 - 19:50 | Link to Comment dwayne elizando
dwayne elizando's picture

Buy necessities. Beans, rice, salt, sugar, toothpaste, shampoo, etc etc.

Sun, 09/16/2012 - 20:02 | Link to Comment kito
kito's picture

No need to stock up on anything, ray dalio says we are deleveraging beautifully and koo says no biggie...we are just japan....we are all overreacting...its just a little debt, it will all get worked out...gosh what was I thinking......

Sun, 09/16/2012 - 20:11 | Link to Comment Think for yourself
Think for yourself's picture

Already done. I'm a migrant backpacker, though, so although I will sometime sit still for a few months to a few quarters, I need to be able to get on the move and so these are not proper investments. A safety net, sure; whenever I arrive in a new location and know that I will be staying for more than a few weeks, I'll buy supplies for a month right away if not more.

Also, being in rural, food producing regions of central america severely lessens the imperative of these supplies compared to western urban centers depending on just-in-time logistics.

But I've got a move planned in a month, so more supplies is not an answer for me. Otherwise, considering the current conditions I'd make sure to have supplies for 6 months or more! Hence the original question: does you believe the CRC is well or badly positioned to deal with the upcoming USD upheaval?

Sun, 09/16/2012 - 19:09 | Link to Comment Captain Benny
Captain Benny's picture

I'd recommend skipping Costa Rica and going to Nicaragua.  Its a little less economically tied to the united states.... they certainly have less interest in long term dollar ties.

Sun, 09/16/2012 - 20:02 | Link to Comment Think for yourself
Think for yourself's picture

Thanks for that honest feedback. I've been thinking the same thing. I currently have an apprenticeship lined up on an experimental permaculture project in Costa Rica, so I think I might stay there for a while (moving from Panama in a month). But I'm essentially a backpacker so am very flexible and could head to Nicaragua if it does not work out, but when shit gets real I'll probably be heading for Ecuador/Bolivia, not Central America.

The question right now was more one of whether the currency is perceived as a secure investment (return of capital, not return on capital) and if the economy itself is resilient. You seem to say that Costa Rica is too dependent on the US? 

Sun, 09/16/2012 - 19:54 | Link to Comment Treeplanter
Treeplanter's picture

Costa Rica has long been less corrupt and less oppressive than the rest of CA  That gets reflected in the economy.   Monex.com ships PMs overseas and are reliable.

Sun, 09/16/2012 - 16:11 | Link to Comment TrustWho
TrustWho's picture

If inflation becomes the story, real or perceived, private business margin management becomes more problematic. Labor inflation is highly unlikely; therefore disposable income will fall and demand for all good and services will drop. In the next 6 - 9 months, corporations will see their top and bottom line, IN REAL TERMS, will fall.

Inflation adjusted bonds and physical commodities will soar. Idiots may buy equities, and may win in the short term, but Daddy Bernanke has forced a very narrow focused mindset. 

Sun, 09/16/2012 - 21:24 | Link to Comment jerry_theking_lawler
jerry_theking_lawler's picture

its already happening. we are cutting costs, postponing hiring, regulating inventory/cash conversion, etc. it is coming, and coming quickly.

Sun, 09/16/2012 - 16:12 | Link to Comment q99x2
q99x2's picture

That makes things easy. Now the hard part - where to get the money to BTFD.

Sun, 09/16/2012 - 16:12 | Link to Comment wandstrasse
wandstrasse's picture

Freedom is slavery.

War is peace.

Ignorance is strength.

Sun, 09/16/2012 - 19:02 | Link to Comment TrustWho
TrustWho's picture

As long as you have Happy Thoughts, NEW WORLD ORDER baby!

Sun, 09/16/2012 - 20:02 | Link to Comment tarpuranus
tarpuranus's picture

Hey WallStreet...

Those words don't even rhyme

Try to make a point

go at it one more time

else fly this joint

Sun, 09/16/2012 - 16:14 | Link to Comment Conman
Conman's picture

Someone needs to tell the algos that bad news is bad. They are still stuck on frontrunning QE mode.

Sun, 09/16/2012 - 16:15 | Link to Comment TheSilverJournal
TheSilverJournal's picture

Won't bad news just mean print more? After all, they're committed to print until unemployment improves...which will be never...and it will continue to get worse and worse. That's a lot of printing.

Sun, 09/16/2012 - 16:24 | Link to Comment Dr Benway
Dr Benway's picture

I think the article is trying to say that this manipulation is now priced in due to the fed tying itself to the wheel, so the bad news will no longer bump the stock market, as it previously did due to the perverse indirect effect on fed policy.

 

But yeah you are right, even though QE is unlimited in duration, they can still increase the rate of printing to achieve one last hit off the pipe, and the final endgame of parabolically increasing money supply

Mon, 09/17/2012 - 05:03 | Link to Comment Sheeple Shepard
Sheeple Shepard's picture

Tying itself to the wheel with its face glued to the rear-view mirror and a brick on the accelerator, what can possibly go wrong?

Sun, 09/16/2012 - 16:29 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

Yes it will bad news is good news now for the elite's how's that for chair satan propaganda.

"The greatest trick the devil ever pulled was convincing the world he doesn't exist"   

Baudelaire, Charles

Sun, 09/16/2012 - 16:16 | Link to Comment Tenshin Headache
Tenshin Headache's picture

"QEternity"

I love it. Let's hope that gets picked up and firmly embedded in the finance vocabulary. Captures the situation nicely in one word.

 

Sun, 09/16/2012 - 16:22 | Link to Comment Cursive
Cursive's picture

@Tenshin Headache

I've got to give credit to David Rosenberg for "BernanQE."

Sun, 09/16/2012 - 16:25 | Link to Comment timbo_em
timbo_em's picture

They (Barclays) use the word market way to often.

Sun, 09/16/2012 - 16:21 | Link to Comment Yen Cross
Yen Cross's picture

We don't need no stinking charts. The effects were felt "immediately" via inflation!

Sun, 09/16/2012 - 16:23 | Link to Comment Djirk
Djirk's picture

sorry kids, but it is not about unemployment or even the Burnyankee put. There is no way the US gov can meet the liabilities of Social Security and Medicaid or cover the liabilities of the shadow banking system. The only way to save political face is to inflate away these liabilites and destroy the dollar.....to QEinfitiny and beyond!

Sun, 09/16/2012 - 16:25 | Link to Comment divedivedive
divedivedive's picture

Please help me understand. How does the Fed's purchasing of MBS's on the secondary market directly affect the US equity prices. Let's say WFC offers up a few billion of its inventory. There is no commitment on the part of WFC to do anything with the proceeds of that sale right ? Is there an implied assumption or requirement that they will do something humanitarin with those funds ? Aren't they just going to turn around and open more branches on more street corners ?

 

 

Sun, 09/16/2012 - 16:40 | Link to Comment Dr Benway
Dr Benway's picture

In your example, giving cash to WFC in return for shitty assets raises the share price of WFC, at least temporarily until the cash is vaporized. QE is a huge gift to financial institutions, nothing remotely 'humanitarian' about it.

Sun, 09/16/2012 - 16:45 | Link to Comment divedivedive
divedivedive's picture

Exactly - so there is a very small group of beneficiaries of QE3 and they are sll holders of MBS's. If you put aside BAC and JPM why should QE3 cause any of the other 28 DOW stocks to rise ? 

Sun, 09/16/2012 - 16:55 | Link to Comment Dr Benway
Dr Benway's picture

It frees up funds so the the financial insitutions can buy other stocks and commodities and blow up some more bubbles.

Sun, 09/16/2012 - 17:12 | Link to Comment divedivedive
divedivedive's picture

Ok that makes some sense. I guess we should see an appreciable increase in volumn then if the money gets put to that use.

Switching topics - Given these MBS purchases - should we see the "St Louis Adjusted Monetary Base" start rising ? Is that a good way to track the Fed's spending on these securities ?

 

Sun, 09/16/2012 - 17:20 | Link to Comment Dr Benway
Dr Benway's picture

Hey an even simpler way to look at it: Increase the number of dollars, and the price in dollars of everything rises.

 

Not sure about the appropriate metric to track Fed spending on this. Do you mean track spending between disclosures, as I am assuming they will have some regular disclosure how much they bought?

Sun, 09/16/2012 - 17:40 | Link to Comment divedivedive
divedivedive's picture

Sorry - I'm just full of questions tonight. Since these MBS's are to be purchased on the secondary market can it be assumed that the sellers will receive (no more than) a fair market value for these securities ? How will the value of these securities be determined ? What I'm asking is - what are the chances they will take even a tiny haircut ?

And I'm sure this is a particularly silly question to ask on ZH - is there any chance that the Fed will have a source of funds for these securities other than printing ? Can Operation Twist be unscrewed let's say ?

 

 

Sun, 09/16/2012 - 19:55 | Link to Comment Papasmurf
Papasmurf's picture

There is no viable price discovery on MBS, so they will be paid more than fair market value.

Sun, 09/16/2012 - 18:23 | Link to Comment itstippy
itstippy's picture

The FED will only buy Agency MBS: Fannie, Freddie, Ginnie, and FHA.  Those MBS already have the explicit backing of the US Treasury, so they're not "toxic".  They're liquid.

The toxic MBS out there (non-agency; old Wamu & Countrywide crap) will remain on the banks', insurance companies', and pension funds' books, marked to model.  To unload the bad mortgages within them the banks and mortgage servicers have to restructure the loans to conform to GSE standards and unload them on the GSEs.  If that were easy to do they'd have done it already.

QE3 is all about the FED creating money and feeding it into the financial system via one of its very limited transfer vehicles.  They can't lower interest rates any further.  All they can do is print money and use it to buy Treasuries or Agency MBS.  They can't fling it out of helicopters (much to Bernanke's chagrin).  They're fucked, basically.

We shall see the longterm effect on equities in time.  If corporate profits suck going forward, and I suspect they will, who will buy equities?

Bernanke's "reducing unemployment" bullshit is a canard.  He knows he's fucked.  He made Time Magazine's Man Of The Year for "saving the financial system".  It's finally becoming clear to all that the financial system is deeply flawed, it's based on illusion and fraud, and it needs fixing not saving.

Dabble in equities if you will; enjoy in Great Moderation.    

Sun, 09/16/2012 - 19:15 | Link to Comment TrustWho
TrustWho's picture

Agency backed MBS is the toxic assets, because of the gov't guarentee. With the guarentee, wall street bundled shitty loans into CDOs with triple A rating. Prior to this buble, all bubbles were only regional/local, so if the housing prices continued to advance, even a default was still money good; thus logic of triple A rating on completely fraudantly loan documentation. Damn, where is Linda Green?

In fact, GSEs are having success making the mortgage banks buy back this shit. I will bet this was an element that made daddy Bernanke buy this shit to save the banks!

Sun, 09/16/2012 - 20:10 | Link to Comment Withdrawn Sanction
Withdrawn Sanction's picture

QE3 is all about the FED creating money and feeding it into the financial system via one of its very limited transfer vehicles. They can't lower interest rates any further. All they can do is print money and use it to buy Treasuries or Agency MBS.

In Bernanke's famous speech "Making sure IT doesn't happen here," the "it" he was referring to is of course deflation.  He proceeded to outline a number of steps, including asset purchases as a way to forestall deflation.  His strong but unstated assumption was that velocity held constant.  If it did/does, then rising prices in response to rising money/credit pops out of the monetarist's kit bag like magic.  If, on the other hand, velocity stalls, his expansionary policy is neutered.  Velocity has resumed dropping after a brief period of stability in 2009/10; meaning, households and businesses are drawing in their horns DESPITE increased money/credit from BB.

I understand BB's policy selection (not that I like or approve of it, but I understand it) .  His only tool is a monetary hammer.  Unfortunately not every problem is a nail amenable to a monetary solution.  Giving banks fresh cash for bad debts does not get rid of the bad debts from the system, it only changes the identity of the bad debt bag-holder.

Really, when you think about it, it's a pathetically savage philosophy...if we just print more little green strips of paper (or their electronic equivalent), all will be well.  Really?  That's your answer, BB?

 

 

Sun, 09/16/2012 - 16:33 | Link to Comment Yen Cross
Yen Cross's picture

 If the Fed. was smart, they would retract- and let due process, run it's course! 

  The fed. is so fixated on inflating $ supply. Why not take/reduce "alpha", and force banks to spend all that "ghost cash" on their balance sheets.

     Shit! Channel stuffing worked in the " auto sector"/sarc.

Sun, 09/16/2012 - 16:40 | Link to Comment All Out Of Bubblegum
All Out Of Bubblegum's picture

Understanding Bitcoin by Trace Mayer of Run To Gold:

 

http://youtu.be/OtN9YUvh_XM?t=46s

 

Sun, 09/16/2012 - 17:26 | Link to Comment malikai
malikai's picture

Listening to him now. Not a bad explanation. He could do better to keep it more simple for the unitiated.

Sun, 09/16/2012 - 17:41 | Link to Comment All Out Of Bubblegum
All Out Of Bubblegum's picture

Agreed, but it's a complex topic. Took me a day or two of study to wrap my head around. Trace does a good job overall.

The thing he really needs to reinforce is that it's a peer-to-peer (P2P) system, like bit torrent. Bit torrent can't be taken down by the Powers That Be because it's P2P. They'll have an even harder time with bitcoin.

Bitcoin is the mammal to the dinosaur of centralized economic control. 

Sun, 09/16/2012 - 18:06 | Link to Comment malikai
malikai's picture

I would focus on trade facilitation and foreign exchange.

Why pay shitty fees to get rediculous spreads at western union or wherever? Or, why do the same to buy from that retailer in the foreign country?

Utility, bitchez.

Sun, 09/16/2012 - 18:13 | Link to Comment All Out Of Bubblegum
All Out Of Bubblegum's picture

I remember back in the 80s/90s when we were hearing about all of the proprietary networks that we'd have in our homes to do shopping, watch movies, etc. Then TCP/IP (the internet) came along and upended those proprietary schemes. Even Microsfot had to retool Windows 95 because the internet took it by surprise.

 

For decades, the Money Powers have been scheming to create their own proprietary Global Money Network, to which we'd all be beholden. Bitcoin will do the same thing to those schemes that TCP/IP did to the old, now forgotten, proprietary networks.

Sun, 09/16/2012 - 16:43 | Link to Comment flyingpigg
flyingpigg's picture

", and good news will be unambiguously positive."

I don't think so. Bernanke said he will print money until employment improves. Imagine we get a good NFP number. It might stop QE3...bearish!

Sun, 09/16/2012 - 16:43 | Link to Comment insanelysane
insanelysane's picture

Do you guys want the good news or the bad news?  Well actually the good news is that there is more bad news.  Continue printing at will.

Sun, 09/16/2012 - 16:49 | Link to Comment insanelysane
insanelysane's picture

The end game from the Fed is this.  The majority of voters are the baby boomers.  At the moment a majority of baby boomers are only single digit years away from retiring.  These boomers are thinking that the world is going to shit, food and gas going through the roof, but hey my 401k plan and stock plans are going gangbusters.  The Fed is no longer counting on the old school "wealth effect" where people felt good because the stock market is up.  That decoupled over the last couple of years.  The new "wealth effect" is for people to say well I'll have enough to retire on even if I retire early.  The Fed needs to ctrl-p because if the stock market tanks, all of those retirement plans move towards 0, and then the rioting begins.

Sun, 09/16/2012 - 16:59 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Right, so the U.S. is essentially Japan in the 80's.  How has that worked out again?

Sun, 09/16/2012 - 17:17 | Link to Comment Yen Cross
Yen Cross's picture

  White faced {Geishas} are non existant!

  Bukkake Queens

Sun, 09/16/2012 - 17:02 | Link to Comment mt paul
mt paul's picture

same crap different generation

 

the debts of the past

are forwarded to 

the next generation ...

Sun, 09/16/2012 - 17:05 | Link to Comment babylon15
babylon15's picture

what next generation?  nobody had any kids.

Sun, 09/16/2012 - 20:16 | Link to Comment Withdrawn Sanction
Withdrawn Sanction's picture

I do.  And I've given them a "Return to Sender" stamp for the bill when it comes from my generation.

Sun, 09/16/2012 - 17:12 | Link to Comment Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Question :

The FED has launched QE nth because ?

1) It has a dual mandate and "inflation" is low, while unemployment is high, therefore it is conducting non traditional monetary policy at the zero interest rate boundary.

2) It is an arm of the State Department / Pentagon, and will buy every single UST which the Chinese hold since the Chinese have threatened to sell USTs. All your USTs are belong to US.

3) It is an arm of the US Treasury, and will buy every Treasury that the US Government auctions, with printed money of its own, effectively monetizing the debt and inflating away any residual balance of government debt.

4) It is an arm of Fannie / Freddie / Wall Street and will buy every mortgage bond in the market, effectively monetizing the housing bust by clearing every bad mortgage in the land and having it land on the FED's balance sheet.

5) The Chairman blew a sprocket.

6) ALL OF THE ABOVE

Sun, 09/16/2012 - 19:06 | Link to Comment chump666
chump666's picture

The Fed are out of control, it is pure madness, a method to their madness?  Maybe global conflict could be the primer why both the Fed and ECB are now "unlimited".

But this is bad, Iran can mess with the oil pumps, China can now get a green light to start major navel pressure in the South China Sea.  Inflation riots/pain in the west, note OWS just re-started.  Arabs losing their marbles more etc etc etc.

As for markets, big swings, momo time is finished.  That is it.

Sun, 09/16/2012 - 19:39 | Link to Comment Bear
Bear's picture

Words well chosen BB launches an SP-Rocket

Sun, 09/16/2012 - 17:31 | Link to Comment hooligan2009
hooligan2009's picture

lets make qe3 a little clearer. qe3 is targeted at agency backed securities.

agencies borrow money to on lend to indiviudals in the form of mortgages. these agencies then sell securities to banks, effectively borrowing money so that they now own almost every house in the USA that has a mortgage. this is communism.

fraudie and funny (oops, i just cant stop doing that) i mean freddie and fannie are the device by which this state owned housing stock is accomplished and are federal agencies. these agencies are the same as the federal reserve.

fraudie owns 2.1 trillion of mortgages with $75 billion of accumulated realised losses (not marked to market, so a 5% unbooked loss would add another $100bn or so in accumulated realised losses).

http://www.freddiemac.com/investors/er/pdf/financial-statements_2011-2.pdf

funny owns c. 3trillion with 72 billion of accululated losses (apologies for the non official source)

http://www.marketwatch.com/investing/stock/fnma/financials/balance-sheet

their combined balance sheets are 5 trillion and are double that of the Fed's SOMA holdings of which 843 billion are agency mrotgages.

http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html

the Fed is going to buy $40 billion a month on top of its 843 billion in holdings already. it will take these securities from the current owners. remember when the chinese cashed up and exchanged their fraudie and funny holdings for treasuries when they smelled a rat, just prior to these agencies going bankrupt (oops placed in conservatorship)?

the action of the Fed Reserve of buying 40 billion a month is to remove agency mortgage backed securities (agency MBS) from the banks, both in the US and, importantly, from German landesbanks who are just as broke as the other Japanese, British, French, Italian, Spanish and Dutch (et al). 

without this exchange of us dollar cash for MBS, large banks everywhere, would have to sit on agency MBS and wait for the losses to mount and the negative convexity to play out. 

make no bones about it, this is the next stage in the ongoing bailout of banks at the expense of the people taking out mortgages in the US in the first place (and having to pay charges - not interest rates - local city taxes and insurance, repat not interest rates) and suffering mounting losses on mortgage portfolios that are not marked to market in the second place. 

by the way, what happened to the obfuscation of title via MERS?

Sun, 09/16/2012 - 17:54 | Link to Comment divedivedive
divedivedive's picture

Was there any sort of market for these securities before Bernanke spoke this week ?  Wasn't PIMCO already purchasing them ? 

Is the Fed targeting the banks which hold these securities or the agencies or both ?

Sun, 09/16/2012 - 19:45 | Link to Comment trebuchet
trebuchet's picture

hooligan i've been saying it too. 

 

this is bank bailout straight off the top and all they going to do is write more crap and flip it to the fed.... unless they are really broke and just keep on deleveraging

or buy good shit using funny money for crappy mortgages.. AAPL + gold

like ecb ltro, end up with stigmata

Sun, 09/16/2012 - 21:34 | Link to Comment tom a taxpayer
tom a taxpayer's picture

Here's what is happening to MERS.

State court ruling deals blow to U.S. bank mortgage system: MERS

http://www.reuters.com/article/2012/09/14/us-foreclosures-courtcase-wash...

Mon, 09/17/2012 - 05:46 | Link to Comment hooligan2009
hooligan2009's picture

thanks...so no more MERS registrations for now, bit no cleat title for any mortgage prior to last year, plus the MERS team are rebranding to make it legal. I still can#t see where the States are getting their money from registration of title fees. This is low hanging fruit for the States who are all pretty broke from what I can make out.

Sun, 09/16/2012 - 17:57 | Link to Comment Curt W
Curt W's picture

The Bernank can't come out and say this but...

He is trying to bring jobs back by de-valueing the dollar to the point that it will be cheaper to pay Americans Dollars than the Chinese Yaun.

Sun, 09/16/2012 - 18:39 | Link to Comment css1971
css1971's picture

Now that's still a long way down.

Sun, 09/16/2012 - 19:47 | Link to Comment trebuchet
trebuchet's picture

yup, lower dollar, higher house prices who woudda thunk it can happen in the same market at the same time?

Sun, 09/16/2012 - 17:58 | Link to Comment DeficitAlchemist
DeficitAlchemist's picture

We have gone from once of morphine use once off to save us (QE1), to opiates for our bad days by arrangement to make us feel better (QE2) , to continous heroin on tap without prescription to just stay alive.

This is bound to end well!

Sun, 09/16/2012 - 18:07 | Link to Comment XtraBullish
XtraBullish's picture

The exact moment when the ZH-ers start talking about investment opportunities I will sell every ounce of gold and silver and short the shit out of the S&P but for now, and as this superb website continues to trumpet the Bear's Siren, and as long as the commenters continue to gnarl and gnash their teeth over the multi-year highs in the S&P, stocks will continue to rise. You can never underestimate the replacement power of stocks within an inflationary conflagration and unlike the 70's, this is now a GLOBAL re-flation with ex-Goldman bankers in charge of central bank policy around the world. You don't want to fade rallies in an environment like this. There are simply no Paul Volckers' to be found anywhere, anymore....

Sun, 09/16/2012 - 19:35 | Link to Comment Bear
Bear's picture

"The exact moment when the ZH-ers start talking about investment opportunities" ... I've heard many a ZH'er talk about a real solid opportunity ... ES at 666

Sun, 09/16/2012 - 19:01 | Link to Comment chump666
chump666's picture

"markets have had the good news" Meaning?

Huge amounts of volatility is about to hit markets, fat swings and juicy slaughter.  Hedge funds will lap this up.

The Fed and ECB (in their crazed wisdom) are most likely front running a looming war.  Equities hate war, oil, USD, USTs do really well.  But stocks could be stripped mined to a major low.

Sun, 09/16/2012 - 19:32 | Link to Comment Bear
Bear's picture

Why does this make sense? Since QE3 announcement:

ES up 2.1%

GC up 2.6%

Si up 7.3%

HG up 4.1%

Thinner markets more short covering?

Sun, 09/16/2012 - 19:41 | Link to Comment Mamzer Ben Zonah
Mamzer Ben Zonah's picture

So QE really IS like heroin, in this case dulling the sensorium of the market.

Mon, 09/17/2012 - 01:10 | Link to Comment Elmer Fudd
Elmer Fudd's picture

You didn't print that, the government did. 

Mon, 09/17/2012 - 09:05 | Link to Comment Shizzmoney
Shizzmoney's picture
Benjamin Bernanke LIED To The World About QE3 & Unemployment & Reggie Middleton Calls Him On It

http://www.youtube.com/watch?v=MvMlDtDDgps&feature=youtu.be

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