Rosenberg: "If The US Is Truly Japan, The Fed Will End Up Owning The Entire Market"

Tyler Durden's picture

David Rosenberg, Gluskin Sheff: BernanQE Plays With A New Deck


It would be glib to ask "well, wasn't QE3 priced in?"

What the Fed did was actually much more than QE3. Call it QE3-plus... a gift that will now keep on giving. No maximum. No time limit. The Fed also lowered the bar on what it will take, going forward, for even more intervention.

The Fed announced that it will buy $40 billion per month in MBS (together with the on-going Operation Twist program, this brings total asset purchases to around $85 billion monthly through year-end), but the press statement contained an open-ended commitment to QE until labour market conditions not only improve, but do so 'substantially". This is a radical shift.

Before, the QEs had an explicit maximum limit in magnitude duration. That is no longer the case — $40 billion in MBS buying month in, month out, perhaps until such time that the Fed owns the entire market (the Fed already has $843 billion of Agency MBS on its balance sheet as it is — if this is truly Japan and it takes another ten years for the economy to improve "substantially", the Fed will end up owning the entire market).

Prior QEs seemed predicated on relapses in economic growth (or at least no follow-through). This was the case with QE1 in March 2009, QE2 in November 2010 and Operation Twist just over a year ago. Now the economy has to strengthen dramatically and if it doesn't - the Fed is clearly targeting the jobs market and specifically on the unemployment rate here - then the spectre of even more balance sheet expansion will remain fully intact. We could soon be attaching Roman numerals to future QE actions (January 31st 2014 is Bernanke's last day as Fed Chairman and that is a loooong way away).

The payroll data always move the market but now more than ever and the Fed's explicit goal of generating "substantial" improvement in the jobs market will ensure that this 'bad news is good news' psychology will remain fully intact (why the stock market so easily managed to shrug off last week's data - this new normal of bad news being good news is now going to be more fully entrenched for the market). And with the Fed targeting mortgages, it is clear that it views housing as the transmission mechanism for its objective of strengthening the jobs market. So each housing indicator going forward is also going to very likely elicit a stronger market reaction than normal - remember, because the stock market is addicted to QE, weak data can still be expected to be supportive. A notable improvement in the data will be even more supportive because the Fed will still keep the hope alive of more QE even if economic conditions get better.

I have to stress this but anything less than "substantial" is just not going to cut it for the Fed - I don't know how that is defined numerically, but if the economy and specifically the jobs market does not go gangbusters, more QE can be expected. And it won't always be in MBS - the Fed came right out and said that it will also "undertake additional asset purchases and employ other tools as appropriate until such improvement is achieved in the context of price stability".

That reference to "price stability" is a bit comical because in the prior rounds of unconventional stimulus: market-based inflation expectations (from the TIPS market) were sub-2% and falling. Going into today's meeting, they were 2.6% and rising. This, for a central bank that spent an inordinate amount of time talking about how important it was to prevent inflation expectations from becoming unhinged when it was busy tightening policy in the 2004-2006 rate-hiking cycle. The times, they are a changin' (in other words, the price stability objective has a big fat R.I.P. on its tombstone). This is why gold swung from a moderate decline to a huge gain yesterday afternoon, and the DXY is breaking. It is clear that out of its dual mandate, a lower unemployment rate right now clearly trumps any concern over higher inflation expectations (whether justified or not).

Equities have ripped to the upside. Commodities are bid. Gold has broken out. The U.S. dollar is sliding. Yet the bond market refuses to buy in. The yield on the 10-year note has remained stable through this entire dramatic response to QE3 (and pledges for more). The Fed announced that it was buying mortgage-backed securities, not Treasuries, so it is curious as to why the bond market is not selling off dramatically. I can count numerous Fed meeting days when the stock market rallied sizably and bonds sold off alongside the reflationary view. I recall all too well the June 26, 2003 FOMC meeting when the Fed cut rates for the last time in that cycle and told the market it was on its own because the economic clouds had finally parted. The Dow ran up more than 100 points from the intra-day low that session and the 10-year note yield jumped 17 basis points, basically ratifying the view of the equity market at the time. But this time around, the Treasury market remains the odd man out on this new pro-growth view evident in the pricing of other asset classes. For any perma-bull out there, Mr. Bond is like having a mosquito in your ear on the putting green.

So from a markets standpoint, let's talk about what all this means.

  • The Fed is setting us up for more risk-on/risk-off volatility. Long-short strategies or relative value strategies are perfectly appropriate.
  • The Fed extended the period of ultra low policy rates through to mid-2015 (one FOMC member is at 20161) from the end of 2014, which will nurture a low yield environment even further. Not only that, but the Fed said that "a highly accommodative stance of monetary policy will remain appropriate fora considerable time after the economic recovery strengthens" which means that even if growth miraculously manages to accelerate earlier than expected, the Fed is not going to begin raising rates. The age of "pre-emptive" tightening is long gone. This nurturing of a low policy rate environment for years to come will continue to underpin the income (dividend) theme in the stock market.
  • The fact that the Fed is embarking on an even more aggressive course with inflation expectations on the rise should be viewed constructively for gold and other precious metals (and gold mining stocks).
  • The Treasury market is like the brake lights on a car - we need to acknowledge that it is not signalling better growth ahead. Screen for earnings visibility and less cyclicality. Bonds usually have the economy right.
  • Corporate bonds should be a beneficiary as the Fed continues to anchor a low interest cost environment and as such, correspondingly keep debt- servicing charges and default risks at bay.


I don't think this latest Fed action does anything more for the economy than the previous rounds did. It's just an added reminder of how screwed up the economy really is and that the U.S. is much closer to resembling Japan of the past two decades than is generally recognized. Maybe in the central bank world of the "counterfactual" these QEs prevent a worse outcome but the most radical easing in monetary policy ever recorded has not stopped this post-bubble-bust American economy from posting its weakest recovery ever whether measured in real, nominal or per capita terms.

The economy is saddled with too much debt, a shortage of skills, bloated government, an uncertain tax rate outlook, the costs associated with Obamacare, banking sector re-regulation and a spreading European recession. Home prices may have revived of late, but there are still an amazing 22% of debt-ridden homeowners who are upside-down on their mortgage. Monetary policy is best equipped to deal with the vagaries of the business cycle but is a blunt way to deal with deep structural, fiscal and regulatory hurdles. QE has done squat for the economy and I don't expect that to change. Even the Fed cut its 2012 real GDP growth projection for this year to 1.85% from 2.15% - for a year when typically growth is closer to 4% - and so the bump-up in 2013 to 2.75% from 2.5% has to be viewed in that context (in fact, it would seem as though for all the bluster, the level of real GDP is actually lower now at the end of next year compared to the pre-QE3 forecast... maybe this is what the Treasury market has latched on to).

It would seem as though the Fed's macro models have a massive coefficient for the 'wealth effect' factor. The wealth effect may well stimulate economic activity at the bottom of an inventory or a normal business cycle. But this factor is really irrelevant at the trough of a balance sheet/delivering recession. The economy is suffering from a shortage of aggregate demand. Full stop. Perhaps most importantly, in order for the Fed's action to have a lasting impact on the direction of the equity market, it must foster at least some significant belief that the action will lead to self-sustaining economic expansion. The scars of real family median income declining for two years in a row - the Fed's action in a perverse way perpetuates this by forcing essential basic material prices higher - and an unprecedented five-year decline in household net worth are lingering, and exerting far more powerful dampening effect on spending and confidence than the Fed's repeated attempts to generate risk-taking behaviour.

To the extent that the Fed is at least temporarily successful in nurturing a risk-on trade for portfolio managers, the reality is that changing the relative prices of assets does not create demand.


It just perpetuates the inequality that is building up in the country, and while this is not a headline maker, it is a real long term risk for the health of the country, from a social stability perspective as well.

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e-man's picture

And so the beatings will continue until morale improves.

joemayo's picture

At some point one has to realize that the guy holding the gas can really is the arsonist and is not a member of the fire and rescue team.

Jason T's picture "the federal reserve will not monetize the debt" 


I could cry.  

Spirit Of Truth's picture

It's all about America worshipping and serving the false god of money (Mammon) instead of the true God of Israel IMHO:

RichardP's picture

Actually, I think it is more about the fact that everybody who wanted stuff pretty much has it by now.  As the article states, demand has fallen off considerably.  I don't see any way it will come back to what it was, given that the baby boomers are moving up and out.

PD Quig's picture


We've managed to pull 15-20 years of demand forward by going into hock (personal + corporate + government) to the tune of 350% of GDP. When the 1300 sq ft house across the street has 7 Mexican families living in it, with nine cars parked in the driveway and street, big screen TVs flickering out of every room in the house, and five kids sitting on the sidewalk talking into their iPhones, you get a pretty good pulse on the economy. It looks a bit like prosperity until you realize that we're only buying replacement shit the markets.

Back in the olden days, we all know what happened when everybody who wanted to buy had bought. But what happens now that Ben and The Boyz keep buying whenever buyers run short? What I'd really like to know is how many contracts of ES, TF, NQ, and YM are on the Fed balance sheet?...and how many DX are they short?

Theosebes Goodfellow's picture

If you understand that the banksters are dumping their crappy MBS on the Fed, then just wait for the other shoe to drop. That will occur when they push Congress to nationalize the Fed.

Mountainview's picture

The end will be a name change to Soviet Union of the Americas.

The trend is your friend's picture

American express black limit

babylon15's picture

This talks about Japan like it has arrived at its destination.  Japan has avoided the headlines since Fukushima, but Japan is about to become Greece 3.0.

The Navigator's picture

debt/GDP ratio:

Japan - 200%

Greece - 85%

USA - 105%

vast-dom's picture

Rosenberg do not be fooled re: "with the Fed targeting mortgages, it is clear that it views housing as the transmission mechanism for its objective of strengthening the jobs market."

because knowing FULL WELL that buying up MBS's to infinity WILL DO NOTHING TO REDUCE UNEMPLOYMENT is simply another way of saying WE WILL RIG THESE MARKETS INDEFINITELY 



banksterhater's picture

Trimtabs/Bidderman pointed out there was a mini refi boom when rates got below 4%, Bernanke sees this as consumption to save economy, he is DELUSIONAL! To not see price of oil, food global unrest as a result and the blood on his hands from this engineered speculation, this is a Crime vs Humanity and a Citizen's Arrest is long overdue in a just society.

vast-dom's picture

fed is targeting insolvent tbtf banking sector shadow books such that they can leak out and unload their toxic liabilities to be soaked up by QE. 


fed's very own shadow books are full of this caustic crap and will grow at the expense of entire Ponzi Planet

banksterhater's picture

Bernanke's voice is more trembling each time. He is an insecure a-hole, not the type to be in charge of this, anyone can see that he needs to be removed. He's making it up as he goes.

The public need to petition for his removal b4 it's too late.

ekm's picture

Very true. His voice shows a lot of insecurity.

asteroids's picture

The "transmission mechanism" is something I really don't understand. I don't see how buying a mortgage directly generates a  job or increases inflation.  I call bullshit on the FED.

WarriorClass's picture

This is just another Bankster Bailout at tax payer (and dollar holder’s) expense. The banks were stuck with a bunch of worthless MBS that they couldn’t sell, or could only sell for pennies on the dollar, so the Fed buys them and gives the banks a profit on their losing bets.

This is THEFT folks. There is no intent to “stimulate” the economy, only bailout the Banksters by stealing from you in the form of taxes and inflation.

Lock & load, people.

Antifaschistische's picture

You say "wake up" and that would be nice, but the Fed's actions are to sedate the sheeple.


Priority #1 keep bond market artificially inflated  - check

Priority #2 keep stock market artificially inflated  - check

Priority #3 keep home valuations artificially inflated - check

Each 'check' buys them more time before the collapse and allows them to counterfeit to friends and family while the dollar has residual value.  Friends and family will use those dollars to buy real stuff and wait for the collapse.  These maggot counterfeiters are buying up our gold too.  Ticks me off.

KickIce's picture

Not to mention keeping the EBT cards flush.

ekm's picture

Finally. What have I been saying so far?

The more Fed and Primary Dealers buy, the less tradeable assets are available. 


Regardless of how much money is printed, if there's not much left to trade, then there's not much left to trade.


Federal Reserve + Primary Dealers have become like Robinson Cruzoe.

Cash in deserted island won't help. Food is required.

Same with the Fed and Primary Dealers. Having electronic cash in a market that has not much stock left to trade won't help. Let them eat electrons.


banksterhater's picture

WTF? ("...the Fed already has $843 trillion of Agency MRS...")

How many cocktails for lunch today?

CClarity's picture

Hehe - back in the '80s, Friday lunches were liquid.  Not so much today.  But Trillions were almost inconcievable.  Again, not so much today.  Easy enough to slip up between trillions and billions when quickly typing . . . it may be quadrillions before long, then zillions.   MBS  MRS maybe they just want matrimony? So good catch banksterhater - and ZH, a cocktail now and then is allowed. But don't rush to the altar. Keep up the good work!

CIABS's picture

Yeah, that's a whole bunch, isn't it?

Rainman's picture

With a default rate at 9.5% and climbing, The FHA must be shitting out plenty of MBS for Ben to infinity.

They gettin the runs like Fan and Fred.

IndicaTive's picture

I have a FHA with Wells Fargo. They've been dragging their feet for two+ months on my refi to a 3.85%. Nothing got done unless I called, twice or more. Last week the broker was mumbling as he was clicking on my file. His words, "um yea looks like the want to close this ASAP, we should be able to next week." Sent me one more paper to sign on Wed. Today via Fedex I get my GFE and he actually called me to make sure I got it. I've never refinanced before. Does their sudden intereste in closing quickly have to do with QE? Or am I just reading too much into it? 

adr's picture

Yes, yes, it does. The second you sign they will sell it off to Mr. Ben for the full amount. Bonuses for all at Wells.

Theyvalso want you to sign before the rate drops further. Getting you to sign at 3.85% means they get a larger payout.

Tell Wells Fargo to fuck off and wait a few weeks to get a better rate. Pretty soon every bank out there will be beggin to refi your loan. It is free money to them with the greatest fool buying everything he can.

Freewheelin Franklin's picture

I told Wells to fuck off when they tried to charge me $7.50 to cash a check drawn on their bank because I ddin't have an account with them.

IndicaTive's picture

I thought the same thing adr. I can hang for a while. Thanks for the response and confirmation bias. Being a ZH student I ask a lot of questions.

banksterhater's picture

I got a HARP refi from Wells that they sold to Freddie. They were exceptionally nice about it as we have lots of savings but little income ($500K+ in equity on the house) Wells is not making a lot of money on these. We got 4% 30-yr fixed, dropping our paymt $500/mo, anything for you around 3.5% take it before they change the rules, IN FACT THEY CHANGED THE AMOUNT OF EQUITY YOU CAN HAVE for HARP refis after we got our, we would NOT now qualify because the mortgage is about $225K and we have 3x that in cash savings. (IRA)

techstrategy's picture

Spot on.  I'm the contrarian out there staying short the MOMO crowd...  I think Benny B eased pre-emptively to prevent a 2008 style freefall.  Now, the market will fall gradually...

banksterhater's picture

Not if Dollar breaks below 78 and keeps on going, Euro could see 135, buy oil, UCO is most bang to play their corrupt game. Momo is best time to get rich.

Yen Cross's picture

Not yet. MOMO is too short, and needs some new stops to run. You are on the right track though.

banksterhater's picture

this has 1500 all over it, to me. I'm sticking with scalping UCO until dollar bottoms, look at the chart being above 200-day, the gap has to fill back to 36.03, it only got to 36.09, I sold at 36.90 and won't reload until that fills, history says all gaps fill, I guess it could be a breakaway gap buy I doubt it. The chart has 40 written all over it, that gap above to left

look at s-t chart for gap from yesterday 36.03-.09

Yen Cross's picture

DXY is forming a S/T base. The $ will gap up Sunday. Open a hourly chart, and use " weighted 10-20-200 MAS" they should have a parabolic SAR option as well.

   Short term the $ is going to bounce. I should send you a screen shot from a real trading platform, but I'm getting ready to have dinner. Thanks for taking the time to share your trading ideas. Have a good W/E.

banksterhater's picture

Thanks. I will check, I know it's oversold but I don't think Sun nite reversal. crude has had resistance at 100 though sev times.

yea, it's really oversold but I'm not convinced this is a reversal by any means, I think $WTI tests $100 again and breaks thru- all markets are parabolic overbought thou now

no reversal sign here>

Boilermaker's picture

Will end up owning?!?!

Good one!!!

dwdollar's picture

"The economy is saddled with too much debt, a shortage of skills, bloated government, an uncertain tax rate outlook, the costs associated with Obamacare, banking sector re-regulation and a spreading European recession."

A shortage of skills? Don't make me laugh. Perhaps you meant a shortage of job creating talent?

New_Meat's picture

odious debt, bitchez!

- Ned

q99x2's picture

Number one reason that the FED has released its latest financial terrorism is because they are getting ready to light it up physically. Whether in the Mid East, Europe and/or the US they will be going physical soon.

I mentioned about a year ago that if a corporation wanted to maintain its control and ownership it should remove its listing from the markets.

rfaze's picture

Fed is buying MBSs as a backdoor bailout for banks because they could fail during the recession in the coming months. The Fed knows higher prices will crush spending as Edan Jones stated but a bank failure could bring down the entire system.  

banksterhater's picture

I doubt that. Banks can't fail when they mark to fantasy in perpetuity. He believes in the "wealth affect of higher stock ownership" HE EVEN ALLUDED TO IT AGAIN.


khakuda's picture

Maybe the Fed is worried that someone might remember they suspended mark to market on the mortgages. I do think they are trying to put the MBS issues in the taxpayer's backs and bail out the banks. Remember, Obama and Geithner have tried to get principal reductions with little luck. This is stealth.

Clashfan's picture

It's not even stealth if you really examine it at all. It's simply another bailout of the bankster criminals, period. Little stealth about it except for the lamestream media failing to report it properly.

It's not so much the printing as it is where the money's going.

WarriorClass's picture

Clashfan hit the nail on the head. +100

Squid Vicious's picture

this week will be remembered for a long, long time for the "risk on" madness thanks to QE3 and I-gadget #5...  both absurd in their own ways... somewhere Aldous Huxley is laughing heartily