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The Scary Math Behind The Mechanics Of QE3, And Why Bernanke's Hands May Be Tied
When it comes to the NEW QE, everyone has an opinion, and most seem to believe that the NEW QE will come next week, now that the US economy added "just" 96,000 people (but, but, the unemployment rate 'fell'). Certainly, and far more importantly, if the most recent FOMC minutes are any guide, the Fed shares this view. Sadly, as so often happens, most, and this includes the FOMC's various voting members, have once again made up their minds without actually evaluating the limitations posed by simple math. After all it is far easier to form an opinion, and actually think about the underlying facts later. The math, for those who actually have looked at the numbers behind the scenes, is scary (in UBS' words, not ours).
Here is the math.
As part of its Operation Twist, the Fed is buying long-term bonds, and selling short-term (0-3 years) bonds. As we reported in April, the biggest limitation for the Fed is that it is rapidly running out of short-term bonds to sell. There is a fix to this: the Fed will simply have to sell longer dated bonds from its SOMA portfolio, first up to 5 years, then 7, and so on. Of course, this will also force the Fed to extend its ZIRP language by an appropriate amount of time, through 2017, then 2019, and so on (which also means all bets that the Fed will hike any time in the next 5 years will be immediately null and void, and one can position accordingly in the Eurodollar space).
This move, however, will simply permit the Fed to extend Twist 2 beyond its year-end maturity. As a reminder, the primary role of Twist, aside from that stated one which is to keep the curve as flat as possible (i.e., boost housing which as we showed yesterday is not working, as refis have plunged recently despite record low mortgage rates), is to absorb virtually all the long-end supply: after all, it is all about the funding of the US $1 trillion+ annual budget deficit.
Said otherwise, when it comes to the 10-30 year sector the Fed is already monetizing all new issuance. This is part of the entire flow argument which we have been discussing for the past 6 months, and why we, correctly, say that Operation Twist is really QE 3 and QE 3.5 (for the recent extension of Twist). So far so good.
Here comes the important part.
Three weeks ago we presented a video courtesy of Stone McCarthy which showed a timelapse of the "takeover" of the Fed as the primary holder of public debt. For those short on time, here is how the Fed's holdings portfolio looked like then...
and now:
The shaded region is important for two reasons: this is where the Fed will be buying new bonds as part of any new QE Large Scale Asset Purchase program, and it tells us all there is to know about how big and how effective QE3 (really 4) will be. The bottom line, as calculated by UBS' Michael Schumacher and confirmed by anyone with access to the detail behind the Fed's SOMA holdings, which incidentally just hit a record 116 months two months ahead of Twist 2 schedule, is that "the Fed owns all but $650 billion of 10-30 year nominal Treasuries." Also as pointed out above, Twist 2, aka QE 3.5 is already absorbing all of the long end supply. And herein lies the rub. To quote UBS: "Taking out, say, $300 billion in long-end Treasuries almost certainly would put tremendous pressure on liquidity in that market....Ploughing ahead with a large, fixed size QE program could cause liquidity to tank."
In other words, anyone expecting a full blown LSAP focusing only on US Treasurys will very likely be disappointed as the Fed will certainly realize, quite soon we hope, that it has only $650 billion in total 10 year + bonds available in the entire private market!
Well, perhaps the Fed will just monetize MBS, as Bill Gross has been betting on for nearly a year now. It could do that... but when once factors in "math", the results are once again quite startling. Quote UBS again:
The alternative of tilting purchases toward MBS implies that the QE program would need to be quite protracted. Monthly supply of conventional 15yr, 30yr and 30yr GNMA has averaged about $85-90 billion over the past year and the Fed is already buying about $25 billion. The Fed might be able to buy another $40 billion without disrupting the market. Assuming that the Fed does a $600 billion program with 75% in MBS, it would need to buy $450 billion in mortgages, so in our estimation the program would need to last nearly a year.
UBS conclusion is self-evident:
We doubt the market would respond well to that prescription from Dr. Bernanke.
Bottom line, if and when someone does the actual math on what the Fed can do, the results are quite disturbing, as they indicate Ben's hands are very much tied, and the Chairman no longer can conduct the type of bazooka event that most have expected. It certainly means that the Fed can not engage in anything remotely resembling the $1 trillion LSAP in QE3 (sic) that has been whispered.
Most importantly, all of the above actually confirms our biggest worry: the Chairman is well aware of the math behind this analysis, and is the reason why month after month he has been forced to pull a 'Girl with the Draghi Tatto' and jawbone the market into submission, hoping nobody else does the math on what Bernanke's real options are, because once the details are out there, and everyone can do the math on their own, only disappointment can follow.
As it turns out, Adam Yogi Berra Smith Dzhugashvili was right: there indeed is no such thing as a free lunch, especially not under central planning.
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Slewie is a sharp guy, that is 4 sure. Thanks!
Maybe slewie is Ben? You can not know this. The Chairman has to sell the country to the press, he has to "bend the truth". Slewie does not.
Simply the CLEAREST most SUCCINCT lookie here ma, yet.
Kudos
(maybe some dah others'll read it and think about it for a mo mo moment)
Focusing solely upon the Federalies du Money-Jour is ignoring the real problem, the fiscal side of the ledger, so to speak, same as the Type 1,2,3 and 4, maybe even 5 and 6 Errors in the EU that EveryBodyHereKeepsBitchingAboutForChristsSake
BUT BUT BUT BUT
Never ever forget that we as People, the frail little self-centered egocentric, full of false pride and hubris foibles we be, we'll look, listen and cross continuing to bitch about Bennie and his ilk demanding, expecting, hoping for naught from the short bus boys.
Maybe we've just given up there.
Hmmmmmmmmmmmmmmmmmmmmm
Slewie
Take it easy on the rat poison- it's gonna kill ya.
Benny's been monetizing shite on the Big Banks books and in order to keep interest rates from skyrocketing, he's been buying up newly printed Gubmint debt.
Benny the intellectual has not painted himself into a corner, rather, he has burned the fucking house down, save and except for the burned post that he is currently perched on. His only move is Tibetan Monk time.
Thanks for your usual clarity.
all the best.
K
you're welcome
how much has the FED's balance sheet expanded since the end of QE II last summer?
I hate how everyone says "Market"
Is this really a Market?
if you have anything REAL, you might try this experiment, son
if you are not IN a market, what is your interest? are you a professor of shitheadedness?
if you are in the/a market, you would already know the answer
or this:
when you buy a loaf of bread, is there a "market" or not?
markets are changing very fast, structurally, and certain interests may dominate certain markets
that is why any sane person would advocate anti-trust laws, btw; but then if some other political interests come in and say :> that's unfair to the ubers! we'll be at a disadvantage "internationally"...
...etc...
Any sane person would know that, like all laws, anti-trust is a giant joke and it's on you. Your entire post was nothing more than an exercise in specious rhetoric ... based on equivocation on the meaning of "market". Then this gem: "markets are changing very fast, structurally, and certain interests may dominate certain markets", we call that begging the question, and the non-sequitur literally irrelevant conclusion, bravo! Professor of Shitheadedness? No, you are the department chair.
you can certainly disagree with me
my point is IF you have an asset there is a market
if you don't, you can't play; if you have silver there is a market; if you own stocks you can sell them quite readily and easily; the RE market will function; you may not get $600K like in 2007 but that doesn't mean there is no market
there may be NO MARKET FOR YOU; it is after two AM here; anybody wants a drink, they can't get one; the market is CLOSED; not "disappeared"
or if you have cash you can buy these things, if you have good credit you can get a loan
you can buy and sell cars, bikes, furs, antiques, toys and artwork
if you want to buy you should be able to find a seller and vice-versa
so you can say "ain't it awful", you don't own anything and can't find a job and are in debt you won't like the "markets" much
you can say i'm begging the question by specious reasoning but that doen't make it true, dude
the question: is there really a market?
my answer is yes. clearly. it is where buyer and seller meet and transact the business
it is not an abstraction; it you do not have a silver quarter you can't sell it; if you don't have $6.00 you can't buy it
you don't know what i mean or you are having trouble thinking thru this, perhaps
do you know anyone who wished to buy or sell any securities in the last week who was not able to do so? i don't! and the trasactions took place in the markets
those are FACTS
well, the volume is too low!
too low for whom?
for people who choose not to participate
why do they do that?
because there are no markets
and slewie is circular? Hahaha!
slewie doesn't want to participate in the stock market; i think it is styooopid and i don't think it is pricing right; but i first reached that decision in the mid-80's! so i haven't TRADED securities in 25 years
but that doesn't mean there aren't markets
but i would rather buy a new schwinn for $200 than 1/3 of a share of appl
so what? that's just a choice and if i don't have the MONEY i can't do either
the fact that i am broke or don't wish to participate doesn't mean there are no markets
well stocks are too high!
then sell!
well i don't own any
then there is NO MARKET FOR YOU! unless you "short"
if you don't want to lend the goobermint $10K for 10 years at 1.6% i don't blame you! but that doesn't mean there is no market
youwill get points here trying to take me down; but you didn't, you know
the guy doesn't know if there are martkets or not; well there ARE. that is all
it isn't slewie's fault that he doesn't know this and you think you can sling a buncha sophomoric shit at slewie and have it stick
you can go dry behind yer ears, toy-boy and re-load; you can try again tomorrow, ok?
parroting tyler's propaganda isn't "arguing rationally"
wake up and smell the coffee, son...
my conclusion isn't that markets are in flux; my conclusion is that there are markets. that is my answer to the question; Y.E.S. you know it too! L0L!!!
t/y for playing, sonny!
buh-bye!
Hey...everyone.
Silver is on lease for -0.55%
And if you were quick you could have leased gold for -0.5% last night only.
THEY ENDED THE GOLD SPECIAL RATE AWFULLY FAST.
Silver still dirt cheap.
When you have to lease it out at negative rates,you are desperate.
FUCK YOU'S bankers.
L0L!!!
i recently read a well-written piece (not here) which indicated that negaive lease-rates are just another "valve" on the "pricing schemes"
the point was that when they pay to get PMs OUT they tend to be sold into the markets, but not on the bullion bankster's account (i think; this isn't all clear to slewie. yet)
blythe has a lease contract for some warehouse PM weight, and the borrower is "long" and "sells" into the "market", not blythe; maybe today, next week or next month, depending on the borrower and the lease-length term(s)
so the writer who seemed to understand this waaay more than slewie saw these as a "dump" valve
the "price is cheap" or not depending on perspective
anyhow, this seems to me to be one of the must confusing parts of the complexities and "games"
i'm looking for the "source" but no luck. so far. sry
anyhow, i think that writer would agree that it could be seen as a kind of "desperation" to pay someone to take this asset offa yer hands for a while; but maybe as a complex startegy piece for blythe or her "holding company" with contract dates, options, spreads, ETFs, longs and shorts everywhere and tons of the phyzz in the barn bought more cheaply, recently (!) it makes cool-thinking sense
of course blythe has told us herself, theMorgue's bullion-bankstering is strictly "client-centered"
which, if the CentralBank is the client, is 100% true, too! trust me! theMorgue just works for a small fee or commish... L0L
Methinks that JP handles Treasury/Fed's dealings while HSBC has been known to play-ball for the BoE. Or so the legend goes. Legend as in Daddy telling you NOT to put your hand in the Lion Cage.
If so, and fits with the paradigm exceedingly well, those who continually short the paper markets on behalf of their CB clientele, notice never ever have shown large P&L hits of misses even during the most violent times.
The P&L impact is lodged somewhere on the client books, the BoE, Fed?Treasury or even Exchange Stabilization Fund, etc., so we never ever hear about it.
Why ain't it reorted?
If it were a commercial entity(not) under GAAP it'd be "material" or not.
But it ain't commercial, it ain't GAAP, and it is Official Policy which under newest friendly legislation of our new and transparent times, is a natsec consideration, don't have to say shit and if somebody asks they can take a trip to a certain naval base in Ku-bah.
That's my working hypothesis which reasonably fits within the parametrics of observation, anecdotal evidence and Occam's Razor
i've heard the same rumors and if theMorgue is trading for a client, they are trading for a client
but i'm not quite sure how "negative lease rates" work; and the article i read said that when they go negative, the bullion goes "out of inventory" and "hits the MARKET"
this is almost like an option, but a different boilerplate, a different derivative contract is my thinking. wow! huh? Hahaha!
and we both know options can be used in multiple ways; the stuff we learn at the beginning is just the beginning
i just know the little bit i tried to explain, k_nuk; something to do with the time-value of a non-interest bearing asset? could this effect the contango? the b'wardization? the "implied" rate?
blythe knows; but when i fuk her silly she just likes to smoke afterward and not say much
damn! she's a hottie! L0L!!!
Market be damned; he will have no choice. $1.3TB/y of over-consumption will not just stop. There are incumbents to protect.
'QE3'? I thought it was now 'NEW-QE'? Maybe just call it 'QE-WHATEVER'.
someone in another thread used "QE -4-EVER" ... that one sounds about right to me
hey, SD1!
earlier this evening i was on another string and one of the guys was writing about being in japan during the tsunami om 3.11.11
so i checked his "bio" and saw he'd come off the porch about the same time as myself: feb. 2011; he has juat a few comments, tho, but i went back to his 2 strings after the nukuler disaster
they were just like today!
everybody knows the future; the doom! the bullets and choas to come! the "markets"! the future! the "jobs"! the whole drill hasn't changed much at all in 18 months
but if i asked these QE expert bloggers today how much the FED balance sheet had expanded since the end of QE2, only a very few would have the slightest idea of the significance of the question, much less a ballpark answer
i try to study the FED b/c i realize i don't know as much about it as the FED does; and if the chairsatan knows more about this bank than i do. maybe i should pay attention to him and not just to what tyler says about him and his bank; and the other writers here, too
what does the FED say it is trying to do and why? what do the bankstering laws say? when were they passed; and why?
and i'm no keynesian, noLeo; but when i studied, i learned a few things and attempted to alert people here to what i was finding, asking them to please get some info from beyond zeroHedge about what was going on with the FED, for themselves
for their own sake; and why
BERNANKE HAS HIS HANDS TIED BECAUSE DRAGHI WILL NEED LOW USD RATES TO BE ABLE TO STERILIZE HIS BOND PURCHASES VIA ECB DEBT.
every time i read "sterilization" and "bond purchases" in any article these days i giggle...
got Au79?
I am giving you an up arrow based on the perfect ass.
Not really for one thing by creating money the Fed makes the dollar less competitive and..
The ECB, ‘Sterilization’ and Money Supply
snip
"Under the plan unveiled Thursday, the ECB will buy in the secondary market only existing government bonds with remaining maturities between one and three years without announcing any limits in advance, as long as the government in question is under a program approved by the euro zone. It will offset these purchases in full by taking an equal amount of money out of circulation, in a process known as sterilization"
Twist= QE except for Gold it seems... 2011/2012 rational investors got robbed (again)..
Isn't this implying that Ben's Cntrl P buttons are broken? Do you really believe that? If QE is what the bankers want, QE is what we will get when he turns on the printer.
does anyone else get the feeling QuickEnd 3 will coincide with a war with Iran ?
yes its an obvious option. I was born in England so I heard many stories from the grandparents, uncles, aunts, even my own parents about war rations during WW2. If it gets to the point where TPTB have to either lose control or go full on global conflict to control every aspect of our lives through war rationing of essentials they will. The only problem for TPTB is, people in 1939 were a whole lot different than today, at least I'm hoping.
edit: yes it could, if they're boxed into a corner which TD's post shows they are, for sure. From their perspective it would be better to QE and go into global conflict rather than just let the banks fail because in their minds, it would be better to go into global conflict and use that to keep the natives passive against their rulers, rather than wait for banking holidays, several days of bank chaos and the land between New York and L.A. getting a little uppitdy.
false flag watch on high alert, this one will be imaginative, can't believe sinking an aged carrier will do the trick nor be believable enough by many to mobilize the necessary sentiment. this one will truly have to be devastating to bring the prerequisite numbers of red/blues together to mount another false war, scary to think what they'll go to in order to manufacturer this war. They being the MIC.
Solution = Cut deficit = Cut new Treasury issuance = Drain reserves = Higher rates? Nah!
Right on. The only way more QE is coming is if the federal deficit continues to grow. Larger deficit = more treasuries to buy.
My best bet is there will be a non QE stimulus before a QE stimulus. Maybe another ARRA type program which will drive up the debt and interest rates to be followed by QE to eventaully drive interest rates back down.
Well a larger Federal deficit is almost 100% assured, regardless of the party in power. Nonetheless, the Republicans can make a pretty pursuasive case that any new round of QE is "political", in the sense that it allows the Fed to essentially finance the next round of deficit spending, however much that may be. Why couldn't it be a trillion?
At the same time, why couldn't S&P just downgrade the U.S. government sovereign rating by another notch?
I think by far the biggest issue with QE, as Tyler mentions, is one of supply... but it goes further than the Fed crowding the 10-30 year curve.
When the Fed buys Treasuries and/or MBS, they are effectively taking collateral out of the banking system. Banks need quality collateral... especially when many of them are adding low quality subprime auto loans to their asset base. A depreicating automobile doesn't classify as "quality collateral".
I'm just glad that our monetary leaders can talk a good game, becuase I can't wait to see how all this plays out.
A bit of dis, a bit of dat, u got $50 billion a month.
I'm sorry to break it to you, but going forward nothing so pedestrian as math will have anything to do with any of this.
It's an end-game. The board is set and the pieces are in motion. Everything that came before got us here, and the game will play out now exactly as it must. Nothing matters now but moving quickly and running out the clock.
Nothing else.
'Death, your only salvation'....Slayer 'Overt Enemy'
I did not mean to imply that this would be the end of humanity. I can think of a lot of things that might accomplish that but "the end of banking as we know it" is nowhere on the list. I don't even rank "the end of civilization as we know it" very highly. Humans can get along really well without these things.
The end of banking will by really disruptive. Little as we know it now will go forward. And for bankers as a class (who I don't care about particularly) the end of banking will prove infinitely lethal.
But on the whole, I don't find myself overly concerned.
Therefore. Fucking bring it bitchez.
Likewise, bring it. Know the real value of you labor? fuck the paperpushers who have been robbing everyone and lets find the fuck out.
Meet the people they pushed paper for ... the land owners.
Long sharecropping then.
Not the worst outcome really. After a few generations away from the TV and media people will be able to "think" clearly again. Something they haven't done for a long time. They will then remember what it was they were supposed to be caring about. Seriously. No sarc implied.
And from such simple acorns mighty oaks are born.
That is nostalgia for a fiction - fantasizing a romantic, idealized past in which X, Y, & Z were so much better than they are today. When exactly, pray tell, did people - a simple majority or better - ever "think clearly" on a routine basis? A lack of "thinking clearly" is in every way the historical norm and will be until the cost/benefit of rational thought exceeds the cost/benefit of irrational thought and the threshold at which bounded rationality becomes the optimal strategy is pushed far, far beyond its paltry historical mean.
I value clear thinking, but I hold no illusions about its prevalence now or ever before.
Everyone has always been able to do the maths, you can ony get rid of this amount of debt by a default or suppression and money printing. Low interest rates and high inflation. Keynes should have been drowned at birth.
should have drowned Malthus too...Keynes and Malthus a lot of misery and death that their sick ideas have thrown onto humanity.
Don't forget Krugman. If ever there was a poster child for being a useless eater, he is it.
I bet a lot of young boys would have shared your sentiments as well.
Miffed:-)
The establishment is waiting for 'sustainable growth' (private sector lending) that is ever less likely to arrive.
There is too much 'left hand lending to the right hand' already. At some point, who is lending -- and what is being lent -- becomes funny/irrelevant.
We have private-sector money blessed by government. When the government becomes the fool and the private sector is bankrupt, what is left?
Don't know, can't say but chances are it rhymes with 'garter'.
..or he can just start outright, naked monetization.
The whole point of this article is that he can't due to liquidity limitations. He is already buying all the long-end issuance.
Again, how about they just print and send me a check? Bush did it....I need my thingamajigs.
Or a turkey sandwich.
By naked monetization I think he meant just turn on the printing press and make some money. Or bang on the zero key a couple times. You don't even have to bang it but once or twice to really manufacture some moola. Exponential, bitchezz!!
Our monitary system is DEBT BASED. So without more debt/collateral being issued money the FED can't be created out of thin air (just as in a gold based monitary system, more currency requires more gold which is fortunately finite). so, they need the government/private sector to take on more debt to create more money. But so far this pushing on the string approach isn't working too well as the private sector knows it already has too much debt. Thus, more student loans, subprime auto loans etc. all backed by the government/taxpayer is their "hope" for more QE. Ever wonder why the entire vote against audit the fed was from the democratic party in the house? Don't they want to transparency? Answer: whores (debtors) love their pimps (the FED) and vice versa. The first step to sound money and a balanced budget-eliminate the FED-that will automatically balance the budget.
you, doc engali, are the one to be providing the turkey sandwiches.............................and i dont see how bernanke is in a bind. all the treasury has to do is create the 1000 year bond on the long end, and the 2 hour bond on the short end......problem solved, more for bernanke to buy.............................
Well done +1
This would be far better than the printing and giving it to the wealthy and saying it will trickle down.
Tru dat. But I think there will be some unveiling as shit deteriorates. I got the over under at 4 months.
The period right before or just after US elections is tantilizing. If someone out there wanted to pull the "US civil war + martial law" rabbit out of the hat, in order to get things rolling nicely toward a North American fascist state, that time frame presents some really excellent opportunities.
Watch the military in the coming months. Watch DHS. Listen carefully if a ranking General ever takes a microphone, even at the local Elks Lodge. These things have subtle beginings.
You wouldn't want to miss it.
As former ARMY AMEDD I am somewhat disappointed that an intelligent general with a strong following hasn't already secured all the representatives of congress with troops and simply said; "Okay assholes, time for an adult conversation about the constitution and the good of the country, every one of you puppets that still feels loyal to your banking and financial house masters, please stand against that wall."
Guess what happens next.
The problem with your statement is with the intelligent general comment. The generals have been so compromised through the political proccess that the ones in power put party over principle.
I still know many intelligent Colonels and Majors that could get it done. A general may indeed be optimistic, they are also older and less charismatic.
Sing me up for a nice military coup - I have more faith in the military restoring us to a limited constitutional government than either party.
If so, then our theorhetical General would not be inclined to proceed in defence of the Constitution. However my opening comment regarded the establishment of an American fascist state, and dstruction of the Constitution. In which case I imagine a General with compormised values and a political bent would fit the bill nicely.
oh great an unconsitutional military coup to protect the constitution....where have i heard something similar.....oh yes.......bush and his abanonding the free market system to save the free market system.....hows that working out?..............................
Most likely ... a bloody military dictatorship.
Don't worry Tyler, he'll just start dumping money out of helicopters.
"it has only $650 billion in total 10 year + bonds available in the entire private market!"
i think more than one ! is required here.
the nuts and bolts are ratteling out and falling off. Brilliant reporting tyler(s)
yes, its fucked!
I get the limitation on long-end issuance, although with a ~1.5 trillion deficit to fund, it doesn't seem like too much of a stretch to see where that constraint might be relaxed. But if there's ~1.5 trillion in new funding required every year, that still leaves 120 billion/month of some kind of debt available for the FED to monetize (unless we're to assume that the PDs and the rest of the world is so enamored with this high-quality US debt that the private appetite for it leaves nothing left for the FED to buy).
Or I guess, in this bizarro world we live in, where the complexity of the system trumps all association with reality, they could go WAY out into the surreal and use this as an argument that the US needs to run even BIGGER deficits, to support the QE required to kickstart the economy.
Precisely
Going to be a HUGE "Emergency" spending bill right after the US Election - in the lame duck session. I'm guessing $1T.
I can easily see checks being sent to US Families in 1Q of Calendar 2013.
JMO.
seems like a fair assumption
Don't drink their koolaid Tyler, they just wana give the appearance there's some sort of sanity in what they're doing.
There's no sanity in it. Printing and buying government debt is insane, be it short end, long end, what the fuck ever.
All their complexity is a smoke screen to hide the reality that they're fucked. It's their end-of-the-road desparation to keep a failed government and a failed currency going just a bit longer.
Bernanke will end up printing and buying the entire "yield curve", every single bond Treasury issues ...just before the lights go out on the US dollar.
You seem to enjoy telling us how they're arranging deck chairs on the Titanic.
(A gold-backed BRIC currency is the iceberg out there somewhere in the night ...and lookouts have no binoculars ...hell, they're not even watching, they're partying on bailout money.)
Tyler. Whether one agrees that QE is stimulative or not and to what degree the fact is that the #1 reason for doing it is to monetize the deficit(s). Before all the talk of QE and helping the economy, Intl buyers of UST had already started their long-feared buyers strike. The mandate(s) are just an excuse at this point. China and the Petrodollar countries can see their is no pea under any of the shells.
1010101011000111001011011011000000000011111111110101010101010101010111111111110000000001111110000000110101010 <-------------_Look! I just created JOBS!!!!! Where's my damn Nobel?!?!?!
LOL
Best-comment-of-the-week award :)
As part of its Operation Twist, the Fed is buying long-term bonds, and selling short-term (0-3 years) bonds. As we reported in April, the biggest limitation for the Fed is that it is rapidly running out of short-term bonds to sell.
As I said On BK's post RE: Mario Draghi earlier: "sterilized" and "unlimited" are incompatible.
But shit that second chart is scary. Be nice to calculate the face value of the "red zone" vs. comp 2003
As soon as the BOTS understand it's HF sell time.
The quickest BOT wins. One huge flash-crash.
Have at it and burn up your circuit boards BOTS.
Tyler,
It's good to look at the math of a potential QE exercise for sure, but in this case I'm not sure the math is being done correctly.
To assess QE "capacity", you have to look at BOTH the stock and the flow of debt (with regard to Treasuries and MBS).
With this analysis, they are looking at ONLY the stock of Treasuries and ignoring the flow (which is effectively the size of the annual deficit that continually adds to the total stock of debt --- about $1.2 TRILLION).
With regard to MBS, they are looking at the flow ($85-90 billion per month) and ignoring the total stock of non-Fed owned GSE MBS (which I think is probably in the trillions of dollars as well).
If we factor this in, then the FED has *plenty* of room to do more QE.
Best regards,
Bernard
Reread: through Twist "the Fed is already monetizing all new issuance." -> Flow is already accounted for unless of course the US Treasury were to issue far more debt, which would mean the "need" for a larger deficit. Surely, US politicians would be delighted to oblige.
QE3 LSAP will be monetization of the privately held stock. This is the limitation.
in other words, ZIRP a NIRP and the U.S. is in deep shit January 1st.
How long before it is openly acknowledged that the patient is dead.
The FED, as the physician in chief, is trying all of the tools in his "life support" arsenal to maintain a heartbeat.
He will never give up.
Futile.
True, but new issuance isn't exactly fixed. Treasury and the Fed can work hand and glove. $100 billion of 30 years at each quarterly auction would help to fill the gap.Does that defeat the purpose of it? We'll, I guess that depends on what you think the purpose is.
So you really think the dollar will still be around or have any purchasing power if the Fed is the only bond buyer. That is some funny shit right there. Time to load up on some more commodities then - epic motherfucking fail.
Tyler,
I think that Bernanke has known about this limitation all along, which is why in each and every speech he says that monetary policy is not a panacea and that we must a fiscal plan as well. Some people interpreted this as a punt to Congress, I think it is him pleading with Congress to vote on a new stimulus.
Did you say stimulus?
A Modest Proposal To Boost US GDP By $852 Quadrillion: Build The Imperial Death Star
http://www.zerohedge.com/news/modest-proposal-boost-us-gdp-852-quadrillion-build-imperial-death-star
Question --If money creation depends on debt and all issuance is already bought and the banks are flush with zirp zeros enough to cover real estate bubble losses and equity and commodity margin where will the debt come from to balance the print?---just askin
OH its all based upon precise mathematical formulas and such now instead of just throwing imaginary money around....uh huh sure.
yes, but still ignores the skyrocketing cost of commodities that will follow. Besides ZIRP is essentially unlimited, unsterilized, QE anyway. Well unless of course you really believe there is no "cost" associated with capital creation. The mis-allocation and mal-investment continues.
Just think how fun ZIRP will be. Retirees will pay the government to lose their savings, but will the bank pay me to take out another loan?
FAIL.
Bearish silver and gold. No printing.
ZIRP is essentially unlimited, unsterilized, QE anyway. Well unless of course you really believe there is no "cost" associated with capital creation. The mis-allocation and mal-investment continues.
Just think how fun ZIRP will be. Retirees will pay the government to lose their savings (nominally they are already), but will the bank pay me to take out another loan?
FAIL.
I'm going to flip a coin. Heads I hedge my shorts, tails I don't. whatcha think?
Alright...so now what?
Another indication that, at some point, there is going to be a Humpty Dumpty moment.
All this printing and household wages are still dropping?
This is not going to end well.
I have an unemployed neighbor. Advanced degree. Former six figures. Now off all benefits.
They have been driving out to local farms and culling the fields for local produce at night.
They waited 6 months for a slot to open in the farmer's market and now they sell food.
The guy said he was now stopped losing weight since he got in the food business.
Obama and his controllers let the banks do this to us.
What happens when they can't afford the gas bill for the helicopter???
Retrofit the helicopter engine to burn money.
The menace doesn't care if liquidity tanks...hell, just gives him more room to manipulate Credit, like he's doing in the Eq markets. This article appears to make the incorrect assumption that the bearded fuck and his band of thieves will ever be held accountable, or even care if they are.
This is the Fiscal Policy equivalent of doubling-up to catch-up....how does that usually work out? See you at the Expiration Party.
You got it! If the real economy and economic principles were in play here, then math would make a difference. The FMOC will continue printing, no matter what. They will do it in secret (and probably have been doing some of that already) if they have to in order to continue extracting wealth from the common man (whether it is intentional or not).
Nice one, Tyler.
Hmmm, how to perpetually increase the flow of debt when you're running out of things to monetize. I believe I recall ZH discussing how the Fed could very well over time become the market for all securities just to 'feed the beast'.
Perhaps building a Death Star or two really is part of the solution. /sarc
The great minds of Obama, Geithner, Bernank... buying more toxic MBS trash with OUR cash will be sure to stimulate the ecomony, create millions of jobs, ensure that the friendly, patriotic bankers will start to lend to allcomers and solve all of our problems... er.... won't it?
In theory there is no difference between theory and practice. In practice there is.
- Yogi Berra
Tyler,
I'm not sure how the "Fed is monetizing ALL new Treasury issuance" at present.
The run rate for Operation Twist is about $50 billion per month (call it $600 billion per year).
The annual deficit alone is $1.2 trillion. And this does not include the remainder of the non-Fed owned stock of Treasuries.
As a last note, it is not clear why the Fed has to solely concentrate its new purchases on 10 years and up. It could buy the 0-10 years part of the curve as well.
Regards,
Bernard
The market IS the Fed, and they have known for a while what they are about to do, print to the moon, and wall street can't figure why the retail investor has long since left.
So what does this mean for the rally in PM after Sept 12? I was becoming bullish but now I'm not so sure.
I'll tell you when the PM rally takes off. When USD crashes, which it will pretty much overnight.
Trouble is, nobody knows what night exactly.
Bernanke is caught with his foot in the moral hazard trap.
Peter Warburton, author of Debt and Delusion, wrote on May 2005: “The most glaring examples of moral hazard excesses are to be found in emerging market bonds, corporate bonds, mortgage bonds, asset-backed securities and credit derivatives. For these are the boiler rooms of the moral hazard economy. For the past seven years, those who have understood the nature of the compromise struck by the U.S. Fed realize that an upward-sloping term structure of US interest rates is essential to the stability of the global financial system.”
He concluded: “The untold corporate governance failure that is likely to overshadow all others is that of the US Federal Reserve itself. It appears that its chairman and governors have neglected their duty to the stability of the domestic financial system and, by their neglect, have cultivated a global moral hazard economy that is nourished by cheap credit and the systematic mis-pricing of credit risk.”
In the end, the truth of economic reality will break this false monetary system and it will collapse. It’s hard for a trader or investor when he’s playing against a cheater who knows the cards while he’s trying to be honest. It’s hard to anticipate Bernanke because he has you figured – you’re going to be honest and if you see something attractive he knows you’re going to go there – and he goes there and waits… That’s the new math.
There’s another story, and that is that truth and reality if given the chance, win out. If you take a peach seed and plant it, you get a peach tree. If you destroy this market, and investors figure it out, you won’t have a market. That’s the old math, i.e., the truth.
Let's start from a different premise ...
The premise is Bernanke understands all of the math laid out above, knows his ability to jawbone the markets is nearly at an end & will comletely disappear once the reality (math) of Drahgi's latest scam is revealed (sometime between September 12th and January 2nd), and perceives the actual problem being the current occupant of 1600 Pennsylvania Avenue. The SCOAMF - for those of you who have forgotten - broke the rule of law by putting the UAW ahead of the bondholders in "fixing" GM and thereby made senior investment vehicles in the U.S. equivalent in value to used toilet paper in a third world outhouse.
On top of those considerations, he knows he has a number of ticking time bombs that are going to go off - the markets euphoria collpasing and their reversion to mean (i.e. S&P 950), the now inevitable EU/euro collapse or war in the Middle East (obviously the last two drive the S&P to the trigger point). Any one of them detonating provides him with the political cover to act and the rationale to act on a scale beyond the limits of the math laid out above.
There will be only ONE more QE and it will be QEEND pushed through to "save the world" and will be at least $ 5 trillion in size. Since this number is so far beyond the constraining math, it will also deliver the massive devaluation of the USD which is now and forever more shall be the true goal o Bernanke's fiscal policy.
barliman
The central bank may be sociopathic but I don't think its bent on suicide.
The end goal of the Fed HAS to be devaluation of the USD. It is the only path "in their sociopathic judgment" which makes it possible for the funded (acknowledged) and unfunded (long term government pensions, Medicare, Social Security, etc) be able to be addressed.
They have used this before in the late 1980's. Everyone was up in arms because Japan was going to end up "owning" America. Devalue the dollar by more than 50% and voila! The Japanese "investments" in the US are worth less than 50% of their original purchase price.
Of course, Japan got 'proper fucked' in the bargain and has never recovered.
In a race to the bottom, going "nuclear" to "save the world economy" is perfectly acceptable to a sociopath like Bernanke.
barliman
Interesting thesis Barliman...
ori
hands tied? check.
printer plugged in? check
chopper has petrol? check
delivery locations identified? check
contracts signed? che ... ahh ... well?
all go to inducement exercise number 999.
all anyone saw was a chem trail , or vapor trail,
depending on whatever ...
As it turns out, Adam Yogi Berra Smith Dzhugashvili was right: there indeed is no such thing as a free lunch, especially not under central planning.
I doubt he pays for his own lunch...
I wouldn't want to be a "Fly on The wall" in the Santelli Household, this weekend. :/
Tyler,
I think that Bernanke has known about this limitation all along, which is why in each and every speech he says that monetary policy is not a panacea and that we must a fiscal plan as well. Some people interpreted this as a punt to Congress, I think it is him pleading with Congress to vote on a new stimulus.
please .. dont use that word "stimulus" its anything but
"that Operation Twist is really QE 3 and QE 3.5" uhhh duhhhhh
"As a reminder, the primary role of Twist, aside from that stated one which is to keep the curve as flat as possible " no its not. The primary goal is political. The reason being to boost asset prices thus making the sheeple all warm and fuzzy that they can hear yesterday "stocks at new 5 year highs" The wealth effect is the only way to stave up extreme discontent and funnel money to da boyz all in one motion
Sept 12: German court ruling. Morgan Stanley is out with 40% odds that they rule against the bailout fund.
http://www.wallstreetexaminer.com/blogs/winter/?p=5361
Sept 12-13: The Fed meets in midst of increased inflation expectations and with hands tied. Big let down.
http://www.wallstreetexaminer.com/blogs/winter/?p=5377
Sept 15: new moon good conditions for operations over Iran. http://www.wallstreetexaminer.com/blogs/winter/?p=5372
Anyone know anybody that got hired last month? Me neither.
It's just the Bernank playing w/ the levers.
I am newish here and would like a serious response to my confusion...
Our government issues a call for money to fund itself - it is issuing requests to the market to take on more Government Bonds. The Fed upon receipt of these requests prints money (God bless the Gestetner machines) and FILLS the Governments request for more dosh. Thus as a country we have filled our need for money to fund the day to day workings of our 9 Nuclear Carrier Battle Groups (and various other sundry) by having another arm of the Government PRINT the money out of thin air to buy the debt. Our debt thus rises dollar for dollar with what the Fed printed - as realistically we do not use that new money to purchase any new assets - we merely spend it on jet fuel, bombs and new knees for the aged.
THEN: For reasons considerably beyond my pay grade, the market WANTS the fed to PRINT more money out of thin air and BUY billions of the existing debt owned by non Government sources and when it does the MARKET goes all weak in the knees and rises to new highs - it is happy? Surely you jest? Seriously, can someone explain this to me in simple language - I'm a simple man at heart - this makes NO sence to me at all. On the face of it this is madness - OBVIOUSLY - my rational brain is of no use in understanding this - PLEASE SOMEONE - what is it about this that makes the markets rise? I REALLY don't get it...
First, The Federal Reserve is a private bank that will do what is best for its shareholders (Windors, Rothchilds, Rockefeller, etc.) not the American people. As a taxpayer, you have been paying this private bank interest to coin your money for you, something the treasury can do on it's own.
Second, there are no "markets". The Fed is now directly monetizing everything through a shell game with the primary dealers and in a NIRP/ZIRP environment (where retirees holding treasuries are now paying the treasury to lose their savings). Lots of people including the PDs are chasing yield wherever they can find it. The PDs have computers trading stocks on a microsecond time scale, do you really think any wall street outsider/human stands a chance.
Look what has happened to the " market" for essentially any country that has had it's currency collapse and fail. massive deflation following by hyperinflation...
Pretty well established the as a currency devalues, prices go up along with stocks initially. I guess I view the rise as an inflation "tell" for now, we'll see.
Let me just add that the shareholders of the Fed really believe that they own the western world and that everyone owes them interest. Think of it as rent peasant, now pay up. The Federal Reserve and it's owners will see to it that you pay your rent through default(death) or inflation. Know your history.
This previous article on ZH and the links to the pdfs will help.
"When Money Dies" Author Adam Fergusson And James Turk Discuss (Hyper)Inflation In The Past, In The Present And In The Future
http://www.zerohedge.com/news/when-money-dies-author-adam-fergusson-and-james-turk-discuss-hyperinflation-past-present-and-fu
http://www.zerohedge.com/sites/default/files/Jens%20Parsson%20-%20Dying%20Of%20Money.pdf
http://www.wolf1168.us/misc/Articles%20of%20Interest/When%20Money%20Dies.pdf
"The Market" is an illusion. It's roughly 90% HFT's (stocks traded after being HELD for less than 11 seconds) and most of the rest is mutual funds. There are basically no carbon based units present.
'Truth is teason in the empire of lies.' -Ron Paul
Truth...I hate it when that babe teases me.
When the Fed prints money it goes to the Federal Reserve banks and from there it goes instantly to the big banks. The problem is the big banks are in the market -- Goldman, JP Morgan and their favorite clients -- the big corporations, the IPOs they started, and the people who owe them money, all are in the market. The modern day equity market is literally dominated by the financial sector and on days of very low volume the financial sector trades can drive the S&P as far as it wants, on days of low volume the financial sector literally owns the market driving it up or down at will.
So as soon as they hear the QE printing presses grinding and starting up, they jump into the market and start buying. They’ve got money! You know whose money it is, of course; it’s not money out of thin air, it’s taxpayer money, it’s money derived from inflation, it’s savers’ and pensioners’ and wage earners’ money.
And it’s political money - because when Obama wanted that first $700 billion to stimulate the economy and make things go, his handlers put it into where their projects go, into wind turns and all those worthless things; it greased the projects of all the people who helped Obama get elected. They were just jumping for joy, taking half of it and putting it into their pockets.
Unfortunately, there’s practically no air between the big banks and the government; they seem to be making the laws, cancelling out industries that compete with their favorite clients, encouraging the growth of industries that have no chance of success but offer temporary high profits, putting people out of work, invading countries, telling us what to do… (Shouldn’t they be running for president instead of these two stooges?)
The government should not be in a money printing business that is used for politics and personal gain.
The price to the American people of the Fed's fraudulent, moral hazard, fractional reserve banking has been rising prices, built-up malinvestments, defaults, unemployment, lower purchasing power of their dollars and wages, poverty, lost savings, and broken pension promises -- all the horrors of Krugman’s so-called free lunch, all the result of the criminal duplicity between the Federal Reserve and its lobbyist-bought Congress.
And that’s why the stock market is “happy”: it got the "free lunch."
I am newish here and would like a serious response to my confusion...
It's very simple really. The government has debt diarrhea and Fed is the toilet.
Ok, a better answer:
Government debt is out of control, nobody wants to buy it at 1% interest when inflation is 15%. So the Fed prints currency and buys it (ignoring how it's debasing the currency and destroying the economy).
Wall Street is giddy over news of more printing and buying because they sell the stuff to the Fed and make lots of fee income (along with front-running income).
Well... that's part of it. Wall Street is giddy over news of more printing and buying because it keeps the bond market from crashing ...which keeps them from crashing.
Rapidly escalating debt is the driving force in our financial system now. Everything is done to keep a market going for all that new debt, which gets more difficult as time goes along, so the Fed becomes the bad bank of last resort, turns the presses on, tapes the "print" button down, and buys everything.
But it's an end game play. They're destroying the currency.
A measure of the health.
http://www.investmenttools.com/images/wfut/crb/bdi.gif
FRED Does Not Lie
http://chartistfriendfrompittsburgh.blogspot.com/2012/09/fred-does-not-l...
it has been nearly 100 years since the FED was created. Why are not people on here of the mind that a default is planned, scheduled and telegraphed? Everyone keeps frettingabout when but it seems to be orchistrated.
Only if you really believe that the owners on the other side of that debt are willing to sacrafice that income stream. The last hundred years has shown pretty clearly what these fuckers are willing to do in order to prevent that from happening as it means losing power and control.
Kennedy thought he saw a defaut coming and worried about the dollar dying, he tried to reinstate a gold/silver exchange to restore faith and power to the treasury and american people, how did that turn out?
So lets say that the Fed buys up all a section of the long term bonds... llike say the 25-30 year bonds. Can they just cancel them and save the taxpayer the cost of paying interest on them?
A jubilee on debt? While I'd like to think that the real owners on the other side of that debt would love to give up that income stream and actually work for a living, history is pretty clear on how far they will go to protect that "money for nothing" as it were.
Government paying interest to itself. Brilliant!
I'm going to lend money to myself at a high interest rate. I need the income.
Think that is funny you will really get a chuckle out of this
Presenting The Shocking Source Of US Treasury Demand In The Past Year
Here is an example Phil. You borrow from your "pension fund", and agree to pay yourself back with interest. You run into "hard times" and decide to just pay just the principal (no interest) on your loan. Or, you just decide to "default" on the loan you made to yourself.
Who suffers the loss Phil? You do! Who suffers the loss if the Fed cancels out bonds Phil? You do. The "Feds" pension fund is the American Taxpayer.
Whatever, it's not like 10,000 baby boomers are retiring everyday. There will be enough growth to pay it all back....
[shrugs]
....right?
True enough - monetized debt (debt "paid for" by printed, as opposed to earned or accumulated dollars) really has no meaning and should not be paid back - there is no "quid pro quo." Who owns those debts in the Fed vaults, the member banks?
Can they just cancel them and save the taxpayer the cost of paying interest on them?
Banker rule #1: No debt gets cancelled.
Interest and fees from debt is how bankers make money.
Would you give up part of your paycheck to help your employer avoid bankruptcy?
Nope, didn't think so.
Bankers won't either.
ALL previous qe occurred when stock market was down and not up.
Again, ZIRP/NIRP is QE via direct unsterilized monetization of fucking everything - FAIL.
Irregardless, of what the fed does next week, what scares me more than anything is two words.
" OPEN ENDED"
Time to monetize student loans. :d
Let's see now, banks print money to make those loans, now the Fed prints more money to buy 'em from banks.
So every dollar loaned to a student results in two dollars added to the money supply.
Oh wait, I forgot. Fed money printed to buy 'em from banks goes into "reserve accounts" at the Fed, not part of the circulating money supply.
But those "reserve account" funds DO allow the bank to print more money and loan it out ...maybe to more students, making MORE student loans.
Do those students learn about "hyperinflation" in college?
With no more bonds (once they are all bought) and no more bond market , the money will go into equities and with all of the bond money going into equities, equities will never go down but only up and parabolically so.
Every red cent of Chinese, Japanese mercantilist "profits" will be buying AAPL, GE and XOM.
How's THAT for perverse logic.
Fear and Loathing in Washington.
tulips
If Treasury increases issuance of the long stuff, by some large number, it would have less of an impact on liquidity.
Oh come now; this is Benny the Magician were are talking about. Surely the government can issue more shorter term bonds and Benny can suck those up hitting the buy key on his laptop. Besides, there is no risk since he has promised to keep interest rates low, low, low for eternity.
They are acutely aware it's all Jew Confetti so they know they have to be extremely careful. The sooner they QE the sooner the muppets will realize this too. The only thing they have left now is to jawbone.
Great analysis.
Bingo. Here's the stimulus:
A Modest Proposal To Boost US GDP By $852 Quadrillion: Build The Imperial Death Star
http://www.zerohedge.com/news/modest-proposal-boost-us-gdp-852-quadrillion-build-imperial-death-star
edit: this was intended as a reply to a previous comment and reposted inline accordingly
Articles like this are why I LOVE zh. Bernanke is out of bullets but DHS sure isn't.
Here comes the storm.
And Barry said, of the great bond "shortage":
"No worries, we'll make more."
This is a fantastic perspective. Very thought provoking and I now think we will get only jawboning next FOMC meeting time. Makes sense to jsut jawbone for a whole lot of reasons, not the least of which is that the much-vaunted Fed bag of tools seems to lack any more bazookas.
NO REFI TILL 1.00% !!!!
How bout a trillion or 2 in refunds distributed equally among holders of social security numbers (except for those that have 2 or more [they would only get 1 portion].)
That would do 2 things: 1) it would put the revolution off for a year or two and 2) it would distribute the wealth back toward the people that it was stolen from.
Then for added measure do as Fitts says is likely. Have the military take over the banks and treat them as a public utility My version is to have them owned by the people and operated by the military contractors and community software developers.
We would get possibly a few more generations before we have to, again, face the great poof.
Might want to prosecute Bernanke for treason just for good measure and to appease the masses.