Q3 growth in line with consensus expectations-but slightly higher than ours due to faster-than-expected inventory accumulation. Growth in real final sales was a touch weaker than expected, due mainly to another large trade drag. Consumption growth was healthy, though slower than we thought, while federal government outlays and business fixed investment (mainly construction) were higher. Meanwhile, moderation in employment costs reflects budget pressures of state and local sector.
Preliminary GDP for Q3 - the datapoint which Fed members said would be critical in determining QE2, also employment costs, the Chicago purchasing managers’ index, and the final Reuters/Michigan confidence read for October. Most importantly, no POMO today.
In today's note by Goldman's Robin Brook, the analyst takes an inverse approach of looking at what a dollar drop implies for CPI and general prices, in an attempt to settle a debate whether the expected drop in the USD as a result of QE2 will have a meaningful impact on both inflation, currency wars, and other derivatives of monetary policy. As Goldman concludes: "the ‘pass-through’ from Dollar declines to US consumer price inflation
is small. This in turn means that – if indeed the Fed sees the Dollar as
one of its key policy levers for preventing inflation from staying
below its mandate for a prolonged period – the Dollar needs to fall a lot further from here." The quantification of "lot" is not provided but is sufficiently indicative from a qualitative standpoint. Of course, the biggest issue here is with the construction of CPI itself, which is driven far more by a collapse in leveraged input prices specifically as pertains to shelter, then spiking prices in items most see as critical in day to day use. Nonetheless, as Goldman is one of the Primary Dealers whose opinion is now a part of the "reverse inquiry" methodology in determining monetary policy, the fact that the hedge fund is comfortable with a substantial drop in the USD implies that the Fed should be just as comfortable with a shock and awe approach to QE2, as a pronounced effect on the dollar would likely have to come from a stepwise drop as opposed to a gradual wear down which would be intercepted by other central banks. The key question remains: what level on the DXY is Goldman, and thus the Fed comfortable with as ""modestly inflation stimulating, and what will the price of jeans be, gold, and other commodities be, not to mention what the final level of excess reserves and margins for Chinese exporters, once that level is finally attained.
Just the weekly stuff today—claims at the beginning of the day, Fed balance sheet at the end. And of course, POMO. Look for the accepted to submitted ratio to determine how much higher stocks will close.
A Paralyzed Fed Defers Decision On Monetary Policy To Primary Dealers In An Act That Can Only Be Classified As TreasonSubmitted by Tyler Durden on 10/28/2010 00:23 -0400
As if there was any doubt before which way the arrow of control, and particularly causality, points in America's financial system, the following stunner just released from Bloomberg confirms it once and for all. According to Rebecca Christie and Craig Torres, the New York Fed has issued a survey to Primary Dealers, which asks
for suggestions on the size of QE2 as well as the time over which it would be completed. It
also asks firms how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. This is nothing short of a stunning indication of three things: i) that the Fed is most likely completely paralyzed due to the escalating confrontation between the Hawks and the Doves, and that not even Bernanke believes has has sufficient clout to prevent what Time magazine has dubbed a potential opening salvo into a chain of events that could lead to civil war: in effect Bernanke will use the PD's decision as a trump card to the Hawks and say the market will plunge unless at least this much money is printed, ii) that the Fed is effectively asking the Primary Dealers to act as underwriters on whatever announcement the Fed will come up with, and thus prop the market, and, most importantly, iii) that the PDs will most likely demand the highest possible amount, using Goldman's $2-4 trillion as a benchmark, and not only frontrun the ultimate issuance knowing full well what the syndicate of 18 will decide in advance of what the final amount will be, but will also ramp stocks on November 3 to make the actual QE announcement seem like a surprise. This also means that the Primary Dealers of America, which include among them such hedge funds as Goldman Sachs, such mortgage frauds as Bank of America, such insolvent foreign banks as Deutsche, RBS, UBS and RBS, and such middle-market excuses for banks as Jefferies, are now in control of US monetary, and as we explain below fiscal, policy.
Junk economics and the Taylor Rule guide the Fed's QE2 monetary policy. Junk or not, the important thing is that they believe it. So does Goldman Sachs. How many dollars will the Fed print? $1Trn, $2Trn, $4Trn? You should know that they are all just guessing and have no idea how this will come out. Remember this word: stagflation.
An excellent commentary by the director of "Inside Job"
Chris Whalen Welcomes Our New Tyrannical Overlords, Prepares For The Taxpayer Funded Mortgage Insurer BailoutSubmitted by Tyler Durden on 10/27/2010 12:26 -0400
Chris Whalen's latest Institutional Risk Analytics is a must read letter as it highlights yet another aspect of foreclosure fraud, one which finds various analogues in the way the MBS originating banks took advantage of AIG, knowing full well it was stuffed to the gills with worthless pieces of paper and taking out enough insurance on it to require a federal bailout when mark to fraud failed and mark to market finally worked for a very short period of time. Now, it seems, it is the mortgage insurers turn: "So today the MIs are still operating, though they are not providing insurance because they can't. Observers in the operational trenches tell The IRA that virtually no MI claims are being paid - even if the claim is legitimate. The MIs are very undercapitalized and still bleeding heavily. But they get continued business because the GSEs demand MI on high LTV loans. Lenders are forced to use the MIs and consumers are made to pay the premium. Thus the auditors of the GSE continue to respect the cover from the MIs, even though the entire industry is arguably insolvent." The question is how many CDS have Goldman et al purchased in bulk in anticipation of the imminent wholesale MI Event of Default, which will force Geithner to once again use the Mutual Assured Destruction wildcard and force taxpayers to bail out those holding MI insurance, especially if the originators and servicers end up being one and the same...
We have long noted that Goldman's feigned change of heart to eliminate its prop desk is nothing but a sham, as the very same traders will continue pursuing principal strategies but merely be given the additional layer of protection that they are "client facing" i.e., make fake flow markets. Today, Michael Lewis confirms this speculation, and identifies precisely how not only Goldman, but all banks are abusing Frank Dodd using legalistic loopholes that do nothing at all to change the actual role of the principal trader, whose existence has always been predicated upon accumulating positions primarily in OTC products (nobody makes money trading stocks any more) and selling when the firm so desires.
- Foreclosure Lawyers Go to Gardner's Farm for Edge on Lenders (Bloomberg)
- Employers in U.S. Start Bracing for Higher Tax Withholding (Bloomberg)
- Fed leaks more data via WSJ: Fed Gears Up for Stimulus, and will buy
trillions, $100 billion at a time as long as Depression continues and
bonds available for purchase don't run out (WSJ)
- Fed looks set for new round of monetary easing (Reuters)
- Florida Foreclosure Auction Cancellations `Frustrating' to Judge (Bloomberg)
- Asian Leaders Head to Hanoi Amid Concern at China Yuan (Bloomberg)
- Fed Won't Join Banks in Discount-Window Appeal (WSJ)
- CNBC now just 9 months behind the curve, discovers insider selling: Insider Selling Volume at Highest Level Ever Tracked (CNBC)
Goldman is Ratcheting Up VIE Risk!!! More So Than the Top of the Bubble! Many Thought the Enronesque Days of “Hide the Sausage” Accounting Games Were OverSubmitted by Reggie Middleton on 10/27/2010 08:27 -0400
“Goldman, unlike the rest of the street and practically the rest of the I banking world, is ratcheting up VIE risk!!! Is BoomBustBlog the only one inquiring as to WHY??? We have a few reasons in mind… And to think, many thought the Enronesque days of “hide the sausage” games have come to an end…”
Finally we enter the informal “blackout” period for policy-related FOMC commentary one week ahead of the scheduled announcement from next week’s meeting, which means the Fed chatterboxes finally shut up. Just one speech today with little likelihood of breaking new ground, following the morning's data on mortgage applications, durable goods, and new home sales…Most importantly, no POMO. Futures already reflect it.
As we noted yesterday, Goldman was in the market for a 50 year bond at a token amount of $250 million. We speculated this was merely a test to gauge market interest in the space. Sure enough, courtesy of the Fed's free money, interest was massive, and today, Goldman announced that the deal was upsized. Not only that, but price talk has been reduced from 6.25% to 6.125%. What this means is that bank after bank is about to begin rolling out 50 year and possible longer dated debt issuance, as investors no longer care about bullet maturity repayment but are all looking for yield. And it appears that anything over 6% will get massively oversubscribed, maturity be damned. After all, it is other people's money (hopefully).
Home prices, consumer confidence, the Richmond Fed index, and one more Fed speech….
Who ya gonna call?