Bernanke's Bluff: QE II won't Really Happen?

[Raz]

Occasionally I read articles on Minyanville.com, some of which are quite good.

This guy is an ex-banker who has made at least two outstanding calls: (1) he called the very bottom of the equity market in Mid-March 2009, and (2) he predicted the EU Sovereign Debt Crisis about six months in advance.

I don't know if he's profited from the EU Crisis, but he sure made a lot of money by going fully invested in stocks back in March/April of 2009!

QUESTION: is he making sense in these two articles? I would like to hear opinions from this erudite and intelligent community of iTulipers.

http://www.minyanville.com/businessm.../2010/id/30224


PS. Both articles are very short, so I converted them to pdfs if you care to read them that way.

[jk]

Re: Bernanke's Bluff: QE II won't Really Happen?

i think the fed can buy treasuries further out on the curve and thereby bring down mortgage rates another notch, lending some support to the crippled housing market and allowing those homeowners who are not underwater or unemployed to refi. this will help consumers' balance sheets in aggregate. also, grg55 today posted a note about the flow of liquidity into [perhaps dodgy] corporate debt. to this i would also add that it's worth noting that msft borrowed this week at under 1%. further fed action will reinforce and amplify these flows. thus i don't agree with kostohryz' contention that further qe, beyond supporting the gov'ts fiscal deficit, would have no effect.

more speculatively, i wonder if at some point the fed will be buying, or participating in repos, with munis to support squeezed state and municipal gov'ts.

[aaron]

Re: Bernanke's Bluff: QE II won't Really Happen?

Kostohryz also said he was shorting gold a year ago. But, his trading record does look pretty good besides.

I do not believe that the same skills in predicting short term market direction and predicting what the Fed will do are related. Has he made any accurate Federal Reserve predictions before?

[vinoveri]

Re: Bernanke's Bluff: QE II won't Really Happen?

i think the fed can buy treasuries further out on the curve and thereby bring down mortgage rates another notch, lending some support to the crippled housing market and allowing those homeowners who are not underwater or unemployed to refi. this will help consumers' balance sheets in aggregate. also, grg55 today posted a note about the flow of liquidity into [perhaps dodgy] corporate debt. to this i would also add that it's worth noting that msft borrowed this week at under 1%. further fed action will reinforce and amplify these flows. thus i don't agree with kostohryz' contention that further qe, beyond supporting the gov'ts fiscal deficit, would have no effect.

more speculatively, i wonder if at some point the fed will be buying, or participating in repos, with munis to support squeezed state and municipal gov'ts.

I tend to agree with this view.
The only near to mid-term fear for the fed regarding any QE is not to spook the investor class or creditors in order to support the equity, bond and other asset markets. In fact, both these groups want the game to continue (with bailouts along the way if necessary). They have been doing pretty good with it.

As long as the QE is done in stages and in coordination with other governments I think, unfortunately, it can continue for a good while. The liquidity will go somewhere, whether making whole defaulted debt or chasing risky assets, the only powers that can pull the plug and call the fed are those with too much at stake and will continue to let it run its course of money printing as long as yield can be generated and not see their financial way of life disrupted.

Of course, the powerless saver and the middle class in general b/c ofo the monetary debasement and continuance of the status quo absent economic structural reform will suffer under the ZIRP and QE policy.

Where the stock market is going near-mid term is anybody's guess. Take a look at http://stockcharts.com/charts/gallery.html?$SPX:$GOLD for one idea.

[jk]

Re: Bernanke's Bluff: QE II won't Really Happen?

an additional point, from john mauldin's letter this week:

That is not much bang for the buck, so to speak, but it would be pointing a gun with a very big bang at the valuation of the dollar. If QE were attempted on that scale, it would not be good for the dollar. My call for the pound and the euro to go to parity with the dollar would be out the window for some time, and maybe for good.

Now, if the strategy is to lower the dollar, then QE might make some sense; but of course no one would admit to that, not when we are accusing other countries of manipulating their currencies (as in China). No, we would just be fighting deflation. The fact that the dollar dropped would just be a coincidence, a necessary but sad thing in the important fight against deflation.

[Jay]

Re: Bernanke's Bluff: QE II won't Really Happen?

an additional point, from john mauldin's letter this week:

That is not much bang for the buck, so to speak, but it would be pointing a gun with a very big bang at the valuation of the dollar. If QE were attempted on that scale, it would not be good for the dollar. My call for the pound and the euro to go to parity with the dollar would be out the window for some time, and maybe for good.

Now, if the strategy is to lower the dollar, then QE might make some sense; but of course no one would admit to that, not when we are accusing other countries of manipulating their currencies (as in China). No, we would just be fighting deflation. The fact that the dollar dropped would just be a coincidence, a necessary but sad thing in the important fight against deflation.

QE didn't work well in Japan. I doubt the Fed expects immediate miracles with it here either. While it may help drop the dollar on the FOREX, I have been thinking for some time that its real purpose is to facilitate debt jubilee through currency inflation, unbeknownst to even those using it. After all they have a different agenda. But jubilee may be a process that HAS to happen; it is possibly a natural economic phenomenon.

[Minion]

Re: Bernanke's Bluff: QE II won't Really Happen?

Over this past week the trading community was ecstatic over Bernanke's vague comments about providing additional support as needed. A certain Bill Gross of PIMCO claimed that this opened the door for QE2 next month. They also remember Greenspan's claim that a rising stock market was good for the economy. Shortly thereafter, stocks and gold continued their ascent while the dollar settled below 80.

The obvious conundrum is rising stocks do not mask a tanking dollar and gold making new highs. Bernanke radiates fear when speaking before Congress, in my opinion, and that is telling..... the mood of people is almost as important as the fundamentals behind the economy.

I don't think QE2 can be conducted on the scale that the market has priced in, because loss of confidence in the dollar is much worse than loss of "wealth" to the hedge funds, who are long equities. And confidence is the problem - the majority feels suckered by Wall Street and are looking for any way to protect their savings. They see inflation in consumables and deflation in bubble assets.

The FED appears to be cornered. On the street, the little guy isn't producing like he could, and real tangible wealth seems to come from overseas (other than weapons, intellectual property, and food, what do we export?). Petro dollars allowed the trade deficit to perpetuate but we're nearing the end of its capacity, it seems. Just like how Britain's power evaporated long after their physical productivity, so shall this empire.

[jk]

Re: Bernanke's Bluff: QE II won't Really Happen?

QE didn't work well in Japan. I doubt the Fed expects immediate miracles with it here either. While it may help drop the dollar on the FOREX, I have been thinking for some time that its real purpose is to facilitate debt jubilee through currency inflation, unbeknownst to even those using it. After all they have a different agenda. But jubilee may be a process that HAS to happen; it is possibly a natural economic phenomenon.

i hope you're right. a replay of the '70s is the most positive scenario i can imagine. [and the '70s were not so wonderful.]

[Minion]

Re: Bernanke's Bluff: QE II won't Really Happen?

Where the stock market is going near-mid term is anybody's guess. Take a look at http://stockcharts.com/charts/gallery.html?$SPX:$GOLD for one idea.

Here's my guess: We're wildly overbought, at the top of a rising wedge, at the end of wave B in the corrective sequence, volume is getting extremely low, and bullish sentiment is getting feverish. Also if you look at the monthly chart it's a classic pendant continuation pattern. From a technical standpoint, the case is very strong for a correction.

[GRG55]

Re: Bernanke's Bluff: QE II won't Really Happen?

i hope you're right. a replay of the '70s is the most positive scenario i can imagine. [and the '70s were not so wonderful.]

- The Dollar looks oversold imo, and if the USA economy continues to soften [Rosenberg's 4Q zero growth scenario] then it isn't hard to see another acceleration in the pace of deleveraging...which should put a bid under the US Dollar later this year or 1st Q 2011 as demand for Dollars to pay down debt increases.

- This raises a scenario whereby the Fed needs to implement QE2 in order to prevent too much of a rise [or any rise?] in the US Dollar, as opposed to trying to debase it further [as measured by the index].

- For the next couple of quarters this would seem the most benign scenario for the Fed, if it was to unfold as I have described. And I don't think the Fed is looking beyond a couple of quarters at most.

[Adeptus]

Re: Bernanke's Bluff: QE II won't Really Happen?

For whatever it's worth...ZH linked David Taper's take on the subject this evening: Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame.

Partial quote...

Recently the debate over when QE2 will occur has taken a back seat over the question of what the implications of the Fed's latest intervention in monetary policy will be, as it is now certain that Bernanke will attempt a fresh round of monetary stimulus to prevent the recent deceleration in the economy from transforming into outright deflation. Whether or not the Fed will decide to engage in QE2 on its November 3 meeting, or as others have suggested December 14, and maybe even as far out as January 25, the actual event is now a certainty. And while many have discussed this topic in big picture terms, most notably David Tepper, who on Friday stated that no matter what, stocks will benefit from QE2, few if any have actually considered what the impact of QE2 will be on the Fed's balance sheet, and how the change in composition in Fed assets will impact all marketable asset classes. We have conducted a rough analysis on how QE2 will reshape the Fed's balance sheet. We were stunned to realize that over the next 6 months the Fed may be the net buyer of nearly $3 trillion in Treasurys, an action which will likely set off a chain of events which could result in rates dropping all the way to zero, stocks surging, and gold (and other precious metals) going from current price levels to well in the 5 digit range.

[jk]

Re: Bernanke's Bluff: QE II won't Really Happen?

For whatever it's worth...ZH linked David Taper's take on the subject this evening: Why QE2 + QE Lite Mean The Fed Will Purchase Almost $3 Trillion In Treasurys And Set The Stage For The Monetary Endgame.

Partial quote...

thanks for posting that link. that piece was long but fascinating. i recommend it to all itulipers.

[we_are_toast]

Re: Bernanke's Bluff: QE II won't Really Happen?

This QE2 has me pretty puzzled. I have 3 questions that I can't find consistent answers.

Why?
How?
How much?

[jk]

Re: Bernanke's Bluff: QE II won't Really Happen?

This QE2 has me pretty puzzled. I have 3 questions that I can't find consistent answers.

Why?
How?
How much?

why? to forestall deflation
how? purchases of securities, especially treasuries but really any kind of paper, paid for by creating book entries on the primary dealers' accounts at the fed.
how much? i've seen estimates of $1-3 trillion.

[we_are_toast]

Re: Bernanke's Bluff: QE II won't Really Happen?

why? to forestall deflation
how? purchases of securities, especially treasuries but really any kind of paper, paid for by creating book entries on the primary dealers' accounts at the fed.
how much? i've seen estimates of $1-3 trillion.

Thanks jk, these are some of the answers I've been hearing. If I may play devils advocate to further the discussion.

why? to forestall deflation

Are there any immediate or nearterm signs of deflation large enough to make the FED act decisively with $1-3 trillion QE? Not even during the collapse of 2008 did the FED intervene with anything like $3 trillion. It would take something at least as bad.

GRG55 mentions an attempt to prevent a rise in the dollar as a reason for QE2.

how? purchases of securities, especially treasuries but really any kind of paper, paid for by creating book entries on the primary dealers' accounts at the fed.

I agree that they have many options, and which option or combination of options, will determine how and to what degree the economy will be impacted, and what investments will be successful.

how much? i've seen estimates of $1-3 trillion.

The FEDs last move was a baby step in reinvesting proceeds from MBS to keep their balance sheet at the same level. If they decide to go with another minor QE step, it may not only be ineffective, it could crash a stock market with already high expectations built in.

Once again, I find myself very unsure how this is going to play out, but right now I'm leaning that there isn't a big enough reason for Bernanke to jump in with both feet. We need a much bigger Ka before Bernanke gives us a Poom.