QE III

[rffrydr]

There's another cloud up there....a dark one:

http://www.bls.gov/news.release/empsit.t12.htm


QE III now gonna be the topic de jour.

At this point I think we put half a year of Wall St. acrimony to bed, fueled by the hubris of Tiffany's stock price. Still, nowhere to go but up: look for the new austerity to be mellowed even if we don't get something from the FED--even in an election year.

My view? QE II is QE III.

– Employment-to-population ratio declined from 58.4 to 58.2 per cent, and is now tied with two other months as the lowest point since the start of the recession.

– Both the length of the average work week and average hourly earnings declined.

– Jobs numbers for both April and May were revised down, by 15,000 and 29,000 respectively.

– Average duration of unemployment up to 39.9 weeks: see this chart for a further breakdown.
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Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

Re: users vs issuers, a primary reason why U.S. can't be the next Greece. Sovereign defaults of issuers whose debt is in their own currency = 0.

Had a conversation this am about Moody's ratings of U.S. debt, called it immaterial, spoke of market yields and CDS spreads, and my breakfast companion looked at me as if I had a third eye. Funny.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[diesel]

I would argue they are focused on the budget deficits of countries that are currency users rather than currency issuers. Explain to me the yields on Japanese and US government paper if you think differently?

Additionally the Fed easing you are talking about sounds more like fiscal policy to me and is a sad reflection on the state of US politics...
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All cats are gray in the dark.

[HenryTo]

Well, one can never prove the counter-factual so the argument is quite pointless. However--the Fed is not out of options even in a so-called liquidity trap. In fact, Fed easing is preferable, especially since investors are now clearly focused on the budget deficits of OECD countries. The Fed has latitude to conduct monetary policy through other purchases, such as commercial paper, municipal bonds, corporate credit, and even equities of blue chip companies. If push comes to shove, the Fed can even guarantee loans/bonds of middle market private companies--the middle market is in dire need of funds right now given the lack of middle market PE investing, as well as lack of bank lending in this segment.

[diesel]

There is no Bernake Put. QE only alters the term structure of rates and that's pointless when you are in a liquidity trap. The previous results speak for themselves.

What the US needs is fiscal stimulus i.e. a net injection of funds into the system either through tax cuts or additional federal spending but it looks like we are going to get the reverse under Obama. RIP USA.
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All cats are gray in the dark.

[HenryTo]

Ven--I can't agree with you more. There is a "Bernanke Put"--at least in theory, but where is the strike price? Definitely significantly lower than where it is today as measured by the S&P 500. But think of the put as a multi-asset option with two benchmarks--the S&P 500 and commodity prices. The latter have to also weaken first before the Fed will implement QE3.

[Ven]

Of course the plan exists -- the question is:
1) whether it would ever be implemented
2) if so, how much, and is that enough to be effective
3) exactly when would it be implemented

The answer to #1 is the easiest, but with a caveat -- yes, when needed.
(when has the Fed ever turned down a chance to meddle in markets?)

Just that timing is the issue.

Which brings us to #3 -- QE would only be used after deflationary shocks.

So what does that say to the QE drug addicts who need their fix as soon as asset prices stop going up?
It means they have to wait until asset prices drop again before another round of easing can commence.

Bernanke has mentioned "trade-offs" several times in the past.

With commodity prices high, the chance of QE 3 is zero. When asset prices complete their drop, back to mid 2010 levels, monetary easing may begin again.

That brings us to question #2, how much QE and would it be effective?

In order to maintain growth, the Fed would have to not only increase liquidity in the financial system, but it would have to increase the rate of increase.
Another $600 billion over 8 months would only be the status quo and would, counter to intuition, actually be a monetary tightening policy, albeit not as tight as doing nothing.

So would the Fed announce a plan for $800 billion? $1 trillion? $1.2 trillion?
Where would that put commodity prices? And the dollar?
How would foreign central banks respond?
What would the political will of the Congress and White House be for such a scheme?

It's not as simple as "asset prices stopped going up for 2 months, we have to monetize more" ...

[rffrydr]

No more denying QIII doesn't/didn't exist:

http://ftalphaville.ft.com/blog/2011/07/12/620156/fomc-minutes-from-the-june-21-22-meeting/
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Today is the Tomorrow you worried about Yesterday!

[Ven]

There is no QE 3 .... QE 2 was distribution.

Market corrected from March '09 lows back to LEH levels.
Then, sovereign debt crisis began and the rally stalled out.

Had to sell all those stocks bought on the way up somehow ...

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Besides, QE 2 sent gas prices from $2.50 to $4.00 / gallon and started a bunch of riots in the middle east.
I don't think $6-7 gas prices are on the table -- especially heading into the election next year.

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The only way you get QE 3 is after a deflationary period.
Print money at the bottom, and stop at the top -- that's all the Fed's got.

You see the S&P back at 1040 and gas prices back below $3 and then Ben might wanna fire up the inkjets again.

The only problem is he'll need to pump a lot more than $600 billion in the next time around to get the same results.
Gonna do more than $600 billion? No chance.

QE 3 will probably be a half attempt and even then it will be met with severe countermeasures from emerging market CB's -- which so far have stood pat.