-The Fed’s Beige Book from yesterday did not make a case for an economy that needed emergency measures. Yes there was some discussion about the weak housing market and soft loan demand. But we know that QE-2 is not going to fix those problems.
-It is of significance to me (and should be to all) that Zero Hedge was featured in a Time/CNN article titled, Will the Federal Reserve Start a Civil War?
I am certain that the Fed reads Zero Hedge. But how much influence they have is a question. When it gets up to Time magazine however, it is another matter altogether. It is not possible for the Fed to avoid the collective roar that is coming from across the country at this point. If the Fed blunders with an unpopular QE-2 the results will be disastrous. Not only will the economy tank but the Fed will have lost a good chunk of its remaining credibility. The downside risks to Bernanke are enormous. I don’t think he believes he is in a popularity contest, but he does know he can’t run monetary policy with protesters outside his door. How much is he prepared to gamble given that he clearly does not have a consensus amongst his own board? He is an academic, not a gambler.
-Today St. Louis Fed Bullard made remarks to reporters that were a warning sign to me (and the market). He talked a much different game than what has been dished out of late. He made reference to a smaller program. Maybe less than $500billion (about half what is now in the street). He also threw out something that blew me away. He suggested that the 11/3 decision was in someway dependant on the Q3 GDP numbers that come out before the Fed meets. Bullard even “spun” the numbers on the hot side:
"it may come in a little stronger than the second quarter." So we have to keep our eye on that."
Bond traders shit in their pants and hit bids on long coupons. I like that read. Bullard gave us a hint that maybe this QE-2 is not such a slam-dunk. (See ZH story on Bullard)
-The WSJ had a market story about Bullard’s comments but their big gun on QE, Jon Hilsenrath, has been quiet. Should the press follow with the new question mark on the timing and scope of QE2 we may have an October surprise that is bigger than a SF-Texas series.
I started this with; “The 100% certain sure thing in the market today is that QE-2 will come on November 3rd and that it will be decisive in its scope.” If that certainty factor falls to 50% the S&P is going to take a big dump. That possibility is simply not in the print at the close.
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"He's an academic, not a gambler." Actually, as an academic, he doesn't even realize that he is gambling. Once he figures that out he will lose his nerve. . .
ReplyDeleteBut how much influence they have is a question.
ReplyDeleteProbably very little; it's hard for me to take the site all that seriously anymore.
Actually I don't see QE-2 as much of a gamble, at least as far as the FX markets are concerned in the near term. I think it will hurt the dollar some, but that damage will be limited, and could be already priced in, as most people think stock gains are (i.e. QE-2 will be 'the biggest sell the news opportunity in history') -- it's always a question of relative strength or weakness there, and looking at the other major competing currencies they all have their problems too.
IMO QE-1 was intended to 1) primarily keep interest rates low to stimulate expansion/revive confidence (mixed results) and to provide life support to/attempt to resuscitate the housing market (which didn't work), and 2) secondarily to absorb government debt. I guess it was more or less expected that employment gains would follow, but there's disappointment all 'round on that.
No doubt QE-2 will not create many jobs either, at least directly and immediately. But I don't think deep down that's really expected now -- jobs. It's designed to buy more time by absorbing the really massive amounts of federal government debt that must be issued in the near, and perhaps foreseeable, future.
So you could say the gamble is that QE-2 will not stimulate economic expansion, and the federal government -- which will not be able to reduce spending nearly enough -- will become dependent on QE.
I think this is not a gamble, bur rather a certainty; from that standpoint the situation looks pretty hopeless to me. I mean, with the federal government running trillion dollar deficits...what choice do they have?
I don't believe Bernanke takes these decisions alone -- i.e. Geithner and Obama will sign up for it as well.
#Well I am not so sure any more
ReplyDeleteBruce... figures dont lie.. no matter what FOMC members say.. exist a thing called FEDERAL GOV DEFICIT.. it was $1.7 tlrn in 2010 fin year..
problem is federal revenues still in neg %growth y/y, but outlays grow +5%..
you wrote endlessly about SS in red..
so my point is WHO IS IN RIGHT MIND GONNA BUY 2+ TrLN $$ then US gov officially debasing $$$..
so its currency risk+ inflation risk...
so QE2 gonna be in excess of +1.5$ trln .. mark my word..
alx
Forex market signs are suggesting that Bruce is right. The USD/CHF (Swiss Franc) has broken a long trendline in the past few days, with the USD finally showing some real strength. Weakness of the USD vs CHF has been relentless since June 2010, but that trend has now reversed. Incipient signs of a USD reversal against the Yen are also present on the charts, but this will need more time to confirm. The Fx money is suggesting assumptions about QE2 may need to be reconsidered.
ReplyDeletehttp://au.news.yahoo.com/video/featured/-/watch/22273684/lion-attack-caught-on-tape/
ReplyDeletethis is the moronic species shalom is trying to "save". and this is how ben will look when it all goes tits up and he and his pal from princeton will shrink in their shells.
i would put the chances of the fed losing control and having a major conflict at 60% now. remember it took 10 years of festering for WW2 to start in earnest.