While rumors of a QE3 have been swirling around for a while, the past few weeks have brought an avalanche of disappointing economic news, with yesterday's ADP report a grim preview of NFPs. Add to that a slowdown in global manufacturing and talk of QE3 may be more than just talk and the recent run-up in Treasury prices seems to indicate that markets are pricing in another round of buying courtesy of the Fed.
The political repercussions of such a move would be vast. While Washington bickers over the debt ceiling, some are clamoring for the death of the Fed and the end of QE programs. When QE2 was first implemented, the Fed became an object for political discourse and were QE3 to be announced, you can bet your local Congressman will have something to say. Does that make QE3 impossible? No, but I'm not sure the decline in Treasury yields is simply a bet that QE3 will be put in place. The cost of QE3 seems prohibitive from a political standpoint, unless of course the economy falls from a cliff.
Speaking of the economy falling from a cliff, the most obvious explanation for the recent slowdown is the prohibitive costs of commodities companies were faced with in recent months. It seems that QE2's real effect was to drag risk assets up a steep cliff before throwing them off once they got too expensive. Any more rounds of quantitative easing will probably just serve to repeat the experience ad infinitum.
So what happens when QE2 ends? Could it be that the Treasury market is completely blind and will get absolutely smoked come July 1? I kind of doubt it. Bill Gross keeps asking where the Treasury buyers are. Guess what? They're the guys who've been pushing up Treasuries for the past month. Will they all pull out later this month? Probably not unless we start getting a lot of positive surprises. That depends on how much analysts temper their expectations after an awful month of May. In absolute terms, June will probably be better than May considering slightly lower commodity prices, but whether forecasts are beat depends a lot on where analysts decide to set their sights.
I'm sorry if this doesn't answer any of your questions on where the markets are going, I'm just trying to make sense of what's going on. My only advice is to keep your eyes open, be long volatility and get ready for some fireworks and some major inflection points in the next 2-3 months.
QE2 clearly hasn't improved housing, hasn't improved unemployment numbers, hasn't improved GDP. A lot of the problem appears that you haven't resolved structural issues such as job creation. It doesn't look like we'll be expanding manufacturing jobs anytime soon with the cost of labor in this country greater than every emerging market.
With yields already around 3% on the Ten Year, does the Fed even think that QE3 will be any more successful other than thrilling longs of every risk asset?
And as unpopular as it would be, I don't think Congress nor Obama has any say on whether or not the Fed can conduct QE3. The president can only nominate the Fed chairman who Congress approves and as far as I know cannot be removed by the President or Congress for his views.
You're right. But QE3 could mark the death knell of the Greenspan/Bernanke complex if political ill-will is allowed to fester against the Fed.
I think the surprise we will see is that QE3 might actually be announced. EUR hit a monthly high vs USD today, and USD/CHF is at all time high this week. QE3 (if it happens) will plunge the USD into a downward spiral that will certainly send commodities higher, but if it does not happen, I'm not really sure what will happen next. Economy will basically be off of the proverbial life-support.
I like this recording by Schiff yesterday (if you are clicking this past this threads original date, make sure to go to the June 1st recording, because he records weekly and the link defaults to his latest video), I think he brings up some good points here about this topic. Have a listen if you got 12 mins.
http://www.europac.net/media/video_blog
I'll give that video a look trailmix, it's blocked at work.
thx, let us know what you think
Finally got around to watching the Schiff video. While I agree with his basic premise, some of the consequences he outlines for a QE3 seem hyperbolic and I think he gives QE and QE2 too much credit for the recovery. We're not in a depression, but in a phase of consumer deleveraging which is primarily taking place in the housing market. While ultra-low rates and QE have certainly boosted asset prices, this is a real recovery, regardless of how anemic it is. Just consider the fact that lending is so tight in spite off all of the Fed's efforts. This recovery isn't completely credit-fuelled, there's actually a cyclical bounce going on.
Also, suggesting that Switzerland is doing well because of their strong currency is silly. If you want to see someone crushing it thanks to their currency, look to Germany and France. The swissy is strong because Switzerland is doing well and has pursued the policies to do so.
Voluptate reprehenderit praesentium et et. Blanditiis vitae error aut. Sunt minus qui aliquid voluptatem optio.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...