Prepare for QE3

[sc281]

http://www.cnbc.com/id/43233866

Investors should prepare themselves for a third round of quantitative easing, Simon Maughn, co-head of European equities at MF Global, told CNBC Wednesday.

“The bond market is going in one direction which is up-falling yields which is telling you quite clearly the direction of economic travel is downwards. Downgrades. QE3 (a third round of quantitative easing) is coming,” said Maughn. “The bond markets are all smarter than us, and that’s exactly what the bond markets are telling me.”

“What’s interesting in the bond markets over the last couple of sessions is, you’ve seen human traders trying to step in and call this turn in the market the same way that equities have done … and they have just been mowed down by the quant funds which are all about leverage, all about momentum and are betting on bond prices going up,” added Maughn.

Once again, the United States will step up as the marginal buyer of bonds, said Maughn.

"One more big injection of cash into the bond market should take you through at least the summer season into the beginning of the fourth quarter.”

“That cash injection will have the normal inflationary knock-on impact, driving back up commodities, supporting industrial stocks, dragging the financials up with them… I think it’s all about the monetary injection trade,” Maughn told CNBC.

[Denny]

How can they when we can't sell them now that the debt ceiling didn't get raised? What is the Fed going to buy?

I'm not seeing the Fed buying up bonds. This is going to be something different. I think it's going to be a bumpy ride to August (new deadline). I have a bad feeling that they MIGHT do away with a debt ceiling altogether. If that happens, fuck it all!

[Broncojohnny]

This is just the counter point to El-Erian's article saying there is no way they would be crazy enough to do it. I trust El-Erian, the other half of the management team at PIMCO with Bill Gross, more than anyone.

http://www.cnbc.com/id/43237587

El-Erian: Why Fed Is Unlikely to Have Third Round of Easing
Published: Wednesday, 1 Jun 2011 | 1:15 PM ET Text Size By: Mohamed A. El-Erian
CEO and Co-CIO, Pimco

It is not the only one.

Other economies are also slowing or contracting—some as a result of budget austerity (such as the UK and the struggling European peripheral economies) and others because they are tapping their monetary policy brakes to counter mounting inflationary pressures (China and other emerging economies).

With such broad-based economic slowing, and with unemployment stuck at very high levels and becoming more structural (and therefore protracted) in nature, market participants are asking whether the US authorities will again try to turbo-charge the economy. And with additional fiscal stimulus off the table due to deficit and debt concerns, the spotlight is fully on the Fed’s reaction function.

So, will there be a QE3 program—i.e., another round of asset purchases by the Fed that push valuations higher, make people feel wealthier and, thus, get them to spend on goods and services?

Quite a few people are drawing comfort from a very recent precedent. After all, it is only last year that a significant economic weakening in the second quarter (including talk of a double dip) led both to QE2 and a fiscal stimulus jolt.

"I suspect that it is very unlikely that there will be a QE3.'

Mohamed A. El-Erian
CEO, and co-CIO, PIMCO
Notwithstanding the historical parallel, I suspect that it is very unlikely that there will be a QE3. This view is based on an assessment of economic, political and international factors.

As Chairman Bernanke noted in his August Jackson Hole speech, and reiterated in his first press conference a few weeks ago, policy measures should be judged in terms of the expected balance of benefits, costs and risks.

I suspect that there is now broad agreement that, in the case of QE3, this balance has shifted: lowering the potential gains and increasing the probability of collateral damage and adverse unintended consequences.

It is also clear that, in its attempt to deliver “good” asset price inflation (e.g., higher equity prices), the Fed also got “bad” inflation. The latter, which essentially took the form of higher commodity prices, is stagflationary in that it imposes an inflationary tax on both production and consumption—thus countering the objective of QE2.

Politics also plays a complicating role. With the Fed’s balance sheet having already ballooned, there is growing unease in Washington about an unelected group of officials being so able to implement de facto fiscal measures with few checks and balances. I suspect that Fed officials realize this, and will likely resist further steps that would significantly erode their operational autonomy.

Finally, there is the international angle.

With structural impairments limiting the efficient absorption of stimulus in the US, liquidity injections lead to surges in capital flows to other countries. In addition to weakening the dollar, such surges complicate economic management in the rest of the world. They fuel inflation and credit bubbles, and force countries to counter with monetary policy tightening.

As a result, the global economy becomes like a car that is being driven with one foot on the accelerator and the other on the brake!

Put all this together and the conclusion is clear: It is unlikely that there will be a QE3; and if there is, more time will be spent dealing with the costs and risks, as opposed to the benefits.

[Denny]

I think El-Erian holds too much faith that the Fed will make a good decision.

[Broncojohnny]

I think El-Erian holds too much faith that the Fed will make a good decision.

Well, remember his other half dumped a shitload of Treasuries a while back. I'd bet they can now buy them back cheaper. Might even be able to buy them back cheaper than that in another month or two when the debt scare really gets going good.

These guys make shitloads of money and rub elbows with the assholes who make the decisions. Bottom line is that they know a lot of things we don't.

I give QE3 about a 20% chance of seeing the light of day.

[Slowhand]

Third time's a charm!