Tuesday, October 12, 2010

To QE or not to QE: That is the Question!

Stocks closed flat today after a volatile day of trading.  I wanted to start with the 3 year treasury auction today which was far from impressive:

"Treasuries declined after the government’s sale of $32 billion in three-year debt, the first of three offerings this week of $66 billion in notes and bonds, attracted weaker demand than at past auctions.

The 2.95 bid-to-cover ratio at today’s auction compared with 3.21 at the previous sale and an average of 3.12 for the past 10 offerings.

“The details of the auction do look weak,” said BNP’s Prakash. “Treasury buyers are looking to buy what the Fed buys right now, and that means more intermediate Treasuries. Before the Fed makes its decision there will continue to be lots of uncertainty.”

Indirect Bidders

Indirect bidders, an investor class that includes foreign central banks, purchased 29 percent of the three-year notes at today’s sale, compared with 42.4 percent at the previous auction on Sept. 7 and an average of 47.5 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.9 percent, compared with 11.7 percent of the securities at the prior sale and an average of 13.2 percent for the past 10 auctions."

My Take:

The 10 year no likey this news:

This is pretty ugly when you consider the market has all but priced in a second QE by the Fed.  You have to wonder why the world's central banks backed off big time today today's auction.

I mean why wouldn't you front run the Fed and pile into treasuries if you are a central banker?  Buy today and then sell to the Fed at a higher price tomorrow.  Sounds like easy money right?

Perhaps some are beginning to hedge on the QEII bet?  The FOMC minutes that were released today suggested that things would have to get much worse before they would consider another QE.

Even some of the pigmen are starting to admit that they don't believe another QE will work.  Morgan Stanley's Stephen Roach couldn't have been more blunt when asked about QE(his answer is in the last 30 seconds of the video):

I couldn't agree more Steven.  There is no demand to borrow and spend because the US consumer is shell shocked by the worst economy since the Great Depression.  We are done consuming for a looooong time because our personal balance sheets are as bad as the banks.

Housing is a perfect example of how averse to risk the consumer has become.  Houses(that are 30% cheaper) remain vacant even though lending rates have fallen to a record 3-7/8%.

There isn't a damn thing the Fed can do to change the consumers spending habits right now.  They could do a $10 trillion QE or another twelve as Stephen suggested above.  It's won't matter because the money can't get out into the real economy if the consumer isn't willing to borrow and spend it.

The only thing another QE would do is blow more bubbles within our financial system as the money begins flowing into various assets like commodities, bonds,  and stocks.

All J6P will see is higher prices on everything at a time where they can't afford it.

The reason why Wall St keeps demanding  this because THEY are the beneficiaries of QE.  As usual it comes at the taxpayers expense.

I really hope the Fed wakes up to this reality and never pulls the QE trigger.  I know  it's likely going to happen but a guy can dream can't he?

The Bottom Line

Today was an interesting tape.  The market tried moved higher as the bubbletards on CNBC pounded the QE drums following the the FOMC statement.

It worked for a while but we sold off sharply at the end of the day to close flat.  I continue onto hold my small shorts positions. 

It appears more and more that when the QE announcement finally does happen it may end up being a classic "sell the news" event.  If it doesn't come at all or if the Fed chickens out and announces some puny version of it then the markets could move violently lower.

I still hold out hope that the Fed ends up being like that little boy who kept crying "Wolf!". 

However, I see little evidence that this is gonna happen because the market is dying for a second does of financial "heroine".


getyourselfconnected said...

It's getting crazy out there!

Formerly the area of the tin foil hatters, now the following are discussed in regular economic circles:
-QE does not work
-the FED aims to prop up asset bubbles to goose spending
-Bretton Woods 2 is not sustainable

Well, I always knew I was not crazy!

Jeff said...

It is getting crazy!

Did you see this article below?

The robo signers had no mortgage experience.

Many were hair stylists, Walmart employees, and former plant workers.

These are all noble professions so no offense to anyone of course:)


getyourselfconnected said...

at this point nothing could surprise me. Post up in a bit (very short, home late) where you can play "figure it out" maybe a new feature.

Jeff said...


I'll check it out.

Whoa gold is soaring again tonight. Futes up a tad.

Dollar down(surprise surprise).

Anonymous said...

the fed just has to SAY they'll do something, and they get a knee-jerk market reation. its come to where they actually HAVE their econimic dictatorship; without any tangible actions behind it. sounds familiar; like... currency?lycomo

its safe to say; this will end up just like all the other sugar high stmulus rallies.... a sell off into speculative buying.

Jeff said...


Couldn't agree more. THe Fed is all bark and no bite.

All of these guarantees and saber rattling would mean jack if someone called them on it because they don't have the resources to back it up.

That's why gold is up another $13 today. This is frickin financial insanity.

What's even crazier is the markets are chasing their QE talk.

Like you said, Totally speculative buying based on failed policies that will end up destroying the currency and the real value of anything denominated in dollars.

Jeff said...

Let me fix that. Increase the price of anything denominated in dollars like commodities and oil etc.