Wednesday, March 9, 2011

QE 3; To Be or Not to Be?

I wanted to get this out of the way as soon as possible because I see that plenty of people are getting either worried or have questions about the end of the FED's Quantitative Easing (QE) campaign.

Barry Ritholtz has two items up this week that look at why QE was started in the first and second place (Part 1) and some things to think about when QE 2 ends (part 2). Part 3 comes later this week and will be worth a serious look.

The easy way to look at this is to think the same thing that happened at the end of QE 1 will happen again before QE 3 is rolled out. I think it will happen about the same way but the time frames may be more compressed. I do not want to spend a lot of time going over all the reasons that the FED will now be boxed into supporting markets for a long time. I have spent enough pixels tilting at windmills trying to do anything about it. Who cares.

A lower stock market is going to happen when QE is over because there is so much firepower that flows from it. A lower stock market will rob the FED and the Government of their only example of progress.

Housing is getting worse and will continue to do so. The latest scam settlement with banks for maybe $20 Billion (and the banks are balking at even this!) is a sick joke. More MBS will need to be bought by the FED and I think second mortgage paper will also have to be purchased to "ease tight credit markets". This translates to transferring losses from banks to US taxpayers.

Municipal (muni) bonds are going to have a rough time going forward. Hello QE 3! Another asset class to keep higher than they otherwise might be.

Those are the big three for QE 3 introduction. I think all are almost 100% guaranteed to be serious issues that will threaten the "fragile" recovery that is at the same time a once in a generational rally in our markets (?).

For QE 3 to be either not needed or not able to be used you have to believe one or more of the following lines.

Municipal cutbacks will make large enough differences in budgets to attract capital while at the same time not damaging their finances even more by spending cuts. Tough trick to pull off.

Consumers armed with new low paying jobs (if they have one at all) and a shiny new sub-400 FICO score go on a buying binge with credit expansion that is not student loan debt.

Business is able to pass along substantial margin killing input costs or are able to fire more workers to keep margins a sick levels, hence record earnings on flat revenue.

Housing recovers (lol).

So how do you think this all plays out?

The process will be disjointed and ugly and I expect a hissy fit by Wall Street at some point that results in an ugly day or two. Then it will be the FED's time to ride to the rescue once again.

Have a good night.

1 comment:

GawainsGhost said...

Well, if think all that is bad, now they're messing with our coffee.

GYC, remember when I told you that the best investment was in farm land and that there was a lot of money in coffee?

Well, now it looks like another bubble that's going to burst.

Let's see, over the last few decades we've seen peak S&Ls, peak dot.coms, peak housing, peak oil, peak banking, and now peak coffee.

This is getting ridiculous. When it gets to peak whiskey, I'll start to be worried.