Jeff Matthews on QE part deux ... http://jeffmatthewsisnotmakingthisup.blogspot.com/2010/11/open-letter-to-ben-bernanke.html
IB offered to ask some questions in order to "Interactive Brokers has requested this information so that it can determine whether you qualify under applicable securities laws for a wider range of investment choices and financial options than would be available to a standard investor. If you qualify, you may be eligible to receive information and invest in classes of assets - such as hedge funds, over the counter products, non-US equity options, and complex stock transactions - that only certain classes of investors can access." Looks like CDSs might be coming to IB
5y inflation expectations are getting a bit out of control http://noir.bloomberg.com/apps/quote?ticker=USGG5Y5Y:IND My bet is that the Fed dissapoints tomorrow
I believe Hatzius estimate that the Fed might endup buying up to $4T in assets is wrong. I understand he is not talking about this meeting but over the course of the many possible QE incarnations but I still disagree with that number. He arrived at the number by doing estimates of how much asset buying represents in terms of Fed Funds cuts then estimates how much cuts are needed from a Taylor rule perspective. But I dont believe the Fed is looking from that perspective. Matter of fact the Fed were quite happy to be failing at its due mandate without taking much action. That happened during most of 2009 and 2010 Lets recall that in 2008 when the alphabet soup of lending programs came out, the Fed(Board?) made the decision to not sterilize their programs and baloon their balance sheet. That happened because velocity was collapsing(post Lehman) and they knew that NGDP would collapse as well, so they decided to boost the money supply by letting the base soar(knowing some of that would become M1/M2). Their balooning wasnt enough as NGDP fell in the Lehman quarter. Notice that if this is correct it represents some kind of regime shift that they did not communicate to the markets That is, they are more concerned about broader monetary numbers and inflation(plus expectations) than full employment and the level of interest rates This is my view and because of that $4T is not the right number. To arrive at the right number one needs to know how much more delevering will occur in the next years, what velocity will do and what will be the conversion rate for every dollar printed to the broader money supply numbers. This is too hard to estimate
Another way of putting it is "Fed doesn't care about employment or the GDP output gap as much as their care about preventing deflation and being conservative with balance sheet risks at the same time" I believe this QE2 effort confirms that given that employment didnt change radically over the past 12 months. Inflation did drop, M2 grew weakly and they pulled the trigger when Iexpectations plunged The implication here is that the QEs will only go so far to create 1.5%+ inflation and good money growth. If they reach that with 8.5% UR and a still existent output gap they will stop printing anyway, so $4T can't be the right number
This round of QE will not be as aggressive as conventional thinking has it. The Fed is probably too arrogant to even give a damn about election returns, but I assure you that the new leadership in the House (Ron Paul specifically) will let them know. Bernanke better take it easy with his dollar debasement or he is going to have a battle on his hands in Congress.
" In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability." I'm not sure I'm right but this sounds to me that they are saying 'we intent to buy $600b but dont be surprised if we default on that promise anytime' The pace was bellow expectation and there was no down payment, rather it is a down 'intention'
I'm puzzled by why the market thinks its 'an ok statement' at least so far. The size was right around expectation(surveys were saying $500b or more) but there is no firm commitment from the Fed, they want to have the cake and eat it too by putting the 'we can back down' clause there. I believe they did due the inflation expectations