Strategic Briefing | 5.25.2011 | Will There Be A QE3?

QE3 Has Already Started | May 24
The new QE3 is the “RISK OFF” trade. QE2 ended up pouring $600 billion into stocks, commodities, oil, gold, and silver. Since April 29, the prospect of slowing economic growth has prompted this hot money to take flight and bail from these assets classes. Think of it as the same $600 billion stampeding into risky markets, doing a 180, and then stampeding right back out against. Where is all this money going? Into the Treasury bond market. We have in fact been in new bull market for bonds since February, taking the yield on the ten year Treasury down from 4.10% to 3.10%. If the current “RISK OFF” trade continues, or even accelerates, we could see ten year yields down to 2.0%-2.5% by the end of the summer.

Bernanke Will Be Forced To Do QE3 | May 22
The Fed is serious about freezing its balance sheet starting in June. They will continue to buy Treasurys as issues mature and are replaced. But, as Shostak points out, the momentum of money growth will slow down and that is the key to understanding what will then happen. If Treasury rates do not take off, then my assumption about domestic and foreign demand for Treasurys will be correct. If they do take off, it will be an indication of a shrinking money supply as Shostak points out which will lead to economic stagnation or even a market bust. On the other hand, I don’t believe the Fed will play “chicken” during an election year, and when things turn ugly they will announce QE3 and that will kick the can down the inflationary road. QE3 may be the last installment of this monetary madness.
Fed’s Dudley: Bernanke Put High Bar On QE3 Adoption
The Wall Street Journal | May 19
Federal Reserve Bank of New York President William Dudley on Thursday said people shouldn’t be concerned that massive levels of Fed-created bank reserves will cause an inflation surge down the road. “I don’t think people should be concerned” about the reserves now parked on the Fed’s balance sheet, the policymaker said. “We are going to make sure” they aren’t the source of rising prices and, to ensure that, “we will exit in a timely way,” he explained.
Outlook for S&P 500 and Economic Growth Cut: CNBC Survey
CNBC | May 24
Market participants now virtually rule out QE3 with 82 percent saying there will be no additional purchases after the current QE2 program ends in June. That’s up from 66 percent in the April survey.
The Case for More Monetary Elixir
Guggenheim Partners | May 19
While I acknowledge the potential for rising rates, I don’t think the expiration of QE2 is the catalyst that most believe it to be. In fact, I believe U.S. rates should remain range-bound at historically low levels for an extended period of time. I find it surprising how the majority of market watchers, lost in the obsession with QE2’s expiration, have so quickly dismissed the possibility of QE3.
FX Monthly
Saxo Bank | May 20
The current Fed thinking is that QE2 will end in June and that the economy will continue to sail off into the sunset. But exactly when was the last time Bernanke and Co. Were right about the US economy? The most recent FOMC have the Fed spelling out how it will begin to reduce its balance sheet. But is this simply a replay of the end of QE1, when the Fed was discussing the mechanisms for an exit strategy like reverse repos and the like, only to launch QE2 within a few months as the US economy couldn’t live without its monetary heroin? The base scenario: the US economy will deteriorate again late this year or by early next and, though the hurdle will be very high for QE3, it won’t be any higher than a return above 10% in the unemployment rate and/or very slow growth or a recession, combined with bond yields at the long end moving uncomfortably high.
Puru Saxena, chief executive at Puru Saxena Wealth Management, discusses the prospects for QE3
CNBC | May 19
Puru Saxena, chief executive at Puru Saxena Wealth Management, says the recent sell-off in commodities is a perfect backdrop for QE3.