A young Ben Bernanke?
"He always knew what he wanted to be when he grew up."
and how far can Ben go if he does go with QE 3 .....
http://www.zerohedge.com/news/scary-math-behind-mechanics-qe3-and-why-bernankes-hands-may-be-tied
The Scary Math Behind The Mechanics Of QE3, And Why Bernanke's Hands May Be Tied
When it comes to the NEW QE, everyone has an opinion, and most seem to believe that the NEW QE will come next week, now that the US economy added "just" 96,000 people (but, but, the unemployment rate 'fell'). Certainly, and far more importantly, if the most recent FOMC minutes are any guide, the Fed shares this view. Sadly, as so often happens, most, and this includes the FOMC's various voting members, have once again made up their minds without actually evaluating the limitations posed by simple math. After all it is far easier to form an opinion, and actually think about the underlying facts later. The math, for those who actually have looked at the numbers behind the scenes, is scary(in UBS' words, not ours).
Here is the math.
As part of its Operation Twist, the Fed is buying long-term bonds, and selling short-term (0-3 years) bonds. As we reported in April, the biggest limitation for the Fed is that it is rapidly running out of short-term bonds to sell. There is a fix to this: the Fed will simply have to sell longer dated bonds from its SOMA portfolio, first up to 5 years, then 7, and so on. Of course, this will also force the Fed to extend its ZIRP language by an appropriate amount of time, through 2017, then 2019, and so on (which also means all bets that the Fed will hike any time in the next 5 years will be immediately null and void, and one can position accordingly in the Eurodollar space).
This move, however, will simply permit the Fed to extend Twist 2 beyond its year-end maturity. As a reminder, the primary role of Twist, aside from that stated one which is to keep the curve as flat as possible (i.e., boost housing which as we showed yesterday is not working, as refis have plunged recently despite record low mortgage rates), is to absorb virtually all the long-end supply: after all, it is all about the funding of the US $1 trillion+ annual budget deficit.
Said otherwise, when it comes to the 10-30 year sector the Fed is already monetizing all new issuance. This is part of the entire flow argument which we have been discussing for the past 6 months, and why we, correctly, say that Operation Twist is really QE 3 and QE 3.5 (for the recent extension of Twist). So far so good.
Here comes the important part.
Three weeks ago we presented a video courtesy of Stone McCarthy which showed a timelapse of the "takeover" of the Fed as the primary holder of public debt. For those short on time, here is how the Fed's holdings portfolio looked like then...
and now:
The shaded region is important for two reasons: this is where the Fed will be buying new bonds as part of any new QE Large Scale Asset Purchase program, and it tells us all there is to know about how big and how effective QE3 (really 4) will be. The bottom line, as calculated by UBS' Michael Schumacher and confirmed by anyone with access to the detail behind the Fed's SOMA holdings, which incidentally just hit a record 116 months two months ahead of Twist 2 schedule, is that "the Fed owns all but $650 billion of 10-30 year nominal Treasuries." Also as pointed out above, Twist 2, aka QE 3.5 is already absorbing all of the long end supply. And herein lies the rub. To quote UBS: "Taking out, say, $300 billion in long-end Treasuries almost certainly would put tremendous pressure on liquidity in that market....Ploughing ahead with a large, fixed size QE programcould cause liquidity to tank."
In other words, anyone expecting a full blown LSAP focusing only on US Treasurys will very likely be disappointed as the Fed will certainly realize, quite soon we hope, that it has only $650 billion in total 10 year + bonds available in the entire private market!
Well, perhaps the Fed will just monetize MBS, as Bill Gross has been betting on for nearly a year now. It could do that... but when once factors in "math", the results are once again quite startling. Quote UBS again:
The alternative of tilting purchases toward MBS implies that the QE program would need to be quite protracted. Monthly supply of conventional 15yr, 30yr and 30yr GNMA has averaged about $85-90 billion over the past year and the Fed is already buying about $25 billion. The Fed might be able to buy another $40 billion without disrupting the market. Assuming that the Fed does a $600 billion program with 75% in MBS, it would need to buy $450 billion in mortgages, so in our estimation the program would need to last nearly a year.
UBS conclusion is self-evident:
We doubt the market would respond well to that prescription from Dr. Bernanke.
Bottom line, if and when someone does the actual math on what the Fed can do, the results are quite disturbing, as they indicate Ben's hands are very much tied, and the Chairman no longer can conduct the type of bazooka event that most have expected. It certainly means that the Fed can not engage in anything remotely resembling the $1 trillion LSAP in QE3 (sic) that has been whispered.
Most importantly, all of the above actually confirms our biggest worry: the Chairman is well aware of the math behind this analysis, and is the reason why month after month he has been forced to pull a 'Girl with the Draghi Tatto' and jawbone the market into submission, hoping nobody else does the math on what Bernanke's real options are, because once the details are out there, and everyone can do the math on their own, only disappointment can follow.
As it turns out, Adam Yogi Berra Smith Dzhugashvili was right: there indeed is no such thing as a free lunch, especially not under central planning.
and two more counters against QE 3 from Sober look ... First inflation expectations are picking up while steepening in the treasury curve Friday denotes rapid and food an energy prices may be the outcome of QE 3...
SATURDAY, SEPTEMBER 8, 2012
The anticipation of aggressive monetary expansion by the Fed woke up inflation expectations
Friday's poor employment report has given us a good window into how financial markets react to prospects of a monetary expansion. The weakness in the US labor conditions has significantly increased the probability that the FOMC will lean toward an outright asset purchase program. Friday's market reaction to this possible move by the Fed is shown in the table below.
Typically weak labor markets are an indication of decreased demand and should not result in price increases in industrial commodities or energy. Yet Friday's moves in copper and oil are clearly the result of QE expectations (see this discussion). Some analysts continue to argue that Friday's gasoline price increase is due to the Hurricane Isaac hampering the refining capacity in Louisiana. That is a difficult argument to make in the face of the CRB commodity index as a whole rising 90bp for the day.
In a classic response to a potential monetary expansion, the dollar had a sharp decline of nearly a percent (see this discussion). And as expected treasuries rallied after the jobs report increased the probability of the Fed's incremental buying. But later in the day a more troubling trend was established. The treasury curve steepened, with the 30y bond and other longer dated treasuries steadily selling off for the rest of the day.
Why did the treasury curve steepen in spite of clear expectations of the Fed's new securities buying program? The answer has to do with market participants beginning to price in materially higher longer term inflation. While shorter term inflation expectations remain relatively benign (though rising), the 10-year expectation for example (derived from inflation linked treasury prices) rose to 2.37% on Friday (chart below). The same expectations of elevated inflation in the future also drove up the price of gold.
Rising long term inflation expectations intraday had pushed real yields for longer dated treasuries deeper into negative territory (see this post), forcing a selloff in the 30y bond, even as the shorter dated treasuries were up on the day. In fact the 10-year inflation expectation (and gold price) has been on the rise (chart below) since the market began anticipating additional easing from the Fed and the ECB.
In a classic response to a potential monetary expansion, the dollar had a sharp decline of nearly a percent (see this discussion). And as expected treasuries rallied after the jobs report increased the probability of the Fed's incremental buying. But later in the day a more troubling trend was established. The treasury curve steepened, with the 30y bond and other longer dated treasuries steadily selling off for the rest of the day.
 |
| Source: Bloomberg |
Steepening Treasury Curve
 |
| Treasury yield changes Friday, 9/7/2012 (Source: Bloomberg) |
Why did the treasury curve steepen in spite of clear expectations of the Fed's new securities buying program? The answer has to do with market participants beginning to price in materially higher longer term inflation. While shorter term inflation expectations remain relatively benign (though rising), the 10-year expectation for example (derived from inflation linked treasury prices) rose to 2.37% on Friday (chart below). The same expectations of elevated inflation in the future also drove up the price of gold.
 |
| 10y inflation expectation intraday (10y "breakeven"; Bloomberg) |
Rising long term inflation expectations intraday had pushed real yields for longer dated treasuries deeper into negative territory (see this post), forcing a selloff in the 30y bond, even as the shorter dated treasuries were up on the day. In fact the 10-year inflation expectation (and gold price) has been on the rise (chart below) since the market began anticipating additional easing from the Fed and the ECB.
 |
| 10y inflation expectation (10y "breakeven"; Bloomberg) An aggressive monetary easing program at this juncture could be a dangerous move for the FOMC. Structural changes in the US labor market since the Great Recession make the Fed's quest to materially bring down the unemployment rate rather fruitless (see discussion). And as an "unintended consequence", the central bank could boost inflation expectations - particularly the headline number that includes food and energy. With the US consumer sentiment already shaken (see this discussion), it wouldn't take much for spending to begin declining. Gasoline and food prices may not be a major part of the overall consumer spending in the US, but rapid increases can play an important psychological role in inhibiting spending, thus negating the very reason for the expansionary policy. |
and regarding labor participation - structural changes here in the US moot the Fed argument QE somehow creates jobs....participation rate for 20 - 24 year olds lowest on record - ever .....
SUNDAY, SEPTEMBER 9, 2012
Labor participation for men in the US hit the lowest level on record; decline among younger men is particularly sharp
Friday's employment figures were terrible across the board, although some have naively interpreted the decline in the headline unemployment rate (from 8.3% to 8.1%) as positive news. Unfortunately there is nothing positive about this change. As before, the decline is simply an indication of people dropping out of the labor force. This is clearly visible in the labor force participation rate (discussed earlier this year), which has now declined to the lowest level in over 3 decades. In fact the only reason that labor participation in the late 70s was lower than today is that women were still in the process of entering the workforce. Labor force participation among men is now at the lowest level on record - going back to 1948. This includes men with a college education.
What's particularly troubling is the relatively recent sharp drop off in the participation ratio for younger men (between the ages of 20 and 24), which is also at the lowest level on record (chart below).
 |
| US labor participation rate ages 20-24 SA (Bloomberg) |
Once again, this is a structural issue that can not be remedied with monetary policy.
http://www.zerohedge.com/news/goldmans-prepared-nfp-kneejerk-reponse-qe-probability-now-above-50
Goldman's Prepared NFP Kneejerk Reponse: "QE Probability Now Above 50%"
The NFP number was released at 8:30 am. At 8:40 am Goldman Sachs' Jan Hatzius hit "send" on a 356-word email to clients which was checked, vetted, and given the sign off by compliance, in which the Goldman head economist read through the NFP data, and concluded that "Probability of QE3 Next Week Now Above 50%." Curious why the risk assets first dropped then soared as if stung? Because today, once again, good is great, but worse is greater. Let the global liquidity tsunami continue!
From Goldman:
BOTTOM LINE: With today’s August employment report showing a nonfarm payroll gain of 96,000 and an unemployment rate of 8.1% because of a drop in the participation rate, we expect a return to unsterilized and probably open-ended asset purchases at the September 12-13 FOMC meeting.
MAIN POINTS:
MAIN POINTS:
1. We now anticipate that the FOMC will announce a return to unsterilized asset purchases (QE3), mainly agency mortgage-backed securities but potentially including Treasury securities, at its September 12-13 FOMC meeting. We previously forecasted QE3 in December or early 2013. We continue to expect a lengthening of the FOMC’s forward guidance for the first hike in the funds rate from “late 2014” to mid-2015 or beyond.
2. While there is significant uncertainty around the details of any new program, our base case is that QE3 will be formulated as an open-ended asset purchase program of around $50 billion per month, with an end date that is not given in advance but made dependent on progress in the economic recovery. We expect the criteria set for ending the program to be formulated in qualitative terms in the FOMC statement but explained in more detail in Chairman Bernanke’s press conference and in a statement from the New York Fed. We expect Operation Twist 2 to be continued until its scheduled completion at the end of 2012.
3. The return to asset purchases at this time is not a given. It is also possible that Fed officials will limit themselves to a lengthening of the forward guidance. In that case, we believe that they would try hard to find a way to not only lengthen the guidance but make this guidance more powerful by coupling it with a statement to the effect that “…a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed.” It is even possible that the committee would adopt Chicago Fed President Evans’ proposal to signal no rate hikes until the unemployment rate has fallen to a specific level (in Evans’ version 7%) unless underlying inflation rises above a specific threshold (in Evans’ version 3%). But that is not our base case.
http://www.zerohedge.com/news/us-added-just-96000-jobs-august-far-lessthan-expected-unemployment-rate-slides-81
US Added Just 96,000 Jobs In August, Far LessThan Expected; Unemployment Rate Slides To 8.1%
In August, two months ahead of the presidential election ahead of which this number will be one of the most critical and talked about, the US generated just 96,000 non-farm payroll jobs, on expectations of 130K additions, and compared to the July number of 163,000, now revised to 143,000K. Private payrolls rose by a modest 103,000, much lower than the expected number of 142K, and down from July's revised 162K. -15,000 manufacturing jobs were lost, compared to the expected +10K, and sadly just a little bit short of Obama's recent promise to add 1 million manufacturing jobs by 2016. Finally, while the unemployment rate came lower (surprise, surprise: this is what appears in newspapers) at 8.1%, far lower than expectations of 8.3%, and below last month's 8.3%, the broad total underemployment rate (U-6) continues to be sticky at 14.7%. The reason for the drop in the unemployment rate: labor force participation dropped to 63.5%, down from 63.7%.
From the report:
Total nonfarm payroll employment rose by 96,000 in August. Since the beginning of this year, employment growth has averaged 139,000 per month, compared with an average monthly gain of 153,000 in 2011. In August, employment rose in food services and drinking places, in professional and technical services, and in health care.
Employment in food services and drinking places increased by 28,000 in August and by 298,000 over the past 12 months.
Employment in professional and technical services rose in August (+27,000). Job gains occurred in computer systems design and related services (+11,000) and management and technical consulting services (+9,000).
Health care employment rose by 17,000 in August. Ambulatory health care services and hospitals added 14,000 and 6,000 jobs, respectively. From June through August, job growth in health care averaged 15,000 per month, compared with an average monthly gain of 28,000 in the prior 12 months.
Utilities employment increased in August (+9,000). The increase reflects the return of utility workers who were off payrolls in July due to a labor-management dispute.
Within financial activities, finance and insurance added 11,000 jobs in August. Employment in wholesale trade continued to trend up. Employment in temporary help services changed little over the month and has shown little movement, on net, since February.
Manufacturing employment edged down in August (-15,000). A decline in motor vehicles and parts (-8,000) partially offset a gain in July. Auto manufacturers laid off fewer workers for factory retooling than usual in July, and fewer workers than usual were recalled in August.
Employment in other major industries, including mining and logging, construction, retail trade, transportation and warehousing, information, and government, showed little change over the month.
The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in August. The manufacturing workweek declined by 0.2 hour to 40.5 hours, and factory overtime was unchanged at 3.2 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls was unchanged at 33.7 hours. (See tables B-2 and B-7.)
and....
http://www.zerohedge.com/news/reason-why-unemployment-rate-dropped-labor-participation-rate-fresh-31-year-lows
The Reason Why The Unemployment Rate Dropped: The Labor Participation Rate Is At Fresh 31 Year Lows
Curious why the unemployment rate dropped from 8.3% to 8.1%, even as just 96,000 jobs were added? The labor participation rate declined from 63.7% to 63.5%, the lowest since 1982. It means that somehow in August the labor force declined by 368,000 people, which is a paradox since according to the household survey 119,000 jobs were lost in August. The combination of these two factor magically resulted in a drop in the unemployment rate.
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