Tag Archives: Deflation

US Hit By $3 Trillion Bailout Estimate

The talented people at Zero Hedge makes a hard hitting analysis of the next phase of quantitative easing by the Federal Reserve. Their estimate for the whole so-called QE2 is stunningly 3 trillion dollar – almost the double of QE1 with a price tag of 1,7 trillion. Here’s some highlights, and link to the full report.

Perhaps at this point it is prudent to recall what the first definition of credit is:

1. Belief or confidence in the truth of something.

By that definition, America‘s “credit” has ran out.

Recently the debate over when QE2 will occur has taken a back seat over the question of what the implications of the FED’s latest intervention in monetary policy will be, as it is now certain that Bernanke will attempt a fresh round of monetary stimulus to prevent the recent deceleration in the economy from transforming into outright deflation.

Whether or not the FED will decide to engage in QE2 on its November 3 meeting, or as others have suggested December 14, and maybe even as far out as January 25, the actual event is now a certainty.

And while many have discussed this topic in big picture terms, most notably David Tepper, who on Friday stated that no matter what, stocks will benefit from QE2, few if any have actually considered what the impact of QE2 will be on the FED’s balance sheet, and how the change in composition in FED assets will impact all marketable asset classes.

We have conducted a rough analysis on how QE2 will reshape the FED’s balance sheet:

We were stunned to realize that over the next 6 months the FED may be the net buyer of nearly $3 trillion in Treasures, an action which will likely set off a chain of events which could result in rates dropping all the way to zero, stocks surging, and gold (and other precious metals) going from current price levels to well in the 5 digit range.

A Question of Size

One of the main open questions on QE2, is how large the FED’s next monetization episode will be.

This year’s most prescient economist, Jan Hatzius, has predicted that the minimum floor of Bernanke’s next intervention will be around $1 trillion, which of course means that he likely expects a materially greater final outcome from a FED that is known for “forceful” action.

Others, such as Bank of America‘s Priya Misra, have loftier expectations:

We expect the size of QE2 to be at least as much as QE1 in terms of duration demand.

As a reminder, QE1, when completed, resulted in the repurchase of roughly $1.7 trillion in Treasury and MBS/Agency securities.

It is thus safe to assume that the FED’s QE2 will likely amount to roughly $1.5 trillion in outright security purchases.

However, as we will demonstrate, this is far from the whole story, and the actual marginal purchasing impact will be substantially greater.

A Question of Composition

Probably the most important fact that economists and investors are ignoring is that QE2 will be accompanied by the prerogatives of QE Lite, namely the constant re-balancing the FED’s balance sheet for ongoing and accelerating prepayments of the MBS/Agency portfolio.

This is a critical fact, because once it becomes clear that the FED is indeed commencing on another round of monetization, rates will collapse even more beyond recent all time records (and if we are correct, could plunge all the way to zero).

What is very important to note, is that as Bank of America’s Jeffrey Rosenberg highlights, a material drop in rates, which is now practically inevitable, is certain to cause a surge in mortgage prepayments of agency securities:

“Our mortgage team highlights a 100 basis point decline in rates would raise the agency universe of mortgages refinanciability from currently about half to over 90%.”

Full report link.

Additional: BofA Securitization Weekly 9.17.pdf


Related by the Econotwist:

The US FED Launch The QE2 – Beta Version

Helicopter Ben; Cleared For Take Off

USA Could Be Forced Into Another Trillion Dollar Bank Rescue

James Bullard: The Future Of FED

US Economic growth slows to 1,6% – Does Quantitative Easing Really Matter?

Is Quantitative Easing An Attack On Your Freedom?

EUR Knocked Off Its Pedestal

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Want To Be Ben Bernanke’s Facebook Friend?

Unfortunately, I’m pretty sure that the FED chairman don’t have a Facebook profile. But it sure would be great if he did! However, the clever folks over at Zero Hedge have taken the time to set up one for him.

Take a look at the bright side.

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Fitch: Global Economy At Critical Juncture

The outlook for the global economy and sovereign credit is at a critical and uncertain juncture, Fitch Ratings writes in a new special report. According to Fitch, the economic data is still pointing towards a recovery, but the uncertainty and risk of a double-dip recession is rising. The agency also reports a sharp increase in consumer savings.

“The degree of macroeconomic uncertainty is highlighted by the presence of both inflation and deflation risks, and the scope for policy mistakes is high.”

Fitch Ratings

“The outlook for the global economy and sovereign credit is at a critical and uncertain juncture. Economic data show a strengthening in the global recovery, which would support a gradual exit from unsustainably loose fiscal and monetary policy settings. However, concerns over sovereign debt sustainability in some euro area countries and renewed market volatility raise the risk of a double‐dip recession,” Fitch writes in a new special report.

Fitch Ratings still believe the global economy is on track to recovery, but the agency is clearly getting worried.

In a new special report; “Sovereign Review And Outlook”, Fitch examines the risk of another downturn in the global economy more closely.

The conclusions are not too reassuring:

“As governments eventually rein back fiscal stimulus measures, the burden of countering the risk of a double‐dip recession and deflation in MAEs and soothing market concerns will fall even more squarely on central banks. Against this backdrop, Fitch expects monetary policy in the MAEs to remain looser for longer, and be a vital support for the global economy and financial system. It has adjusted downward its forecast for ECB refinancing rate to 1.25% for 2011 (annual average), from 1.5% (in the March 2010 “Global Economic Outlook”), while forecasts for US and UK policy interest rates are unchanged at 1% and 1.5% respectively.”

“However, at this juncture, there are even greater than usual uncertainties around this essentially benign global base case forecast, highlighted by the presence of risks of both inflation and deflation. First and foremost is how fears about the sustainability of some European countries’ sovereign debt will play out, including whether the market will impose a more abrupt fiscal retrenchment than governments are currently planning, and what impact it will have on EU and global activity. It is also uncertain how heavily household deleveraging will weigh on growth in MAEs and whether the private sector can take up the baton of growth as governments eventually have to tighten fiscal policy to protect their credit profiles. In addition, risk of a sharper than anticipated policy tightening and financial risk in China and other EMs cannot be discounted. Finally, all these uncertainties mean the scope for policy mistakes is high.”

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Those Damn Consumers!

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In spite of the indisputable Keynesian theory, and the immovable beliefs of our governments, the average Joe’s and Jane’s all over the world seem to be perfectly capable of making sound and rational financial decisions on their own.

In fact, the figures in the Fitch report show that private households are the only sector in the overall economy that made significant progress in reducing its debt level (deleverage).

Households in the UK, for example, have increased their savings rate from 0,8% in second half of 2008 to 7,7% in the first six months of 2010.

In the US, the households have increased their savings rate from 1,7% in 2007, to 4,7% in 2009, and will reach 6% this year, according to Fitch Ratings.

“The deleveraging process underway in the US household sector is a key influence on the global economic outlook. Encouragingly, US households have already made significant inroads into debt reduction with the ratio of gross and net debt to income down by about 10% from its peak. This has been achieved by a large swing into financial surplus as savings have risen and residential investment rates fallen since 2007. The position is similar in the UK, where the household savings rate increased to 7.7% of disposable income in H209 from 0.8% in H108.”

“A number of factors suggest that the full peak to trough decline in the US gross debt‐to‐income ratio could be as much as 30% — ie, fully reversing the run‐up in the ratio seen over 2002 to 2007 1 . A further 20% fall in the debt ratio could be achieved by 2015 if the household sector sustains a net saving ratio of 6% over the next five years on plausible growth and other assumptions (see the Outlook for US Household Finances table). This saving ratio would be higher than the rate of 4.3% in 2009, but lower than the rates seen before the 1990s and below the long‐run average.”


This trend is seen all over – and will probably continue for several years to come:

“Overall, this suggests that the household deleveraging process is probably less than half complete, and this will continue to prevent above trend growth over the  medium term. Nevertheless, once the household savings ratio reaches 6% ‐ which could happen this year as consumption is expected to grow less rapidly than GDP ‐ it will not need to increase further to secure a typical pattern of balance sheet improvement by 2015. Consumer spending can then grow in line with GDP from 2011 (provided the labor share and household tax rates are broadly constant) while still allowing balance sheets to improve. Hence household deleveraging should not preclude a return to trend growth from 2011.”

Here’s a copy of the full Fitch Special Report; “Sovereign Review And Outlook.”

Related by the Econotwist:

Internal Wrangles Could Leave EU Without 2011 Budget

German Banks With More Than 200 Billion Euro In Faul Credits

El-Erian On G20: A Non-Cooperative Game

G20: Another Meaningless Summit

Webster Tarpley: The Financial Reform Is A Failure

Welcome To The Euro, Estonia! Here’s Your 4,5% Extra Risk Premium

Citigroup: Euro Zone No Longer A Single Economy

Goodbye Keynes – Hello Ricardo!

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