Sept 27. The market banks on QE
Sept 27. October treasury expiration went out with a whimper. New low dollar. New high gold but interestingly both Barrick (ABX) and Newmont (NEM) closed on their lows. Stocks like a weaker dollar and like the idea of more QE…not surprisingly, equities rallied. As did grains.
–The prospect of more QE is fully embraced by the market. I saw a paraphrase of a view espoused by David Tepper (HF mgr)…either the economy gets better and stocks go up or there’s more Fed liquidity injections and stocks go up. I’m not sure that’s what he said, but it captures the sentiment of the market. My thought is, what if there is no more QE and the economy remains stagnant?
–More on QE: (from Mauldin letter). Lawrence “Meyer estimates that a $2 trillion asset purchase program would: 1) lower Treasury yields by 50bp; 2) increase GDP growth by 0.3pp in 2011 and 0.4pp in 2012; and 3) lower the unemployment rate by 0.3pp by the end of 2011 and 0.5pp by the end of 2012. However, Meyer admits that these may be ‘high-end estimates’.
–The fact is that 5 year notes already fell 9 bps from Friday to Friday, and tens fell 14 bps,
–Auctions of 2, 5 and 7 year notes Monday, Tues, Wed, but the Fed reinvests about $24 B of interest payments on Tues and Thurs; net wash.
Below are a couple of news stories:
–(Reuters) – California voters are essentially split on a ballot measure that would suspend a global warming law until the state’s jobless rate falls to 5.5 percent for a year, according to a poll released on Saturday. [this just shows how dominating the economy has become as an issue].
–(WSJ) about the closure of several wholesale credit unions: “Based on current market values, those securities are worth roughly half of their face value, representing a potential loss of $25 billion.” …”In an effort to minimize and spread out losses that must be absorbed by the credit-union industry, regulators said they will move all the battered securities into a good bank-bad bank structure. NCUA officials will manage the $50 billion portfolio, or “bad bank,” of the failed wholesale institutions. [another $25 to $50 billion of assets go *poof*. The financial press will hail the news as a sign of consumers prudently making necessary deleveraging adjustments]
–September 23 – Bloomberg (Ye Xie): “Chinese Premier Wen Jiabao said a 20% rise in the yuan would cause severe job losses and trigger social instability, putting the nation on course for a clash with U.S. lawmakers demanding a stronger currency. ‘We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs, and how many migrant workers will return to the countryside’ should China acquiesce to demands for a 20% to 40% gain, Wen said… ‘China would suffer major social upheaval.’”
[I think he is saying that he doesn’t want currency appreciation. And he’s not the only one, Brazil and even Peru bought dollars Friday. It’s tough to buy into the devaluation race as a method for economic presperity].
–Prudent Bear: On a year-over-year basis, Federal government expenditures were up 5.0% to $3.704 TN (expenditures up 30% from three years ago). Over the past nine quarters, federal expenditures have jumped from about 21% to 25% of GDP. Federal receipts were up 8.5% y-o-y during Q2 to $2.378 TN, or 16.3% of GDP. During the past nine quarters, receipts have fallen from about 19% of GDP. [this can’t last]
–Finally, if things had changed at all, how can GM be allowed to make POLITICAL DONATIONS? The US owns the company. And they wonder why there is disatisfaction with the political structure in the US?
