To QE Or Not To QE?

Tyler Durden's picture Submitted by Tyler Durden on 10/11/2010 08:22 -0500

2s10sMorgan StanleyQuantitative EasingVolatility

You thought you knew everything there is to know about the implications, consequences, and ways to frontrun the government’s QE2? You were wrong. For everything you always wanted to know about Quantitative Easing, and about 100 pages more, here is Morgan Stanley’s Jim Caron with the definitive presentation deck on everything wicked that this way comes.

QE summary highlights from Morgan Stanley:

QE – whether or not the Fed engages in it, how big, how long and does it include a mortgage stimulus plan? Will this reduce the tail risk in risky assets?How might QE impact yields? Much depends on the point above. Our estimates are as follows:
Level: UST 10y 2.20%Curve: UST 2s10s 175bpsBelly (5-10yr sector) to OutperformMaintain longs on front-end forward ratesSpreads: modestly overweight spread product to earn carry. But we recommend spending some of that carry to hedge tail risks.
Swap spreads: we expect swap spreads to widen particularly in the 5-10yr sector, which is where we think the majority of UST purchases will take place in QE.Volatility: we expect great economic and political uncertainty in Q4. Market moves may be exacerbated due to looming QE concerns.Real rates vs. inflation: falling real rates near term to discount slowing real growth concerns. But inflation risk premiums to rise as QE, debt monetization risk and fiscal stimulus up the ante for inflation later on.Increased risk profile: the market is exposed to long duration, i.e., interest rate risk now more than ever.
The correlation of performance across asset classes in closely tied to changes in rate levels. But the expectation of QE allows some investors to look past this risk. We think that’s a mistake.

And here is how Morgan Stanley sees the event risk calendar into the first month of 2011:

To QE or not to QE: That is the Question


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by peripatetic86
on Mon, 10/11/2010 – 08:30

We know from history that Danegeld payments went on for many years by many different actors in power during the Anglo Saxon and Norman eras.  QE is no different.  There will be as many iterations as necessary until the rich and powerful are satiated enough to never fear that their power can be usurped or their influence diminished.   In other words as long as the weakling currency can withstand such graft and then and only then until the replacement currency can withstand such graft and then and only then…

Login or register to post comments by SheepDog-One
on Mon, 10/11/2010 – 08:47

But theres no ‘there’ there. Pay with what? Decimal points on a screen?

Login or register to post comments by firstdivision
on Mon, 10/11/2010 – 08:31

I think the markets have basically backed the Fed into a corner to push for QE2 by having such high prices.  If there is no QE announced, the markets will tank.  So it is not a question of whether or not to have it, but more of a when will it happen question.


Good thing the Feds supported this moral hazard that is rampant in the entire system now. 

Login or register to post comments by AccreditedEYE
on Mon, 10/11/2010 – 09:17

Good thing the Feds supported this moral hazard that is rampant in the entire system now.

+10 Agreed. Allan Meltzer had a great piece in the Journal this morning in regards to Fed stupidity at our expense. He also brought up the rumor last week of them moving their inflation target higher… (This while risk assets climb, commodities climb yet CPI goes nowhere) How much more obvious does it have to become that the Fed is only playing for the Banks and when the hell does the international market wake up to this reality and speak with their sell orders?

Login or register to post comments by SheepDog-One
on Mon, 10/11/2010 – 08:45

‘Stocks Rise on Continued Hope FED Does Something’…I’ve never seen a more ridiculous world ever. Who exactly bought stocks due to reassurance the FED would ‘ease’? Ease what, WITH what? Just massive stupidity, I’m outta this crap forever.

Login or register to post comments by Kina
on Mon, 10/11/2010 – 08:47

BB QE2 will get you another step out into space.…



Login or register to post comments by snowball777
on Mon, 10/11/2010 – 09:16

They’ll attempt to do it low and slow (in their eyes, of course) and that may be our only saving grace.

Great Karnak says: “$100B bundles which will push up oil beyond comfortable levels before six such disbursements can be made”

The astute will note that this is not enough to be useful for asset reflation, but will do wonders for crushing the dollar and corporate margins.

Login or register to post comments by tom
on Mon, 10/11/2010 – 09:31

“Increased risk profile: the market is exposed to long duration, i.e., interest rate risk now more than ever.”

Well, at least one of the big houses sees it. But I doubt this will stop the market from piling up more of the same.

Login or register to post comments by Andrew G
on Mon, 10/11/2010 – 09:41

Boring… QE2 is getting so fuckin boring I’d rather watch fuckin Oprah than read another article on QE2. A typical Hollywood happy ending is more uncertain than QE2.

Why doesn’t Bearwanke just fuckin do it and get over it.

Or maybe he’s getting kicks out of playing “how to keep 10 million idiot pundits in suspense”. I probably would… except that there’s nobody left in suspense, apart from CNBC and other complete fuckwits.

Login or register to post comments by SheepDog-One
on Mon, 10/11/2010 – 09:50

Right Andrew, Q/E2 hype has been the lone market driving hype for how long now, 8 months and 1.500 DOW points? Did everyone forget that the Q/E2 was to sail into port on the Sept FOMC, where they kicked the can further down the road again instead? Highly suspicious! I think now the Q/E2 hype is nothing BUT hype, as the FED has nothing!

Login or register to post comments by Andrew G
on Mon, 10/11/2010 – 10:23

Well, QE / POMO seems to be ongoing without any formal announcements from the Fed… It’s not like the extra $1T or so would even make much of a difference, which is why it’s boring me to death.

Back to Oprah. Wake me up when gold is $2000 or when there’s rioting on the streets, whichever comes first.

Login or register to post comments by apberusdisvet
on Mon, 10/11/2010 – 09:58

The end game is coming:  the DOW and Gold reach an equilibrium at 5000.

Login or register to post comments by Tsunami Effect
on Mon, 10/11/2010 – 10:10

The Fed will not announce QE2 the day after the mid-term elections when the Democrats get crushed.  Think about it, a crushing defeat in the mid-terms followed by a 500pt rally in the Dow due to QE2.  Never going to happen.  Already priced in and what would be Dem’s/Obama’s goal?  For a market sell-off after the mid-terms with Fed NOT announcing QE2! 

Login or register to post comments by SheepDog-One
on Mon, 10/11/2010 – 10:20

I agree. Its a total bluff, we may as well be watching ‘The Sting’ as the pot has been ante’d up and is all in and the FED holds a pair of 2’s.

Your theory is the rug is pulled after the election ass-kicking, I still believe they avoid an election humiliation and do it before, due to whatever ‘totaly unforeseen disaster’, where the markets, FED, incompetent politicians and crooked banksters suddenly become the last thing on anyones mind.

Login or register to post comments by gwar5
on Mon, 10/11/2010 – 10:19

Thanks ZH.

Any news on QE II is welcome even if the Fed is the one getting tedious with all the posturing and talk. Looks like they’re playing a big game of chicken with China to get them to raise their currency and will crush our own  if they don’t.

So, what if China cries Uncle and signals they’ll raise their currency? That would not be small thing. What will BB do then? That’s why I keep tabs on this. 


Login or register to post comments by Apostate
on Mon, 10/11/2010 – 10:19

When Morgan Stanley starts using clip art, does it mean that we’re all going to die?

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