"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Saturday, November 10, 2012

So Where's the QE3??? (Updated)

As you all know by now, the Federal Reserve boldly announced plans "to boldly go where no man has gone before" and purchase each and every month, the tidy sum of $40 BILLION in US Mortgage Backed Securities (MBS ) to "aid the recovery". This was supposed to begin in September of this year and continue on out as far as the eye can see, into infinity, as my friend Jim Sinclair has stated, or until economic conditions warrant a cessation of the program.

Here is the problem however. I have been closely monitoring the balance sheet of the Fed each and every week and I simply do not see it! Take a look at the following chart I have constructed of the overall balance sheet but detailing also the sum of mortgage backed securities contained therein.

Can you see how both lines have basically flatlined since the cessation of QE2 last year? Does anyone out there see a climbing MBS line on this chart especially to the tune of $40 billion higher each month? I sure don't!

Here's a closer look at just the Mortgage Backed Securities listed on their Balance Sheet. Does anyone looking at this see any sort of SUSTAINED move upward on this graph as of yet?

By now we should have seen at the very least a jump of $40 billion for the month of October. We did get some buying seeing a jump from 835,000 to 868,069 ( a rise of $33.1 billion - less than $40 billion) but then we fell right back again. Obviously the Fed is selling some of these assets as they have been doing for some time now but in my mind, this defeats the entire reason behind an addtional stimulus effort involving $40 billion in new purchases each and every month. It may be that if this is the trend (purchase new MBS's and add to the balance sheet while selling some existing MBS's and remove those from the balance sheet) that the actual QE3 effort is going to fall short of an increase of $40 billion each and every month.

Here are the big questions which I hope someone out there who is more versed in these things than I am can answer - Where's the QE3 going? What is the Fed buying or are they even buying anything? If they are not buying, why not? If they are buying, why is the size of their balance sheet not increasing by at least the tune of $40 billion each month? How many existing MBS's already on their balance sheet prior to the onset of QE3 are they planning on selling?


  1. The bonds bought during QE1 and QE2 are not maturing and coming off the Fed's balance sheet at a similar rate to the 40B/month the Fed is adding.

  2. Maybe Bernanke is just letting commodities and stocks sell off a little. He also must be worried about Treasuries like TIPS and muni-bond ETF's going parabolic due to Fiscal Cliff worries.

    Eventually, he'll have to crank up QE3 and step on the gas, perhaps then we will see a selloff in bonds relieve the overbought conditions.

    QE3 will be initiated to entice "Animal Spirit" buying of equities after they get oversold, and when bonds eventually sell off, Bernanke will use QE3 to slow down the decline so that it is orderly.

    Of course, that will drive up gold and other commodity prices, but as soon as they get to high, he'll start gum flapping about "price stability" and threaten to stop QE and that will instantaneously crash the CRB index and the Algos will immediately start buying bonds and U.S. Dollars again.

    Do you guys see how "easy" it is to be a central banker these days with the Algos being led on a leash like a pack of greyhounds chasing a meatball?

    It is as if Bernanke is purposely engineering a zig zag pattern higher and higher with both stocks and bonds, while the CRB Index remains mired in a predictable trading range.

    All done with "words" and "threats". If needed, he can always fool around with raising margin requirements if things really get out of hand.

  3. I think Bernanke knows what the result of QE to infinity will be especially with the politicians not doing anything to help solve the problems (he has said in his speeches that he cannot solve the problem alone). He has figured out that of all of the previous FED chairmen who has gotten away with the money printing he is now stuck with a problem so huge that kicking the can down the road is soon becoming impossible for him and the result of trying to do so will be devastating.

    He is smart enough to know exactly which steps are necessary to kick the can down the road and he is exceptional skilled in doing this. He had to launch QE3 to make the economy look good for the election and to keep the system from imploding.

    Bernanke has let us know that he is not going to seek a third term as FED chairman. He does not want to be the FED chairman who caused the hyperinflation and made the dollar collapse. He has figured out he is in over his head and now he wants to escape.

    The reason why the QE3 is not showing up in the FED balance sheet is that Bernanke knows the result of QE to infinity and he does not want that. Also he knows that he is found trustworthy and that he can make people believe there are QE3 (without it being there), and the risk of hyperinflation and dollar collapse in the short term will be less if QE3 is imaginary. Actual money creation is needed for hyperinflation. If there are no money creation there will be no hyperinflation. The risk of him being blamed for hyperinflation and dollar collapse will be less if he leaves the responsibility for actually implementing QE3 to his successor.

    Of course the imaginary QE3 will not be a viable solution since people with time will figure out that QE3 is imaginary and the money is not there. Sooner or later the QE3 money will be created by Bernanke or his successor, but for now Bernanke is trying to delay QE3 in an attempt to escape before things really get out of hand.

  4. As far as I know, there's been only 1 MBS purchase under QE3 so far. Not surprised it's not noticeable on the Fed's balance sheet yet.

    1. BTW, the scale of your chart is wrong. The side bar should say "millions of dollars" not "billions of dollars." Otherwise the Fed balance sheet would now be at over $2.5 quadrillion according to your chart, instead of the actual $2.5+ trillion.

    2. Unknown;

      thanks for letting me know about that scale notation being incorrect. I appreciate that as I missed that when preparing the chart. Also, I included a more narrowly focused chart detailing only the Mortgage Backed Securities on their Balance sheet. Take a fresh look at this and you will see my puzzlement!

      Trader Dan

    3. You're welcome.

      I read somewhere (forget where) that the Fed's statement of "$40 billion per month" wasn't intended to be precise, it was just supposed to be a rough number. Some months it could be a little more than $40 billion, some months it could be less. Looks like the October purchase was a bit less.

  5. Perhaps allowing a delay in applying the liquidity and thus creating a temporary fall in stocks will help to give insight into a free market in short term bonds without fed assistance. Should this market fail to be substantial enough then expect op twist to continue as outright money purchases along with more support from the masses as they will the have the view that mbs alone were clearly not enough.

    1. Could it be because of the following?

      "There has been some fluctuation since QE3+ was announced, but the Fed's balance sheet is essentially flat.

      The reason appears to be due to technical factors having to due with idiosyncrasies of the mortgage-backed securities (MBS) market, where settlement take place once a month and delivery can take up to six months.
      In addition, refinancing of mortgages results in early pre-payment of previously borrowed money. The maturing of current MBS holdings may be taking place faster than new ones can show up on the Fed's balance sheet.

      There is no reason to doubt that QE3+ will produce an expansion of the Fed's balance sheet. The real question is whether this expansion is going to bring the Fed any closer to its full employment objective."

      Read more: http://feedproxy.google.com/~r/MarcToMarket/~3/axf1OxrKfUM/great-graphic-qe3-yet-to-impact-balance.html#ixzz2BwLBozje

  6. I've seen several articles saying basically that the settlement of the FED MBS purchases will only begin to occur this week and thus are not on the balance sheet yet nor has the money been printed yet.

    Here is a typical link -


    I wonder if that means we will start seeing the effects to the market soon?

  7. Yes some of comments above are correct. Get this from the WSJ:

    "The Federal Reserve launched a major bond-buying program this fall,
    fueling worries that the ballooning size of its portfolio of assets
    could stoke inflation. So why has the Fed’s balance sheet been
    shrinking over the last two weeks?

    "The Fed held $2.825 trillion in assets as of Oct. 31, down from
    $2.849 trillion on Oct. 19. That’s nearly a 1% contraction, even
    though the Fed said in September it would begin adding $40 billion a
    month of mortgage-backed securities to its portfolio.

    "There are two main reasons for the drop, which should prove
    temporary: the fact that new Fed purchases take time to settle, and
    that old mortgage securities already in its portfolio are being
    retired at a faster pace with interest rates down.

    "As people pay back their mortgages — if they are re-financing, for
    example –the Fed’s holdings of mortgage backed securities shrink until
    it can use those funds to buy more."

    my comments:
    Mostly has to do with settlement dates

  8. This blog is really nice and informative. We are pleased to know this blog is really helping people.

    Free Nifty Tips


Note: Only a member of this blog may post a comment.