November 3, 2010 - How Big is QEII?

Featured Trades: (HOW BIG IS QEII?)

1) How Big is QEII? Speculation is rife in the Treasury markets on if quantitative easing has already started, and if it has, how big it is, or whether it will happen at all? Goldman Sachs has opened more than a few eyes when they put their $2 trillion forecast out there. The low-end estimate is $100 million between Fed meetings every six weeks.

Let me tell you how big that is. This month the Fed will buy $30 billion as part of its regular refunding efforts. The mean of these two predictions is $117 billion a month, or $1.4 trillion a year. That means that the Fed will buy the entire amount of debt created by the 2010 budget! This is why all asset classes are going up, even the wheezing, arthritic ones, like US stocks.

There are two great unknowns here. When does the Fed take the punch bowl away, and what will the markets do when it senses this is happening. My guess is that QEII will end sooner than later, because private investors have already done so much front running.

When it does end, the markets will sell off much more than in the past. The new, post crash risk control regime has a much finer hair trigger than before. Investors will no longer sit back and willingly take a 50% hit to their net worth. Buy and hold is dead, and the markets know it.

Alan Greenspan used to spike his punch with a surreptitious flask of Ron Rico rum. Ben Bernanke uses crystal meth, ecstasy, and steroids, and the hangover will be monumental. What will lead the downturn??? Wheezing, arthritic assets, like US stocks.

What's Really In There?