I wrote yesterday: The Fed Will Not Reduce Liquidity at This Time. Today, I will reiterate and state: Quantitative Easing will not and cannot end at this time.
This statement may appear to be rather bold in light of the noise emanating from traditional news outlets and the occasional Fed comment. However, a review of the facts support the notion an end to Q.E. would be catastrophic for the economy and therefore unlikely to occur under the present administration. I would also like to add, 2010 is an important mid-term election year. This fact would lay credence to the idea of further stimulus in 2010 not a reduction.
In order to support my thesis I have included three stories from a varying array of sources. The first story, brilliantly styled by Zero Hedge, highlights a voting member of the Fed. The second reveals the dire situation of the real estate market as told by the Mortgage Bankers Association. And the third story quotes the respected Bill Gross of Pimco. Bill explains, in plain English, the conundrum of Q.E..
From Zero Hedge (here):
Bullard Acknowledges Asset Bubble, Yet Fed Policy Will Remain Unchanged As Change Would Destroy Banks
…Ah, the fabled “extended period” clause. Well, thanks to Bullard’s clarification, we now know that this determination defines not an interest rate duration ambiguity, but rather one of the Q.E. program itself. The latter, in turn, is inextricably linked to the $1.1 trillion in excess reserves. So long as that massive overhang exists, and continues growing, any hopes for an end to Q.E., let alone rate increases, are a deluded myth. And all that posturing about extracting excess liquidity and adjusting the liability side of the Fed’s balance sheet, well, we’ll believe it when we see it. Until then, we, and judging by the dollar’s response to this speech, the broader market as well, fully expect another several hundred billion in tack-on MBS and, who knows, maybe even Treasury purchases by the Fed. The dollar carry trade is back, just as it seemed that Japan may regain the dubious distinction of being the supreme annihilator of one’s own currency. Sorry Japan, Ben is the man.
US mortgage originations seen plummeting – MBA (here):
WASHINGTON, Jan 12 (Reuters) – U.S. residential mortgage originations will plunge 40 percent this year to the lowest level in a decade as home refinancing demand sinks with rising mortgage rates, the industry’s main trade group said. Lenders will underwrite $1.28 trillion in home loans this year, down from $2.11 trillion in 2009, the Mortgage Bankers Association said in its annual forecast on Tuesday. That would be the lowest since $1.14 trillion in 2000. The forecast was downgraded from December, when the MBA predicted originations would fall about 24 percent.
Pimco’s Bill Gross on the Fed Q.E. conundrum:
Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds.
Disclosure: No positions