“At difficult times requiring sophisticated analysis, it is Greg’s time to shine. He has been top of these events for so long other analyst’s turn to Weldons work because it has been so good, is so good.” –  Michael Campbell.

Is the Federal Reserve going to save us all with QE3?  Weldon say’s “absolutely they will do QE3. The questions are only the timing, how to execute and how much will be needed to be effective”. There is a great deal of uncertainty right now as these markets and the environment have never been more difficult. “The fed will keep dangling the QE3 carrot in front of the markets long enough to keep them in check, so that they don’t hit another slide into a deflationary mode, which they are really on the verge of doing”. So QE3 is coming and the markets sense that. The real question is when. Greg spells out below some of the challenges the Fed faces in timing its QE3 stimulus below.

“Never has there been been a more critical fiscal or political situation. No one can really debate the fact that the fiscal future of the US hangs in the balance. That is a daunting process that really, in my mind, keeps the Fed on hold for the moment. Regardless the hope will run out at some point and the fed will move. You’ll get a rally, it will be disappointing,”

That and the Fed won’t have a lot of bullets left should QE3 fail. That and there is an election coming.

 With previous stimulus packages “We knew you would get some commodity inflation, some inflation in the markets, but you would not get the type of inflation that would show up in the regular economy, like wage inflation for exampe. You just wouldn’t have it. The trillions of dollars printed and pumped in sent the equity markets and commodity markets higher. It also re-liquified the banks and kept the system from collapsing into itself, yet it had very little efect on the real economy. The US economy is sick and getting sicker with US existing home sales recently seeing its biggest monthy decline, and US Food and Energy prices, particularly gasoline, are now down 3 months in a row. Further the US. posted the biggest retail sales decline in its history and the US labour market is clearly in a long term crisis of unemployment. Case closed”.

The markets are living on hope here, but that can only last so long. The real question is, can Bernanke can pull off something monetarily before the election?

Whats up for grabs is absolutely key to understand,  what is happening now, in Europe and the USA, is  not a minor event, not even a major event. It has  the possibility of being a catastrophic event.” Weldon gives one example to underscore that point. As the fiscal situation stands, June was one of the top 10 spending months in US history and that spending was twice that of the revenue taken in. Public borrowing for June was an enormous 200 billion, on course to 1.3 trillion in borrowing for 2012. You’ve also have the situation where the treasury is introducing new bonds at the same time the Fed is is spending billions to take bonds out of circulation. “The fiscal picture is working against the Fed and its doing it right now in a major way”. Wow” So it makes it even more difficult for the Fed in terms of timing of QE3. 

 

When they do do QE3, and they will do it says Greg, he thinks its likely that the markets will be at a lower level than they are now when the Fed pulls the trigger. For traders and investors they’ll not onl have the opportunity to loadup at lower prices, but lowerprices in markets will be the signal that the Fed is about to act and unleash QE3. Further, he thinks that there will likely be an immediate pop in the markets but the situation is so dangerous right now that if the Fed’s timing is not nearly perfect , and the and the markets don’t respond,  it will be the Fed’s worst case scenario described below:

 

As for the type of action the Fed is likely to take, one factor is that since it can’t lower interests past zero, the only place the Fed has any hope of bringing long term rates down is  by messing around and manuipulating in the long end of the Bond Market. Greg thinks that when you look at it from that perspective, a solution is not possible and “that is just reality.“The reality being that when push comes to shove, and we stare into that deflationary abyss, “every central banker in the world will choose to reflate no matter what the cost because they think that they can deal with reflation better. Iin their minds its preferable to the pain of deflation. That’s the bottom line. The question becomes when does their pumping of money not work? There are no easy solutions to this and Europe is demonstrating that right now”

Yesterday the 10 Year T-Note hit a record low interest rate of 1.402%

Bottom Line, this is a and extremely dangersous market. Mark’s key point on the timing of QE3 is that it is likely to come with markets at a lower level from where they are now. That would be consitent with the Federal Reserve and Governments natural tendency to  react to and unfolding crisis. 

 

Best reduce risk wherever possible.

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