As Clock Ticks on Effort, Some See a Round 3

WSJ ^ | APRIL 25, 2011 | By JONATHAN CHENG And TOM LAURICELLA

[throwback]

"QE2" is not even in drydock, yet some money managers are preparing for the christening of "QE3."

Investors appear to expect the Federal Reserve to wind down in June its extraordinary efforts to support the economy known as quantitative easing—currently in its second installment and therefore referred to as QE2.

But a handful say the financial markets and the economy still aren't strong enough to stand on their own. They argue that, soon after QE2 ends, the economy, the jobs market and asset prices will stumble. The housing market, they say, is still struggling and may founder further without the Fed support.

That, in turn, will force the Fed—which is on track to spend $600 billion in newly created dollars to buy Treasurys through QE2—to come back in to again prop up markets: Enter QE3.

John Burbank, founder of Passport Capital, a San Francisco-based hedge-fund firm that manages $4.4 billion, argues that the role of QE2 in inflating the prices of stocks, commodities and other riskier investments has been "enormous."

The current Fed buying spree comes on the heels of its first big binge, when the central bank bought $1.7 trillion worth of Treasurys and mortgage-backed securities.

That, Mr. Burbank says, has resulted in asset prices that don't reflect the economic fundamentals. "It's not the real world," he says. "But people draw conclusions from prices that, if they're up, then the world must be good."

Mr. Burbank thinks stock prices could fall anywhere from 10% to 20% around the time QE2 stops, with some of the decline coming in anticipation of its ending and some after. However, "I don't think the Fed will tolerate a situation where asset prices are meaningfully lower, and that's when we get a version of QE3."

[throwback]

John Burbank, founder of Passport Capital, a San Francisco-based hedge-fund firm that manages $4.4 billion, argues that the role of QE2 in inflating the prices of stocks, commodities and other riskier investments has been "enormous."

"The Fed is working like a wife who has two or three jobs, while the deadbeat husband sits on the couch drinking beer and complaining," he says.

Or Ben is our crack dealer, and just one more hit and we'll feel better. Fake President. Fake recovery.

[kittymyrib]

Wall St., like Congress, is a perpetual teenager. It always needs more money.

[Nervous Tick]

America — indeed, most of the world — has discarded honest productivity and thoroughly embraced asset bubbles as the preferred economic growth engine.

Is is a Sisyphean task to keep the ol’ bubble inflated.

The longer it’s kept artificially inflated though, the worse the mess when it finally pops. And it WILL pop. Bubbles always have popped, and they always will.

Prepare. Whatever that means to you. I know what it means to *me* (right or wrong), and I’m preparing accordingly.

[Scott from the Left Coast]

They are keeping the financial markets inflated because if they don’t every union, government and even private sector pension bubble pops just like the housing market did. Every baby boomer pension goes up in smoke - I mean completely up in smoke because all those defined benefit plans that government employees and union employees have become completely insolvent and unable to pay retirees or cover their health insurance. It would be armageddon for those who vote more faithfully than any other cohort.

[bbernard]

Weimar Republic here we come....

[henkster]

This is all BS. QE 1, 2, 3, and on and on is not at all about “stimulating” the economy. The rationale is just cover for what the Fed is really doing: Printing money to paper over the massive deficits our government is racking up. At $400 billion annual deficits, there was enough money in the international bond market to externalize our deficit spending. At $1.7 Trillion, we far exceed the capacity of the international bond markets, so the only alternative is to internalize and monetize the new debt.

Compare the QE numbers to the non-externalized deficits and the numbers are roughly the same.

This is exactly how the Germans tried to finance World War 1, and by 1923 they were taking home their paychecks in wheelbarrows full of worthless paper.

[KarlInOhio]

Do they keep playing Khachaturian's Sabre Dance at a high volume through the entire Federal Reserve building. It's looking more and more like a plate spinning trick where they are barely keeping the plates they have balanced, are trying to add new plates and have no possible way of taking any down without crashing the whole mess.

[CowboyJay]

The only thing they’ve succeeded in ‘stimulating’ is basic commodity inflation. Which is, of course, the most damaging thing imaginable to an economy not based on raw resource production.

We need a gold backing requirement again to keep them from playing the asset bubble game going forward.