The most anticipated announcement of the year – perhaps too anticipated (sell the news?) – will answer the question, “How much new money will the Fed decide dump into the situation at their next meeting?”
Estimates range from a low of $500 billion to as high as $4 trillion. In the middle of the range is Bill Gross of PIMCO, who thinks the Fed needs to buy around $100 billion a month of US Treasuries (effectively monetizing the entire US deficit next year), while the high end is claimed by Jan Hatzius of Goldman Sachs, who makes the case that the Fed’s own “Taylor Rule” requires them to buy $4 trillion if they wish to close the apparent gap that exists between that rule and economic reality.
What began as a temporary rescue operation by the Fed and the feds to try and perform a normal Keynesian jump-start operation on the economy is now a permanent fixture without which the markets cannot operate.
For example, as noted here a few weeks ago, the stock markets owe much of their gains to the days that the Fed pumps money into the system via their POMO activities (and something that I have been observing and writing about for a couple of years now). Goldman Sachs has now pointed this same feature out to their clients.
Since Sept 1 – when QE was becoming a mainstream focus – if you only owned S&P on days when the Fed conducted Open Market Operations (in US Treasuries), your cumulative return is over 11%. in addition, 6 of the 7 times when S&P rallied 1% or more, OMO was conducted that day. this compares to a YTD return of 5.8%. the point: you would have outperformed the market 2x by being long on just the 16 days when – this is the important part – you knew in advance that OMO was to be conducted. The market’s performance on the 19 non-OMO days: +70bps.
(Via ZeroHedge)
But this is only a recent observation. What should we make of the fact that the entire mortgage-backed securities market seems to only be able to function with massive assistance from the Fed, which has pumped more than $1.25 trillion (with a “T”) into the system?
by acomfort 
