The Playbook For QE3

Yesterday

on what the Federal Reserve had to say, as it intends to leave rates alone until at least mid-2013 due to a weak economy. For about 30 minutes, the equity markets jumped, then plunged, then sputtered around, until Goldman Sachs came out and saved the day, at least for a couple of hours. No one was quite sure how to read the statement yesterday, but ultimately it was seen as being ultra-dovish, even more so then anybody on the Street, including Goldman, expected. "We now see a greater-than-even chance that the FOMC will resume quantitative easing later this year or in early 2012. We have changed our call because today's statement suggests that the committee's reaction function to incoming economic news is more dovish than we had previously thought," said Goldman's chief economist, Jan Hatzius. Many are calling this Operation Twist 2, as the Federal Reserve announced it would be capping gains on the front end of the yield curve, at least for 2 years. Bill Gross of PIMCO had

this back in June, and it looks like it is coming. Operation Twist was enacted back in the 1960's, and capped gains on short term U.S. Treasury debt. With yesterdays FOMC statement, the Fed is not just capping gains, it is sending them all the way to O for the next two years. Today, equities are plunging on the fact that French banks are down sharply, and the continued rumors that there could be a potential French bank failing. If a French bank were failing, we could see equities plunge far more sharply than what we are seeing today, but QE3 is coming, do not doubt this. No one knows the size of QE3 yet, but many are speculating it could be an open ended version, having easing go on until the Fed sees fit to end it. It would have to be bigger than QE2, which was $600 billion. Those gains are now gone, and it is painfully obvious the only thing keeping the equity markets afloat is the Fed. If Goldman wanted QE3, it looks like it is certainly getting it. This comes despite having 3 dissenting votes for the first time in Fed history, with Fisher, Kocherlakota, and Plosser dissenting. Ben Bernanke is set to speak at Jackson Hole, Wy. later in the month, and this was the platform for announcing QE2 last time. History repeats itself. Despite today's drops, we are seeing certain commodities holding up relative to the market, with crude oil up $2 per barrel, gold soaring, and copper hanging on, down slightly. The playbook for QE3 is being handed to you today, as long as you are paying attention, amidst all of the market turmoil in the equities markets. What worked before will work again, once all the turmoil settles down. It could take weeks for the turmoil to settle down, with perhaps the Jackson Hole speech being the catalyst for ending the volatility. The definition of insanity is repeating the same action and expecting different results. The economy is not going to be bailed out this time. Welcome to QE3.

Traders who believe that QE3 is coming might want to consider the following trades:

Traders who believe that QE3 is not coming, you may consider alternate positions:

Bullish: everything will soar if QE3 happens, POT, MOS, BHP, AGU, MON Bearish: for the U.S. dollar, savings accounts, and the middle class