Here We Go: SocGen Warns There Is "Possibility" Fed May Increase QE Next Week

[thenews]

And so, one by one, the crazy pills theories start rolling out. Yesterday, as we first pointed out, Deutsche Bank made waves when it became the first "serious" organization to suggest that the Fed has now missed its tapering window, and will plough on thorough until the next downturn without ever lowering the pace of Flow (of course the reflexive paradox that the economy would be in an out of control depression without QE in the first place somehow does not figure in that calculation).

And while this has not been a novel idea (we first predicted that once perpetual QE starts it will never taper, long before QE 3, aka QEternity was even publicly announced last summer) today, all the penguin "pundit" copycats have jumped aboard this theory. Well, not all. SocGen has decided to make waves of its own with an even crazier pills idea: instead of no taper... ever... the Fed, that glorious redistributor of wealth from the middle class to the 1%, while happy to adhere to that old saying: "a funded welfare program a day, keeps the guillotines away" will not only not announce a Taper in next week's FOMC meeting but will in fact hike QE!

From SocGen:

Although we assign a very low probability to a decision by the FOMC to increase asset purchases at its October meeting, it is not a possibility we can ignore. Assuming the Fed does not increase asset purchases this year, we consider the bottom of the range on the 10yT to be 2.40%. The market impact of an increase in Treasury and/or MBS purchases would be to rally the long-end of the curve back towards 2.00%, destroy volatility (again), possibly tighten the mortgage basis, and supporting equity, credit and emerging markets.

The potential downsides to increasing asset purchases would be that (1) the market would assume the FOMC was focusing on a very grim economic picture; (2) the perceived risk of inflating asset bubbles in various market segments would rise; and (3) the FOMC may run into a credibility problem (again) by whipsawing the market.

...

The question now may very well be whether or not the FOMC will choose to increase asset purchases at the next meeting, or whether it will include language in the FOMC statement that indicates they are strongly considering the option. A simple interim solution would be to reinsert the language that appeared in the May through July FOMC statements that “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriatepolicy accommodation as the outlook for the labor market or inflation changes.”

...

Market Impact

The outcome for the US rates market going into year-end could vary dramatically based on what the FOMC signals next week.

Scenario 1: The FOMC statement is relatively unchanged, recognizes recent economic weakness as potentially temporary, and suggests that a reduction in asset purchases within the next six months has not been removed from consideration. Probability: 50%.

Lower end of range on 10yT: 2.40% through November; possible sell-off in December if data begins to improve.

Scenario 2: The FOMC statement reinstates language that asset purchases could be increased or reduced, and raises greater concern about recent economic weakness. Probability: 40%.

Lower end of range on 10yT: 2.30% through November; sell-off muted or unlikely unless December FOMC statement and communication begin to reinstate possibility of tapering in Q1 14 in response to improving fundamentals.

Scenario 3: The FOMC increases asset purchases by $10-20bn in October. Probability: 10%, with full disclaimer that our economics team thinks this probability is closer to 0.0001% and that your author is nuts!

Lower end of range on 10yT: 2.00%. The bull flattening of the Treasury curve will run us all over.

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[techmac]

They will never stop

[eurofreek]

Even if only a rumor (for now), this is how the markets are feeling about dollar.

[ndsouz1]

eur/usd will be kissing 1.40 or more if this happens?

[eurofreek]

On long term, it will sure go to those levels. If they raise the QE it will only send a message that dollar is weak

[thenews]

Fed could up QE to $1 trillion a month: Marc Faber

Marc Faber, publisher of The Gloom, Boom & Doom Report, told CNBC on Monday that investors are asking the wrong question about when the Federal Reserve will taper its massive bond-buying program. They should be asking when the central bank will be increasing it, he argued.

"The question is not tapering. The question is at what point will they increase the asset purchases to say $150 , $200 , a trillion dollars a month," Faber said in a "Squawk Box" interview.

The Fed—which is currently buying $85 billion worth of bonds every month—will hold its October meeting next week to deliberate the future of its asset purchases known as quantitative easing.

Faber has been predicting so-called "QE infinity" because "every government program that is introduced under urgency and as a temporary measure is always permanent." He also said, "The Fed has boxed itself into a position where there is no exit strategy."

The continuation of Fed bond-buying has helped support stocks, and the Dow Jones Industrial Average and S&P 500 Index are coming off two straight weeks of gains, highlighted by record highs for the S&P.

While there may be little inflation in the U.S., Faber said there's been incredible asset inflation. "We are the bubble. We have a colossal asset bubble in the world [and] a leverage or a debt bubble."

Back in April 2012, Faber said the world will face "massive wealth destruction" in which "well to-do people will lose up to 50 percent of their total wealth."

In Monday's "Squawk" appearance, he said that could still happen but possibly from higher levels because of the "asset bubble" caused by the Fed.

"One day this asset inflation will lead to a deflationary collapse one way or the other. We don't know yet what will cause it," he said.

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