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Will QE3 be a concerted attack against the 10 year bond?

A few weeks ago several of us were discussing what shape could QE3 take, clearly (even at the Feds) QE2 has been a dismal failure; after all it only created bubbles in energy and stock prices. Expectation for economic growth have been substantially below target once the Fed (State and Local too) started contracting spending. Virtually all the GDP growth over the past 2 years has been driven by government spending, companies have improved profits by cutting costs – especially labor cost (there is clearly no labor inflation). Top line growth has been minimal – that’s important. The fact, that investors are finally waking up to Q1/11 GDP growth of 1.8% and not 4% is sinking in – BTW pay attention to bank stocks, look at GS, its not $175 anymore…

So Bernake has to find a new target, and that target has to be the longer end of the interest rate curve. The Feds will begin an aggressive program of buying America’s real benchmark bond – the 10 year. You don’t believe me; look at the 10Y T-Bill yield (it’s below 3%, a first in nearly 18 months). His objective to make the cost of borrowing for American companies lower (since companies don’t borrow overnight), it will also reduce mortgages (again the 10Y TBILL is a benchmark).

So that’s going to be the strategy (assuming that Congress can get its act together by August 2nd and raise the debt ceiling).

An alternative strategy is that the GOP is serious and its only goal is to defeat Obama in 2012 at ANY cost, if its 15% unemployment, recession and mass poverty, that’s a cost it is ready to assume. Since the GOP is now the party of very rich people and corporations – don’t confuse supporters with overlords! The GOP (and the Democrats to a certain extent) will answer to their paymaster [yes I know I am a cynic], but a strategy to defeat Obama needs to include a recession and high unemployment. The hatred (polarization) between the two parties has grown to such an extent that to defeat the other side Armageddon is not only contemplated but seems to be actively promoted.

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