Government Sachs Says To Expect QE3

Jan Hatzius, the prestigious economist at Government, err Goldman Sachs GS came out with a report this morning and told us to expect some kind of QE3 announcement when the Federal Reserve meets next week. This is from his note this morning, thanks to ZeroHedge: "We have lowered our forecast for US real GDP growth further and now expect real GDP to grow just 2%-2½% through the end of 2012. Our forecast for annual average GDP growth has fallen to 1.7% in 2011 (from 1.8%) and to 2.1% in 2012 (from 3.0%). Since this pace is slightly below the US economy's potential, we now expect the unemployment rate to be at 9¼% by the end of 2012, slightly above the current level. 2. Even our new forecast is subject to meaningful downside risk. We now see a one-in-three risk of renewed recession, mostly concentrated in the next 6-9 months. There are three specific issues that concern us. First, a worsening of the European financial crisis, and a failure of European policymakers to respond adequately, could lead to a further tightening of financial conditions and credit availability, which would worsen the economic outlook globally. Second, our forecast assumes that the payroll tax cut—currently scheduled to expire at the end of 2011—is extended for another year, but if that failed to happen the fiscal drag in early 2012 would increase significantly. Third, increases in the US unemployment rate have historically had a tendency to feed on themselves, and this could happen again." He was just on CNBC and continued to echo these steps. "The Fed is probably going to respond with at least some small steps. The chances are now 1 in 3 that we will slide back into recession," Hatzius said. Usually, Hatzius waits until Friday night to revise his reports on the economy. Either he has an important dinner engagement this evening, or he really wanted to make a point to those that read his research. It has become abundantly clear that we either never really left the recession, or we are slipping back into another one. Despite today's better than expected July Nonfarm Payroll report, unemployment is still stubbornly high. There is tremendous amounts of public sector debt. We throw around the terminology of "hundreds of billions" like its pennies and nickels. Earlier this week, former Federal Reserve officials were interviewed by the Wall Street Journal's Jon Hilsenrath, and they essentially told you QE3 was coming. It has become abundantly clear a new round of securities purchases are under heavy discussion at top levels, as Jon Hilsenrath was the person interviewed. Hilsenrath is one of the main sources from the Fed to Wall Street, and if the above mentioned former Fed officials are discussing it, you can be sure Ben Bernanke, Bill Dudley, and others are discussing it as well." If Goldman, and the three former Fed officials expect something in the way of QE3, you can be sure it is coming. Along with higher gas prices, higher commodity prices, and not much else. When your 401k is up 20% for the year, but you are taking wheelbarrows full of money to the store to buy bread, you know who to thank. ACTION ITEMS:

Bullish:
Traders who believe that Goldman is right and QE3 is coming might want to consider the following trades:

• Anything oil or commodity related should do well. Potash Corp. POT, SPDR GOLD ETF GLD, Stillwater Mining SWC all should see a boost, as both agricultural and resource commodities will move higher.

• Also consider high beta tech, like Apple AAPL, Baidu BIDU, F5 Networks FFIV and others come to mind as well.

Bearish:
Traders who believe that QE3 is not coming thanks in part to today's July Nonfarm Payrolls report may consider alternate positions:

• Go long bonds. Economic growth is anemic, and we are seeing nothing close to anything that makes anyone bullish. iShares Barclays 20+ Yr Treas.Bond ETF TLT while down today, is likely to continue to see inflows if economic growth remains weak.

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