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QE3 More Likely On Borrowed Time Than Not, Some People Say

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Sure, we've heard it before, but this time 31 of 47 people who bothered to answer their phone/e-mail are pretty sure that next week's Fed meeting will be the Fed meeting we've all been waiting and waiting and waiting for.

A majority of economists surveyed by The Wall Street Journal—66% of the 47 who responded—expect the Federal Reserve to say at next week's policy meeting that it will begin cutting back its bond purchases, a widely anticipated milestone in a period of extraordinary monetary policy….

Though the majority of the economists expect the announcement of the reduction in the pace of purchases to come next week, a third of the respondents don't expect tapering to be unveiled in September. That is less of a consensus than usually precedes Fed moves and suggests that at least some market participants will be surprised if the central bank acts next week.

Does it matter? No, according to Goldman Sachs! The only thing that matters is growth, and there'll be plenty of that.

While a rolling back of Federal Reserve stimulus and budget debates in Congress will pose “moderate risk” to stocks, wrote David Kostin in a note this morning, “a pick-up in U.S. growth will outweigh near-term policy” concerns.

He recommends investors “use any equity weakness around those events as an opportunity to add exposure.”

That would be a very bad idea, one (and only one) analyst at a lesser bank says, because, as it turns out, the taper does matter.

Gina Martin Adams is out on a limb. The strategist at Wells Fargo Securities is the only stock-market guru at a major Wall Street firm calling for U.S. shares to slump.

She is sticking with a call made earlier this year that the S&P 500-stock index will end 2013 at 1440. That would mean a 14% decline over the next 31/2 months, all but wiping out this year's gains. Ms. Adams reasons that once the Federal Reserve begins to pull back on its stimulus efforts, the stock market will lose a crucial source of support amid soft earnings growth….

Over the last two years, Ms. Adams's S&P 500 calls have been close to the mark. In late 2011, she predicted the index would rise to end 2012 at 1360, just 2.9% below its actual finishing mark. In 2011, she originally expected a rise to 1390, but cut her projection for the stock market's performance to 1250 in September, close to its year-end mark of 1258. But she was too bearish in 2010, when she expected the S&P 500 to finish between 980 and 1150. Instead it finished at 1258.

Economists Expect Tapering Announcement Next Week [WSJ]
Fed Taper? Debt Ceiling? No Worries, Says Goldman Sachs [WSJ Money Beat blog]
At Wells Fargo, a Bear Among Bulls [WSJ]


Banks Prove That They Are Not Too Big To Fail By Saying "We Can Fail" On A Piece Of Paper, Moving On

One way you could spend this slow week is reading the "living wills" submitted by a bunch of banks telling regulators how to wind them up if they go under. Don't, though: they're about the most boring and least informative things imaginable and I am angry that I read them.* Here for instance is how JPMorgan would wind itself up if left to its own devices**: (1) It would just file for bankruptcy and stiff its non-deposit creditors (at the holding company and then, if necessary, at the bank). (2) If after stiffing its non-deposit creditors it didn't have enough money to pay its depositors it would sell its highly attractive businesses in a competitive sale to willing buyers who would pay top dollar. This seems wrong, no? And not just in the sense of "in my opinion that would be sort of difficult, what with people freaking out about JPMorgan going bankrupt and its highly attractive businesses having landing it in, um, bankruptcy." It's wrong in the sense that it's the opposite of having a plan for dealing with banks being "too big to fail": it's premised on an assumption that the bank is not too big to fail. If JPMorgan runs into trouble that it can't get out of without taxpayer support, it'll just file for bankruptcy like anybody else. Depositors will be repaid (if they're under FDIC limits); non-depositor creditors will be screwed just like they would be on a failure of Second Community Bank of Kenosha.