heard various views. From Kocherlakota who suggested that interest rate
should rise by the end of the year, to Dudley who made it pretty clear
that he thinks it would be a mistake to back off the gas pedal anytime
soon.
None of those speeches matter much. The only thing that counts is Bernanke. The Fed will end up doing what he wants. There
is no true debate at the Fed. All the speeches are show ponies to
demonstrate that there is open thinking at the Fed. I don’t believe a
word of it. But I do believe when Jon Hilsenrath echoes Ben’s thinking. I believe the Ben/Jon duo was at work in this WSJ article today. The critical words from Ben’s lips: (link)
a $600 billion program of Treasury bond purchases known as quantitative easing looks likely to run its course as planned in June. This will effectively mean the Fed is moving to a neutral stance of no longer easing while not beginning to tighten policy.
Mark Ben’s, Jon’s and my words. This is what the future will bring us. QE will end in June. But the policy of ZIRP will be with us for a long time to come.
There are so many factors at play in the big capital markets these days.
The Fed is just one element in the equation. But if you focused on just
their effort you would have to conclude that the end of QE but never
ending ZIRP will bring us the following:
-Long end yields are going higher. I think the Fed moves have set
us up for a 5% long bond and a 4% 10-year. Long bonds are a sucker play
when the Fed continues to pour on the gas.
-ZIRP is good for stocks. We shall see about this. One can’t deny that equities are a better place to be than in cash that has a negative return.
-The dollar is going to get crushed. The Yen is a wild card that
is influenced today by the uncertainties of Fukushima. We could see more
weakness there. But the rest of the currencies of the world are going
to have to move higher. I see the Euro over 1.5 the Pound pushing 1.7
and the CHF at around 85 to the dollar. The C&A dollars will be a
good place to hide as well.
-PMs have to move higher. We will maintain a policy of cheap money and dollar debasement. How could the metals not respond?
-Inflation is going to roar. The food and energy component of the
puzzle that Bernanke refuses to consider is going straight up in my
opinion. I wouldn’t be at all surprised to see the non-core CPI up by 5%
by the end of the year. We could easily see $5 gas in six months.
I think this is an insane next step for monetary policy. We will all pay
a very dear price for this. I think it is also insane to have monetary
policy conducted through speeches, innuendo and newspaper leaks.
I couldn't disagree more. And I will mark your words!
First some clarification: for me "ending" means really ending not tapering off, not restarted soon thereafter (within 6 months), and not replaced by some differently termed and/or a backdoor approach effectively doing the same thing.
Simply put: How will the federal budget together with the bonds markets survive QE ending? 5% for the long bond would be a very tame number then.
Bernanke has already , repeatedly announced how he intends to "tighten policy". He intends to "tighten" by paying the banks a higher interest rate on their reserves.
Now, where do ya think he is gonna get the biyyons and biyyons of dolahs to pay dem banks? Huh? By printing it out of thin air of course- where else - I mean as Ben has already admitted the Fed cannot grow wheat or make stuff to sell right? So the money will just be created - by the summer intern typing in some additional significant figures into the balance sheet.
Soooo- the trade is this. Folks are gonna panic when the Fed announces that it will graduall "tighten'. Stocks will tank. The Playas will be loading up - because they will have the brains to figure out that the so called "tightening' in BenWorld actually entails putting more monety into the system! Brilliant - they dont just give those Phds at Priceton for nothing. Right?
Why do you all think so short term? The truth is that there will be many more Treasuries issued as far as the eye can see! The last twenty years were spent building a huge global paper ponzi scheme based on nothing more than a floating fiat currency construct designed by the globalists. The floating currencies are now floating away! Gold and silver are the only way!
Really? You mean the consistent, 80+ year depreciation of the dollar is magically going to come to an end --- particularly in light of our exponentially growing and already unsustainable debt? Do you have any historical precedent regarding ANY fiat currency to justify such an outrageous claim?
Yes the dollar has depreciated when comparing it to PM and yeah the FED has been around since 1913 doing it's evil work, etc. Having said that, I do not trade in 80 or 100 year cycles. The dollar is garbage, but when comparing it with the EUR in today's environment, I would sell the EUR and buy USD. As of right now, I am not aware of people transacting contracts in gold or silver, so paper is needed in today's world. As long as that is the case, I am bias toward USD....
I will take the opposite trade to every one of your points. The end of qe2 may be the end of commodity inflation and we have probably seen the intermediate top in everything. Everything is already priced in right now. It is going to take a surprise to make ur predictions.come thru and ben is doing his best to avoid surprises. Fiscal policy is the only unknown right now and that is up to congress. It is expected to tighten. If it doesnt you may be.correct. that would be unexpected by the markets, a failure to tighten fiscal policy.
The best the Republicons have come up with is around $60Billion in budget cuts, with the Decepticrats arguing for only around $33Billion -- the Tea Party is holding out for $100Billion -- the debt/deficit is around $1.6TRILLION!
Do the math, fiscal (futile) policy is pretty much non-existent at this point!
Long end yields going higher?
WOW, what an original prediction, and so brave.
Unlimited demand from China+Low government debt service=low long rates FOREVER.
God, you bond vigilantes are so dense, yes- yields on the SHORT end will go UP, while the long end will go down and invert-AGAIN!!!!
Jeez, you made me spill my tea.
PS: I disagree with all your other points as well. EVERY ONE.
Please explain why the USD will get crushed when QE2 ends on June 30th? I understand all paper is garbage and this is a huge USD bear website, but how can you say the USD will get crushed with the end of QE2 and no QE3? The Euro makes up a large part of the dollar index. What stands behind the Euro? You have every soverign on the continent going BK with the exception of Germany, France, etc. The IMF is in there pushing around the weak soverigns and Euro has no unified army behind it. Without a doubt the US has big problems that are being put off, but Europe's problems are right here right now. With no QE3 and Europe going down the tubes, how can the dollar not go up?
Someone define QE2 "End" - Principal and interest from QE1+2 should be about $75B/mth. If Benny actually cancels the debt sure but that's still a huge fire hose to keep rates low. That could keep ZIRP going a couple more years alone!
EUR & EU is relatively worse than the USD & USA in my view...perhaps if you only consider interest rate differentials you can make a case that the USD will go lower, but I don't see how anyone can ignore the problems in the EU...Reggie Middleton has some excellent pieces on this. Of course, its all relative to the situation we have in the USA and government sachs may be right and the EUR may go to 1.5 but that does not change the facts in the EU, and I am reasonably confident that the EUR will completely collapse and fail long before the USD does....
"We will all pay a very dear price for this."
In fact, it doesn't matter now what Bernanke does, this statement will be true. We're past that point of no return.
Just wondering: If this were an earlier era in the US, wouldn't there have been rioting in the streets by this point?
foodstamps...44m last count
Good point. Plus "reality" TV, I guess....
good analysis. you forgot about using the rollover to coninue to monetize the debt. The FED will be buying USTs forever....the dollar will soon just be one of many world currencies with gold/silver as part of the basket. the east, the new manufacturing and merchantile giant, will demand it as they have understood gold/silver to be money for centuries.
Ben heads to the sidelines as Europe implodes, and money runs for the relative cover of the dollar. Ben unloads, and lives to fight another day...
No one has given him props for this observation, yet, and it's quite insightful, so I'm going to. Conducting monetary policy through speeches, innuendo and newspaper leaks IS insane, Bruce. It's also disgusting, cowardly, deceptive and dangerous. Which describes Bernanke perfectly.
Obviously Herr Gross and Bruce have more knowledge and insight here, but I fail to see how the US Gov't will remain solvent. If QE ends, someone will have to pick up the $150bln/mo ball here when Ben heads for the bench in June. Bruce says rates will rise, but will there be enough buyers out there (even at these higher rates) for us to avoid a failed auction ? This money would have to be removed from somewhere-- bank vaults ? equities ? China ? I'm thinking it'll all be OK this year, but if we attempt to borrow another $1.6T in 2012 the bond markets will throw a serious hissy fit. I seriously doubt the US Gov't will ever reign in it's spending willingly-- especially before the 2012 election. As rates rise, so do the rates for housing loans, kneecaping any recovery in this area.
A lot depends on what we call "recovery"' in housing. If a recovery means prices go back up toward bubble era prices, there will never be a complete recovery in our lifetimes.
If a recovery means there's a brisk pace of sales, a drop in prices and true price discovery through market action might actually help.
But even a little movement in these historically low rates will crunch prices. People make the payments they can and buy as much house as they can at that payment. If interest rates go up then the amount of house that same payment buys becomes less.
For instance, if after down payment home buyers can afford a $300,000 mortgage with interest rates at 5%, you do the math and fine they can afford a$283,600 mortgage at 5.5% and a $268,700 mortgage at 6%.
So, if interest rates go up even 1%, the owner of a house that might sell for, say, $350,000 (let's assume a 50k down payment) will have lost around $30,000 in resale value compared to rates now.
good post. if uncle ben ends qe2 we got problems houston.
Bruce,
You do not see the issues with the EU & the PIGS as being a drag on the EURO?
What I like about Krasting's analytical style, is that he hones in on the simple and critical ideas as though his investing life depended on it. And that is a very good approach, a sturdy approach. Bruce reduces his work down to what will happen, free of what he wants to happen. I like it.
GG
In a free market, fractional reserve banks compete with one another by continually issuing more loans relative their reserves. This process is not coordinated and thus at any given time some banks will have more outstanding loans than others. Therefore, the customers of those overextended banks will spend more money in the community, which means that the customers of the other banks will be depositing/cashing more checks or other claims on the overextended banks than vice versa, such that when the various banks settle up, the overextended ones will get hit by net outflows to the other banks to cover those claims against them. Over time, this natural trend results in bankruptcies among the more extended banks. The purpose of a central bank is to coordinate the activities of all these banks, by mandating reserve ratios, and limiting competition from outsider or upstart banks. As such, the central bank is literally the manager of a banking cartel, the sole purpose of which is to allow all the member (i.e. owner) banks to inflate indefinately, without competing with one another (or anyone else) and without risking bankruptcy. The Fed is just such an entity, an intra-cartel government of, by, and for the banks which created it, operate it, and own it. There could not be any more conflict between the Fed and the member banks than there could be between a hammer and the hand that weilds it.
Great article Bruce... thanks.
You and Dollar Bill Hiccup actually gave me something to ponder. It is April and June is around the corner.
You put it out there, rubbing your crystal ball, leaving a benchmark for us to reflect back on, come late summer.
I can't help but think of wild cards yet played. I subscribe to the deterministic chaos theory where current events and those not yet revealed will impact the Fed's actions.
Chaos in MENA is spreading. What impact is the attack on the UN offices in Mazar-i-Sharif to US citizens' support for continuing to try "Winning the hearts and minds of the Afghan people."
I accentuate this incident as it is another precursor of change... chaos.
I see a gathering of critical mass thoughout the world. Call it chaos or yin-yang as these events confound conventional wisdom and make predicting the end of QE2 and never ending ZIRP an entertaining endeavor.
What is missed in most discussions... as the quality of living degrades, anger increases. It's an even sum equation that becomes visible once reaching critical mass.
As the FED spins chaos grows.
Godspeed Bruce
The Fed issued a test reverse repo this week. Why? To test the system and prepare for hikes I think they will increase short term rates 50-75bps this summer and fall to kill commodity inflation and also keep the POMO's coming to finance the deficits.
That won't be nearly enough. Not even close. Over at Max Keiser's site he's got a video with Peter Schiff playing in which Schiff speculates that they'd have to raise short term rates more like 300 bps to get that sort of effect and that ain't happening.
Even a hike of 3% is not nearly enough at this point, as the hike from 1.0% to 5+% in the period 2004 to 2006 clearly did not stop the ongoing rise in the precious metals either.
I'll bet a DU bomb or worse nullifies all "plans".
a nose the grows longer with each passing day, when has bernikie ever said what he means ,
this guy lies through his teeth and some article in the WSJ is spot on in his thinking ,,
Bridge still on sell one left ,, cheap
The Fed's talk is cheap. Based on the debt and deficit I don't see anyway the Fed could stop QE, or ever consider ending ZIRP under this monetary regime (can anyone show a way they could?). Based on the need to print money to service current obligations the argument that QE is necessary to avoid "falling back into recession" becomes irrelevant. However, based on the crooked nature of the system, I expect they will stop outright QE long enough to allow tax free repatriation of offshore corporate money, and create enough distress so that people will cry for more.
Based on the current level of excess reserves in the banking system and fractional lending, I anticipate the money supply will take off and velocity to pick up, followed by the necessary rise in price levels to stablize demand with the supply of real goods. If things get real bad, a repeat of the 1980s talk about price controls, rent control, etc. I haven't heard much recently but there was talk about instituting price controls in China a couple of months ago.
Fed default will be either outright, via debasement, or a combination of both but first, several states and munis will outright default. Probable riots in several states as public employees get Greeced and social saftey nets collapse. Armed robberies have spiked recently in an area I follow.
Residential real estate - the physical asset (excluding land value) is depreciating at 3.65% based on 27.5 year life, and much worse when maintenance is deferred. Add in the cost of inflation and all those vacant and/or squatter occupied homes are depreciating at a much higher rate.
Hayek wrote quite lucidly about how the use of QE as an ecomomic tonic was as addiction that could only end in disaster. Someone said it's not the what but the when.
In S America in the 1980s during inflationary spikes, companies and individuals found it necessary to speculate for survival. Same as in Weimar in the 20s. Trying to protect oneself is a rational thing to do.
Closing the somewhat pessimistic circle of thought, it seems the NWO is consolidating ME energy resources after having effectively nationalized all significant western financial institutions under the control of central banks, this seems to be the final play for the brass ring of world government. However the delusion of the central planners is forever fatally flawed by the inability to calculate the infinite variables and the cascading cluster f**k which occurs after minor oversights [let alone the inability to imagine a 9.0 followed by a tusnami, or a minister burning a Koran].
Enjoy the day, who knows what the morrow shall bring.
Great article. I am one who does not understand completely the flow of capital currently being thrown around. MY hunch is short term gain is being traded for long term disaster. For bonds and commodities, resources the result seems most clear. What is not, is the stock market. Does it rally ala Weimar style?
Bernanke disseminating information this way is suspicious. What also strikes me odd is that everyone, I mean everyone, is predicting inflation-- as if the fed actions really have some kind of effect on the ultimate outcome of the largest debt bubble the world has ever seen. From my experience, when everyone is on board with the same opinion in a financial market the opposite is set to happen. Does anyone believe that Bernanke is willing to wait 20 or 25 years to make money on those long term bonds he's been hoarding?
While mindlessly running with the herd is certainly no guarantee of success, and usually in fact just the opposite, there are occasions when something is so obvious that it is equally mindless to be blindly contrarian.
If you had been in one of those Japanese cities recently wiped away by the tsunami, and had suddenly found yourself in the middle of the entire town's population as it madly ran uphill, would you have been wise to think "if everyone is running uphill, I should do the opposite"?
And a few days later he could have patted himself on the back for another brilliant contrarian play as he saw everyone fleeing the nuclear reactor.
What also strikes me odd is that everyone, I mean everyone, is predicting inflation--
A little too easy for me as well.
And you are perhaps expecting to see, for the very FIRST time in history I might add, an honest-to-God fiat monetary deflation anytime soon?
The history of fiat currencies is not just littered with monetary debasements, it is DEFINED by that fact, and the history of the US dollar is no exception. To expect that the currency of a nation ruinously in debt, and sinking exponentially deeper into the same, is NOT going to experience significant currency debasement (if not collapse) is to ignore every lesson of financial and monetary history.
Later edit: This response seems to have shut up the deflationary flat-earthers, as it almost always does. The deflationary "wisdom" of Prechter and Denninger is a mile wide, but only an inch deep, and invariably dries up in the light of facts, reason, and even a cursory examination of monetary history.
The FED will pull the plug on QE2. Then the recovery bitches will beg them for more QE. "Please sir, can I have some more?" I liked my job, my Ipad and my car.
Who will be buying all the U.S. Treasuries that need to be issued to refinance roll and fund the massive Federal deficit? Japan? I don't think so. If they end QE for a short time it will just be gamesmanship to scare politicians who are looking to 2012 elections. QE is not stopping in my opinion.
My issue with the election argument is that the average Obummy supporter is the biggest victim of the QE programs - they will likely be better off with controlled inflation unlike the rich who can protect themselves by investing accordingly. We are all talking our book but I just don't see why 2012 election naturally leads to more QE.
I do believe, however, that Ben want as much QE as possible BUT only when it is beneficial, but the problem is that money currently seems to end disproportional up in commodities - which makes QE counter-productive, in my opinion.
Perhaps Big Ben will stop (temporarily) after QE2 sending the message to banks that they better start lending rather than speculating, thus allowing the markets (stock and commodities) to cool off, taming price inflation, stabilizing unemployment and real estate all resulting in a new "lower" normal standard of living for the middle class. This however could set up a "game of chicken" between the banks and the Fed as to who is going to give in first (QE3 or do you want the banks to fail). It will be like watching the ultimate fighting match as the "Trillionaire Titans" (banks vs Fed) duke it out!
Um, the Fed is an instrument of the banks.
I would love to hear Bruce's take on this issue "the Fed is an instrument of the banks". While I don't totally disagree, I raise the question: TO WHAT DEGREE? (i.e. until the system and middle class collapse?)
The Banks literally own the Fed; own the original shares.
The Federal Government has next to no effective control over the Fed.
Conveniently, the Banks also own our politicians in a somewhat less formal way.
My trading experience is mostly Canadian small and mid cap equities (and some US) so excuse my ignorance about the bond market but if the Fed ends its program to buy 600BN worth of bonds will the market not go no bid (until a level is reached that "natural buyers will bid)? I like to simply things and a market is a market and if a big buyer stops buying an equity it goes down.
So I think my question is, isn't all else moot, won't the market dictate that bonds go lower and interest rates rise despite what the Bernank wants to do?
I welcome feedback and am trying to figure this out myself.
Thank you RTT, your response makes sense to me.
Not necessarily. QE has encouraged risk taking and money has flown accordingly - if the market interpret end of QE2 as a tightening (clearly it is not but the market is arguably stretched) these flows might reverse like they did when QE1 ended leading to defensive bond buying.
Also another difference between equities and bonds is that regardless of market conditions certain participants (insurance companies, pension funds,...) have a forced allocation to fixed income so there will always be a bid.
The nash equilibrium seems to be quivering precariously, with major players keeping one foot up in the air.
QE can only stop in name only. If it falters, the ponzi gets herpes, and the FRN's womanizing is met more and more often by girls night out debauchery complete with hiding their gold rings in safe places.
Look at the FRN's Libya Concubine, got caught cheating, didn't have a rescue home to go to, and is about to have her 100+ton ring re-allocated for ponzi sustaining PM suppressing duty.
Inflation is nothing new.
The dollar losing its value is nothing new.
The growing worldwide revolution against authority, whoever that might be, that is still relatively new, and will continue to grow.
The uber rich-power elite don't like that ... at all.
Our Soylent Green future, which the super rich and powerful have planned for us, will have to be accelerated via Monetary Policy, so that we submit to their will. Our destiny is not that far off.
Showed his hand to the WSJ and showed his ass to the rest of us.
QE will end in June. But the policy of ZIRP will be with us for a long time to come.
ZIRP in perpetuity is probably more accurate ZIRP is simply a tacit admission that the banks specifcally and the financial sector in general is insolvent. ZIRP is the cheapest alternative (from the perspective of the banks) to recapitalize while flying underneath the radar screen of 99.9999% of the population.
Jamie Dimon continually states how JPM didn't need $25 billion of TARP money, which was just walking around money. Too bad he can't say the same for ZIRP, QE1, QE2, etc., etc., etc.