Fed, ECB Throwing World Into Chaos?

Via Pension Pulse.

Walter Brandimarte of Reuters reports, Fed, ECB throwing world into chaos: Stiglitz:

Ultra-loose
monetary policies by the Federal Reserve and the European Central Bank
are throwing the world into "chaos" rather than helping the global
economic recovery, Nobel Prize-winning economist Joseph Stiglitz said on
Tuesday.

A
"flood of liquidity" from the Fed and the ECB is bringing instability
to foreign-exchange markets, forcing countries such as Japan and Brazil
to defend its exporters, Stiglitz told reporters in a conference at
Columbia University.

"The irony is
that the Fed is creating all this liquidity with the hope that it will
revive the American economy," Stiglitz said. "It's doing nothing for
the American economy, but it's causing chaos over the rest of the
world. It's a very strange policy that they are pursuing."

The
U.S. dollar has weakened about 6.5 percent against a basket of major
currencies since the beginning of September as prospects for further
monetary easing by the Fed have led investors to seek higher returns
elsewhere.

That flow of dollars
caused currencies to appreciate in many emerging market countries such
as Brazil, which offers strong growth prospects. The Japanese yen has
also hit record highs against the dollar on expectation of additional
greenback weakness.

Recent actions by those countries to curb the strength of their currency were "necessary," Stiglitz added.

"It's
natural in that context for them to say -- we can't just let our
exchange rates appreciate and destroy our exports," he said.

On
Monday, Brazil doubled a tax on foreign investment into local
government bonds, while Japan lowered the target for its benchmark
interest rate to a range between zero and 0.1 percent.

The
Bank of Japan also pledged to buy 5 trillion yen ($60 billion) worth
of assets, in a strategy similar to the one adopted by the Fed to pump
funds into the economy.

But additional monetary stimulus will "clearly" not solve the problems caused by lack of global aggregate demand, Stiglitz said.

"Lowering
the interest rates may help a little bit, but that's much too weak to
address the problems facing the United States and Europe," Stiglitz
said. "We need fiscal stimulus."

What we
really need to boost aggregate demand is jobs. According to Stéfane
Marion, Chief Economist at the National Bank of Canada, there is scope
for some optimism on the jobs front:

The American
Staffing Association (ASA) reported that its index of temporary &
contract employment rose to a level of 100 during the week of September
26. This means that current employment in the staffing industry – which
tends to be a leading indicator of overall trends in U.S. labour markets
– is back to a level comparable to that of 29 months ago. As today’s
Hot Chart shows (see above), however, the improvement in the ASA index
has yet to be reflected in the official BLS data. This divergence cannot
last. If the past is any guide, we would expect the BLS data to
converge on the ASA index.

I expect some improvements
in the labor market, but obviously not enough to give a sustained boost
to aggregate demand. As for currency warfare, I think you should all go back to read the comment on the death-defying US dollar. With global ZIRP firmly entrenched, we shouldn't be surprised to see competitive devaluations. I once quipped that the world is heading towards parity, and it seems like central banks are going to throw everything but the kitchen sink to fight the specter of global deflation. 

The policy remains reflate & inflate. Some think this will lead to "chaos" but the reality is there isn't much choice.  And while Warren Buffett is the latest to warn of a bond bubble, Niels Jensen of Absolute Return Partners wrote an absolutely brilliant piece arguing for lower bond yields, aptly titled Insolvency Too. Mr. Jensen concludes:

So what are my conclusions? For all the reasons above, I continue to
be bullish on bonds. Remember what I said earlier this year about
inflation being difficult to engineer when you need it the most?
Unfortunately, this is truer than ever. We could really do with a bit of
inflation and the higher bond yields which would probably follow (it
would fix an awful lot of problems in the pension industry), but it is
when you need it the most that it is least likely to happen.

Another question altogether is, where does this leave equities? I
believe it will ultimately be the bond market that holds the answer to
when it is time to buy the stock market aggressively again. Long term
readers of this letter will know that I have argued for over 6 years now
that we are stuck in a secular bear market (i.e. a market characterised
by falling P/E ratios). This doesn’t
mean you can’t make money in stocks. Plenty of people do every day. But
you need to be selective. Don’t buy the market yet. It is still
premature. Invest with active managers capable of delivering alpha.
The time to buy the market again will probably be when the bond bull
finally decides to call it a day. There is only one caveat. Interest
rates must go up for the right reasons, but that is a story for another
day.

We'll see if interest rates start going up for the "right reasons", but I
do agree that you have to be selective in this market. I am less
convinced that pension funds need to pay 2 & 20 for active
management, especially if they have the expertise to do it internally.
But Mr. Jensen is talking up his industry. Can't blame a man for
promoting his livelihood.

Comments

[traderjoe]

The Federal Reserve is owned by the banks (yes, it is privately held). Fractional reserve lending is fundamentally flawed. It's demise is a mathematical certainty. Therefore, the privately-held bankers knew that there would be an end-game. Therefore, the goal is to skim as much interest as possible for as long as possible, and then rape and pillage as the game goes super-nova. Look at the bonus pools. What did Mozilla earn at Countrywide - $500 million? How about Sandy Weil? Thousands of bankers have made millions - and what really did they produce for our country? Yes, the banks have been in on the scam since 1913. 

[web bot]

"There can be NO appreciable rise in interest rates. Debt service payments would balloon, house prices would decline (all other things being equal), and all those newly printed bonds would decline in value. ZIRP is a trap. The Fed is painted in a corner."

Your comments are right on my friend. We're #ucked. I still believe that the US gov't is scenario-ing a hyperinflation scenario... which will take care of the debt... it's just the social costs that have me worried.