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The Fed Must End QE2 on April 27th
By Dian L. Chu, EconMatters
The Federal Reserve has lost all credibility on Wall Street, and most of the American public with the absolute refusal to recognize the dire effects on asset prices that QE2 has created. But the refusal is part of the problem. It reinforces the wide spread belief of investors that the Fed is out of touch with reality, and that they sit in their Ivory Tower implementing an exceedingly loose monetary policy, with the stated goal of inflating asset prices.
The Fed has refused to even acknowledge the possibility (rather than the indisputable facts) that not only have they inflated selected asset prices like S&P 500, the Dow indexes, but they also have inflated asset prices like food, energy, and clothing which would actually hurt the economy and consumers (See Chart).
Needed – Housing and Wage Inflation
Remember, overall inflation is actually being artificially under-reported by the numbers because housing and wages are not inflating. These are the two actual groups of assets that Americans in reality need the Fed to inflate. But Fed’s policies have been unable to help and seem to essentially be hurting the housing sector, as higher everyday living costs with stagnant wages tend to reduce disposable income and resources that could be otherwise allocated to saving towards a down payment to purchase a house, improving the real estate sector of the economy.
Inflation Exported Would Come Back To Haunt
Furthermore, since most of these asset prices are priced in dollar, the fed has exported dire and extreme inflationary pressures on an already precariously balanced inflationary picture in the emerging market economies from China to India.
It is the proverbial throwing of jet fuel on a barbeque for most of the economies. Yes, Bernanke is right that these countries had inflationary problems before based upon their undervaluing currencies. Nevertheless, this is how their economies have been set up in the global trade role that has been 30 years in the making.
These countries just couldn`t revalue their currencies near enough to still keep their role as exporting, cheap labor manufacturers, without sending the entire region into a 10-year depression which would bring the entire world into a depression not seen since the Great Depression.
Unmanageable Inflation Elsewhere
Given the fact that these manufacturing exporting countries cannot meaningfully revalue their currencies, they are basically stuck with an endemic higher level of inflation compared with the developed economies, but it is still manageable. Now, with the US`s persistently loose monetary policies exacerbated by QE2, raising input costs for commodities used in abundance by these manufacturing, cheap labor economies like Oil, Copper, Cotton, and Iron Ore (See Chart), these policies are exporting additional inflationary pressures to these developing economies.
This results in making what would be a manageable level of inflation in China of around 3.5 to 4% an unmanageable level of inflation at 5.5 to 6%, and maybe even higher as the full effects of the inflation of commodity asset prices have not yet fully been incorporated and manifested in the Chinese manufacturing economy.
Long Live the Inflation Trade
The other area where Ben Bernanke`s stubbornness of acknowledging the effects of QE2 on food and energy prices, i.e., the rise in prices is due strictly to demand reasons, Middle East tensions, and product shortages and in no part to a loose monetary policy which encourages traders to make the following trade:
- Loose monetary policy is dollar negative (printing money, currency devaluation, etc).
- Commodities like Oil, Gold, Silver, Wheat, Corn, Cotton, Copper are Dollar negative Hedges
- Therefore, put on the following trade: Short the dollar, and go long commodities.
This is the famous inflation trade is has been going on and off for the past 10 years by fund managers around the world. This trade has been in the investing 101 handbook for 50 plus years. And the fact that Ben Bernanke never admits to knowing about these trade dynamics in the marketplace, and how his policy initiate of QE2 actually encourages, facilitates and even mandates that fund managers around the world put on this very trade is beyond a rational explanation.
Inflationary Effects Are Transitory?
In addition, it is even more incredulous of Bernanke and his failure to acknowledge any role whatsoever for the feds function in these higher commodity prices when their stated goal is to in fact inflate asset prices. Whenever he is interviewed about this very question he always uses the standard response that inflationary pressures are not due to the recent Fed policy of QE2.
I guess these are assets that the Federal Reserve has expressly forbidden traders to inflate. However, Bernanke also adds that these inflationary effects are transitory in nature--he has been saying “transitory” for over 6 months now. How long does it take for ‘transitory” to become “stuck in the economy, and cannot get rid of without a massive rate hike sledgehammer”?
Fed Out of Touch with Reality
It is starting to sound like a broken record, and it is completely divorced from the facts in the marketplace, or the facts on the ground for those not in the Ivory Tower. It is this main street denial that has reinforced the notion that Bernanke and his dovish colleagues with their incessant soft selling of inflation in their comments regarding inflation questions every week that they are out of touch with reality.
This “fed out of touch with reality” notion only goes to reinforce the very “Inflation /Currency Devaluation Trade” causing traders to pile even more capital into shorting the US Dollar and going long Commodities because it is only going to get worse down the line. This is what is referred to as inflation expectations.
Dovish Fed Undermines The Dollar
The fed policies regarding QE2 are not near as damaging for the US Dollar as traders perceptions of the Fed policy of QE2, and judging by the rise in Silver alone will tell you, traders perceptions of QE2 is extremely negative. And that old adage perception is reality takes hold and traders do far more damage to the US Dollar than any actual currency devaluation due to QE2 by going heavily short the currency. Traders and their perceptions right now are what is really hurting the US Dollar and Bernanke has failed to realize this fact.
Another interesting question for Bernanke and his Dovish colleagues, and it appears that even the more hawkish members of the Fed are still to dovish in their market comments regarding inflation. Probably because they all are in the upper income bracket on a percentage basis compared with the average US consumer, and are largely immune to the ridiculous six month rise in food and energy prices felt by the average American citizen.
The Fed can change all that on the 27th of April with either a cutting short of QE2, or an equally hawkish wording of the fed statement with a nod towards tightening sooner than previously indicated in past policy statement wording.
Everyone Worries Except the Fed
The Fed might ask themselves the following question:
- How come at every Speech where there is a question and answer session that you are asked about inflation?
- Or how come every reporter when interviewing a fed member asks them about their role in causing inflation around the world and how this is contributing to political and social instability in emerging economies?
- Is this just by coincidence, all these reporters and questions revolving around inflation effects? The answer is that these questions are being asked for a reason, and that alone is a problem for the fed.
Another question for Bernanke is how come every other country is worried about inflation, including developed economy neighbor Europe, while the US doesn`t have an inflation problem? It seems the US is the only country in the entire world where inflation isn`t a problem? Does this seem logical? And if it is in fact the case, how long do you think it will stay this way, where the entire globe is experiencing inflation pressures but the US has a “transitory” inflation problem?
When Transitory Turns Self-Fulfilling
The problem for the Fed is that this goes beyond current inflationary effects in the economy, but future expectations of inflation in the economy. And none of these are transitory in nature once they get embedded in the psyche of investors and consumers. The only way they were doused in 2008 when they were at these exact levels was a near historic crash in the financial and housing markets.
Absent of some similarly extreme deflationary event, inflation and expectations of inflation are only going to feed on themselves and become even more firmly entrenched in the economy, negatively reinforcing investors and consumer’s asset allocation and spending habits.
This all becomes self fulfilling in nature, and the real nasty part about inflation is if you don`t head it off early, once it gets even a little momentum, it becomes much more difficult to control and manage. This is where the fed is right now; they are at the cusp of losing control of their handle on inflation with their incredibly dovish stance towards inflation.
End the Denial or Lose on Inflation
Bernanke and the current Federal Reserve Board have a credibility problem both with Wall Street traders and the American population. The sooner Ben Bernanke acknowledges his role in causing inflation, the better off we will be in fighting the battle of inflation. The longer the denial routine of “transitory’ responses continues, the increased chance that Bernanke loses what shred of remaining credibility he has on the inflation issue.
Then, the inflation battle is essentially lost without equally devastating policy responses that are almost similarly as bad as the inflation effects, i.e., you have to send the economy into a recession with an abundance of tightening measures that completely destroys growth to get a handle on prices.
Needed - Hawkish & Cut Short of QE2
Again, the Fed and Bernanke can change all this on the 27th of April, failure to do so basically dooms Bernanke`s legacy to be remembered by the initial moniker put on him when he initially was chosen as Alan Greenspan`s successor, when he was commonly referred to as “Helicopter Ben”!
During his first six months on the job as Fed chairman, he did everything possible to dispel such a label, but he has more than made up for that period during the last six months regarding his outright refusal to acknowledge the exceedingly negative side effects revolving around out of control food and energy prices related to his QE2 Initiative.
The average American citizen cannot withstand another two months of “Asset Inflating” on behalf of the Fed, enough is enough, time to cut the QE2 policy initiative short.
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Nymex $Natgas has been trading between $4 and $5 for a year. In 2009 it dipped below $3.
Residential, commercial and industrial electricity rates were all higher at the end of 2010 than the end of 2009.
http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_a.html
Not sure where you're getting your data. Maybe some little fantasy world.
Wasn't that $8 back in 2001? $10 in 2005, the collapse of which brought down Brian Hunter and Amaranth?
Also, CRB index hasn't even exceeded its old highs, nevermind set new ones:
http://www.zealllc.com/2007/ccicrb.htm
(today the index is ~340, which is still showing deflation compared to the peak of 400).
Again, I see no evidence of the strong inflation that is claimed here. Sure, there might be inflation compared to the depths of the 2009 deflationary collapse, but significant deflation from 2008-present.
Rents are coming down as well as landlords are either lowering their expectations due to the housing glut
rental vacancies are DOWN around here so no surprise RENTS ARE UP
next door what was $900 a month for 7 years & 5 tenants is now $980 for the next ones
So the US isn't facing an epic housing glut???? What planet do you live on??
just because the houses exist, doesn't mean that the owners are renting them...
Then the "owners" are suffering deflation in cashflow if they're being left vacant instead of taking the market clearing price for rent.
Look, I have no reason to make anything up. All I'm seeing is the cost of living getting increasingly less expensive. Rents are coming down as well as landlords are either lowering their expectations due to the housing glut, or new landlords are entering with lower cost structures than in the past. The average low income person has almost never had it better either here in Canada or in the USA, and of course, those high-income people are just raking it in.
Natural gas bills have also collapsed, as well as electric bills. Housing maintenance is significantly less these days than just a few years ago because of the collapsed housing market. All big-ticket items, and all down significantly.
nothing is going down where I live, same shitty duplexes all cost the same or more, much less of them available.. lots of homes for sale or vacant..
maybe I'm just not an average low income person, but I'm having quite a time just finding anything I can afford..
plus everywhere runs credit/criminal/proof of employment checks and charges you $50+ whether you get in or not. they can make money just accepting fees and never renting a place.
That's probably because your (private sector) income has deflated. Not because housing has gone up. It just 'feels' like more money to you because you have less.
Deflation is when nobody has money and its worth a lot.
Inflation is when everybody has money, and its worth nothing.
I agree. I drove by one a couple of days ago. Moreover they have started to scale back on the quantity and jacking up the prices. It is getting scary at the Grocery stores. Packing getting smaller and the prices are higher.
shelf prices are stable to down
wtf
3 weeks after hurricane Katrina in 2005 I noticed 20% price increases at Walmart on heavy items like cat litter
that was 5 1/2 years ago
I've seen worse increases then that over the last 6 months both in price increase & quantity decrease
I think you're either a paid shill or clueless
But lots of stuff has gone down, or is going down. Big ticket items are cheaper than ever like cars. Petrol isn't even back to its 2008 levels. Bernanke might be an ass, but its very hard to see any evidence of inflation.
Huh? It's hard to see any evidence of inflation?
Have a look at some widely used indices for commodity prices (hint: "commodities" are things you HAVE to consume)
http://stockcharts.com/freecharts/gallery.html?$CCI
http://stockcharts.com/freecharts/gallery.html?s=%24CRB
This one is just energy: http://stockcharts.com/freecharts/gallery.html?s=%24GJX
Eyes wide shut.
Not to sound like a douchebag here, but:
http://www.zealllc.com/2007/ccicrb.htm
CRB index peaked at ~400. Today its 341.
Sure looks, smells, and feels like deflation to me.
Not seeing that. The sales at the grocery stores have become ferocious as the economy remains mired in depression. Maybe the raw food costs have gone up, but the grocery stores must be taking huge hits on their margins because shelf prices are stable to down. If you're buying gold because of all this 'inflation', you're apt to be hugely dissappointed (although I hear gold is actually an excellent deflation hedge).
This administration is exactly right in their belief that everything is going exactly aspland.
assplanned by assclowns.
And to top it off...Our Stupid President says " No magic bullet" to bring down gas prices. I really beleive he and his staff had brain surgery.
There was no need for surgery. After he was sworn in they ushered him into the oval office, pulled back the curtain and the man behind the current told him how it would be. Thereafter, they replaced his drummer so he could proceed in office to the beat of a different drummer. Enter Summers, Geithner, return Bernanke to the throne and as they say the rest is history.
It must be the drugs...
"The Federal Reserve has lost all credibility on Wall Street, and most of the American public with the absolute refusal to recognize the dire effects on asset prices that QE2 has created."
on the last post on silver we had...
"without QE2, that bubble would have formed and burst by now."
bubbles ;-)
Bubble, bubble, toil and trouble.... (macbeth)
Chu has been off recently re oil and recently silver.
She was off on oil because she gave too much sway to the inventories in the usa and did not take in the whole picture in the middle east and now, Nigeria.
Nigeria is about to go up in smoke and i think (correct me please) that it supplies 10% of the usa's LSC - which is best for gasoline. this could keep oil up for a while - but not forever.
This time she is correct on QE.
It will end formally, but continue in another form.
The dip it creates will not be particularly long but if you are ready it could be the big one you are waiting for. In PM's for sure. There may not be too many others similar.
i've been buying most dips since 2003 and i'm preparing accordingly.
you can't miss the big one.
so dont be dumb and ignore the consensus that QE2 will end...
'come on in for the big win, son...' (full metal jacket)
Its not often i open up and give my special advice to you bums and thats what happens...
who was it said?
'its better to get junked that be ignored...'
wit is wasted on the graveyard shift around here. i give up.
Greetings BigD,
'tis better to get junked than be ignored...' than to have never been read at all...LOL...don't sweat the junks, they are the weak or they would have responded.
I was struck how, in one post, the good doctor could say if it were not for the fed "printing" FRN's...silver would have formed a bubble and blew off already while in the very next one demonize the fed for blowing paper asset bubbles.
So is the fed blowing bubbles good or bad ;-)
In my view, it is because the fed launched into a dollar & wage devaluing regimen (driven by profligate government spending) that people take their earnings & investments out of dollars and place them into other specie...so (in her first statement) the fed did not prevent silver and golds rise (in fiat terms) it exacerbated it...the opposite of what she said...possibly not what she intended to say, possibly I read it wrong...but that's how I read it.
While we know some of this digitizing is flowing toward "paper metals" we also know the actual metal itself is being taken out of the market by very strong, very irate hands who will not be giving it up any time soon...with fiat priced dips bought aggressively.
For myself, the fiat price means the same as it meant yesterday and last year and the year before...nothing...basically, if you hold debt based fiat it is a depreciating asset so I don't hold it or gauge value by it...that is, there is no way to truly know if 46 pieces of fiat is the proper value to place on an ounce of silver or if 146 is.
The easiest story to tell is about the 90% silver quarters. One of these bought a gallon of gas in 1959, and one of them buys a gallon of gas today. Most sheeple can at least grasp this, though they may not be able to figure out that a pound of coffee is not 12 oz.
A dime is closer than a quarter.
If you are going to try to educate people please get your story straight first. A pre-1965 quarter currently has a melt value of about $8.50. That is more than two gallons of gas in the U.S. of A.
Shit if you can get them to understand that a pre 65 quarter is worth more than a quarter you are already doing pretty good
"The Federal Reserve has lost all credibility on Wall Street, and most of the American public ..."
I would think that 90% or more of the American has no idea what the Federal Reserve does let alone that they are responsible for the rise in prices that they see.
"I would think that 90% or more of the American has no idea what the Federal Reserve does let alone that they are responsible for the rise in prices that they see."
True. But by the time they get it it will be too late for them. It's already too late for the system as we know it. We are sitting at the Captain's table for dinner discussing the metalurgy of the rivets and hull plates on the Titanic on 14 April 1912.
Is Idol on tonight?
When does Glee go into reruns?
The FED? Isn't that the government? They are doing their best, why would they cause inflation for all the good people of the land?
Nice chatting - Twinkie run to WalMart then to Chase bank about that home equity loan.
Muah's!
LOL no shit the vast majority of Americans are completely clueless, have little knowledge about money and even less regarding the Fed. I think more and more Americans think "something" is wrong but since they have the attention span of gnats the feeling passes pretty quickly.
The Bear is here to explain the oil problem.
http://www.xtranormal.com/watch/11855451/drill-and-quit-printing-money?l...
The Federal Reserve has lost all credibility on Wall Street, and most of the American public
J6P or John Q. Public has very little concept or understanding of the FED.
The author of the article has no understanding either.
Exactly right. The writer of this article is deeply out of touch. Wall Street loves the Fed, and the American public believes that there some evil speculators out there somewhere who are solely responsible for the rise in oil prices.
One thing that *is* true is that high gas prices do spell doom for Obama, and he either brings them down -- via delayed QE3 or some other mechanism -- or he loses the throne.
Exactly right. The writer of this article is deeply out of touch. Wall Street loves the Fed, and the American public believes that there some evil speculators out there somewhere who are solely responsible for the rise in oil prices.
One thing that *is* true is that high gas prices do spell doom for Obama, and he either brings them down -- via delayed QE3 or some other mechanism -- or he loses the throne.
Well put and true. No wonder Americans are so poor when it comes to financial's.
Now for something completely different:
hang the bastards
And 99% of the people who think that inflation will inflate away their debt and that for them it will be good.
For "others" like Ben, we think: the idiot. Inflation is a wealth destructor.
For themselves, they think: my debt goes down.
But in fact they ignore the inflation problem for themselves.
Their income won't go up as fast as inflation, and those who are in a financial mess will get deeper in the financial mess. That's why the 4% inflation barrier is so dangerous.
It makes it also easier to understand why Ben thinks inflation will help his problems. Because a small doze can indeed do good, a overdose will kill you.
It's like cocaine, if you only use a little once in a while. It's fun and not that bad. On a daily basis, and you've got a problem.
And Ben switched from cocaine to crack in 2008 and without a forcing hand, the FED will never go cold turkey.
oil and commodities have been the big winners not Wall Street. Wall Street wins when the dollar strenghtens and pricing power holds ala the 90's and when "governments bail out Wall Street" out of an irrational fear of "campaign contributions drying up." What Bernanke has done is insert the "law of comparative advantage" and put it on steroids. Add to this radical policy the worst possible government in the history of the American Republic and you have a recipe for "changing fortunes" on a grand scale. and soaring interest rates interestingly enough.
ag will root out the speculators on oil and commodities....
If I had a nickel for every idiot that told me that inflation isn't so bad because they can pay back their mortgage in cheaper dollars I would have a shitload of nickels. As I pointed out above the author of this piece seems to agree. High housing prices apparently are good. Never mind how much that hurts our ability to be competitive in a global market.
This article was unreadable for me.
I agree with your point about unreadable. I am not certain of the author. Poor command of the English language to start and then to top it off, some absolutely wrong perspectives as you have pointed out. I am not certain why Tyler allows these posts. For the last several weeks as I have read the posts my first thought has been "bull shit, who the hell are you working for?"
Inflation is favored by the government and bankers. Because the government can print, its debt service will always be eased by printing. People don't matter to Bernanke.
This is what Bernanke is listening on his IPod http://www.youtube.com/watch?v=9MYbrOUTURA 'People=Shit'
Thanks for the laugh :)
Just an historical update :
In the 70's the salaried saw inflation with a kind eye as salaries were indexed on the hyper inflation of those days. Volcker/Thatcher killed all that. Won't work today! Inflation lovers duly warned!
OFF WITH THEIR MOTHER FUCKING HEADS!
You've hit the nail on the hammer (pun intended). Lot of words in this post to say almost nothing of any worth.
The Fed has lost all credibility on Wall Street. WTF? The Fed and Wall Street are one and the same entity. It's "Mission Accomplished" for the Fed and Wall Street.
"Remember, overall inflation is actually being artificially under-reported by the numbers because housing and wages are not inflating. These are the two actual groups of assets that Americans in reality need the Fed to inflate."
Lost me right there. This is just another idiot that thinks high housing prices are good for the average American. If you can't figure out how stupid that is then you shouldn't be posting anything anywhere. Those needed "high housing prices" are the building block upon which this entire clusterfuck was built. No need to read any further.
Actually, to understand better you need to know that the gov't pegs its yearly cost of living increases to the bogus gov't CPI releases. As well, most private companies also use the official CPI as the benchmark for pay raises. So, the gov't really has a vested interest in keeping the CPI reading artificially understated. Doing so saves them billions. One (of the many) reasons that CPI is understated is that the cost for housing and wages have offset the increases in 'unnecessary' items such as food and fuel. Another couple of reasons are the bogus adjustments made to the cost of things (please see ShadowGovernmentStatistics.com). This is the insidious thing about 'stagflation'. The cost for things that we truly use daily, weekly and monthly are going up while some assets and wages are flat or even down.