Strategic Alpha On QE, Greece And UK Inflation

Tyler Durden's picture

Submitted by Maurice Pomery of Strategic Alpha

Looking at the US economic data it has to be said that Q/E has achieved little:

I am now of the opinion that the US will have to go back to fighting deflation soon and that Q/E (probably in a different form) will be needed. Massive inflationary impacts look to be delayed (for now):

Whilst I am happy to accept that Bernanke may have delayed or stopped a deep depression for now and that he has made a lot of Wall St. guys very rich, the whole idea of the Q/E programme was supposed to be, if we are to believe him, to create growth and set the economy back on a sustainable growth path, reduce unemployment and cure the housing problem by getting banks to lend and the consumer spending. Mate, you failed!

Unemployment is still at 9% (and a lot more if you look at the real stats), the participation rate is falling and the amount on food stamps is over 4mln! Housing is spiralling lower again as prices continue to fall and banks, whilst having their balance sheets ballooned by free money still sit on hidden toxic waste from the sub-prime issue and refuse to lend at competitive rates.

The housing data components yesterday were bad from top to toe as some blamed the weather but there were other fundamental factors. Single family starts, arguably the most important data point because it represents homeownership and mortgage creation, posted a print at -5.1% to 394,000. The tax credit expiry highlights that this economy is suffering without the drugs. Confidence is getting rather a concern here as few seem to think housing is a worthwhile investment, even at these levels. This data is dismal and coupled with the poor levels of employment I find it hard to understand why so many analysts suggest that the US economy is recovering!

Just because the S&P500 has rallied is NOT a sign of strength in the economy and the data supports the fact that growth is indeed slowing as inflation is starting to rise. Higher prices of essentials in the US will see further cutbacks by consumers and at some point soon they will surely have to face tax hikes and cuts to benefits to reduce the deficit at both national and state levels. This is a nightmare scenario that will not be missed by Bernanke and maybe that is why we have yet to hear from him about what he expects to do after Q/E2 runs out at the end of June.

Industrial production fell yet again if we take in last month’s revision lower and ended up a big miss on expectations and rather worryingly capacity utilisation also fell. This does not auger well for growth on any level. On top of all this there are going to be further investigations into US banks as the New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses. This is not going to go away and someone needs to open up this Pandora’s Box.

The debt issue and spending cuts are likely to become the biggest election campaign fight but will the US public vote for austerity? They better had or else the whole US system that relies on having the world’s reserve currency will end in a mighty implosion. I am already unsure if it will remain a safe haven if the roof falls in now! The question is will Bernanke see the economy as on a sustainable path and that the world can soak up all the issuance coming from the treasury without yields rising? I doubt it somehow so at best we get a pause but they will be back pretty soon I would imagine, as to honest it has yet to prove it has worked for anyone else but the top 0.1% of the population who work on Wall St. To me the economy is starting to trend lower and Q/E3 might still be on the cards in my view and so this rally in the Dollar, at some point may be a gift. I will keep you posted. New Q/E might be disguised and I hear there are discussions on Treasury puts. Listen out for this as it is still Q/E! Tonight’s minutes that are released by the Fed might just be worth a read as we rush towards the end of Q/E2.

UK inflation rises again but growth is still soft:

UK inflation rose again and was driven primarily by the shift in Easter holidays as air travel dominated with the recent rise in VAT. I said at the time the rise in VAT was bad timing and it seems to be the case. Worryingly inflation is set to rise further in the next few months but the Bank of England's Monetary Policy Committee believes it would cause undue output volatility if it tries to get CPI back to its 2.0% target rapidly, Bank of England Governor Mervyn King said in an open letter Tuesday. The BoE has continually warned of higher inflation but always countered this with the lack of growth in the economy. The point is will higher prices for essentials continue to undermine spending by the consumer on non-essentials? Surely it must and the influential ITEM club agree.

Are we facing stagflation and can the bank deal with this by adjusting monetary policy? Well no not really as one sacrifices the other and I am sure the government would be less than impressed if King and the MPC condemned the UK economy to years of recession or worse to hold onto an inflation mandate at a time when the government needs the consumer to help get rid of the deficit. I am afraid that King is going to have to fight off the press and hawks a bit longer even if some may question the Banks independence. Interestingly, in reply to King's letter the Chancellor said the government was committed to its fiscal tightening plan! Why does the bank not just set a higher target due to current circumstances? Stagflation is a great concern and the cost of living is soaring as real wages collapse. The public cannot take much more and something may snap as I am not sure that commodity rises are a transitory phase. Demand and consumption suggests that food commodities are on the rise for good.

It would appear to me that many a central bank needs to come clean and admit that its mandate needs more flexibility so it can deal with these complex times. Many seem rigid and out of date which gives the impression of bending the rules. The BoE is a prime example. Just let them do their job and stop forcing mandates on them. Do what is right! What else is there, politics? The minutes today may make interesting reading.

Will Greece be able to survive? In fact will the peripherals ever be competitive enough to live in a one currency, one policy environment?

Without any doubt, the answer to this question (with Spain the possible exception but even they will struggle) is NO. Central bankers are always going on about global imbalances but within the EU we see some of the biggest and it just does not appear conceivable that Europe can function properly as a whole whilst these imbalances are governed by a single monetary policy and one currency. It was a nice idea but it cannot work practically and at some point the weight of forced austerity measures will see a backlash from voters.

Even if the likes of Greece default and write of ALL of their debt, they still cannot survive in this environment and nor can Ireland or Portugal. The ECB will always set policy for Germany and the stronger nations and this is the point. It will never be of any benefit to the peripheral southern states. Greek yields look set to stay extremely restrictive and the chance of growing or exporting themselves out of this mess is zero. Greece IS insolvent.

Not only will the civil unrest and the political pressure on peripheral governments increase, the pressure on the likes of Merkel and Sarkozy will too as the northern European tax payers are getting fed up with paying for all this and not all these governments can afford to show any leniency towards the poorer nations so draconian measures will be attached to any concessions on future bail-outs. Is this what the electorate voted for from their leaders? Obviously not and Germany is going to find that out very soon as this problem is not solvable by just throwing money and buying time.

We know what impact Lehman had on markets so I guess the EU leaders fear that if Greece, Ireland and Portugal all went down, then the lights would go out. So for now they will continue to buy time and hope the problem goes away unless they are forced to act by unhappy voters. It happened in Finland! I am not sure what the EU leaders can do about this!

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Salinger's picture

Meredith on Bloomberg radio 7am to 8am today



(Tom Keene at the top of the show acknowledged Tyler Durden and Zero Hedge and the double down article on Meredith)

oogs66's picture

do listen to her, as much as I agree with her conclusions, her ability to logically demonstrate how she got them has been extremely weak

I am a Man I am Forty's picture

she needs to be very specific when it comes to munis because they vary so widely from state to state and municipality to municipality


i buy munis and she sounds like she doesn't know what she is talking about unless she is referring mainly to CA, IL, and NJ

Salinger's picture

I think Tom Keene said if you email him he will send the research

BetTheHouse's picture

Prechter, Bitchez!

Frozen IcQb's picture

Errata: 40 mil on food stamps

TheMerryPrankster's picture

actually 44.2 million according to last official numbers. Equates to  about 1 in 7 people nationwide, much higher in Oregon and Mississippi.


Of all the disastrous consequences of the economic crisis, perhaps the most devastating is the idea of even more Americans struggling to feed their families.

Recent statistics from the USDA indicate that 14.2 percent of the U.S. population was using food stamps in February 2011, or around 44.2 million total, up from 33 million just two years before in 2009.

In 2006, the year before the financial crisis, 26.5 million people participated in the program, officially titled the Supplemental Nutrition Assistance Program (SNAP).

The increased rate of food stamp participation has led, in turn, to a significant increase in the amount of money SNAP spends on food benefits. In 2010, the total cost of food stamp redemption in the U.S. rose 29 percent from the previous year, totaling around $64 billion, according to the USDA’s 2010 annual report.

And use of food stamps still varies widely by state. New York, for one, saw an 11 percent increase in food stamp participation last year, and the cost of redemptions in the state rose to $5.1 billion from $4.3 billion. Today, around 15 percent of New York's population collects food benefits.

States with smaller populations participate in food stamp programs most often, particularly in the South, where as many as 20 percent of the population is found to use food stamps.

doomandbloom's picture

what about jobs lost by technology?

With all this huge improvements in technology why are people required to work 5 days a week?

note: I cant fight the 'we need to maintain a lifestyle' argument...

earnulf's picture

There are still jobs that have to be done that technology can't replace at a price that is feasible.    Technology is great for producing something new, but not for maintaining it.    It is more cost effective to replace than to repair, thus repair jobs are lost which amount to more than the manufacturing jobs the new technology creates.   

I can tell you for a fact that the business I operate requires that we process for 10 hours per day, six days a week because the customer does not have the inventory to operate without a delivery six days a week.

Every business that is open 7 days a week must either 1) get daily delivery of certain items or 2) stock enough items to get them through the weekend.     That stock is goods that cost money just sitting there until they are "sold" or used.

Tell people that they are only going to have to work 4 days a week and they will want more money for the hours they work, or they will try to find a second job to fill the time.    Increases in the prices of many goods have forced even people who can work 5 days a week to find a part time job to pay the bills and maintain their current level of existance.

Businesses can't afford to pay more per hour because they can't pass that increase in cost along to the customer.     Losing that "5th day" would result in an hourly increase of about 20% and there is NO room right now for that kind of a price increase to cover the cost.


Urban Redneck's picture

Unless you are an owner- and purchasing either technology or labor, you are competing with technology, not its beneficiary.  Therefore, as technology improves, you must work more for less just to maintain break-even against being automated into the unemployment line.

Josephine29's picture

This is a very low quality effort as for the UK to say.

The BoE has continually warned of higher inflation


is absolute drivel! The Bank of England has continually under forecast inflation over the past two years...

writingsonthewall's picture

It's less of a forecast - more a 'wish list'

DoctorGold's picture

43,930,161 currently on the food stamp program. This increases about 3 per minute, or right at 4,320 each day. Actual unemployed is at 23,712,634. 

TheMerryPrankster's picture

actually according to

44,199,391  as of 2/2011

11.6% increase year over year.


Tragic number that indicates the "recovery" is a total sham

and the real economy is continuing to decline.

bigwavedave's picture

All this talk of "The End of QE2" --- Isn't it just coming up to half time? Doesn't the 'End' involve normalizing the Fed balance sheet? 

Al Gorerhythm's picture

The bamboozlement has been complete. They are in complete awe of their own press. QE is all they have left however. Interest rate adjustment to attract bond buyers is out of the question. It would destroy what's left of the housing market and drive many a business into bankruptcy. Most work off overdrafts or bank credit cards.

Exponential printing or credit via bailout.

Al Gorerhythm's picture

Central Banks have failed to fulfill their politically promulgated mandates across the globe. The inherent flaw in all of them (paper money and credit creation without "consideration) ensures a tipping point in trust. The end of their obvious Ponzi scheme (to those of us not wearing rose colored glasses) is going to be ugly. This time rates a high probability of being different, as people have a higher distrust of bankers and their printed paper.

The "four pillars" of Australian banking, have just been downgraded a notch by Moodys and S&P, having weighed up their risk of borrowings from overseas creditors.

Up to their necks in debt the world over.

Here is a snippet from The Daily Reckoning, where Bill Bonner brings up a prescient extract of the history of paper money. Quite an eye opener for a newbie and confirmation of the structure of the current wealth heist bt un-backed paper fiat.:

And now over to Bill Bonner from Shanghai, China

...Cathedral's going by to the right, so that means they are, what? two blocks away from the Bund. A Yangtze River Patrol gunboat is tied up there, waiting for the stuff they've got in the back of this truck. The only real problem is that those particular two blocks are inhabited by about five million Chinese people.


Here you've got the Hong Kong and Shanghai Bank of course, City Bank, Chase Manhattan, the Bank of America, and BBME and the Agricultural Bank of China and any number of crappy little provincial banks, and several of those banks have contracts with what's left of the Chinese Government to print currency. It must be a cutthroat business because they slash costs by printing it on old newspapers, and if you k now how to read Chinese, you can see last year's news stories and polo scores peeking through the colored numbers and pictures that transform these pieces of paper into legal tender.

As every chicken-peddler and rickshaw operator in Shanghai knows, the money-printing contracts stipulate that all of the bills these banks print have to be backed by such-and-such an amount of silver; i.e., anyone should be able to walk into one of those banks at the end of Kiukiang Road and slap down a pile of bills and (provided that those bills were printed by that same bank) receive actual metallic silver in exchange.

Now if China weren't right in the middle of getting systematically drawn and quartered by the Empire of Nippon, it would probably send official bean counters around to keep tabs on how much silver was actually present in these banks' vaults, and it would all be quiet and orderly. But as it stands, the only thing keeping these banks honest is the other banks.

Here's how they do it: during the normal course of business, lots of paper money will pass over the counters of (say) Chase Manhattan Bank. They'll take it into a back room and sort it, throwing into money boxes (a couple of feet square and a yard deep, with ropes on the four corners) all of the bills that were printed by (say) Bank of America in one, all of the City Bank bills into another. Then, on Friday afternoon they will bring in coolies. Each coolie, or pair of coolies, will of course have his great big long bamboo pole with him--a coolie without his pole is like a China Marine without his nickel-plated bayonet--and will poke their pole through the ropes on the corners of the box. Then one coolie will get underneath each end of the pole, hoisting the box into the air. They have to move in unison or else the box begins flailing around and everything gets out of whack. So as they head towards their destination--whatever bank whose name is printed on the bill s in their box--they sing to each other, and plant their feet on the pavement in time to the music. The pole's pretty long, so they are that far apart, and they have to sing loud to hear each other, and of course each pair of coolies in the street is singing their own particular song, trying to drown out all of the others so that they don't get out of step.

So ten minutes before closing time on Friday afternoon, the doors of many banks burst open and numerous pairs of coolies march in singing, like the curtain-raiser on a f*&@ing Broadway musical, slam their huge boxes of tattered currency down, and demand silver in exchange. All of the banks do this to each other. Sometimes, they'll all do it on the same Friday, particularly at times like 28 November 1941, when even a grunt like Bobby Shaftoe can understand that it's better to be holding silver than piles of old cut-up newspaper. And that is why, once the normal pedestrians and food-cart operators and furious Sikh cops have scurried out of the way, and plastered themselves up against the clubs and shops and bordellos on Kiukiang Road, Bobby Shaftoe and the other Marines on the truck still cannot even see the gunboat that is their destination, because of this horizontal forest of mighty bamboo poles. They cannot even hear the honking of their own truck horn because of the wild throbbing pentatonic cacophony of coolies singing. This ain't just your regular Friday P.M. Shanghai bank-district money-rush. This is an ultimate settling of accounts before the whole Eastern Hemisphere catches fire. The millions of promises printed on those slips of bumwad will all be kept or broken in the next ten minutes; actual pieces of silver and gold will move, or they won't. It is some kind of fiduciary Judgment Day.

Cryptonomicon by Neal Stephenson

What happened on the 28th of November, 1941? Japanese troops entered Shanghai's international zone. Shanghai was occupied until the end of the war.

cossack55's picture

Cryptonomicon was a very good read. Highly recommend. Damned funny.

oogs66's picture

ECB cannot afford to let Greece go.  Trichet's 'legacy' is at stake.

agent default's picture

" if Greece, Ireland and Portugal all went down"


No, if one of them goes down Spain will be next.  Or even worse France.  They don't look too good either, but so far nobody looked hard enough in that direction.

Dollar Bill Hiccup's picture

On the one hand, the end of QE reawakens the risk off market. This is also conditional on austerity measures to tame the fiscal deficits in the US. Bond yields fall, USD is bid, equities fall, commodities fall -- David Rosenberg, Geoff Gundlach etc.

On the other hand, the end of QE brings rising yields in a stagflationary quagmire, USD falls, commodities remain bid, equities ok -- Bill Gross.

Either way, at one point or another, the "soft patch" will turn recessionary. Since the FED is already in a defacto tightening mode you've seen defensive equities grossly outperform cyclicals, commodities get trashed, the USD rallying and bond yields falling.

Emerging market central banks are still behind the curve with real yields negative for the most part. Inflation in both China, India and elsewhere is high.

Leading indicators have been topping to rolling over.

So, pick your poison. The whats are fairly clear. The when makes it much more difficult.

SP666_IsComing's picture

All news everywhere now is completely worthless and irrelevant except for ONE!

The truth will finally come crashing down in October of this year. There is no escape. It will be impossible to prop these markets through October, impossible.

Comet Elenin is going to be a real nasty little bitch.  The earth will pass through its comet tail in October.  The solar winds will be cut in half for days.  It’s impact will be ENORMOUS.  It will cause the earth’s mantle to vibrate, it will create unimaginable weather of wind and rain.  It will cause destruction beyond comprehension.  Dust particles from the tail will create enormous rainclouds on a global scale.  Sea levels everywhere will rise, a great deal higher than right now.

How many Fukushima type nuclear power plants are sitting in the US? All of them are designed to blow sky-high when they lose power.  Elenin is going to cause a worldwide blackout and hell will fall on the earth when power is lost everywhere.  How many Fukushima’s in the US are priced into this market right now?

SP666 is going to be taken out when Elenin passes, there is no doubt.

We are about to start the perilous journey down the other side of the human population growth impulse spike.  Literally billions of people are going to die when Elenin strikes, and world population will continue to tumble when all infrastructure is destroyed and food becomes as scarce as gold. 

Bankster criminal elite families have been planning for this event for millennium.  They’ve used their central banking thievery machines to steal the world’s gold, created paper mountains of bullshit, all for this event and its all about to go up in smoke, as planned.  This comet is old.  Only those “elect” few have known of its existence and timing.  The old books of Enoch for example, and the old stories of the great flood, the Epic of Gilgamesh, etc. Even some old jewish texts allude to this comet as being the coming “Messiah”. 

It is going to be downplayed by the lying ass media till it smashes everything. There is no stopping it. The destruction to come is not a joke. It will be very very real.

SP-666 is coming, and very soon.

Wake up world. Protect yourselves.

maximin thrax's picture

NASA says the gravitational pull on the earth by comet Elenin will be approximately the same as the gravitational pull of a compact car on earth, given Elinen's size, distance and composition.

mayhem_korner's picture

Massive inflationary impacts look to be delayed (for now):

Umm...pass the cannibis, please, dr. pomery.

Stuck on Zero's picture

The Bernanke will continue to hand out trillions to the elite to get the economy moving. If that doesn't work he'll give them more.  If that doesn't work...

DoctorGold's picture

If that doesn't work, he will purchase securities. He will buy as many as required, he's stated as much. 

zippy_uk's picture

Cuts "Proper" are about to hit the UK. People here think is going to be bad, because the have "seen" some cuts already. In fact they have no idea. The savage cutting of government posts has only just begun and 250,000 jobs are scheduled to go.

So the BOE has almost crossed the line on keeping interest rates low in terms of fending off criticism.

The "inflation" is all bogus - its effectively a stealth tax take based on VAT (sales tax) and duties (including energy, oil). The calculation behind this is that there is already too much margin on goods and services in the UK (known as Treasure Island due to over charging) plus North Sea Oil should hold up over the term of the cuts