Van Hoisington Eviscerates QE2: Full Q1 Review And Outlook

Tyler Durden's picture

Van Hoisington shares a good analysis at the reverse psychology that the prevailing crowd grasped, and yet was completely lost on the Ivy League educated Academics at the Marriner Eccles building.

If the objectives of Quantitative Easing 2 (QE2) were to: a) raise interest rates; b) slow economic growth; c) encourage speculation, and d) eviscerate the standard of living of the average American family, then it has been enormously successful. Clearly, with the benefit of 20/20 hindsight these results represent the Federal Reserve’s impact on the U.S. economy, regardless of their claims to the contrary.

For example, the Fed promoted the idea that implementation of QE1 and QE2 would lower interest rates. Apparently this fantasy was based on the assumption that the flow of their purchases would heavily offset (and in the case of QE2 almost fully offset) the flow of new debt being issued by the U.S. Treasury. This flow analysis appears irrefutable in concept, but actually interest rates rose across the yield curve in both cases. Why? Concentrating on the flow of Treasury debt, apparently the Fed failed to take into account that the existing stock of  outstanding Treasury debt totaled nearly $8 trillion. The holders included individuals, mutual funds, pension plans, insurance companies, state and local governments and foreigners. Their actions indicate that they perceived Federal Reserve activity to be inflationary, and therefore harmful to their position. Their response was to reduce their relative holdings of Treasuries and purchase riskier assets. Interest rates rose.  One large investor famously sold all his Treasuries—a rational choice in the shorter end of the Treasury market as some day QE2 will have to be  reversed.

Why the Fed would believe the economy could benefit from the addition of $600 billion (the QE2 target) in reserves to a banking system that already had over $1.1 trillion in unused, idle, but potentially inflationary reserves on hand nearly defies understanding. The action, however, was not lost on holders of the $8 trillion Treasury securities outstanding.

This increase in the level of interest rates occurred, not only during QE2, but in QE1 as well. Thus the Federal Reserve engineered a rate increase, and the injection of excess reserves had several other deleterious ramifications for the U.S. economy.

According to Van Hoisignton this is what needs to happen:

Presently the Fed is odd man out among the world’s leading central banks. A major divergence in opinion has risen between the Fed on one side, and the European Central Bank (ECB), the Bank of England, and the PBOC on the other side. These major foreign central banks, unlike the Fed, believe that extreme monetary intervention has contributed to higher inflation. For that reason the ECB has taken rates higher to stop inflation tendencies and the BOE is preparing to take initial steps to remove extreme monetary accommodation. Such actions are likely to produce lower inflation and better results than Fed policy. While terminating QE2 will not result in a restoration of the Fed’s balance to a reasonable size, this is an essential first step. Such a move will serve to reinforce actions by the ECB, BOE and PBOC. As such, the global upturn in inflation will reverse, thereby placing the global economy on a more stable footing. risk adverse investments. This will release funds for the mortgage market and credit worthy state and local governments. Upward pressure on commodity prices will abate. This will begin to mitigate the downward pressure on real wage income and consumer confidence. The lower commodity prices will also serve to unwind the corporate margin squeeze that resulted from the higher commodity costs.

While the economy will slow initially, the drop in inflation over time should lift real income and serve to stabilize the economy. The dollar should firm, encouraging foreign investors to place additional funds in U.S. markets. Taken together, these factors should give the economy the opportunity to stand on its own, rather than rely on massive governmental interventions whose potentially negative and unintended  consequences are unknown.

The evidence of the past three years seems clear in that monetary and fiscal policy have been unable to improve the average American’s standard of living. Time will be required to reestablish balance sheets to more normal levels, and in the interim disinflationary/deflationary tendencies will be ascendant. This environment is favorable for holders of long dated Treasuries. Positioning for an inflation boom will prove to be disappointing.

We agree. Which is why this outlook will never be realized. The Fed will simply never accept the risk of another bout of deflation. Period.

Full letter:

Hoisington 1Q11 Update

h/t Adam


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oh_bama's picture

This guy is too negative and UNAMERICAN!!

  • QE2 CREATED the most powerful investment opportunities of ALL TIME!

Wake up and BTFD!!!


Highrev's picture

Now that's well argued!

BTW, I just added a comment to 

It might be of interest to you and the rest of the BTFD crowd. ;-)

LowProfile's picture

Nice.  Left you a comment there.

And did you do this:  The Squid as CTHULU!?


Harlequin001's picture

This guy is deluded. If the only money created when you buy a house is the capital that you pay then the interest that you promise must be created at a later date.

That means that if you don't create and release that new money into the economy at a later date you have a banking collapse and none of the aforesaid.

There is no way out once you embark on the path of easy credit money, except collapse.

jeff montanye's picture

until one reads john hussman's current piece on short term interest rates, money supply and inflation it's hard to know how poisonous extremely low short rates can be when they are reversed.  

because it is a non linear function, huge liquidity must be drained from the economy if/when current u.s. rates are raised by even 25 basis points, about equal to q.e.2.  if liquidity is not drained, an increase in price levels of some 40% will occur in six to eight months.

the ecb never painted itself quite so far into the corner as its rate was raised from 1% not the 5 or so basis points currently facing the fed.  

check his work out and refute it if you can.  

TruthInSunshine's picture

Report says: This environment is favorable for holders of long dated Treasuries. Positioning for an inflation boom will prove to be disappointing.

ZeroHedge says: We agree. Which is why this outlook will never be realized. The Fed will simply never accept the risk of another bout of deflation. Period.


Am I the only one to spot the glaring inconsistency?

VH says deflation, NOT inflation, is in the cards.

ZH says inflation is in the cards.



mogul rider's picture

It's the abortion pill you will need to take the next day that is gonna ruin it for you all. I can't wait to see those millions of retiring sods lining up at McDonalds not for food but for a job.

TruthInSunshine's picture

Bernanke will go down as the WORST FEDERAL RESERVE CHAIRSHITSTAIN EVER, and that's quite an accomplishment.

traderjoe's picture

Anyone that discusses what the Fed should or should not do just doesn't get it. The fed was CREATED to cause inflation and steal the wealth of Americans for their Banker owners. Government and politicians were complicit partners. It was a scam and theft from the beginning. A well-crafted and executed plan.

The only escape will be to end the fed and default/repudiate the debt for the people.

Mentaliusanything's picture

@ oh-bama

Ya don't get a prize for absolute sarcasm.

But if there was one .... you would get it.

"More Americans retired early than any other time in History because of QE2."

Get your spray can and paint the town red with that!!!!!

Pepe's picture


grekko's picture

Sure, the early Boomers retired, as their jobs were outsourced. 

vast-dom's picture

And yet bond yeilds must go up and bond market must collapse, yes? Yes? YES! 

I have no idea what the hell correlates and corresponds to what corresponds and correlates to these markets.....

6 String's picture

Well, sure. With banks still leveraged 20:1, this scenario will unravel equity markets, real estate, and therefore banks balance sheets.

And it also assumes that while indeed risk may leave to UST's, that will only be short lived. As Austerity is something only talked about in far, far away lands. And then while banks are in trouble, so too with the Treasury.


LowProfile's picture

Thought that was higher, but 20:1, 40:1, in the end, what's the difference...

gordengeko's picture

Perhaps maybe if he went to one of those inbred keynesian private clubs instead of a public college for his MBA he could see the shithole they created and why.  Oh, and just how much he is vastly outnumbered.

ivars's picture

Fed will have to accept deflation as economy drops into next recession due to oil.

chrisd's picture

Just like the last one

SilverBaron's picture

Don't let them off easy by blaming oil.  There are a lot worse problems than rising oil, and there are a lot of people who should be held responsible.  Oil is just speeding up the inevitable ponzi collapse.

grekko's picture

Oil is still mostly paid for in US dollars.  As the dollar goes down the toilet the price of oil goes up...just like all other commoditees.

falak pema's picture

Von Hoisington's dilemma : to QE-3 or not to QE-3. If hyperinflation is the devil, then WS assets are toast. The USD's on the grill. If it burns it splurges inflation. Oh Ben, you are now condemned to do the great splits like a true ballerina. I hope your nuts can withstand the stress test. Like true Trojan or Spartan on naked butt night alert. If not, roasted chest nuts in spring bonfire will be dime a dozen wrapped up in greasy, green backed notes. 

grekko's picture

I'm saving my greenbacks, they're soft and worth less than toilet paper which I can barter!

mynhair's picture

QE and bastardizations did what they were intended to do.  Clinton already proved lying has no consequences, what's the problem?

Milton Waddams's picture

The stated intent of QE2 has shifted more frequently than the intent of the Iraq war. The real intent of QE2 was to restore the rate of growth of the Fed's portfolio of Treasury debt.

It was a success, and now it is likely ending ->

X. Kurt OSis's picture

They keep obscuring it because its true intent, a negative interest rate, is just as unseemly as calling it money printing.

Negative interest rates = Japan's Lost Decade

Money printing = banana republic

No way to keep credibility with those policies. 

QE = magical economic cure-all whose only side-affect is periodic pants-shitting from the euphoric wealth effecting. 


It's economic heroin and leads to much the same result.  Weight loss due to starvation, stealing our parents jewelry and appliances, and bus-station-bathroom-stall-cocksucking to make ends meet.

topcallingtroll's picture

Impressive, succinct.....true wisdom.

grekko's picture

I think he's purposely destroying the dollar in favor of the dreaded world currency.  After all, isn't the Bernank in league with the financial elites?  They most likely promised him a front row seat at the alter of wall street worship.

6 String's picture

....but, but John Maudlin just said the debt supercyle is over and austerity will be painful for ordinary Americans then equities will soar!

How's that for a fucking thesis? What a fucking jackass John Maudlin has become.

Just take away the back-door spending, er money printing, making its way vastly into the real economy and let's see how this will help equities.  Boo-yeah!

X. Kurt OSis's picture

Fed stimulus has been centered exclusively on stimulated the balance sheet efficiency of its banking cartel owners.  The Fed gave up caring about price stability and full employment in the 1990's. 

The Taylor rule was thrown out the window and the Fed's sole purpose is to ramp money center bank profits, using any policy tool it sees fit to whatever degree it sees fit.  The fact that this will have devistating consequences doesn't seem to trouble anyone.  Whether the Fed keeps monetizing or withdraws stimulus at this point doesn't really matter.  We are screwed either way.

narnia's picture

Richard Koo said recently that the American global banks were originally insolvent during the Latin American debt crisis.

Seems like the Fed & the whole system is like a bad dog chasing its tail from bubble to bubble since then.  We the people should have sent the beast to a better place like Old Yeller in the mid 2000's.  Instead, we went in the other direction, and now we have Cujo on our hands.

SME MOFO's picture

Dear Sir,

I liked your earlier comment better. 

More stomach churning profanity and fewer fitty cent words please.

Thank you in advance,

X. Kurt OSis's picture

Sorry. I'll do better next time. I can come up with analogies for our current policies that go to the depth of their depravity all day. How about a necrophilia theme on the next post?

Fed policy is nothing more than the banking cartel mindlessly fucking our dead and partially decomposed corpse...

Oh wait, Bill Gross already went there.

Fed bashing is getting really crowded.

centerline's picture

Absent a black pterodactyl event, the deflation we see next will be engineered / planned.

WonderDawg's picture

Deflation is coming, but I highly doubt it's planned. The only thing the QE's have done is delay it a bit. The Fed can't reflate the credit market; it's already overburdened and there is a lack of will in the consumer market to take on more debt. In order to reflate you have to have a lender and a borrower, and the borrower's are already soaked.

narnia's picture

I personally believe the Fed will purchase as much US government debt as it has to or even purchase residences before you will see a deflationary spiral.  All of our national debt parked in a big zombie bank that shares an address with the NY Fed is a more likely answer. 

WonderDawg's picture

I think the Fed would try, but the market will bitch slap them. It's inevitable that T rates will rise and force a stoppage of the Fed's reflation efforts. The market will eventually have its way.

defn8Dog's picture

All you need to know:  CMG is inversely correlated to the DXY.

6_7_42's picture

If we had deflation the gub'mint would have to pay back more than they borrowed. Wouldn't want to bet on that for my retirement.

Ajaxromeo's picture

Why is Van Helsing surprised?

QE is not an attempt at economic stimulation. It is a device for keeping the treasury auctions bid at a low interest rate so the Arab Genocide Program can keep going until the dollar collapses and the blood suckers can start herding the US sheeple into the FEMA camps via another false flag project.


Building seven? It just fell down.

The Dollar? It just fell down too.





falak pema's picture

Well if you pump something up that doesn't deserve to go up...the harder it falls...I don't know why they think at the FED they've patented the perpetual motion machine. A PHD in economics is NOT a ticket to understanding the laws of mechanics and moments. He is a virtual con artist on the loose. He needs to go with the rest of the mad mob of printers. To the museum of wax models. 

simon says's picture

TD summarizes it best:

"We agree. Which is why this outlook will never be realized. The Fed will simply never accept the risk of another bout of deflation. Period."



Hedgetard55's picture

We need a real man in control. Like this dude:

Hedgetard55's picture

Bob Hauk: [reading Plissken's file] S.D. Plissken... American, Lieutenant: Special Forces Unit "Black Light". Two Purple Hearts, Leningrad and Siberia. Youngest man to be decorated by the President. Then you robbed the Federal Reserve Depository... life sentence, New York maximum security penitentary. I'm about to kick your ass out of *the world*, war hero...
Snake Plissken: [calmly strikes a match against Hauk's desk to light his cigarette and in a bored tone of voice] Who're you?
Bob Hauk: Hauk, Police Commissioner.
Snake Plissken: Bob Hauk...
Bob Hauk: Special Forces Unit "Texas Thunder"... we heard of you too, Plissken.

RobotTrader's picture

Who would have ever dreamed that all this POMO liquidity and QE2 funds would have piled directly into the likes of LULU, PCLN, SBUX, DECK, etc.

Seems like Newmont Mining or Goldcorp should be a $90/share, not LULU.

Oh well, I guess that is what they call "unintended consequences" of trying to fight the Fed.

I suppose that if QE3 is announced, the retail cult stocks will simply accelerate up even faster.