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Week in Review
The
market re-priced some significant asset classes last week. There was
not that much news behind the big adjustments. So I’m left wondering.
To be sure there has been a growing whiff of a slowdown brewing for a
few weeks. The announced end of QE2 has come at a very inconvenient
time. Tightening monetary policy in Europe (or the threat of it) is part
of the change in sentiment. Then there is the slowdown in China. We
have also come to learn that Japan, (contrary to all the initial bullish
spin) is not going to be anyone’s engine for growth. And finally, we
end the week with what appears to be a very significant step forward to a
restructuring of Greek debt.
Has the economy hit a wall? Again? For me, this is
reminiscent of last summer. That was also a period where there was
evidence of a slowdown. Greenspan scared the hell out of everyone with
his comment, “The economy has hit an invisible wall”.
I’m convinced that the Greenspan comment was the final push
Bernanke needed for him to commit to QE2. It took him another two months
of talking with the other Fed heads, but on 8/27/2010 he gave the infamous famous speech in Jackson Hole that he was going to expand the Fed balance sheet with more QE.
A friend sent me this chart that looks at the equity market and the
history of QE. The pattern is pretty clear. When QE is first announced
stocks catch a bid and bonds trade lower. When QE is ending the opposite
has happened. Stocks work lower and so do longer-term interest rates.
The market conclusion is that without a constant dose of QE the economy (AKA the Stock Market)
will sputter. Maybe the market is right this time. I’m not so sure how
reliable the market “view” is this Saturday given how wrong it was last
Saturday.
One thing I am convinced of; there will not be a QE3 in 2011.
Not even Bernanke can flip flop that fast. Having just announced the
end of QE2, there is no way the Fed is going to sneak in a QE3 over the
next seven months. That’s not going to happen.
If the existence of a QE program is the necessary condition for growth
in the USA we are in very big trouble. We are looking at two dead ends.
One is an economy that can’t grow, create jobs and pay for the $10b a
day we are spending. The other is a monetary policy that will most
certainly kill the country in just a few years.
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The ugliest thing we're facing is that Keynesians are right on one point: if you withdraw stimulus, the economy shrinks, revenues shrink, employment shrinks, and you end up hardly reducing the deficit, if at all. They do word it slightly differently, they say "if you withdraw stimulus too soon", but for them, it's somehow always too soon.
And that is indeed what we're facing. The economy can neither sustain this level of stimulus, nor withstand its withdrawal. So the people in charge prevaricate.
Bernanke announces the end of QE2 while trying to convince us and himself that it's the Fed's stocks of Treasuries holdings, and not the flows of Fed Treasuries purchases, that is the proper measure of monetary easiness. Yeah right. When the Fed stops buying for QE2, that's some $75b a month of and issuance that Treasury will need to find other buyers for. Whatever else those potential buyers have been doing with their money - buying corporate bonds, whatever - they need to be lured back into Treasuries. Meanwhile the mere fact that less capital will be available to corporate bond markets etc dampens expectations for growth and lowers risk appetite. And so Bernanke says look, Treasuries prices aren't falling, they're growing, as if this somehow proved him right.
And in Congress and in the White House, it's become all the fashion to talk about reducing the deficit. Talk talk talk talk talk. Action? Who are you kidding? Ain't gonna happen. Maybe they'll pass some bill that's announced to save $35 bill that actually saves nothing. Maybe they'll agree to some long-term principles and mechanisms that will surely reduce the deficit on Tuesday in return for just a little bit more deficit today.
And that boomer retirement squeeze just keeps ramping up faster than forecast. As if nobodoy knows how many people are due to retire. Of course it's well known but somehow the forecasters just can't seem to get their math right.
Ireland is an example, they implemented govt spending reductions to pay off the investors in their banks (I wish some would bail me out for investing in the wrong things...but I digress) after the implemented the reductions in govt spending, 6 months later their deficit was larger,becuase of the the deflationary pressures of unemployed people, further reductions in real estate values, people emigrating etc...
So I wish some Repub would be honest, if you are promoting deficit reduction via cuts in govt spending it will be brutal on jobs for many many years. Paying off credit card hurts ones lifestyle bad enough, but in a regular household, a dollar not spent is a dollar save and dollar down on the credit card balance, its not like your reduced spending as individual. into the economy suddenly makes your sales commission selling widgets to other people go down. But if every indvidual in entire country decided to pay down their credit cards at same time, economy would tank it and reduce peoples incomes, employment etc. And so it is with in a the govt spending...if you cut costs by laying off teachers, stop building roads, stop paying UI, cutting Medicare benes, cutting Soc Sec paymants, you are directly reducing domestic economy, that money withdrawn from domestic economy now reduces tax receipts greatly. Worse yet, the things that are most stimulative, like road projects, are cut first, and the things that are least stimulative, like foreign wars, are cut last.
So if you think we must drastically decrease deficit then be honest, we don't just have to cut govt spending ___ trillion...given the antistimulative affect fo that we will actually need to cut deficit 1.__ trillion...and that will be brutal on jobs and economy for long long time. People seem to totally over look that govt spending does not just support school teachers and EPA lawyers but also private road and utility contractors, private prisons, private military contractors, private businesses like Boeing and Lockheed, private doctors and hospitals providing Medicare and Medicaid services....all these private businesses shrink enourmosuly with shrinking govt spending.
That politicians say cutting the deficit by cutting govt spending will create jobs is crazy making to me. If they said cutting deficits via cutting govt spending is going to hurt like hell, tank the stock market, raise unemployement BUT we have no choice, it must be done and maybe after 10-20 years of life altering pain it will lead to net job creation...that would be honest. If they said closing the deficit via higher taxes would also be anti-stimulative (since money out of system to stop debt bleeding is money out of syste either via increased taxes or decreased spending) but raising taxes on rich would be way way less anti-stimulative than cutting road building projects, they would be honest. If they said, even tho raising taxes is the least macro eocnomic harmful way to close deficits but they still were opposed to raisign taxes to rather because they just wanted philosophically to keep govt smaller, that would be honest. If they said, hey our way - govt spending cuts only - will hurt more and take longer to close deficit but its the only way to make govt smaller, so we must endure more pain longer to make that happen, that would be honest.
If there was no deficit, and ever dollar saved in govt spending went directly back to tax payer, one could argue that would be stimulative to economy, or at least qualitiatively better to economy because private market consumers get to chose spending rather than govt. But given a dollar saved ( or "earned" via taxes) that is used to reduce deficit is just another dollar out of economy, not way reducing deficit helps with jobs for a very very logn time
Perhaps, but sooner or later, someone/something is gonna yank the joystick out of Uncle Sam's hands, kick his ass outside and tell him to get a job!
Recently Bill Gross of PIMCO on Bloomberg stated words to the effect that "in the US we will experience a decade of savings deterioration" I guess that means low interest rates, no to slow growth, and pump priming. The japan model comes to mind. As far as stock market is concerned, multinationals will be only game in town by continuing to outsource, take advantage of weak dollar and grow overseas. Commodities will do well but risky with speculation by institutional investors ,mostly banks ,seeking yield and profits. That said , America is no longer America as our capital base and assets decline . Do not be surprised if the US sells Alaska to China along with Sarah Palin
I believe that Bruce is incorrect in assuming that there is appetite for 1.5 T in new US debt.
First, the amount needed will be more than 1.5 T as the roll will not be 100%. Second, the increase in interest rates is impossible as the rate needed would implode the banking system, which is wired together by CDS.
In fact I am certain that if Bruce produced a hypothetical projection of who would purchase the treasuries and at what rates from June 2011 through June 2012 sans the Fed, that was picked over by ZH readers they would find both a shortfall and rates by Jan 2012 high enough to spring a debt trap - i.e. more new debt than revenue received.
So what will the Bernank do? He told us at the recent press conference - to 'support' the bond market he will reduce the size of the Fed's 'balance sheet'. In other words he will take income from the revenues of the Fed's bond portfollio and buy treasuries. How much revenues will the Bernank have? Well - whatever amount he needs to keep interest rates where he wants.
Don't worry about how much of the Fed's GBS crap will cash flow or reach 'maturity' during the fiscal year. Remember Freddie and Fannie were each given their own printing press last year as Christmass presents and if needed (and it will be needed) they will just buy back the neccesary amount of their of debt - which remember the Fed bought using money created with its printing press in the first place - with 'money' they will create using their presses.
If things get tight - and they will - the Fed will just further 'reduce' its 'balance sheet' by selling its old treasuries to the turd world and using the cash to buy the new treasuries recently bought by the PD's. And when the 3T is gone (2013), well, then the economy will need 'stimulation' (guaranteed) and so a new round of QE will swell the balance sheet once again.
They know what they are doing. The above process may look like a game of three handed monty in an insane asylum but all the moving parts are just a little opacity to fool the sheep. The wealth of the middle class (the dollar) is being destroyed by a controlled demolition.
'We are looking at two dead ends. One is an economy that can’t grow, create jobs and pay for the $10b a day we are spending. The other is a monetary policy that will most certainly kill the country in just a few years."
The first dead end is out, leaving the second.
Every year hundreds of thousands of cancer patients take chemotherapy, hoping to rid themselves of their terrible scourge. Or just buy a few more years. Are we so much more deserving than they are? Are a few more years of higher prices worse than "lights out" now"? And perhaps the shepherds of the global economy today can find a solution to our dilemma.
Or we can put the previous shepherds back into power and they can find us the solution.
"If the Fed wanted to get the market to buy paper all it would have to do is offer derivatives to the banks so they can position the paper with no interest rate risk. I think they are already doing this"
Lovely. Oh well.. when it all goes down in flames, at least it'll be fairly quick.
As usual, terrific artice Bruce. As for QE3, if the deflationary pressures mount, I cant see Ben refusing another chance to crank up the presses. I look for QE3 by year's end. By next summer, gas will be at $5.00/gal and Obama's reelection bid will stall. Equities will hold up well enough thanks to funny money. But for us serfs, it's a step by step impoverishment thanks to ever increasing commodity prices, this week not withstanding.
http://www.countercurrents.org/gatto070511.htm
offtopic
It seems clear from your article that corrective action is needed. What the WH should do is send out improved copies of the birth certificate and reissue a new copy based on the criticisms at each step of the process. Eventually they are bound to come up with one that satisfies everyone, and then this whole controversy will be over. The idea is to beta test birth certificates like you do software.
I agree. They should also float trial ballons on killing other world leaders. Like announce they killed Putin, see how it goes. Adverse public reaction, don't do it - issue a retraction. People like it, go with the flow. Same thing with invading countries. Float it out there or run it up the flag pole and see if the MSM salutes.
Offtopic again:
http://thenewamerican.com/usnews/politics/7387-media-scrambles-as-bin-la...
Seems as though he enjoys witholding things that would allow us to go forth as a nation.
Whether it his birth certificate, a proof positive dead Osama, he kept the country uncertain on extending the tax cut and no one will hire until his healthcare bill is final defeated.
He pops off his mouth saying lies like "acted stupidly" or "intense firefight".. and never apologetic just thinned skinned if asked anything but softball questions.
Simply put he enjoys creating angst and watching in "bemusement" in his autobiography he recounted the joy he felt after scolding white people to pick up their dog's shit.
Just like Jessie who recounted spitting in white people's food- this guy has one hell of a chip on his shoulders and no matter how old they get,they never get wiser. They are indicative of a whole generation of victims who need a chance to "get theirs".
With both fiscal and monetary policy pedal-to-the-metal for 2+ years we can only get 2% GDP growth. Presuming both get pared back (for a few months anyway), have to believe the economy is going to slow down.
You can argue the Fed keeps rates low for the banks, but a 200 bps increase would have most people (>50%) in the US crying (despite that might be best in the long run -- but no one is interested in the long run (> 6 months).
There's only one thing to do. Trash Social Security and increase military spending.
Social security is a ponzi scheme that requires and ever growing population to sustain itself.
worker to retiree ratio in 1940 was 159:1
worker to retiree ratio 2009 was 3:1
http://www.ssa.gov/history/ratios.html
In a few decades, the ratio will be 1:1
do you think we could sell a navy seal team to the amazonian indians? To attack the anacondas and piranhas!
Only if they have weapons of mass destruction (the piranas--razor sharp teeth?)..
No problem...I'm sure the WS psyops team can prove the piranhas have the spirit of OBL blown into them since he was shipped out into the deep blue. That is the killer : evil knievel mantra...he always re-appears ...like Jaws! When you think you've got rid of him for good!...He'll reappear in the form of a sharp toothed piranha, Pr Moriarty will! ...Oh Jesus, there goes Brazil....We've lost Brazil!...like WE lost China...like we lost Vietnam! ...like we..never mind...just send the Seals to Belem, down that lousy river of no return, full of evil spirits...its a question of life and death for the freeeeeeee world! Pronto...remember GWB now has a ranch in Paraguy...it needs to be protected! damn it!
Bruce - I agree to a certain extent. My analysis suggest that the banks are losing productive assets at a rapid rate and NIM is suffering as a result of their tight private market lending standards. Theyare the marginal buyers of Treasuries in the near future, as sovereign debt requires no capital commitment for them. I suspect the curve will have a flattening bias for the next few months.
This will all be a non event. The over arching issue is debt and debt monetization. Bonds have already rallied because of the "end of QE" psy ops and further rallying will lead to saturation once again, supporting stocks and commodities. Debt will be issued, and debt will be monetized whether announced or not. Just keep buying precious metals regularly in protest. This is the way
The only invisible wall is the wall of lies, damn lies...and ...well...the tsunami of printed paper lies.
there will be no Q3! there will be a war which is imminent! a war is the only way the damned US will use as an excuse to get out of this huge mess! Osama dead fo 10 years, Pakistan invaded on a false pretext. they sell oil to china, and have nuclear weaponry! India will be used also to invade Pakistan, which of course will drag in China! this was the plan all along! the mideast is a distraction! Obama is a lying, coniving bastard! open your eyes people, OPEN YOUR EYES! pretty please?
My guess is an incident in Afganistan/Pakistan with China. Lots of resources there. Good way to write off China's debt holdings.
Eli Lake
The Washington Times
May 7, 2011
Intelligence analysts are sifting through phone numbers and email addresses found at Osama bin Laden’s compound to determine potential links to Pakistani government and military officials while U.S. officials and analysts raise concerns about the safety of Pakistan’s nuclear materials.
According to three U.S. intelligence officials, the race is on to identify what President Obama’s top counterterrorism adviser, John Brennan, has called bin Laden’s “support system” inside Pakistan. These sources sought anonymity because they are not authorized to speak to reporters.
“My concern now is that we cannot exclude the possibility that officers in the Pakistani military and the intelligence service were helping to harbor or aware of the location of bin Laden,” said Olli Heinonen, who served as the deputy director general of the International Atomic Energy Agency (IAEA) from 2005 to 2010.
We can sell Afghanistan, Iraq, and Libya to the Chinese for $1.5 trillion. Lots of oil in Libya and Iraq. Lots of industrial metals in Afghanistan.
the .gov is addicted to power and so let the multinationals share at the public trough to gain economic influence... but the more power they get the more people have to loose
.
letting the banks create trillions in debt unchecked is the new normal QE or no QE the US public will be prostituted to the globalists to 'SAVE OUR DEBT' lol... international finance/trade is the law, and we dont get to vote on it cop man good job
Don't be Clintonesque. Define, "QE2".
There is "is", and then there is "is".
Unannounced QE 2 will be just as effective as its precursors, without telling us about it.
What is to prevent (and as I already suspect has been happening under the radar) theBernank from stealthily doing precisely the opposite of what he says??
And how would you ever know?
Very naive to think that their words or their overt actions are the only tools in their aresenal when they have access to the accounts of all the banks in the world and can just simply replenish their reserves with the push of the "enter" button.
This makes it important they never get audited. In my increasingly jaded view the Fed's twin mandate has changed to:
1. Insure the banks remain solvent.
2. Make sure Ron Paul is not elected president.
The game must go on.
BINGO
Bottom line is: IT is already out of control. QE, or no QE, it doesn't matter. The only positive thing I'm looking for is the steep vertical climb for my PM's. I believe I'd be selling/shorting the faux market by the end of the month. You can bet your sweet asses the banks will have the usual front running tips. Bastards All..............
Come on Bruce, seriously. If there is no QE who will buy the >80% of treasury issuance that the Fed has POMO's since the beginning of QE2?
Until you can provide a credible answer to that question, there is no possibility of QE ending. All this talk of flip-flopping and who said what to whom is interesting, but ultimately irrelevant.
Bonds must be sold. That requires buyers. There isn't enough spare cash in the world to soak up what Timmay is planning to issue, even if rates do increase (and they'd have to shoot up instantly if a failed auction is to be avoided).
So then - who will buy 80%+ of $1.5T in US debt next year? Struggling Japan? Broke Europe? Over-invested in USTs already China? The US public?
You ask a good question. I'll try an answer.
First off I don't see a collapse in the US bond market on July 5. This is a very big market. You would be amazed at how much paper can be placed. I don't expect a problem in 2011 at all. If it were to happen, I think it is a 2012 event and possibly as far away as 2013. (post election)
Keep in mind that the vast majority of new paper will be short term in duration. Under five years. Much of it under one year.
If the Fed wanted to get the market to buy paper all it would have to do is offer derivatives to the banks so they can position the paper with no interest rate risk. I think they are already doing this.
It's not bonds that must be sold in large quantities. It's Bills. There is no default risk on one year US paper. So there will be buyers. After 24 months however........
Thanks for the response. Interesting thoughts, but I just don't see appetite for an additional $1.5T in bonds on top of the rollovers.
If there was no problem selling what needs to be sold, what was the Fed thinking when it instituted QE 1 and 2? It certainly wasn't anything to do with Jobs or the real economy.
Quite apart from QE, do you recall the ludicrous (and afaik still unexplained) jump in bond purchases by the 'Household Sector' in 2009 and 'London Entities' in 2010. I'll eat my hat if that wasn't the Fed too. My point is that demand for US debt may be spectacularly lower than even the official figures show. So, officially the Fed buys 80% of issuance and behind the scenes using Front buyers it may be buying most of the rest too. And they're just going to stop?
QE1 had to happen. That was Fannie and Freddie paper. The Chinese (and everyone else) made it clear that if this stuff was not "money good" then the game would just stop.
So QE1 lifted a very big panic in the market.
QE2 was a mistake by Bernanke. He fell for the Greenspan talk of hitting a wall. Ben shit in his pants and brought QE back to life. I don't think QE2 accomplish a thing. Except maybe creep-out a whole bunch of people like me who watch the circus.
Whoa.
So in effect you are saying Bernanke 1.) still has some sanity in him and 2.) will someday do the right thing for a long-term sustainable economy (although he did about everything diametrally opposed to the right thing so far).
Bruce, they say to distinguish between a belief and an opinion, ask the person what would need to happen so he/she would change his stance.
So I ask you: what would need to happen so you would stop arguing as if the Fed were a sane actor which understands what it's doing and is working (or even just trying to work) in the best interest of the majority of Americans?
And BTW on your previous post in this thread: why do the banks need derivatives to cushion interest rate risk, if the vast majority of new treasuries will be short term in duration? Who is the counterparty on those derivatives? If you say the Fed, do they have the mandate to write such??
Respectfully, what evidence do you have that interest rates would be as low as they were without QE2? Or do you feel that rising interest rates since the date QE2 began (but let's say it didn't) would have been as positive for the recovery, such as it is? And would a higher deficit because of higher debt service also be a positive. Ditto for the national debt.
Seriously even the Greeks can sell their bonds so treasury can too. Give a good enough rate and you can sell almost anything. That's the real question will they pay the interest needed to sell the bonds. What happens to the economy and the financial markets if they do raise rates. Can they sell the bonds if the Fed secretly sells cheap derivatives to insure the value of the bonds if rates rise too much. Maybe they can use that as a back door way to fund the banks, payouts on puts sold to insure the bonds with the printed money going to the primary dealers who bought the majority of the bonds. If the rate increase could be blamed on some external source like a terrorist attack the give away may be politically palatable. Some random musings that I hope aren't incredibly stupid.
The Greeks can only sell their bonds to their Benron equivalent sugar daddy, JC Trichet at the ECB. As with the US (more or less) nobody else will touch them with a 20 foot pole.
I don't think the FED has as much control as most think,and that is scary. To think they have control of the economy would suggest they would not crash it on purpose ,that's just simple logic, but when you realize they just don'tknow what the fuck they are doing or are following some pseudo Keynesian wet dream out of pure blind allegiance to the doctrine...well that's the part that sends chills up your spine.
The bottom line is that there is a most willing puppet in the WH and it is important that he be re-elected. Bernake cannot let the market fall even 20%; it's that simple.
Skyrocketing food and fuel prices will not allow for re-election.
what's best for the current government is to take down commodities during the summer to keep gas prices under $4. The QE begins again in the fall to pump the markets up. Their real problem will come in the summer of 2012 when Obama runs for re-election. Do they want $6 gas with DOW 14K or $3 gas with DOW 8K?
good comments
Their real problem will come in the summer of 2012 when Obama runs for re-election.
yes, I was curious about the timing of it too
we'll see what they can do this time; can they drop commodities including the all important oil beginning in May
give equities a haircut shortly afterwards
and then bring equities back up by the Sept/Oct 2011 (then 2012) timeframe?
Hey Bruce, since you are in Westchester, I would really like to get together for a drink some time to discuss whatever... Do you know Gordo's?
My take is that either they expect the effects of QEII to trickle through for awhile longer or will have some way to do a 'drip' supply of money like keeping a patient in a drug induced coma.
They need QEIII but need to hold off until campaigning really gets underway for 2012.
They'll need the good press then. Just like OBL now. It's a card up the sleeve if needed.
Remember that we are going into an election year and they will want to set the market up according to who they want to see or who they believe will be in the White House next (just wanted to throw a few more variables into the mix).
I had thought that Obama would be a one term president. Prior to the election I had felt whomever got elected would be a one term president because the economy will kill them with bad news.
Now I'm thinking Obama will probably be a two term deal. Not that it mattters to me. While most argue left versus right I believe the issue is up versus down.
http://www.bloomberg.com/news/2011-04-19/bernanke-may-reinvest-maturing-...
I think that's our answer Bruce.
No. this of little consequence at this time. The MBS portfoli is still running down. But at a much lower rate. There are no principal repayments on an of the QE2 POMO buys for at least two years. This Top Up amounts to about 10b a month in POMO. that will not even be noticed.