Folks, QE 3 is not coming. Not without a Crisis first. End of story. The last time the Fed hit “print” with QE 2 put food prices at all time records and kicked off revolutions and riots around the globe. Today, gas is already at $4, food prices aren’t too far off their highs… do you REALLY think the Fed will kick off more QE in this environment… during an election year? At a time when the Fed is becoming a hot topic in the election?
Jan Hatzius was on TV earlier, stating he expects a whisper of Twist extension in today's minutes, as per Hilsenrath. He did not get what he wanted. His take: it is now just deferred to June. To wit: "March FOMC minutes make easing at April meeting unlikely without substantial deterioration in the outlook. However, an announcement of additional asset purchases remains our baseline, with June the most likely timing at this point."
So much for the Hatzius and Hilsenrath prognostications. Headlines coming in:
- FOMC SAW NO NEED TO EASE ANEW UNLESS GROWTH SLOWS, MINUTES SHOW
- MOST FOMC PARTICIPANTS SAW `LITTLE EVIDENCE OF COST PRESSURES
- FOMC PARTICIPANTS SAID LABOR MARKET CONDITIONS HAD IMPROVED
- MOST FOMC PARTICIPANTS EXPECTED INFLATION RATE AT 2% OR LESS
- MANY FOMC PARTICIPANTS SAW `EASED' STRAINS IN GLOBAL MARKETS
- MOST ON FOMC SAW TEMPORARY IMPACT FROM RISING OIL, GAS PRICES
- FOMC SAID SIGNIFICANT OUTLOOK CHANGE COULD ALTER 2014 RATE PLAN
Apparently $4 gas has an impact.
In simple terms, this time around, when Europe goes down (and it will) it’s going to be bigger than anything we’ve seen in our lifetimes. And this time around, the world Central Banks are already leveraged to the hilt having spent virtually all of their dry powder propping up the markets for the last four years. Again, this time it is different. I realize most people believe the Fed can just hit “print” and solve everything, but they’re wrong. The last time the Fed hit “print” food prices hit records and revolutions began spreading in emerging markets. If the Fed does it again, especially in a more aggressive manner as it would have to, we would indeed enter a dark period in the world and the capital markets.
As Europe's exuberance from the LTROs fades (with Italian banks now negative YTD, Sovereigns wider than LTRO2 levels, and financials desparately divided by the LTRO Stigma) Jefferies David Zervos uncovers the sad reality that faces peripheral creditors and Northern Europeans - as we noted a month ago here. The 'success' of the LTRO monetization scheme (as opposed to EFSF/ESM transfer dabacles) is what enabled the Greek restructuring, and as Zervos notes, the losses that the big boys (Spain and Italy) need to take will not be taken via a haircut but a monetization as the number 1 rule is we must always assume that losses will be taken in a way that protects the large northern banks, northern jobs and most importantly Northern politicians. If the loss realization is not managed correctly (and losses there will be), then the ugly truth will escape but the North's large-scale vendor-financing scheme with the periphery will have to continue - even in the knoweldge that the debt will never get paid back.
The income and savings of Northern workers must be ploughed (directly or indirectly) into the rest-of-Europe or the entire structure becomes insolvent and the breaking of that social contract (that they will be looked after when they are old) will inevitably lead to revolt and nasty nationalist political forces being unleashed. The hope to avoid this is the 'wealth illusion' as the workers of the north can never be allowed to realize they have only 50% of their worth in reality. Ireland will be next on the loss-realization-monetization path but as we move from relatively small and containable sovereigns to the big-boys, the idea that Spain and Italy will roll over and accept a decade of austerity in exchange for a haircut is pure folly. These countries hold too much clout in the Eurozone and their threat of exit is a material threat to the northern jobs and hence northern politicians. The only way the northern politicians will be able to save face when it comes to Spain and Italy is through massive monetary policy accommodation. Inflation will rebalance Europe; but let's hope that the process of restating northern wealth and wage rates does not lead to revolt in the northern streets. The politicians will need to carefully execute this trade.
Dr. Constantin Gurdgiev, a non Executive member of the GoldCore Investment Committee, has again analysed the data of US Mint coin sales in Q1 2012 and has looked at the data in their important historical context going back to 1987. He finds that the data regarding gold coin sales in Q1 2012 confirms that there is “no hysteria and no bubble here”. Dr Gurdgiev finds that while volume of sales in Q1 2012 fell from the quite high levels seen Q1 2009, 2010 and 2011, demand was much stronger than “in the pre-crisis average for 2000-2007.” Also of note is the fact that despite the worst financial and economic crisis the modern world has ever seen being experienced since 2008 demand has remained below the record levels seen in the aftermath of the Asian debt crisis and unfounded Y2K concerns. Interestingly, Dr Gurdgiev finds that the historic data (since 1987) shows that the "gold price has virtually nothing to do with demand for US Mint coins - in terms of volume of gold sold via coins." He finds that the demand for gold coins has little to do with the price in general and that “something other than price movements drives demand for coins”.
You have publicly gone on record with some off-the-wall assertions about the gold standard. What made you think you could get away with it? Your best strategy would have been to ignore gold. Although I concede that with the endgame of the regime of irredeemable paper money near, you might not be able to pretend that people aren’t talking and thinking about gold. You can’t win, Ben. In this letter I will address your claims and explain your errors so that the whole world can see them, even if you cannot.
The week ahead will offer significant inputs to our views. ISM and payrolls will likely set the market tone for the next few weeks. Despite the softer signals from regional surveys, Goldman expects the ISM to improve at the margin relative to last month’s print. In contrast, it expects payrolls to grow by 175k, down from last month’s 227k jobs gain. FOMC minutes will likely show that Fed officials had a discussion on further easing but are unlikely to offer strong hints about the likelihood and possible timing of a third round of Quantitative Easing.
By forcing private firms and individuals into spending money on things they don’t believe they need, government can create demand, which will lead to jobs via the magic of Keynesian multipliers. Central planners know better than individuals and businesses. That is because they tend to be better educated, having attended the best schools and universities. Central planners tend to think about the bigger economic picture, while businessmen and individuals tend to have small parochial horizons. They are simply not qualified to know how to spend their money. The biggest problem with “free” markets is the stupidity of the common people. How can they possibly know what they want, or what they want to achieve when they have not attended prestigious universities like Oxford, Harvard, or Yale? Without help from central planners working with fact-based information derived from simulations, mathematical models, and empirical studies the common people will never be able to make informed economic choices. Thanks to the genius of central planning for the common good — as well as the hard work and self-sacrifice of central planners — the common people are liberated from making difficult economic decisions.
The real story of Germany, to be blunt, is that it is a parasite economy. Its domestic demand lags. It has a labor force with different values than most. It will live with low wage increases and low inflation. It has lured other EMU members into a currency bloc and let them run such persistently higher rates of inflation (with no criticism of it!) that Germany now OWNS any domestic demand that other EMU countries can generate. Germany is like the vampire squid economy of Europe. Now it’s kind of caught in its own huge blinding squirt of ink, since its banks have lent to these other EMU countries to finance their excessive consumption and Germany is entangled. But on the real-economy side of things, the German economy is eating their lunch, however, meager.
The sharp drop in the personal savings rate in the month of February, which just hit to lowest level since January of 2008, is indicative of the problem. While personal savings rates could be bled down further to sustain the current level of subpar economic growth - the world today is vastly different than prior to the last two recessions where access to credit and leverage we very easy to obtain. It is entirely possible, that in the very short term, we could see personal consumption expenditures continue to make some gains even in the face of the obvious headwinds. However, it is important to keep these month to month variations in context with longer term historical trends. Personal consumption is ultimately a function of the income available from which that spending is derived. As such, the current decline in the growth rate of incomes, without the tailwind of easy credit, poses a much greater threat to the current level of anemic economic growth than we have seen in past cycles.
Our feeling is that Germany is establishing a "Plan B" in place in case it needs to leave the Euro at some point. The catalyst(s) that might provoke this are the upcoming French, Irish, and Greek elections, which could see a resurgence in leftist, anti-austerity measures in these countries. Moreover, inflation is kicking up in Germany which will exacerbate tensions between it and the ECB.
European markets got off to a bad start following early reports that the Greek PM has not ruled out a further aid package for the country, however European cash equities are now trading higher as US participants come to market. Markets have been reacting to the announcement from EU’s Juncker that the Eurogroup has agreed upon Eurozone bailout funds of EUR 800bln. Elsewhere in the session, FPC member Clark commented that the FPC should not aim to stimulate credit growth in the UK, adding that direct intervention in the mortgage market is too politically volatile, but may be considered in the coming years. Following the reports, GBP/USD spiked lower around 15 pips, however it remains in positive territory, moving above the 1.6000 level in recent trade. In terms of data, the Eurozone CPI estimate for March came in just above expectations at 2.6%, 0.1% above the 2.5% consensus. The market reaction to this data, however, was relatively muted as participants await Eurogroup commentary. Looking ahead in the session, participants await commentary on the Spanish budget, US Personal Spending and Canadian GDP.
- Greek PM does not rule out new bailout package (Reuters)
- Euro zone agrees temporary boost to rescue capacity (Reuters)
- Madrid Commits to Reforms Despite Strike (FT)
- China PBOC: To Keep Reasonable Social Financing, Prudent Monetary Policy In 2012 (WSJ)
- Germany Launches Strategy to Counter ECB Largesse (Telegraph)
- Iran Sanctions Fuel 'Junk for Oil' Barter With China, India (Bloomberg)
- BRICS Nations Threaten IMF Funding (FT)
- Bernanke Optimistic on Long-Term Economic Growth (AP)