Quantitative Easing

In today’s world, there are many who want government to regulate and control everything. The most bizarre instance, though — more bizarre even than banning the sale of large-sized sugary drinks — is surely central banking. Why? Well, central banking was created to replace something that was already working well. Banking panics and bank runs happen, and they have always happened as long as there has been banking. But the old system that the Fed displaced wasn’t really malfunctioning — unlike what the defenders of central banking today would have us believe. Does central banking retard the economy by providing liquidity insurance and a backstop to bad companies that would not otherwise be saved under a free market “bailout” (like that of 1907)? And is it this effect — that we call zombification — that is the force that has prevented Japan from fully recovering from its housing bubble, and that is keeping the West depressed from 2008? Will we only return to growth once the bad assets and bad companies have been liquidated? That conclusion, we think, is becoming inescapable.

Fed governors regurgitate it time and again to rationalize their policies.

Less than an hour ago Zero Hedge was happy to point out the glaringly obvious.

Bernanke speech will have nothing in it

— zerohedge (@zerohedge) June 7, 2012

Shortly thereafter, Bernanke confirmed it. Now it is Wall Street's turn to join in.

Well, risk is on. Not so much because of the ECB, or BOE, both of which did nothing, but because everyone is hoping and praying that in two weeks the Princeton professor will unleash the 4th round of quantitative easing in the US (yes, Twist was a flow-shifting operation and thus QE3). And the reminder that China is not immune, and did its first rate cut since 2008 only validated the realization "that they have every idea just how bad it is", as Cramer would say. Sure enough, risk is ripping, although considering the world's 2nd largest economy just joined the monetary easing pants party, the 10 point ES response is oddly subdued. Where the reaction is yet to manifest itself is in gold: we expect the PBOC will take a little longer before it announces its meager 1000 tons of gold holdings have at least doubled following 100 ton/month gold imports as recently announced. But announce it will. In the meantime, China's aggressive step likely means that unless we get a global coordinated intervention at 9 am today, as was the case on November 30 after the last notable move by the PBOC, which was the first reserve cut also since 2008, there will be none this time around and Bernanke will be on his own. God save the markets if he does not deliver, either today at the JEC testimony at 10 am or at 2:15 pm on June 20, as the S&P has now priced in at least 75 points of NEW QE intervention.

All you need to read.

The employment numbers that came out Friday were very bad and caught most economists and analysts by surprise. Nothing the Fed has done has worked. Once again the ranks of the unemployed grow, wages flatten out, manufacturing weakens, GDP declines, and savings are spent to maintain lifestyles. The U.S. and much of the rest of the world is heading toward stagnation, if not recession. Yet, despite the failures of central bank policies, they will persist in doing the same wrong thing again. Here we review the data and explain why things are heading south.

It's one thing for liberals to demand one group of Americans pay for another group of Americans, with a third group's money of course (until it runs out), but when a progressive think tank actually has the temerity to tell Bernanke that Europe is not socialist enough, and thus needs liberal US support, that's when things just get plain old silly. Which incidentally, is precisely what the progressive brains of Mark Weisbrot and Dean Baker, co-directors of the liberal Center for Economic and Policy Research, have done. Naturally, we are all for a humanistic effort; we also believe in leading by example. If Messrs. Weisbrot and Baker would first be kind enough to divest themselves of all their earthly possessions and bank account contents, which should be Fedexed and wired in the direction of Spain post haste, it would make their transparently theatrical pursuit of pseudo-noble causes just that more palatable to the masses who already are on the verge of poverty, and are now being asked to bail out other countries. 

• Spain Seeks Joint Bank Effort as Pressure Rises on Merkel (Bloomberg)
• Banks Cut Cross-Border Lending Most Since Lehman: BIS (Bloomberg)
• Shirakawa Bows to Yen Bulls as Intervention Fails (Bloomberg)
• Merrill Losses Were Withheld Before Bank of America Deal (NYT)
• Investors Brace for Slowdown (WSJ)
• China's lenders ordered to check bad loans (China Daily)
• Obama Seeks Way Out of Jobs Gloom (WSJ)
• Noda Reshuffles Japan Cabinet in Bid for Support on Sales Tax (Bloomberg)
• China to open the market further (China Daily)
• Australian Industry Must Adapt to High Currency, Hockey Says (Bloomberg)
• Tax-funded projects to be more transparent (China Daily)

All you need to read.

If the U.S. Federal Reserve were a hedge fund, its phones would be ringing off the hook with prospective investors wanting fresh allocations and Ben Bernanke would be zipping around the French Riviera in a gold-plated helicopter.  The Fed’s multibillion-dollar position in Treasuries is nicely in the money with the recent moves to record lows risk-free yields, after all.  But it’s policy outcomes, not returns, that the Fed is after.  By that measure, the current record low payouts in “Safe Haven” bonds (U.S., Germany, U.K, for example) are troublesome.  There is, of course, the worry that they portend a global recession.  This concern cannot be waved away with the notion that a worldwide flight to quality totally upends the bond market’s historical function as a weather-vane of economic expansion and contraction.  Beyond this concern, however, Nic Colas of ConvergEx sees two further worries.  The first is that the Fed has needlessly compromised its independence by pursuing bond purchases that, in hindsight, were unnecessary in the face of the current economic outlook and investment environment.  The second is that interest rates have been demoted to a supporting role in kick starting any global economic recovery. As with unfriendly aliens unpacking their bags at a landing site, the move to record low rates around the world is a truly menacing development. Historically, low interest rates have generally sparked economic recovery.  In the current environment, this gas-down-the-carb approach seems to have simply flooded the engine of growth.  Other factors are at play, as I have outlined here. The real answer is simply more time.

10 Questions ...

Despite - or because of - years of ineffectual gyrations by the Fed

The recent elections in Egypt now lead to a showdown between the two top vote getters on June 16/17. The protagonists, Ahmed Shaiq (former PM for Mubarak and candidate of the military) vs. Mohammed Mursi (Muslim Brotherhood), pits two candidates most of the population really doesn’t want in the first place. Kind of like Obama vs. Romney. Where’s Ron Paul on the ballot, right? The problem here is Egypt’s position on the timeline of revolution. Egypt has gone through the 1st Stage of a government loosing its justification to govern, and now the 2nd Stage of a caretaker, or provisional government, is now coming to an end. However, no accommodation has been created to correct the deficiencies that caused Egypt’s Spring Revolution, and that spells trouble.

• Dublin in final push for EU treaty Yes vote (FT)
• Spain cries for help: is Berlin listening? (Reuters)
• Crisis draws squatters to Spain's empty buildings (Reuters)
• EU World Bank Chief Urges Euro Bonds (WSJ)
• but... EU: Current Plan Is Not To Let ESM Directly Recapitalize Banks (WSJ)
• Graff pulls Hong Kong IPO, latest victim of weak markets (Reuters) - was MS underwriter?
• EU Weighs Direct Aid to Banks as Antidote to Crisis (Bloomberg)
• Dewey's bankruptcy: Let the rumble begin (Dewey)
• More are cutting off Greek trade: Trade credit insurers balk at Greek risk (FT)
• Rosengren wants more Fed easing; Dudley, Fisher don't (Reuters)
• EU throws Spain two potential lifelines (Reuters)
• Fed's Bullard says more quantitative easing unlikely for now, warns on Europe (Reuters)

All you need to read