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How Central Bank Policy Impacts Asset Prices Part 5: How Far Can They Go?
With the unlimited asset purchase announcements by the Fed and ECB recently, the limits of balance sheet expansion will be put to the test. The current levels would have been seen as inconceivable a mere few years ago and now it seems business-as-usual as investors have become heuristically biased away from the remarkable growth. The problem is - central banks are missing inflation targets and credit growth is still declining - need moar easing, forget the consequences.
Via SocGen:
Balance sheet expansion resumes in advanced countries
Following the unlimited asset purchases announcements by the ECB and the Fed, the limits of balance sheet expansion will be put to the test once again.
Further balance sheet expansion is expected from the BoE and the BoJ, among others. The BoE’s asset purchase program will expire in November. For governor King, the MPC is “ready to inject more money” should the signs of a recovery fade.
A few years ago, it would not have been conceivable to go this far with balance sheet expansion. But, looking at where we stand now, it seems central banks could continue to expand their balance sheets further, as long as liquidity injections fail to spread to the economy via higher inflation.
People’s Bank of China and foreign reserves
The PBoC stopped expanding its balance sheet in 2012, as reserve accumulations ceased.
The bank has not responded to the recently announced global easing measures.
Even though inflation has been much lower in recent months (1.9% in September), the PBoC continues to pay close attention to inflation to avoid the formation of another asset bubble, as was the case in 2010.
The key challenge for the PBoC now is to stabilise the banking system as liquidity pressures intensify.
Main risks and opportunities: Inflation missed targets; credit growth declining
Risk 1: All central banks missed their inflation targets
After each round of QE from the Fed, inflation increased significantly. Applying past inflation gains from QE2 to the current level of PCE inflation (1.5% in August) means it could exceed 2.7% one year from now.
The absence of a well-defined exit strategy means inflation may not go down after central banks stimulus cease, despite efforts to reduce money supply.
In the eurozone, although inflation is somewhat higher, the risk in the short term is deflation, with austerity measures acting as a drag on growth.
Risk 2: Credit growth declining
Large liquidity injections by the Fed and the BoE did not succeed in promoting credit growth for the private sector. This market configuration is similar to the situation that took place in Japan after its bubble burst in 1990.
Overall, lending to the non-financial private sector in the euro area remains very weak and this is a genuine source of concern.
For China a potential slowdown in credit growth from its deteriorating banking system is a key risk for future Chinese growth.
Some inflation expectations
While the eurozone is implementing austerity measures adding deflationary pressures to growth, the situation is different in the US where GDP growth is moderate (2% annualized in Q3 )
A rebound in the US housing market is sparking some small improvement in employment and consumption, leading to higher inflation.
Current inflation expectations, as implied by the 10Y breakeven inflation rate, rose to an 18-month high on the day following the last FOMC meeting of September 2012 and now stand at 2.5%.
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I can stop inflation in 15 minutes said the wolf to the lambs....
And I'm 100% confident my shit tastes like rainbow sherbet...
Benarke better read a few more Great Depression books
bernankes approach always amazes me, he treats this as if its exactly the same as the great depression, which everyone knows it aint.
if he was a surgeon he would be reading books about pancreatic cancer to treat people with lung cancer.
Wonder what the Plunge Protection Team is up to?
bailing out Wall Street?
Good article. Despite massive printing by CBs, I still see vicious deflationary downward death spiral all around me. I am not sure what to make out about house prices "rising" since the market is so distorted with zero down mortgages, unsustainably low interest rates and "buy now pay later" house deals.
What happens when "later" arrives?
Seniors have seen their house prices tumble 30-40% and many are struggling with the 0.03% yields on their 'nest egg' in the face of 6-8% inflation of food and energy. The 1.6% COLA does not help them much in this environment of rapid loss of purchasing power. The ones I see doing well are those who diversified into PMs which are up 200-300%.
Some hedge funds are buying up the lower priced homes from the banks in bulk, befor they are put on the market. So supply is drying up in some markets around the country. This is resulting is rising house prices.
"I am not sure what to make out about house prices "rising" since the market is so distorted with zero down mortgages, unsustainably low interest rates and "buy now pay later" house deals."
One reason house prices are rising in some areas is banks holding REO homes off the market to cause enough competition among buyers to keep prices from drastic decline... and, as the poster below pointed out investors are so desperate for returns that they are buying blocks of homes to quickly remodle and flip or to hold for rentals.
There was an article recently about the flippers/hedge funds driving the rental market in Phoenix from 15% returns on rentals down to 6%... So, the hedgies and rental specialists decended on Atlanta in droves and will quickly drive down rental prices in that area.
Where is is going? More of the same till there is no arbitrage opportunities left in housing. Then what will the hedgies do with their portfolio of rentals? Meanwhile the banks sitting on piles of REO could destroy the game by releasing more houses to the market... time will tell.
In an infinite universe there are infinite possibilities (sorry I can't narrow that down a little more) -- the sky isn't the limit
Unfortunately, you don't have access to that "infinite universe" and will have to make do with the available energy in this closed system called earth.
As far as I can tell, the only fusion reactor providing energy in a reliable manner is the sun, and even that will run out of fuel someday. better get those 7+ billion hungry people to work on interstellar space travel quickly.
Regardless of the Fed's target the USD index continues to be technically bullish and could be set for a nice push higher in the near-term. The Fed "thinks" it can control interest rates and inflation, however, in a market economy that is not true and basic Economics 101. The Fed wants the public to believe that it does have influence over the economy, which many times is believed initially, but that belief may be finally wearing off. The only problem is wondering wether or not the US is still a true market economy or is government controlling more and more of the economy. That seems to be more true everyday. Here is the bullish USD technical wave count. http://bit.ly/Uc7PwC