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El-Erian Warns "Fed May Have Won The 'Taper' Battle; But Are Yet To Win The 'QE-Exit' War"
With equity markets reacting enthusiastically to the Fed’s historic policy change announced last week, PIMCO's Mohamed El-Erian notes many have rushed to declare victory. Whether in asserting investor comfort with the policy regime shift or in declaring the definitive end of dependence on quantitative easing (“QE”), they believe that the markets’ short-term reaction can indeed be extrapolated into the longer-term. While most Fed officials will welcome the markets’ favourable reaction – and especially so after the May-June shock – El-Erian suspects that they are much more cautious. Indeed, in this FT Op-Ed, he lays out four reasons why such caution is understandable.
Via The FT,
...
First, the impact of Fed policy remains overly dependent on using artificially-high asset prices to alter household and company economic behaviour. Other transmission mechanisms, including the credit channel and the deployment of cash in real economic investments, remain muted. Accordingly, concerns about financial soundness will persist until the Fed witnesses improving economic fundamentals that validate artificially-elevated asset prices.
Second, the Fed is entering a more uncertain policy phase due to its ongoing instrument pivot – namely, less reliance on a direct measure (monthly purchases) and greater reliance on an indirect one (impacting behaviour through forward policy signals). Issues regarding the degree of effectiveness and control could well come to the fore. Just witness the recent sharp upward moves in the 5-year US Treasury yields, along with other intermediate maturities.
Third, those at the Fed who follow closely market positioning will probably recognise that equity markets are currently in the grips of very favourable technicals; and, judging from history, such technicals can lead to price overshoots whose reversal can be quite disruptive.
Finally, the Fed is not the only central bank that has been active in maintaining economic and financial tranquility and, to this end, continuously bolstering asset prices; and it is not the only institution that has been forced to rely on imperfect instruments to fulfil this task.
The European Central Bank and the Bank of Japan are in the same boat. And they, too, face tricky policy issues ahead, with success also ultimately dependent on the overall ability of their economies to overcome the trio of inadequate aggregate demand, insufficient supply responsiveness and residual debt overhangs.
After a couple of false starts, Fed officials have impressively won the first big battle in implementing a gradual orderly exit from QE3, a highly-experimental measure whose longer-term consequences are not fully known as yet. They are yet to win the war.
Of course, a glance around the world - from Turkey to Thailand and even in credit and volatility markets in the last few days, and perhaps El-Erian's caution is warranted.
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"They are yet to win the war."
Really, Mo? Thanks for the penetrating insight.
There was a reasonable narrative before the closing statement. Try reading instead of glossing and landing on the last sentence. "Mo's" insights get scrutinized and published, regularly, in the world's most respected Financial media. And you; yeah, you were "first!" on ZH today. But beyond that...?
Beyond that...you've completely missed the point.
El-Erian often has insights that are worth reading; I don't discount them, nor did I in this case. It is precisely his closing line that I was criticizing, as it is both trite and painfully obvious.
Bullshit.
Given his closing paragraph - "After a couple of false starts, Fed officials have impressively won the first big battle... gradual orderly exit from QE3, a highly-experimental measure... whose longer-term consequences are not fully known as yet. They are yet to win the war"
it was an entirely appropriate way to wrap up his thoughts in context of his theme. The last line offers his conclusion revealing the reason for the narrative in the first place. It could be argued as perfect but not wanting to overstretch here, let's just say it's hardly a reason for such a shitty criticism. It seemed really picky, so I decided to weigh in.
Happy Holidays.
Both of you..., go to your rooms!
I swear..., splitting hairs and bickering about it....
+100
If you look at his and his master's
track record for the last 12 months,
it immediately becomes quite clear
why he is such a poor and scared crow... hehe
Hilarious! It would only be "entirely appropriate" if the answer were in doubt!
Wait, let me guess – you imagine that the Fed might "win the war"?
Win or lose the result is the same. Dollars worth virtually nothing.
If you don't want them please send them to me.
Ignore Gromit...
I'll give you a shinny copper penny for every worthless dollarbilll.
I'll pay shipping if it's about 50 pounds and I'll ship your pennies 6 months after I received your paper fiat bills.
Well, at 1gram per bill we get a face value of $907k per ton of one $ bills. One cord of wood averages 3800lbs, 23MBTU, or in these parts about $300. So $907k face should have the energy equivalent of at least .52 cords of wood or 11 MBTU ..... which would go in these parts for about $157, or 8oz of silver.
Not that this is my backup heating plan for when we hit Zim-dollar levels and gallon of milk goes for $3000.00.
But I do believe you're jumping the gun and offering the man BTU rates for an asset which is still perceived as having a greater value.
Its not even january yet. Wait till bond auction time
That's the thing that gets me. They haven't even started the taper yet, and people are claiming that the taper is not having any effect, or even claiming that it is having a good effect. They can call me when they actually significantly reduce bond purchases and we see what happens.
(I don't think there will be any real significant reduction, or if there is, it won't be very long lived.)
QE exists simply because the revenues from conventional tax streams is not enough to fund the massive size of government. We are militarily active in 150 countries. There is tons of unemployed. Over half of the revenue of walmart is from snap card recipients!
But oh yeah, the 10billion MBS "taper" is a "win" LMFAO
so like you said, wake me up when they cut back in bonds
And unfortunatly, we are in a position where the Fed cannot end QE and it cannot not end QE. I have no idea what schemes and tricks they'll try, but it's going to be a wild ride.
Only the names change..., the schemes and tricks are the same.
Yes, QE exists to suppress interest rates, our government being the biggest payer of interest in history. Revenue shortfalls must be made up by borrowing, but demand for US paper from bona fide sources is insufficient at negative real rates. Thus, debt monetization.
Using primary dealers as straw purchasers.
Getting off QE will be like getting off a ride on a raging bull. It will be a bear all the way down.
"If you want to keep your Irrational Exuberance, you cannot keep your Irrational Exuberance."
QE4EVAH!
"... if more money were going to the market, then they would lose much of their value and we would lose profits because we are the ones who print money! That's why we invented inflation, to keep governments in fear and directing money back to us through the so-called Quantitative Easing Policies."
http://failedevolution.blogspot.gr/2013/12/an-imaginary-dialogue-between...
"Won the ----- Battle" The real battle hasn't even started yet. TPTB are still choosing sides. "Shiites or Sunnis", "let's divide the far east", "do we really need to get the super powers involved"? "Let's get some nationalism going, to take the sheeples minds off things". "We've kinda pushed it with these little conflicts. What's it going to take when/if this pile of economic shit really starts to fall apart". War has always been their 'get out of jail card'.
It's all about resources, demographics and cycles. Too many people but we're scraping by on resources. Demographics in the industrial world - not good. Cycles: war cycles - not good, economic cycles in the west - not good.
CMYK PICK A COLOUR! And we'll find the country why the citizens have hat skincolour which we can blame and kill.
Ok, let's assume for a moment that the FED is comprised of really decent people. Then, the only risk is that they are incorrect about their monetary theories, or that the data they release to the public is incorrect due to well-intentioned mistakes.
As far as them being wrong or right about their view of the world, clearly their dual mandate has failed. There is not much to argue about there.
As far as their data being reliable, consider: how much are they actually monetizing per month? They said it was $85 billion. and that they are tapering by $10 billion so that leaves $75 billion. But what if they were mistaken? What if they were doing 100 billion, and they are tapering by 25? Or what if they were doing 85, but they are going to accidentlayy increase by 15 billion? How would we know? Well of course it would all come out in the audit.
The problem is that we (yes, you and me) are not allowed to audit them. So that sort of makes problem 2 moot.
The truth is, and all joking aside, you can bleieve whatever you want. But I don't believe their $85 billion number, and I don't believe they are doing any tapering at all.
Go ahead, prove me wrong - you can't.
Ok, let's assume for a moment that the FED is comprised of really decent people.
see... I stopped reading your comment right there because I'm more of a fiction reader kind of guy and not the Harry Potter books.
Toby Connor: Another Bubble Looking for a Pin
Toby Connor provides a very interesting set of charts and market observations. Nothing grows up to the sky and he reminds us that every parabolic move ends in correction. This Friday extremely volatile FOREX moves are the first sign of repositioning by the major players. 10 Year Yield has reached 3.0%, mortgage rates are already going higher and mortgage applications are collapsing - markets can not be sustained by only rising Twitter and other social media. Janet Yellen will be tested very early in her rein and idea that QE can be actually extended is not so crazy any more. http://sufiy.blogspot.co.uk/2013/12/toby-connor-another-bubble-looking-f... Rob Kirby: When China Doesn't Get Their Gold - That's When This Ends GLD, MUX, TNR.v, GDX
"Greg Hunter has conducted another very interesting interview and Rob Kirby points out one more time to the elephant in the room - derivatives market, which can be on fire once interest rates will start going up. With 10 Year Treasury Yield crossing today 3.0% line in the sand we have very interesting time ahead of us. Now, finally, Gold goes vertical with US Dollar under pressure today."
MOAR...ugly bitch has a right to change her mind
As far as ending QE the FED has put it's big toe in the water.
Then Yellen will think she sees a Shark fin and pull it back out.
She'll have to go back to her beach chair and have a Mimosa with Jamie and Lloyd.
Oh... so they "tapered" 12% officially from their printingorgy...
rates on the 10yr are creeping higher ever since because there's nor eal buyers of debt...
and QE... which is also printing like crazy poses a risk?
what risk? that the 10yr goes up another notch?
will it go up the same ammount like the 12% taper? If yes, that means that the 10yr rise in rates will do that for about 15 times...
that's kind of scarry... and even than there would be a deficit...
"First, the impact of Fed policy remains overly dependent on using artificially-high asset prices to alter household and company economic behaviour."
Companies buy back stock and don't hire workers.
Household real income drops, negatively altering economic behavior.
Fed policy gets an F.
on the other hand. the real smart money will have sold all their crap to the lemmings and pension funds so it's not in their interest anymore to devalue their dollars any further.
WHY NOT START WITH REAL DEFLATION?!?
The American empire will crumble for sure but that only means the 1% can buuy the rest of the American parkinglot on the cheap.
They will NEVER exit QE.
That's the historical record, and why hyperinflations occur: The first printing actually causes some economic bounce, and doesn't appear to cause much inflation. The voices of caution are "proven wrong", and a cohort of politicians and the FSA organize to "get their fair share" of the new distribution of "free" money. The political side of caution loses members and the power to persuade as the printers, distributors and spenders gain political power. As each round gives less of an economic bump, the politics now dictate to print moar and faster until: hyperinflation. Next step: Find a scapegoat (Jews, Christians, Whites, Conservatives, etc.), and go to war.
No turnaround in sight:
Economically: Record food stamp usage, record number on disability, record number of people not working, record number of people renouncing US citizenship, record low labor force participation rate, record homeless populations, hope home prices starting to roll over, interest rates starting to creep up, the FSA demands more but collected taxes can't cover interest, SS and Medicare, massive reduction of income due to higher healthcare premiums coming, etc. Fracking seems to be the only thing giving the economy any bump, and Choomer1 would love to shut that down too!
Politically: The Choomer in Chief hates traditional American allies and the traditional way of life ("fundamentally transform"), so now we back Al Queda in Libya and Syria, Moslem B'hood in Egypt, Iran in the UN-NASA is now reaching out to Muslims instead of the stars!?
Outlook: Hyperinflation
It's just so depressingly predictable...
Those fumb ducks haven't even won the taper battle yet since taper doesn't even bucking start until January.
I actually think the wild card is the oil prices as above $100 (as is the case now) this can be inflationary even in the manipulated CPI world. Inflation will start to rear its head maybe 6 months down the line, just as economic growth begins to falter. The FED / ECB and other central banks will be in a dilemma , do they start to take tentative steps towards keeping inflation in check , i.e reduce / stop taper and start to increase interest rates or increase QE to avert a recession. It feels like at some point we will get stagflation ..... inflation without growth.
The 10 year yield looks like it may hit 3.5% within 3 months. The speed of that would definitely spook the stock market. Bizarrely and independently I agree with another poster on here , can't remember who but I've seen his post around re. stock market crash around 14th January.... I came up with that date as well. I guess I just feel realisation hits home on that date, very much like the events of 1987 which I remember well... nothing in particylar new happens but a tipping point is reached!
Won my ass the fed and this government lost control decades go , trying to plug this ships gaping holes only buys time.
Bernanke describes the Fed's exit strategy, February 10, 2010:
http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm
Don't give me any bullshit about how that fucktard has won any battles at all. He's suppposed to be halfway done unwinding the Fed's balance sheet by now, not slowing down a $85B per month increase by 12%.
Same old shit. Run mind-blowingly irresponsible deficit spending programs for a couple years until they're seen as "normal", then ballyhoo loudly about how responsible you are by trimming the deficit increase by some small amount.
Congress passed some nonsense budget that trims $1.99 off the deficit spending too - spread out over the next ten years and not to start until 2015 or so. Yay! Another grand victory for fiscal prudence and responsibility!
I'll sign the damn "Happy Retirement" card and put $5 into the donation envelope for The Bernanke's retirement gift. Maybe we can raise enough cash to get him a gift card for Olive Garden or some other nice place. For everything else there's Mastercard.
When is this world-wide charade going to end? Manipulation of economic data, manipulation of all markets, credit bubbles to keep all these rotten banks afloat, the hollowing out of the middle class, censorship. Central Banks are creating a facade of stability until it all falls apart. The percentage of non performing mortgages to total assets of the six big US banks are still at crisis to pre-crisis levels. Major banks everywhere are all insolvent. The GFC hasn't gone away. It's still alive and well and getting uglier by the day and the sin is that not one single banker has been brought to book.
El-Erian can blow me.