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Hugh Hendry Live 2: "QE 'Worked' By Redistributing Wealth Not Creating It"
In the second of three interviews (part 1 here), Hugh Hendry tells MoneyWeek's Merryn Somerset Webb why central banks will go even further than anyone expects to keep the global economy afloat. Hendry notes, "there’s so much debt that if you reprice debt, the economy slows down. We saw that I think in 2012, after the taper tantrum and ten-year bond use went over 3%. What happened next? The economy slowed down. If anything I would be a buyer of U.S. Treasuries."
Key excerpts (full transcript here)
Let’s move on to looking at markets more specifically.
Hendry: This is almost unparalleled in being the most exciting moment for global macro today. And I predicate that upon making an analogy with the Central Bank coordinated policy intervention, in the foreign exchange markets, after the Plaza Accord in, I believe, 1985. There was a profound unease at the current account and particularly the trade deficit that America was running up, especially against the Japanese, which was deemed to be contentious. The real economy is composed of slow-moving prices, wages are slow and the notion of having to wait for productivity improvements and wage price negotiations to work their course, via the U.S. corporate landscape in Japan, such as those deficits would be resolved successfully and become less politically contentious. It was just too long. Politicians just don’t have that time and so they jumped into the world of macro. Macro’s all about fast-moving prices. Foreign exchange is fast. Stock markets prices are fast.
So the notion then was that the Yen and the Deutschmark would appreciate. Now for hedge funds that was amazing. This is the period of the alchemy of finance, as George Soros has celebrated in very successful financial adventures. They just run the biggest long positions. No one stopped to say “Well, the Deutschmark’s getting expensive.” It didn’t really enter into the vernacular of trading in that market. It was macro, there was a policy impulse, a sponsorship by the world’s monetary authorities and you were trending and you had to have that position.
By and large it succeeded. So what I would said to you today is that the policy response can’t be found in foreign exchange markets. It’s been muted somewhat by the “Beggar thy neighbour” way that everyone can pursue the same policy. So currencies, up until very lately, haven’t really moved that much. Instead the drama is unfolding in the stock market.
I would say to you that policymakers are so absolutely beside themselves with regard to how structural these deflationary forces are, and that they recognise that they really have very little to offer once policy rates are at zero, the zero lower band, that they have to stave this crisis off. They cannot have deflation today.
I believe they are now responding to the fast-moving circuit of the stock market and clearly America’s demonstrated something. That policy response underwrote a very virtuous cycle of higher asset prices.
You’re telling us that QE worked.
Hugh: It’s all about to which degree does it work? Now if you wish to take the other side and say “QE doesn’t work.” It worked by redistributing but it doesn’t create wealth, clearly.
What it aims to do, is redistribute economic growth from one part of the global system to another. So as the U.S. has come to the forefront in the last five years, China’s found its growth rate has, from this perpetual notion of 10% GDP expansion, is now 7%, and everyone’s scratching their head and has great doubts that 7% can be maintained.
Europe needs high equity prices and high animal spirits and then you’ll get people feeling more confident about the collateral
It may not work, but presently the perception is that it will work and those asset prices are trending and you should participate. Then within Europe, such is the political timeframe and the stakes are so enormous, that is has to work now and we have the French elections, national elections are in 2017. Europe has been slow to this game of quantitative easing. As a result they are clearly behind the curve.
So economies from France to Italy and others have been unsuccessful in bringing these deficits below 3%, which of course, then imposes further austerity measures which are toxic in the political/social space, and we’re seeing radicalization of policy.
It may be contentious to say, but if the French election was held today, I would worry that Marine Le Pen’s party would win. That’s not to say, necessarily, to cast aspersions on that side it’s just to say that I think the thrust of her policy would be to take France out of the Euro.
The people who very angry about QE – who disapprove of it. They would say the moral imperative is not to do QE, but you suggested that for you the moral imperative in Europe is to do proper QE.
Hugh: Well, desperate times breed desperate measures and the fatal policy errors are I believe, all in the past. Economies across the world were allowed to take on so much debt, and taking on debt, you’re borrowing from the future. You’re borrowing consumption to spend it today. So we overinflated the GDP growth rate. There’s no surprise to me when people are disappointed by today’s growth rate. Because it’s like “I ate your sandwich yesterday.” It’s not there. So I don’t see this as a clean solution.
I see this is a grubby solution, but it’s closer to being a solution than anything else that I conceive of. With QE, again, I say I think we barely scratched the surface in terms of what will happen. I think it will spread into central banks essentially having to endorse higher government budget deficits to sponsor public work projects or favourably to sponsor tax cuts. I think that is in the future, because we have not resolved that deficiency of demand. Which, of course, is a function of having over-borrowed from the future to spend yesterday.
On Treasuries...
I think Dylan Grice was the great architect of the notion that you can define the upper bound to today’s interest rates by trying to determine society’s capability to meet those interest rates at higher and higher levels. What you find is we cannot live with a Paul Volcker putting interest rates at 15%. It doesn’t work. There’s so much debt that if you reprice debt, the economy slows down. We saw that I think in 2012, after the taper tantrum and ten-year bond use went over 3%. What happened next? The economy slowed down. If anything I would be a buyer of U.S. Treasuries and I’ll come back to that.
...
Well, we are long on 30-year Treasury bond use and this year we have, I think, been among a select group of macro-investors who have actually made money being long U.S. Treasuries. It’s been a very popular trade being short. It’s particularly relevant since the Jackson Hole Central Bank soiree in late August. That there seems to have to come out of it, some tolerance that the dollar would rise.
Typically that’s the fiefdom of the Treasury and not the Central Bank. But I’ll let that pass. The dollar has been on a tear ever since that meeting. My take on that is that I think America looks at it and increasingly feels confident, rightly or wrongly. I’d err on the side of caution. But when it looks to the global theatre, it’s desperately concerned about China, desperately concerned about the Europe. So the last five years were, if you will, it redistributed global growth and by “redistribution” bear in mind, I’m saying that quantitative easing as pursued by the Federal Reserve had the explicit policy aim of ensuring that the dollar would not rise.
The dollar always rises when there’s a deflationary crisis in the marketplace. The dollar index was trading at 80 pre- the events of late 2008. It briefly flared and then you had . . . Immediately you had quantitative easing and it sat at 80 for five years. That’s about America being determined that dollars earned in America create jobs and prosperity in America.
Whereas in the last 10-15 years the mercantilist axis of Europe, and of course, China has meant that those dollars were exported via the trade deficit to elsewhere. That just couldn’t be allowed to happen. That hasn’t happened, which is to say that again, boosted by shale oil, of course, the trade deficit has been falling.
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I agree, so Buy physical GOLD and SILVER.
QE didn't create wealth.
QE didn't redistribute wealth.
QE created claims on wealth, and distributed them to a select few...
Well, this Moral Curmudgeon is perfectly happy about being a Moral Curmudgeon.
Hugh, you are a jerk for saying that Morals don't matter. History says otherwise.
So Hugh must be practically tripping over himself in order to swap his physical gold for U.S. Treasuries.......
I own a small business and have self-funded since inception (3+ years ago). I'm seriously thinking about running up low interest debt instead of continuing to plow in my own money to fund ongoing operations (I have the ability to do that at the moment). I think he's right, and they are going to inflate the currency the moment rates start to creep up. I'd appreciate thoughts from other small business owners.
take credit, cash it and buy gold.
I agree in principle, but I'm already overweight gold/silver (more than 20% total net). And it doesn't help me run/fund my business.
I was also going to say, don't forget back in 2008 and 2009 when banks were calling in lines of credit many businesses assumed they could float on as long as they stayed within the terms of the loan. The businesses that used those lines for things like Payroll (DUH) didn't fare so well.
Good point. I'm already convinced. No debt. Thanks to those who responded.
They are actively discouraging small business. If you take out debt, they will happily BK your ass if you get into financial trouble.
The future is way to sketchy to take on the debt IMO and I would not hinge my businesses future success on the hopes that anything these market manipulating psychopaths may or may not do would be small business or consumer friendly.......
Yeah, if they changed the direction and we went into deflation it would be a bad call. My issue is that I've been self-funding for years because I believed the deflation story so I'm second-guessing myself.
You'll really be second guessing yourself if the keys to all you have struggled for belong to the bank....
I hear you. So better to limit expansion than risk losing it all? This has been my dilemma.
If those were my two choices, I would limit my expansion, or find ways to expand that do not rely solely on capital infusion from an outside source.
If you are on the brink of losing it all without additional capital and expansion then you have even harder choices to make.....
Not on the brink, but thinking ahead in the event I do run out of capital. So far so good and maybe I should just stick with what has worked. Thanks for your reply.
LTER,
I ran a small business for over 30 years, and always reinvested my capital back into it, rather than anywhere else. That's because I trusted the "management."
Only a few times did I take on debt, and that was to buy income producing equipment to expand, thereby letting it liquidate it's own debt.
FWIW.
Thanks for your thoughts. That has been my model so far and it's worked.
You should have used other people money from the start though starting now is just fine.
they are fucking sick with butt head
Thank you Zerohedge. I'm saving these to watch for when I eat my dinner.
may I suggest you watch it pre-dinner? you don't wanna puke while eating...
Disgusting!
He tries so hard to sound good.
Such a little shit.
One would never think that Europe no longer exists.
He certainly is the best advertisement for the dark absurdity that is capitalism.
So fucking pointless.
First I saw this:
"MoneyWeek's Merryn Somerset Webb"
Then I saw this:
"If anything I would be a buyer of U.S. Treasuries."
Then I saw your comment.
That's saved me a few minutes of my life. Thanks.
some highlights you missed.
"i ate your sandwich yesterday,
fugasie, pugasie." whatever that
means?
http://www.youtube.com/watch?v=oEJza1-4zRk
.
fairy dust .....
"That policy response underwrote a very virtuous cycle of higher asset prices."
But every cycle has a down phase, which is the viscious cycle of lower asset prices.
We hear these grand sweeping statements about titanic forces.
That indeed may be the case but it is in the micro human to human dynamic that we see total breakdown.
This fucker is a
. Jester for the king goshamks
Hugh: Well, desperate times breed desperate measures and the fatal policy errors are I believe, all in the past
Not even close. The fatal errors continue. We continue to move toward a 1929 burst credit bubble event. Has Hugh ever bothered to notice that the record credit bubbbble is still inflating?
Basically saying blowing up bubbles is a good way to grow the country.
He fully admits that he is not sure blowing up another bubble might not work, but we have to try. Why?
I hope he is the first one to jump when he is proven to have assisted in making things worse.
QE did not redistribute wealth. Yes in inflated the stock market which appears to be enriching those that took the ride but in the end that wealth will be destroyed. QE was nothing more than paper wealth to bail the balance sheets of banks that were holding all the bubble real estate debt.
So net net not one speck of wealth has been created. Those that made people poorer were the banks, investment banks and the flippers creating the fictitious rise of real estate prices. The big story is nothing happened. No one was punished instead they were bailed out.
And along the way the Fed robbed 10 years of everyones lives and possibly will destroy the horizon of the future anyone alive now can imagine. The crooks should be punished. The head salesmand from countrywide should be punished. The Fed should be punished. But the damage of the biggest dry hump in financial history has been done and the only future is in removing the incompetent Fed from existence.
The rates are low because thats the Fed Devil's Deal with the government debt. All done under the disingenuous guise of stimulating the economy because somehow banks would lend money instead of buying stocks they knew the fed would inflate the price of every afternoon stocks went down in the morning.Thats why you know they are guilty, because they are clearly liars as their stated intention never occured and they just used it as cover for their crimes against the humanity of the United States.
Moving paper wealth from one column to the other never creates wealth it just creates fraud.
QE redistributed wealth. No shit Sherlock
Signed,
Thrifty Saver
Hugh is starting to resemble Brick Top.
http://youtu.be/xu0p6CtioZk
Dude has a potato famine knocking on his door; return of the ice age, and he can't be certain about anything. He better head south while he can and stop believing the City of London BS or he's going to find himself in the same situation as his ancestors did: at the mercy of (neo) colonialism.
listeening to him makes me feel like there some huge inflation coming. His view (even long bonds) is cleary the consnesus (ie no domestic demand anywhere) central banks musk keep buying... even buy new issuance that has targeted purpose (ie say for infastructure / public works) and to pay for pensionss. So everyone is long following the central banks..
He obviously hasnt been to Japan because prices here are up min 7-10% across the board and thats no exaggeration..
Pensioner life style has truly crashed (cuts from 2-3K USD a month to 1.5-2K USD... with prices rises (3% tax but then 3-5% on lot of food / foreign products even local news papers (maybe thats cost of materials.
So they have got their inflation its just made real wages (or pension income) go very negative.. thus declining GDP..
ie rising prices clearly reduce demand .. and the reduced demand makes it almost impossible to raise wages.. so apart from Asset prices rising (which hes following) its prob the stupedest policy for the people of all time..
The good part for Japan before (and why it kept going strong despite slow growth and declining population was that the large fall in Asset ptices (property / shares/ equipement ect) created opportunity for people to set up small business ect.. and actually make money ..
If they keep going like this those chances will be gone.
So pensioner gets 0% interest... s 20-30% cut in benifits... now for the new ones the cost of buying that little shop ect.. (or getting income from shares) is about to go through the roof (ie that last chance is gone).. so
what can they do... and their basically the largest age group in terms of numbers..
ie whats the point of creating inflation .. if rates remain zt zero (so still no interest) and you cut peoples wages (ie by cutting pensions they cut the largest groups wages.
There was a lot of opportunity for general busines when Japan had the low prices for assets and strong currency that made energy ect.. cheap.. this will be much worse .. all opportunity gone..
Wealth redistribution
The socialists take from the capitalist to give to the party
This must be done because votes need to be bought
THe party workers:
the politician the unions the teachers
The unemployed the permanently unemployed the 51 percenters.
And they take not only taxes but they borrow
Once the debt burden becomes too high (2007/8) The system crashes.
Then, to get out of debt so they can start the redistribution of wealth all over again --- the debt must be reduced.
How?
By inflation. But not to the Party workers.But to the capitalist.So it can be confiscated again.
So the infation is aimed at the financial markets.
A redistribution of wealth to the capitalists.
Wealth redistribution
The socialists take from the capitalist to give to the party
This must be done because votes need to be bought
THe party workers:
the politician the unions the teachers
The unemployed the permanently unemployed the 51 percenters.
And they take not only taxes but they borrow
Once the debt burden becomes too high (2007/8) The system crashes.
Then, to get out of debt so they can start the redistribution of wealth all over again --- the debt must be reduced.
How?
By inflation. But not to the Party workers.But to the capitalist.So it can be confiscated again.
So the infation is aimed at the financial markets.
A redistribution of wealth to the capitalists.