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"QE Doesn't Work... But We Can't Wait For More"
Submitted by Jeffrey Snider via Alhambra Investment Partners,
With the “dollar” off the ledger as far as a menacing factor, perceptions have begun to shift toward different if still-confused rhetoric. Figuring out fixed income isn’t always straightforward to begin with, but as the “unexpected” flirtation with deflation over the past few months threw a huge wrench into the economic boom supposedly forming the world over, the temptation now to revisit that idea is proving too much. Setting aside, apparently, that some of the most vital and relevant figures are persisting as delirium for even April, the stretch of oil prices in particular is alluring. That idea itself showcases the questionable foundation for all of this, as it was oil prices that were supposedly not very meaningful on the way down but everything on the way up (whether they last in that position is for someone else to worry about).
The question is how to read the various signals as they are being redefined by the next stage after the “dollar” ran into March 18:
“You’re in the midst of a reflation trade,” said Brent Schutte, senior investment strategist at BMO Global Asset Management in Chicago. The firm manages about $240 billion. “People are beginning to think that global growth may improve toward the end of the year, or at least the deflationary forces that are artificially driving things down are now ebbing.”
That is a sentiment that is gaining across economic forecasting, despite the rather obvious contradictions that remain. It is easy to dismiss those, however, when falling into past bad habits.
“There is more inflation being built into the steeper yield, and a steeper yield curve has been a missing component of the financial sector backdrop for years,” Joe Quinlan, New York-based chief market strategist at U.S. Trust, which oversees about $391 billion, said by phone. “The U.S. economy saved the rest of the world in the second half of last year and now the rest of the world will return the favor to the U.S.”
I raised this issue a few weeks ago as inflation breakevens in particular have stood out since January 15. Whereas it is simply enough to think of inflation breakevens forecasting something of market expectations for inflation, the history under QE/ZIRP more than suggests that TIPS hedging is being used against monetary policy instead. I don’t think that is especially controversial of a claim, as the ups and downs in breakevens match very closely the ins and outs of the QE’s. The timing of this latest uptick echoes signals from the swaps market that looks more and more like “money curve” investors are hedging in that same direction – not of inflation but of the next QE.
It is true that the yield curve shape has taken on more steepening in this recent bond selloff, but again that doesn’t necessarily have to have much to do with “inflation.” When the curve last did so starting in the middle of 2012, both breakevens and yield steepening were taking place just as economic growth and the CPI/PCE deflator started in the opposite direction. That yield curve movement was, however, perfectly timed for expectations about what central banks were doing or were about to do.
And I think, as I said, that is the first part of the contradictions at the center of any idea about “reflation” as it relates to anything in the real economy. The most recent data on incomes, which are the basis for all orthodox treatment and associations for “inflation”, bely the notion of any pickup now or even for the near future. You could make the case, as is noted in the quotes above, that the second half of the year will be much more favorable, but again the persistence of economic weakness right now is proving highly contradictory to both economists’ abilities in forecasting and how the first half might unfold in the expected nonthreatening “slump.”
Even within the stock market itself, the run over the past few months in certain sectors is highly suggestive of that certain stratification:
It’s happening in the Standard & Poor’s 500 Index, where banks and insurers have rallied for five of the last six weeks as drugmakers and household product manufacturers were left behind. Dividend-paying companies such as utilities and property owners, normally considered havens in times of turbulence, have suffered some of the worst losses in years.
In other words, stocks of companies more attached to the real economy (or the trade extrapolations of the “dollar”) are faring much less favorably than financial firms. Into that is a weak to desperately weak economic backdrop where even wages oppose the mainstream employment view. So we have the cumulative situation where banks and financials are doing quite well while the breakevens and even the yield curve are behaving the same way (for now, at least) as they did in the middle of 2012? I suppose there are extrapolations that might lead from that to an economic boom scenario, but the more logical interpretation is that markets, and a growing number and the breadth within them, might be repositioning for the next QE.
Who would benefit if that were to occur? Certainly bank and financial stocks would, if only initially as a matter of past performance. There is still enthusiasm as to how QE might be received (look at Europe’s further insanity), and breakevens and even the yield curve of late are falling into that pattern. But I think the real difference is that that view undercounts the severity of what might be building – the view of just a bad “slump” vs. a full-blown and even severe recession. In other words, all these markets, even stocks in their own way, seem to be recognizing that the recovery idea as it came out of QE3 and QE4 is over, finished in looking ahead to what might come next.
What that means for the depths in the real economy in the near and intermediate terms isn’t quite so solidified, and thus it isn’t surprising to see “markets” follow the initial stages of what happened in the buildup to that last time. That makes at least some sense with oil prices more buoyant as the potential darker times look less dark, but the history of these kinds of trajectories is never close to a straight line. In short, right now it looks like the “slump” is severe enough, in the perception of market agents, to have knocked some “sense” into an otherwise “suicidal” FOMC and put them back on track to what these “markets” love best; no matter how foul that is to the sensibilities of actual investing. It also isn’t so severe apparently, in perception and interpretation, to have changed the common view of QE itself. It would be easy for “everyone” to entertain the idea that the slump itself is not an organic decline but just the absence of QE (which disqualifies QE from its own stated purposes, but these post-crisis “markets” are forgiving such contradiction).
In my view, all of this suggests that markets having been worried about the FOMC raising rates while the economy tails off are now factoring in an almost Goldilocks scenario where the slump is just right to get the policy everyone seems to want but not too deep as to endanger even when that happens. In other words, while there is now rather widespread recognition that the last burst of QE’s failed to do much of anything, they didn’t fail “enough” as to disprove the whole of the trick. That would leave enough room, so to speak, for markets to accept that failure while still holding hope that the next (which is increasingly being priced) will do what the last did not (old dogs and new tricks, apparently) – or even to not care at all about the economy and long-term health as long as we all get another shot of QE.
That would further suggest that the only way to stay in that preferred state is if the economy gets neither worse nor any better too soon. The real downside, then, is not the robust economy but rather a bad enough “slump” that discredits QE for good. That would seem to place markets and the economy in the most precarious position since the Great Recession: if QE3 and QE4 are accepted as not effective enough to have kept us out of a “slump” and that “slump” turns out much, much worse, then what good will QE5 be? For now, that scenario is being given an almost ostrich treatment but the longer this persists you have to wonder just how much hope another QE might provide apart from the usual detached, initial burst.
It is perhaps an emblematic description for our current bubble age; QE doesn’t work but “we” can’t wait for more. Maybe that is just the logical evolution of monetary magic, since QE was brought on with almost mythical properties that were going to cure a lot of financial and economic ills (Bernanke the former). Now resignation (Bernanke the latter) has left it with only the hope that it can just save us from the worst downside, even without any real expectation of a true upside in the economy. In other words, markets hope for the QE zombie, where the economy is kept from death by it, with full recognition now that it will never regain full life either. It’s a new take, surely, on Wall Street vs. Main Street.
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Junky: "Heroin will kill me, but I can't wait to shoot up again."
I loved Heroin but it didn't love me back. The top is obviously in @18k and change, need moar or the patient begins the dopesick process...
The race to the bottom is on, war is on the horizon, and just like WW2, history is yet again repeating itself...
When the banks start buying up bonds you should worry, big time...
(Historically it was used to pay for big wars)
there is no more blood. it's all been spilled and consumed.
but there is a reasonable facsimile. it appears to give life, but in reality delivers only death.
My last pay check was $9500 working 12 hours a week online. My sisters friend has been averaging 15k for months now and she works about 20 hours a week. I can't believe how easy it was once I tried it out. This is what I do... www.jobs-review.com
Just one more taste won't kill me......
lets hope it kills the bankers!
"....But we can't wait for MOAR."
Muahahaha !!!!
What you mean "we" whiteman?
Haha...."Sounds like we can't trust the Whiteman" -Josey Wales
"You bet we can't" -That old indian.
https://youtu.be/tz2DknROaI8
Lone Wattie was his name. I loved it when Josey pulls the girl off him, saving him from a humiliating defeat and the old chief says, "I'm glad you stopped it, I might have killed her."
;)
IMO, based on what I have seen over the past 30 or so years, there should be no equity market. There should only be a debt market with a fixed interest rate that never changes and is available everyone equally. Banks should become utilities instead of casino managers. If people want to participate in the success of a company then they must either work for it or they must lend money to it at the one single allowed rate.
The interest rate can be very low and maybe there can be a mechanism for agreed upon deferred payments. However, under this system money is only put to productive use and if there is no return on the business, then it goes bankrupt because it cannot pay the cost of maintaining the debt.
Companies will be treated like people and not some form of criminal Ponzi scheme used to defraud.
you are right that there will be no equity market. the FED's choice of line of action (asset prices must go up, always) is a slap in the face to market integrity and in the long-run leads to the destruction of (any) public trust in equity markets as a vehicle for savings of any kind. the younger generation will lead this magnificent change, unless stock markets are allowed to correct and price reality, instead of what is in bill dudley's or robert rubin's magic eight ball (that always benefits GS and citibank).
File this in the no freaking shit category.
to me it would be the same if they just came out to the public and admitted: "hey, we are corrupt, we want higher stocks all the time for our benefit and we want a steepening yield curve also for our (banksters) benefit. no one will stop us, so we will do it even without a correction."
I just realized that the safest place during an actual zombie apocalypse would be Wall Street and DC. Ain't no brains there to eat.
Yellen will raise the inflation target to 4% effectively pushing all rates negative. Delation will become the most used word in FED doublespeak.
Its called addiction : to white powder, to violence, to predatory one way sex...all are the language of man's fall from ethics of self control and responsibility to "self aggrandisement" mantra and John Galtism. Jack loves his beanstalk.
"Do unto others as you would have them do unto you"... or you lose the pursuit of happiness, as you transgress theirs' not by their rules but BY YOUR VERY OWN STANDARDS....and the consequence is loss of your own freedom and thus happiness!
QE is the symptom that risk asset aggrandisement is a self fulfilling dream without end and an unending orgasmic experience for mankind.
Hahaha ! The harder the fall!
New bumper sticker, Have you hugged your QE printer today?
Moar Cowbell !!
taking bets at my office as to which comes first:
1. first interest rate increase
2. QE4
im in the "#2 camp"
while im sure they want to put a "symbolic" 25bp interest rate increase on the tape just to get off ZIRP, truth is they can't without initiating the widening of credit spreads + NOBODY knows how all these algos are gonna react. they've been "programmed" for the last 6-7 years to hit the gas on the "buy" button once the fed press release comes out & certain words are omitted. NOBODY from the fed wants their fingerprints on this shit if they raise 25bps with no bid in treasuries behind to mop-up a potential blow-up if al these algos hit the 6-7 year pent-up "sell" button.
will be interesting to see if they actually have the balls to raise even just 25bps. shit, we haven't raised rates in a decade. what could go wrong?
no further QE or stimulus
rate hikes coming
never ever neg. rates on US$ denominated debt paper
And tax the Fed for dumping all this shit to the rich (that didn't need it anyway). Double tax them! Back tax them, fines penalties and everything else!!!!
Just sit, relax, open the organic wine bottle (of your own production) and sip a little. Than reflect about the funny human reflex of, when in power, gripping to the shatters instead of reassessing and redressing with flexibility. Finally praise God for that flaw among the powerfull....
wow, that is poetry.
Look, it's really simple, if you are going to create money out of thin fucking air with no real collateral requirements or connection to reality then you had better give everyone the same access. Otherwise this is simply another "let the majority eat cake" monetary experiment.
Homer say...
http://i.imgur.com/mjyRqQ5.gif
I agree with Dr. Engali – no shit about the effects of QE.
QE is a swap of FED keyboard money, for debt instruments. This keyboard money channels into finance and then gets trapped. It causes sector and asset inflation.
But, the keyboard FED money has a very weak transmission path to the general economy. The General economy still has to hypothecate itself by borrowing private bank credit in order to do their transactions.
The “hope” of QE is that with interest rates low enough, the sheeple will go out and take out new loans. This is more hypnosis spread by private bankers.
QE is just another private banker scheme, where they continue to hold the money power. The money power actually belongs to the people..it is part of the commons.
If 12T had been debt free “spent” into existence, we would now have new roads, bridges, rail, ports, industry, etc. If we wanted to, we could have created “bills” that were targeted at housing, to thus drive down housing principle, so people were no longer in debt. In other words, exogenous money needs to be spent into existence to then pay off debts. On its path (channel) this exogenous money could have ramped up labor and productivity, causing a double wealth effect of eliminating debts and enabling productivity.
The housing bubble was fraud, and QE is more fraud. QE funds financial oligarchy and these oligarchs will claim civilization for perhaps the next century. History will look back on us - probably in disgust.
Giving welfare to the rich doesn’t help any economy. How many pairs of pants can an Oligarch wear? How many maids and butlers can he/she hire?
If a person’s economic output is not vectoring back to them, then the economy is fraudulent.
Finance is now claiming unearned increment of production as theirs. So, all the advances in robotics and telecommunications are not creating leisure for the public, but instead are creating leisure for Oligarchy. When Robots are making everything, there will be one person who owns the world by controlling private credit as money, and then everybody else.
NeoFeudalism is upon us.
I want to see where the taxes have been paid on all this money. I don't care that it is 'made up' just that if I give out money on this scale, either I or the other party is liable for taxes.
The Neocon are rotten centeral planners.. They all need to be rounded up and sent to some 'central planners' gulag in northern siberia for 10 years...
Of course the Fed does more QE.
Larger and larger QEs until the US faces a currency crisis.
Maybe next Fed QE is $150 billion/month, maybe more.
Follow Japan's model because it was created by the Federal Reserve in the US.
Then onward to the next fiat IMF BS called SDRs.
For those who are confused about the above charts and numbers, I found quick example what QE is in layman terms and what QE actually does in language understandable for everyone, a language devoid of purposefully misleading financial jargon of metaphors and innuendos.
QE in simple terms and why it will never work:
https://contrarianopinion.wordpress.com/2015/01/28/liquidity-of-blood-sw...
The post-2008 "New Economy" is based upon pleasing newly-printed-money recipient bankers, not upon making or selling actual products.
By pleasing bankers, you can get a share of what producers produced yesterday, even as producers wither and die.
It is the economic expression of an old methodology - compulsive cannibalism - and will only end when everyone but one banker is dead.
He will then declare himself the winner of all the 'digits', and then starve, secure in his own superiority.
QE works just fine for the central banksters who are transferring the wealth of the world from all of us, to themselves.
Evidence that the economic collapse is being caused by deflation, not inflation, just keeps piling up. This analysis explains why deflation is the root cause of the problems today.
http://www.globaldeflationnews.com/inflation-vs-deflation-part-1which-on...
The liberal criteria for trying a liberal economic solution is "We know it has never worked, but we don't know if it will fail again so we should try it again."
The liberal criteria for trying a conservatives economic solution is "We know your idea has always worked, but can you guarantee it will produce instance wealth for every citizen?"