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"We Should Have Known Something Was Wrong"
Remember when stuff such as the following was written exclusively on "conspiracy" tin-foil blogs by deranged lunatics who could not appreciate the brilliance of the neo-Keynesian system and central-planning by academics, in all its glory? Good times.
Here is Bank of America's Athanasios Vamvakidis channeling Tyler Durden circa 2009
The real cost of QE
QE was not a free lunch after all
If only it was that easy to print our way out of a global crisis. Eight years after the crisis, we are still debating about whether the recovery has gained enough of a momentum to allow exit from crisis-driven policies and start hiking rates from zero. The world economy has actually lost momentum this year (Chart 1), deflation risks have increased (Chart 2), and EM indicators and overall market volatility have reached crisis levels (see Chart 3). All this is despite unprecedented expansion of central bank balance sheets (Chart 4). Things may have been worse otherwise, but in hindsight we believe relying too much on unconventional monetary policies was not a free lunch after all.
We should have known something was wrong
The Fed “taper tantrum” could have been the first warning that QE had gone too far. The Fed’s announcement in June 2013 that they would consider tapering QE, contingent upon continued positive data, triggered a sharp market sell-off, particularly in EM. The aggressive search for yield, which intensified after the Fed announced QE3—or QE infinity as markets called it—came to a sudden stop. QE was not for infinity after all. The Fed tried to reassure markets that QE tapering was still policy easing and that its end would not imply rate hikes immediately, but the markets apparently thought otherwise. A key takeaway was not that QE had already gone too far, but that announcing its tapering may have been a mistake. The Fed waited until December to start tapering, although the market had already priced its beginning in September.
The second warning sign may have been the across-the-board EM sell-off that started in mid-2014, as QE tapering was coming to an end and the market started pricing Fed tightening, a sell-off that intensified substantially this year. EM FX tends to underperform when the Fed tightens and the USD strengthens, but by early 2015 the EM FX index had reached a level below that during the global financial crisis (Chart 3). China’s devaluation made things worse in August, but the EM sell-off started much earlier. Risk assets more broadly have reached oversold levels. The market has been anxious about Fed hikes, despite pricing a very slow tightening and expecting interest rates to remain historically very low for years to come.
The point when things started going wrong
The Fed and other major central banks were the first to act when the global crisis started, and we believe their actions helped avoid another great depression. Political disagreement and brinkmanship led to a messy fiscal policy in the US and a neverending Eurozone crisis. The Fed and the ECB, successfully, came to the rescue a number of times in recent years. In Japan, the BoJ has delivered the strongest arrow from the three arrows in Abenomics, with mixed progress in the arrow on structural reforms and no progress in the arrow on fiscal sustainability. However, monetary easing is not the solution to every problem and risk in an economy – and we believe that using it when other polices may have been better used has its own costs.
At some point during Fed QE, the markets started reacting positively to bad news. In our view, this is when things started going wrong. Bad news became good news for asset prices, as markets expected more QE by the Fed. Asset prices were increasingly deviating from fundamentals, as the markets were trading the Fed instead of the economic reality. This was clearly not sustainable.
We believe QE1 by the Fed (Nov 2008) was a necessity. Without it, the world economy was heading to a new global depression. The Fed, led by the world’s expert on the great depression, did what needed to be done. The ECB took the opposite approach, avoiding QE and even hiking rates in the midst of the global crisis and again in the midst of the Eurozone crisis. The crisis got worse, the Eurozone economy still had the largest output gap in the Q10 group, and deflation forced the ECB to finally start QE this year. We are more skeptical about QE2 (mid 2011). The world had avoided a second great depression by that point. The justification was to address deflation risks and support the recovery during deleveraging. It was not clear cut—US inflation was above 2% and core inflation only slightly below—but one could see the Fed’s point taking into account the risks and empirical evidence that recoveries from balance sheet recessions are very slow. QE2 was not trying to address depression risks, but to avoid a Japan scenario. As such, we think QE2 was needed, albeit less so than QE1.
However, we are less sure about QE3. We believe this round was intended to support asset prices, with the idea that high asset prices would lead to a stronger recovery. Instead, Wall Street was increasingly deviating from Main Street, inflating asset prices. Equity prices started pointing towards a strong recovery, while bond prices were flagging a Japan scenario for the next decade. Both could not be right, and both turned out to be wrong. The recent sell-off suggests to us that the Fed underestimated the risks from strong EM inflows because of QE.
While we will of course never know what would have been had other policies been pursued, we believe that excessive reliance on unconventional monetary policies in recent years has had side effects. The recent market turmoil has shown that macroprudential measures have limited ability to deal with such side effects. Indeed, despite continued central bank balance sheet expansion (Chart 4) and further easing by most G10 central banks from already historically low policy rates (Chart 5), monetary conditions have tightened in most G10 economies (Chart 6) and global liquidity conditions have worsened this year (Chart 7). No macro-prudential measures could prevent this from happening, in our view.
We wouldn’t necessarily look at QE as the root of these issues. Less QE might have been necessary if US fiscal policy wasn’t so fractious, Europe had been faster to respond to the crisis, global policy coordination was stronger, and governments worldwide had grasped the “opportunity” of the crisis to implement structural reforms and progress in trade agreements. As the IMF has warned, we believe the world put too much burden on monetary policy. We have started seeing the consequences this year.
The above has lessons for both the Eurozone and Japan looking forward:
- ECB QE has led to historically low periphery yields, which are not pricing sovereign risks—just think where Greek yields are going to be if the ECB starts buying GGBs. When at some point in the (likely distant) future the ECB stops QE, the adjustment in the periphery yields is unlikely to be smooth, particularly if the countries in the region have not taken advantage of the ECB easing to implement reforms. These concerns would not justify stopping ECB QE early, but we believe they do point to consequences when central bank policies force markets to ignore risks for too long and governments are not addressing these risks in the meantime—recent reform progress in Italy is encouraging from this point of view.
- Japan could face challenges if delivery of the non-monetary “arrows” in Abenomics remains so weak. In our opinion, Japan needs structural reforms to grow and a credible long-term fiscal consolidation plan to ensure debt sustainability. We believe aggressive BoJ QE is currently kicking the can down the road, but these problems could eventually come back to haunt Japan.
Now what?
The story of the year so far may be that of a negative feedback loop leading to a bad equilibrium. First, risk assets sold-off expecting the Fed to tighten. Then, the sell-off went too far and started affecting the real economy, including in the US. Now, the Fed is not tightening as a result. However, postponing Fed tightening does not necessarily increase the demand for risk assets. We are oversimplifying, and there are certainly many other things going on, but it helps make the point.
This appears to be a new regime, in which bad news is bad news, as we wrote a year ago and reiterated recently. Fed QE does not appear to be coming to the rescue anymore. The Fed staying on hold can support risk assets in the short term, but is not as strong as QE. This is an environment with high market volatility, as the so-called central bank put is less powerful without Fed QE. ECB and BOJ QE apparently cannot do the trick. Bad news is supposed to be bad news and this should be a healthier market than before, but the adjustment back to normal has not been, and in our view is not going to be, easy.
Risk-on recommendations are only tactical. If the US data improves in the months ahead, the Fed will likely tighten and risk assets could sell-off again. If the US data remains weak, or weaken even further, we would expect risk aversion to increase, as the threshold for QE4 by the Fed appears high—and more QE may not be as effective anymore.
* * *
And that, dear Janet Yellen, is how you trapped yourself in reflexivity from which there is no way out. Now if only someone could have possibly foreseen all of this years ago...
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www.youtube.com/watch?v=sG4svAppYzw
Sebastian Lyon Interview: the next crisis will be about money itself - MoneyWeekEveryone that has a position of his own, is more or less biased to that side. What we do then, is search for information that confirms our view. And this is the result.
Candle Sticks say a lot about investor behavior as I believe it’s a representation of the market’s psychology. And after last week’s relentless short squeeze (so they say), I noticed a Low Energy day last Friday.
A Low Energy Candle Stick, is a candle stick that forms after a short term uptrend in which the close is at or near the open of that day. In my view, this pattern that we saw yesterday, is a sign of doubt in the market, at least for the short term. It doesn’t have to be a perfect doji.
What I did was the following. I searched for similar patterns as last Friday. And I found 28 periods in which this candle stick pattern popped up since DEC 2014. Strategy to follow: enter a short right before the market closes or at the open of the next day. Set your stop loss and take profit at 1.5%.
The outcome based on 28 trades (excl transaction fee and no leverage) adds up to 15%, which is equal to more than 300 S&P500 points!
http://tripstrading.com/2015/10/10/sp500-suffering-from-low-energy/
That was a good post. Thanks
ALGO's for everyone.
“The point when things started going wrong”
The ideas of supply side economics and trickle down.
We now live in a world full of supply but no demand.
“Supply creates its own demand”
Try telling that to China or any commodities company.
Anyway, how is the global consumer these days?
1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.
2) Japanese consumers have been living in a stagnant economy for decades.
3) Chinese and Eastern consumers were always poorly paid and with nonexistent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now come to an end.
4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.
5) South American and African consumers are busy struggling with economies that are disintegrating fast.
Oh dear.
+50. Allow me to add, "holy fractional reserve lending, Batman."
The VIX won't be riding the 17 handle next Friday.
I keep saying, "give me another XX months before the thing blows up and I'll be OK."
I've been saying that for at least three years. When ZIRP finally made its way to me via 0% interest credit cards, I thought the end was coming. That was early 2014. Now, 18 months hence, I've used said cards to purchase rural land, PMs, useful goods (machines, tools), but mostly, peace of mind.
I thank the banks for financing my near-retirement and have reached the point at which the desirability of blowing up the ponzi the Fed has created is not XX months, but just X months or even weeks. In other words, I'm almost flush and have enough assets, income and cash to extinguish my 0% interest debt.
But, the Fed won't pull the trigger, won't push the putton, pick up the red phone, etc., because they are either a) being blackmailed by the .01%ers; b) scared shitless of the outcome; c) completely clueless frauds, or, a combination - in varying degree - of all three.
Bottom line, I care about me. My parents died in 05 and 09. I handled the estate and now my siblings won't speak to me (they're both teachers with pensions, so fuck them, anyhow). I have a few friends and have made more in rural America, where I now reside (escaped from rapidly-decaying suburbs).
We all know the cities are shitholes. Up here in rural Western NY, we are prepping for Winter and hoping to make it to Spring - an annual ritual of survival.
Eventually, the Fed will pull the trigger and make life even more miserable for many. I don't think I have a point to make except what I usually tell people: Be a Boy Scout. Be Prepared... because, I guess, it's coming, someday...
Doing estates results in broken families.
Jesus stated "hope that your flight is not in winter"; albeit he was speaking to the Jews...I believe He is warning that the flight will be in winter.
Pray that your flight may not be in winter or on a Sabbath. For then there will be great tribulation, such as has not been from the beginning of the world until now, no, and never will be. And if those days had not been cut short (God's mercy), no human being would be saved. But for the sake of the elect those days will be cut short...
When Jesus states that "no human being" would be saved; He means NONE. Note why He intervenes "for the sake of the elect"; people need to surrender to Christ while they can, for the time of Satan is drawing to an end and Satan knows this and so he "ramps" things up to take as many to hell as he can.
Since Judea winter is the same time as our winter, then it reasonable to assume it applies here.
They DIDN'T print. They BORROWED,
PRINTING ... BORROWING ... PRINTING... BORROWING.
Quite different verbs for quite different actions. BORROWING increases debt. It makes the problem worse. I mean ... DUH ... If they had actually printed paper, the debt levels would have fallen. It's a pretty bloody fundamental difference between currency and credit.
FFS.
The treasury printed it, the Fed borrowed it, and then lent it to the banks at 0% who lend it to the consumer at up to 50%.
All that money and I'm not allowed as a citizen to know where it went. How is that possible in a free an open society? Doesn't really matter, the point is more free fiat will be forthcoming in order to maintain power. The only question is when and what form it will take.
We will find out where the money went when we hang a few of these bankers. The rest will start singing. As a father I feel the need to change the direction of things. My children now have a burden that no child, for that matter no citizen should have. Change is coming and it will not treat the bankers and politicians that screwed us over kindly. When SHTF even the recently retired politicians will feel the rope around their neck. History does repeat itself. Change is coming!!
Looking back in the great depression early last century those elites lost a shed full of value, those losses rebalanced the economy where they had gainned to much. It is all it was ...
This time round, writing on the wall QE was used to ensure those losses did not happen to the entitled this time round ... the reset never occured, the relative gap between poor and wealthy did not close.
The first was a reset, a closing of the gap making the economic mechanism work once more this time round absolutely no reset, worse it went the other way.
Choice really is close the gap, means more liquidity in the ordinary economy for people to trade that the central banks have been printing but it went to the wrong side.
Sure the elites / most wealthiest would have become worse off but I am not talkign about bankrupting them only closing this gap.
So they think they got away with it, well a small loss is better than losing ones head if the game keeps trying to prevent the reset. That is what a revolution is a closing of the gap between two sides, call it a civil war sometimes.
PS:- we don't need to worry about the conditions, that is in the original US constitution or the Magna Carta, you can just use that again.
So simple.
Clearly, Vamvakidis doesn't understand what took place during the Great Depression.
To suggest that the Fed did the "right" thing which "averted" another Great Depression fails to note that there really hasn't been any significant asset destruction. The outcome of the "Great Depression" was to revalue assets. OK, the reason why that came to pass was because assets were WAY-OVERVALUED. In this era we have overvalued assets but instead of correcting this over-valuation we have attempted to prop them up as such.
The debt is still out there, flowing along toward the crack where it shall burst through. The Fed and other central banks are playing chicken with physics/mother nature. On a short enough time-line anything can appear to be successful...
Central banking...a means of transferring peoples' labor to those who produce nothing, but can create "currency" out of thin air.
but can create "currency" out of thin air.
And currency should be created how?
This all makes no difference if the typical American remains clueless :
- I believe the typical American might understand things better if society was broken down to INVESTOR CLASS vs WORKING CLASS. (Investor class as Banksters, but also including CEOs and all parties who profit from high financial asset levels - along with the wealthy who rely on unearned income).
- IMO, the first QE was like an individual looking at the total dogs on his brokerage account statement. For example - using simplistic numbers for ease : Let's say he looks at ten stocks that he paid an average of $100 for. He sees their current value ranging from $10-$65. He then has the opportunity to exchange them with A CERTAIN BODY for cash. He tells this BODY (the FED) that each stock is worth the $100 he initially paid for it. The BODY (the FED) accepts this valuation and gives the investor $100 in credit for each share of the ten dogs. THAT IS EFFECTIVELY REWARDING THE INVESTOR FOR HIS FAILURES AND SETS THE STAGE WHERE HE CAN DO NO WRONG WITH RISKY TRADING.
- Every QE thereafter has been a slightly different design to continue rewarding the banks and encouraging mal-investment. And ZIRP has been the engine to even further accelerate things. Financing stock buybacks for the INVESTOR CLASS and the parking of excess reserves by the TBTFs and dividend-receiving member banks for further profit while keeping the money away from Main Street investment.
- Then last week you saw the fortunes of the INVESTOR CLASS go ballistic after it was announced through the job numbers that in no uncertain terms the WORKING CLASS is screwed, has been screwed, and will be screwed (by the raft of layoff announcements). That all these policies have had zero benefit to the WORKING CLASS.
- It should be startling clear to any thinking person what is going on. That the FED is 100% focused on the INVESTOR CLASS. But it is not. The great majority of Americans idiotically believe that the FED is a trustworthy, intellectual, federal agency that came to the rescue of the economy after the financial crisis.
How bout
Investors
Workers
Bankers USA
Bankers World
Big Gov USA
Big Gov World
Bankers USA want higher interest rates
They just cant pull the trigger because Bankers World
At the behest of Big Gov world lowered rates
If they did we would fall into depression putting Workers USA out of work
All this is despite unprecedented expansion of central bank balance sheets
How many ways are there to say "monetization of debt" and "counterfeiting"?
You've got to love the "Quantitative Easing" one. :-)
Monetization of debt is not bad in and of itself; it is the non-sterilization of the monetized debt, which is your second point, which is counterfeiting.
This is not new, the the magnitude in both breadth and depth is unprecedented and there is no turning back. The greater problem is that ALL of us have participated in this; often without realizing it and sometimes because the alternative is too painful financially.
Think about all the people who are joined with AARP as an example. They offer "free and discounted" stuff and use the membership is used to influence policies contrary to these people's moral values. Moral values are the core or root problem with our societies.
What is demonized most in society is often where the solutions are; I cite the demonetization of Christians as an example. Yet if commandments 5-10 were were obeyed, there would be no more lying, stealing, cheating, fornication or murder...what would that look like for the nation and the world? Many that call themselves Christian or Christian based are very far removed from the teaching of Christ and therefore are charlatans. Most would agree these would be good, but no one could keep them; it is the very purpose for the law...to show that man has a moral problem that can only be mitigated through one source.
Monetization of debt is not bad in and of itself;
That's like saying failure to deliver on a trading promise "is not bad in of of itself" ... a ridiculous statement.
Think about all the people who are joined with AARP as an example.
I have always thrown the AARP stuff straight into the trash without looking at it. As an old person (as with any person) I claim no special privileges.
What is demonized most in society is often where the solutions are; I cite the demonetization of Christians as an example. Yet if commandments 5-10 were were obeyed, there would be no more lying, stealing, cheating, fornication or murder...what would that look like for the nation and the world?
Religions are the same as governments. In fact, they are the earliest form of government. They prey on the feeble minded (which is the majority).
And take your 10 commandments. Five of them have to do with "respect for authority". The other five are no-brainers and far from an exhaustive list of things you wouldn't want to have done on you ... so you shouldn't do them either. And why are these 10 things so hard to remember that the religious among us demand they be posted in our court rooms. Plain and simple. The religious government is competing with the national government ... and is demanding advertising space.
The golden rule is pretty simple. And it's not religious. Its just plain common sense and looking out for one's self interest without trampling on others.
it is the very purpose for the law...to show that man has a moral problem that can only be mitigated through one source.
With 40,000 new laws a year, laws are useless. Jury nullification should be practiced by "all" juries.
Right and wrong is founded in principles of selfishness (and you're not being selfish when you sock someone in the nose because you're going to get it back in spades ... it's not in "your" self interest).
Never forget ... there are no saints ... there is no altruism.
And that, dear Janet Yellen, is how you trapped yourself in reflexivity from which there is no way out. Now if only someone could have possibly foreseen all of this years ago...
So you have exposed the obvious ... that the Fed is clueless about the proper management of the Medium of Exchange (MOE) process. What you haven't exposed is that they are clueless on purpose ... it is very profitible for their owners.
Now ... tell us how the MOE process should be managed. It should take no more than 500 words.
Regardless the Fed pushes for ever-more debt and printing as a solution.
Eventually their Keynesian-Ponzi scheme fails and the dollar falls.
Just a matter of time before the Fed loses control of the everything-rigged market.
QE3 was a huge policy error, just as keeping rates at zero this long has been. QE3 took the S&P, then at 1350 once its existence was leaked, up another 50% on top of the fact that it had already doubled off the bottom of 666. There was no reason for it. The S&P was already in a solid recovery uptrend, but Ben decided to juice it up even more and the markets are now well ahead of the real world fundamentals. The widely quoted $118 in earnings number this year does not include option expense which most tech companies ignore. Just taking that out alone knocks the earnings down to $103, leaving the market at 20 times earnings. I could make it look worse by removing other things, but it's Saturday and I have to mow the lawn.
Oops.
yeah well get ready theyr'e doing it again, the massive does of reverse repo is tantamount to QE, all for wall street none for main street. at the end of this cycle there will be no more private sector, Hillary wasnt speaking out of the top of her hat, she knows how it works, government is the only thing that creates jobs. NIRP amounts to depositor bail-ins, the large depositors were warned away months ago. they were told their deposits werent welcome. after the first depression the family farm was over, after this depression there will no more private home ownership, it will all be corporate. you wont own anything, your car, your house, your wife if shes pretty and some rich bastard wants her. no wonder janet had to hesitate a moment giving that speech to those college morons, who dont care about learning they just want to rule. the youtube clip calls it a nervous breakdown, well i have seen those, they come about from working yourself into soggy pile of crying sobbing quivering flesh, that woman has no idea what a nervous breakdown is, for a fletting moment her conscience passed before her eyes, and she was dumbstruck..
"We believe QE1 by the Fed (Nov 2008) was a necessity. Without it, the world economy was heading to a new global depression."
The depression started in 2008 and has been ongoing ever since. Papering over does not change mathematical facts.
You, whose net worth quadrupled since you took the FED chair, and your Bankster Buddies put all that free money in the markets, and now you're about to take it out PLUS your insane profits. And its all perfectly legal.