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Albert Edwards: "Marc Faber Is Right. QE99 Here We Come"

Tyler Durden's picture




 

The bloodbath in the bond markets has led some 'greatly rotating' commentators to see this as the end of the long bull market (and the beginning of a lost decade for Treasuries); in fact, as SocGen's Albert Edwards notes, the financial wreckage left in the wake of Bernanke's taper talk has generated a lot of interesting commentary. But, he asks (and answers eloquently in this far-reaching anatomy of all-the-world's-views-on-what-the-Fed-is-doing) what if (as we have noted) tapering has nothing to do with the US economy having reached a sustainable take-off velocity? From Janjuah to Rosenberg, and from Wolf to Faber, Edwards explains how his Ice-Age thesis (lower lows and lower highs for nominal economic quantities in each cycle... with each recovery bringing a partial reversal to the process and each recessionary phase taking us to shocking new lows, both in bond yields and in equity multiples) is very much still in play; and governments will take the path of least resistance, which is to print their way out of this looming fiscal catastrophe. Marc Faber is right. QE99 here we come.

Exceprted from SocGen's Albert Edwards' "Is The Ice-Age Over?",

On the lost decade for bonds:

...the dramatic sell-off in bonds began right at the start of May when T-Note yields bottomed at 1.63%, well ahead of Bernanke's speech last week.

 

...Indeed, let?s put the recent bond sell-off into a longer term context. Bond yields at 2.5% still remain locked in a technically well-established bull trend that will not be broken until yields spike above 3.5%.

 

The Fed was considerably more dovish than many considered...

Our US Economist Aneta Markowska... describes the US economic data as merely "lukewarm" and not responsible for the run-up in yields prior to the speech. Instead she believes that the Fed had previously introduced uncertainty as to their intentions on tapering. But despite Bernanke having removed much of that uncertainly, the bond markets (and much else besides) certainly did not like what they heard. Indeed the bond rout occurred despite some commentators describing Bernanke's speech as rather dovish in making clear very robust economic prerequisites for tapering.

And data is not providing the hawks with the ammo they need to see taper coming anytime soon...

Indeed, although the economic data has perked up a tad in the last week or so, most notably with durable goods orders, house prices and the Philly Fed manufacturing survey, more generally data has remained lukewarm over the last few months. But what will happen now is that with the Fed projecting a stronger economy and the markets having reacted to that projection, economic data will be framed in that context, even if it is still as tepid as before.

 

So, for example, the market ignored the weak May Chicago Fed National Activity Index (CFNAI). This data gives us an indication of overall US activity on a monthly basis. On the CFNAI?s preferred measure (using a 3-month mav), activity slipped to its lowest level since October 2012.

 

...

 

The Chicago Fed itself says that this is the level normally consistent with an economy on the edge of recession... the economy at present simply cannot be described as anything but lacklustre.

 

So why was the Fed so keen to deliver a message to the markets that it was prepared to slow its $85bn per month injection of liquidity. To answer that Edwards turns to Bob Janjuah...

"Tapering is going to happen. It will be gentle, it will be well telegraphed, and the key will be to avoid a major shock to the real economy. But the Fed is NOT going to taper because the economy is too strong or because we have sustained core (wage) inflation, or because we have full employment - none of these conditions will be seen for some years to come.

 

Rather, I feel that the Fed is going to taper because it is getting very fearful that it is creating a number of significant and dangerous leverage driven speculative bubbles that could threaten the financial stability of the US. In central bank speak, the Fed has likely come to the point where it feels the costs now outweigh the benefits of more policy."

Indeed this was the general thrust of what Edwards calls "an extraordinary broadside against excessive QE" that the the Bank of international Settlements (BIS) launched in its annual report.

Central banks cannot repair the balance sheets of households and financial institutions. Central banks cannot ensure the sustainability of fiscal finances. And, most of all, central banks cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect.

 

What central bank accommodation has done during the recovery is to borrow time – time for balance sheet repair, time for fiscal consolidation, and time for reforms to restore productivity growth. But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system.

 

After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change.

So merely kicking the can...

All QE is doing here is kicking the can down the road and in the process inflating asset bubbles to reduce the need for deleveraging. I can see both sides of the argument and wouldn't categorize myself as either an Austrian or a Krugmanite, but I do strongly believe that QE will ultimately make things worse in the long run rather than better.

 

Recent economic history is replete with examples of well intentioned central bank interventions causing unpredicted increased volatility further down the road.

Which makes perfect sense - but, Edwards explains, the problem is that for a man holding a hammer, everything is a nail...

Ben Bernanke's whole academic career led him to the over-riding conclusion that the Great Depression was 'caused' by the Fed being too tight. And remember, he promised Milton Friedman, the high priest of monetarism, that the Fed wouldn't make the same mistake again. So if QE1 didn't work to produce a self-sustaining recovery the solution is simple; print more and more and more until it does work.

 

And therein lies the problem -? loose money has created financial bubbles that when they burst will send the economy into deep recession exactly like 2008 ? this is the very risk Bob Janjuah thinks the Fed is worrying about now. Maybe, just maybe, some members of the Fed have learnt the lessons of the past (incidentally China also seems to have gone down this same path but we will discuss this another time).

 

Just because the Fed forecasts robust growth ahead and a sharp decline in unemployment as the backdrop to withdrawing from QE, do not believe that that will be the actual economic outturn. Indeed, I seem to remember similar forecasts of exit velocity having been achieved when both QE1 and QE2 were ended.

But Edwards explains,

we remain one short recession away from outright deflation especially if Bernanke is wrong in his view that core inflation has dipped way below target due to temporary factors such as the effect of seques ration on hospital payments.

Which leaves the Ice Age thesis very much still in play...

It is worth repeating the very simple point that an integral part of the Ice Age thesis is lower lows and lower highs for nominal economic quantities in each cycle. So, for example, in the chart below we see progressive steps down in each cycle ? almost unnoticed unless you take the longer view.

 

 

It is this process that drives the Ice Age re-rating of government bonds and the de-rating of equities - ?each recovery bringing a partial reversal to the process and each recessionary phase taking us to shocking new lows, both in bond yields and in equity multiples.

 

I do not believe this process is complete, especially as I do not see the economy as reaching exit velocity of GDP in excess of 3%. Indeed, growth is still anaemic and vulnerable.

 

We note that, amid the carnage in the government bond market, implied inflation not only remains subdued but has fallen decisively. Maybe that reflects an acknowledgement that the economy is indeed nowhere near exit velocity. Certainly the divergence between the ISM and inflation expectations has been unusual and history suggests it is inflation expectations that eventually catch up with the economic reality. And with events unfolding in emerging markets as they are, I see a good chance of a repeat of 1998 where a deflationary wave of manufactured goods washed up from Asia.

 

Deflation risks remain high.

 

We note that, amid the carnage in the government bond market, implied inflation not only remains subdued but has fallen decisively. Maybe that reflects an acknowledgement that the economy is indeed nowhere near exit velocity.

So where does that leave us in terms of QE. Edwards fully concurs with the legendary Marc Faber who, when asked during a Bloomberg TV interview if Bernanke meant what he said on starting to taper sooner rather than later, responded...

"If you say that if he means what he says, then you believe in Father Christmas. He said if the economy does not meet the expectations of the Fed in one years' time, they will consider additional measures. In other words, if the economy has not fully recovered by mid-2014, more QE will be forthcoming.

 

As I said already three years ago, we are going to go with the Fed to QE99."

Edwards concludes:

I tend to agree with that view. The economic reality in the West will force further rounds of QE. And in addition do not forget one over-riding structural trend towards fiscal insolvency and unlimited money printing.

 

[Governments] will take the path of least resistance, which is to print their way out of this looming fiscal catastrophe. Marc Faber is right. QE99 here we come.

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Thu, 06/27/2013 - 21:51 | 3701962 LetThemEatRand
LetThemEatRand's picture

99th time is the charm.

Thu, 06/27/2013 - 21:55 | 3701973 kliguy38
kliguy38's picture

There's a finite number of times you can run a peep through a wash rinse repeat cycle........and I think we just might find out that number....................someday

Thu, 06/27/2013 - 22:08 | 3702043 LetThemEatRand
LetThemEatRand's picture

What I'm worried about mostly is when they decide to clean the lint screen.

Thu, 06/27/2013 - 22:23 | 3702102 Skateboarder
Skateboarder's picture

The dang machine is broken. The repairman keeps telling us it's working perfectly, but why does it need servicing so many times. Was it designed poorly? He couldn't be lying to us... he seems like such a good, honest fella.

Thu, 06/27/2013 - 22:29 | 3702119 LetThemEatRand
LetThemEatRand's picture

Planned obsolesence and plausible deniability.  

Fri, 06/28/2013 - 00:12 | 3702393 flacon
flacon's picture

So btfd? Sell my puts and buy calls?

Thu, 06/27/2013 - 22:43 | 3702172 Its_the_economy...
Its_the_economy_stupid's picture

@ Skate

I like Metaphors.

Thu, 06/27/2013 - 23:18 | 3702274 philipat
philipat's picture

Fool me once....

Thu, 06/27/2013 - 23:20 | 3702277 Skateboarder
Skateboarder's picture

Fool me once, QE1,
Fool me twice, QE2,
etc.

*cheers*

Fri, 06/28/2013 - 01:23 | 3702502 francis_sawyer
francis_sawyer's picture

...you take one down, pass it around...

Fri, 06/28/2013 - 09:06 | 3702970 spastic_colon
spastic_colon's picture

they're trying to move away from the rhetoric that slowing bond purchases is a tightening of policy and that only raising short rates is a tightening.......there is a reason it is called quantitative EASING, the opposite will be quantitative TIGHTENING and they know this.  They are painted into a global corner.

Fri, 06/28/2013 - 10:15 | 3703174 financial apoca...
financial apocalyptic contagion's picture

na its just slowing the rate of easing

quantitative tightening would be when the fed starts taking money from the banks, well theoretically

Thu, 06/27/2013 - 23:20 | 3702275 philipat
philipat's picture

Duplicate. Fat Finger, sorry.

Thu, 06/27/2013 - 22:20 | 3702086 chump666
chump666's picture

lol

 

Fri, 06/28/2013 - 08:58 | 3702949 Midasking
Midasking's picture

They will never stop until the dollar is confetti http://tinyurl.com/qhxpkyn

Thu, 06/27/2013 - 21:56 | 3701985 infiniti
infiniti's picture

The Fed is going to taper because there is going to be quite a bit less outstanding/eligible paper to buy this fall. It's a really simple concept, we don't need a monograph from perpetually wrong Edwards to overanalyze the subject.

Thu, 06/27/2013 - 22:01 | 3702009 max2205
max2205's picture

Amazing what a 5% correction can make them cry out...farce

Thu, 06/27/2013 - 22:21 | 3702068 DormRoom
DormRoom's picture

They will taper soon.

 

Each QE has produced a diminishing multiplier effect.  Some would argue that we are now in an environment where QE is having a divisor effect (net out the cost of all speculative bubbles popping, and prices adjusting to norm).

 

Thu, 06/27/2013 - 23:13 | 3702256 dryam
dryam's picture

What am I missing?

We have a flawed debt based monetary system. It's an especially flawed system when banks are not allowed to fail. Thus, the entire system from top to bottom is incentivized to go further in debt, grow the money supply, and create inflation in an exponential (not linear, big difference) fashion. Exponential growth is unsustainable, and subsequent collapse is guaranteed at some point. It's simple math. Massive deflation is coming. The house of cards has been meticulously built over the past few years. The Fed can not print enough to ever cause inflation. Even if it could the money would never flow through the economy (credit creation is the only true way to expand the money supply, and that game is almost up). I believe the Fed’s main goal is to keep the banks afloat, either by hook or by crook. Once the TBTF’s are in solid position then the levitation act will give way. Yes, I own PM’s and I’m not selling at any price, but I’m accumulating as much USD’s & euro’s as I can.

It’s hard for me to reconcile the fact that 96+% of our money supply is from credit money and that the Fed could even come close to filling the void with printed money, especially when it comes to actually getting that money flowing into the economy. Yes, if somehow the Fed tried to fill that massive void, the USD would lose any sense of value & there would be hyperinflation. Not knowing which side of this ever narrowing deflation/inflation balance beam things are going to fall, I’m going mainly with PM’s, currencies, and the homestead.

Thu, 06/27/2013 - 23:49 | 3702341 Skateboarder
Skateboarder's picture

You show clear systems understanding, reason and logic, and foresight... you have got to be a terris.

GET HIM!

Fri, 06/28/2013 - 01:41 | 3702519 francis_sawyer
francis_sawyer's picture

It is one thing to understand 'THE SYSTEM' [& it's moving parts]... But it's another thing to consider whether or not that knowledge is RELEVANT... Essentially ~ there are two outcomes:

~~~

1. The "SYSTEM" is dismantled in an organized way [whereby all the synapses you described above fire off in some sequence or another]

2. The "SYSTEM" is dismantled in a way that best protects the elite shareholders [at the expense of others]... This type of dismantling may create dynamics that go against human logic [as most 'non predatory' humans don't have the capacity to think of scenarios that cause asymmetric benefit & misery]...

~~~

Frankly ~ I don't believe #1 [above] is possible... So ~ if you're expecting #2 [and don't happen to be "in the club"], then, by default, you're in FULL SURVIVAL MODE [in the most basic of ways]... Failure to prepare and act with that mindset, & instead, trying to 'surf the tsunami', would not be a good choice...

 

 

Fri, 06/28/2013 - 09:01 | 3702955 new game
new game's picture

the unknown is how far the system breaks down.

lvl one: 08 with massive fed save-faith revisited.

lvl two: fed loses control(bond bubble bursts) and countries default on obligations and mass mad max existence.

lvl one most likely and then we repeat 08-13/14. game replay.

lvl two-well i hope it don't happen cause it will be ugly and bloody. wwIII.

 

Fri, 06/28/2013 - 08:16 | 3702857 Go Tribe
Go Tribe's picture

So, for example, in the chart below we see progressive steps down in each cycle ? almost unnoticed unless you take the longer view.

 

This looks a lot like Japan.

Fri, 06/28/2013 - 09:29 | 3703050 Seer
Seer's picture

But Japan is only a side-show.

This is the REAL "Slinky Down The Staircase" happening here.

Japan paid for their show.  The show won't end with a knock on the door (no collectors except themselves).

Fri, 06/28/2013 - 09:48 | 3703100 Go Tribe
Go Tribe's picture

I hear ya. But I didn't mean it looks like Japan today, I meant Japan from the mid1990s to today. Nothing but lower highs and lows in that Nikki chart. We have a long way to go.

Sat, 06/29/2013 - 01:29 | 3705613 thestarl
thestarl's picture

All the bullshit simplified the games over.Just a matter of what TPTB have in store for us.

Fri, 06/28/2013 - 00:38 | 3702434 yogibear
yogibear's picture

They will do the direct opposite. They will increase the amount of QE from $85 billion monthly to $160 or $170 billion/month.

How could they?

Look at Japan. Who is telling them what to do? Surprise, it's Bernanke and the Fed!

 

 

Fri, 06/28/2013 - 07:53 | 3702795 Zen Bernanke
Zen Bernanke's picture

you're forgetting this is politics.  politics is the art of doing the wrong things for the wrong reasons where expediency rules the day.   it's expedient for the fed to print, so they do.  it's expedient for politicians to spend, so they do.  americans can't take the heat of a market turn down, they'd be apoplectic, and therefore it's expedient for the fed to keep markets elevated, so they will.   furthermore, what political program do you know of that's actually been cancelled due to its abject failure? right, none.  the politicians motto has in recent history been:  if at first, second or third it fails, try again, but bigger. 

Fri, 06/28/2013 - 09:26 | 3703039 mayhem_korner
mayhem_korner's picture

Each QE has produced a diminishing multiplier effect.

 

The multiplier effect is a ruse, DR.  If it wasn't, one would only need one Jack-and-the-Beanstalk dollar to grow the economy to infinity.

QE has NOTHING to do with propping up the real economy.  It has EVERYTHING to do with monetizing the unrepayable debt that the central state(s) have created and cannot get out from under.  If it is not the case now, it will be soon that there is NO MARGINAL BUYER of Treasuries.  Certainly not for the volume that is needed to sustain the pace of monthly deficits.

The Fed CANNOT taper - not for any period of time.  To not understand this is insanity.  And oh, btw, it is quite possible to have a depression and high interest rates.  Just ask the soon-to-expire former Peanut President.

The CBs are in a bad, bad place because they shot their mouths off about the taper.  Because the real issue is not the "market's" response to the threat of a taper (or even a short dabble into it), it is the "market's" response to the confirmation that QE will continue. 

The world economies are not recovering AT ALL.  If the BLS reported actual inflation, it would be clear to all that GDP is contracting, real interest rates are negative, and the only thing that is benefitting from QE is the "re-gifting" of equities that are being bid back-and-forth by the agents of the Fed's injections of liquidity onto their otherwise toxic balance sheets. 

Faber is right.  John (shadowstats) Williams is right.  Peter Schiff is right.  Santinelli is right.  Unless there is an appetite for a near-term revolution, QE cannot end. 

My rant is done.

 

Fri, 06/28/2013 - 09:33 | 3703059 Seer
Seer's picture

I agree.  I also believe that tapering could end if the Fed died.  Years ago I suggested that the Fed might be acting as a sacrificial anode, that it would suck up all the junk/bad debt and then implode: and the US govt could just say that the Fed wasn't part of the US govt.

Thu, 06/27/2013 - 21:58 | 3701992 babylon15
babylon15's picture

If the Fed loses control of the yield curve, all hell will break lose.  They have to prove to the world that this hasn't already happened.

Thu, 06/27/2013 - 22:00 | 3702008 fonzannoon
fonzannoon's picture

at the same time that they encourage everyone to sell bonds and buy stocks....

Thu, 06/27/2013 - 22:07 | 3702038 infiniti
infiniti's picture

If the fed loses control and treasury yields skyrocket, it will cause a massive recession, which will lead to plunging treasury yields. So the bottom line is that treasuries are a good buy right now.

Thu, 06/27/2013 - 22:45 | 3702179 Its_the_economy...
Its_the_economy_stupid's picture

funny

Thu, 06/27/2013 - 22:46 | 3702184 Professorlocknload
Professorlocknload's picture

Infiniti, sound reasoning there. Question is, will yields skyrocket from here first, or just go quietly back to under ten year 1.50, proving this out as a test firing by the fed for effect?

On another note, FWIW, heard today there are more offers than inventory, from a realtor in the Seattle area. Same a week ago in the Socal Inland Empire area.

In Norcal, "know" of a multi-unit being listed @06 price and getting offered on in 24 hours.

To quote the Great Shalom, "Puzzling."

Still bond bound 'till I see a sign from "out there."

 

Fri, 06/28/2013 - 08:20 | 3702867 Go Tribe
Go Tribe's picture

The price of cyanide has bottomed, so buy the fucking dip. Good God.

Fri, 06/28/2013 - 00:44 | 3702445 yogibear
yogibear's picture

This why they will push the lever ever more to counteract deflation.  Until the US dollar crumbles. The Fed is in a corner. They dare not taper. 

Print till you die seems milder. A real-life lesson for these Keynesian worshipers.  

Thu, 06/27/2013 - 22:00 | 3702003 fonzannoon
fonzannoon's picture

what country in the history of mankind ever successfully printed their way out?

Thu, 06/27/2013 - 22:30 | 3702012 LetThemEatRand
LetThemEatRand's picture

So far, only the one with "fuck yeah!" after its name.  

Thu, 06/27/2013 - 22:49 | 3702194 Professorlocknload
Professorlocknload's picture

Wiemar Germany. They printed their way into a whole new dimension.

Thu, 06/27/2013 - 23:07 | 3702240 Skateboarder
Skateboarder's picture

We gonna enter a whole another DimBension brotha, on the count of  our history marks being so low and all.

Thu, 06/27/2013 - 23:58 | 3702361 spine001
spine001's picture

Argentina did print its way out. 1 peso of today means 10 cuadrillion of 1972... imagine that. not even a wheel barrow would be enough...

Fri, 06/28/2013 - 09:05 | 3702969 Chupacabra-322
Chupacabra-322's picture

None, not one. In the history of mankind there has not been any Fiat Currency which has withstood the test of time. All have fallen in one way or another except, Gold/Silver.

Fri, 06/28/2013 - 07:25 | 3702751 GOSPLAN HERO
GOSPLAN HERO's picture

Outcome in 1933 ... National Socialists control Germany.

Fri, 06/28/2013 - 07:43 | 3702781 overmedicatedun...
overmedicatedundersexed's picture

1. monitize debt is the tool central banks and large internationals are digging with.

2. to me (a non ivy league grad) this is debt forgiveness dressed as a sheep, paying off debt with less valued fiat

3. at the same time this new fiat cannot reach into  the economy to promote growth, as it's value is bled off to save central banks and governments loaded with debt.

4. if co's in the base economy cannot replace or grow the economy becomes more and more inefficent and unable to produce jobs as these co's pay regulations, tax, burdens to .gov which expands welfare to off set the weak economy.

5. the ultimate end is the gov owns all wealth, (many in .gov already think this anyway, ask any socialist/fascist)

6. living standards across the world will fall, with the 0.1% gaining d/t cronyism and well the word is crime.

7. the real answer (to a non ivy leaguer) is a long tax holiday, where by business is not bled dry and the people have disposable income, this presents a problem for .gov as they would lose control of a major weapon used by the state.

Thu, 06/27/2013 - 22:03 | 3702018 buzzsaw99
buzzsaw99's picture

carnage in the government bond market, lulz

hyperbole much?

Thu, 06/27/2013 - 22:06 | 3702029 Cognitive Dissonance
Cognitive Dissonance's picture

It is an abject failure of our own imagination that we cannot conceive how much longer this implosion can go on.

Ironically (tragically) when faith and belief are severely tested to the point of great pain, most will beg for reasons to believe once again if only because they know not what else to believe in. The failure is not in the system, but in our need to believe in something other than ourselves, thus surrendering our own sovereignty to an external authority.

Thu, 06/27/2013 - 22:09 | 3702047 fonzannoon
fonzannoon's picture

It's funny I am begging for the opposite. I must be crazy.

Thu, 06/27/2013 - 22:13 | 3702064 Cognitive Dissonance
Cognitive Dissonance's picture

The primary reason the crazies are locked up in the nut house is because they are in the minority. Crazy is in the eye of the majority.

<I might be crazy....but I ain't stupid.>

Thu, 06/27/2013 - 22:15 | 3702070 fonzannoon
fonzannoon's picture

I just watched Shanghai go green, along with every other asian market.

Whatever is going on has nothing to do with anyone imploding. My crazy ass is going to sleep. You fella's enjoy your evening.

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