Under the Lens - 09-19-12-sub-UNLIMITED QE/OMT
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Under the Lens - 09-19-12-sub-UNLIMITED QE/OMT
- 1. Global Macro Tipping Points September 19th, 2011 UNLIMITED: QE & OMT Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 2. Global Macro Tipping Points September 19th, 2011 UNLIMITED: QE & OMT GLOBAL CENTRAL BANK ACTIONS • ECB’S OMT / SMP-2.0 • Federal Reserve’s QE-finity • BOJ Injections MACRO HIGHLIGHTS • EU Bank Runs & Capital Flight • Rate of Global Slowdown – PMI, Exports, GDP US ECONOMY • US Credit Downgrade • Collapsing Consumer Confidence Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 3. Global Macro Tipping Points September 19th, 2011 GLOBAL CENTRAL BANK ACTIONS Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 4. Global Macro Tipping Points September 19th, 2011 GLOBAL CENTRAL BANK ACTIONS Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 5. Global Macro Tipping Points September 19th, 2011 ECB’S OMT / SMP2 ECB - IS OMT / SMP2 Actually Real? The recent position of the Fed was spelled out and will be enacted. You may be happy, unhappy or camped in between but they will do exactly what they have said they are going to do. This is a Continent apart for the recent announcement of the ECB and should be noted. The European Central Bank waved the banner of “unlimited” and “without cap” subject to the CONDITION of the EU’s acceptance and audits and the approval of any nation applying for aid. It may not have dawned upon you or most of the world but the ECB may never do anything as a result of the yoke that it placed upon itself; nothing at all may ever happen. If the Austrians and the Dutch are to be taken at their word and no more of their money is going to be used to bailout other nations then all of the fluff raised upon giant banners may be no more than flags waving in the wind. The strategy has worked to date and driven down interest rates but when people figure out that the condition is actually an impediment; the winds may begin blowing in the other direction. If “A” depends on “B” and “B” is not forthcoming then “A” is a worthless proposition. “Let the key guns be mounted, make a brave show of waging war, and pry off the lid of Pandora's Box once more.” The Fed May Be Pumped Up 09-15-12 Mark Grant of "Out of the Box" via Zero Hedge Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 6. Global Macro Tipping Points September 19th, 2011 ECB’S OMT / SMP2 Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 7. Global Macro Tipping Points September 19th, 2011 QE UNLIMITED Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 8. Global Macro Tipping Points September 19th, 2011 QE UNLIMITED The Fed will monetize through QE-finity roughly half of the US budget deficit in 2013. Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 9. Global Macro Tipping Points September 19th, 2011 QE UNLIMITED Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 10. Global Macro Tipping Points September 19th, 2011 BOJ INJECTIONS Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 11. Global Macro Tipping Points September 19th, 2011 FLEEING EU PERIPHERALS – Was Going To Germany Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 12. Global Macro Tipping Points September 19th, 2011 SWITZERLAND Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 13. Global Macro Tipping Points September 19th, 2011 SINGAPORE Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 14. Global Macro Tipping Points September 19th, 2011 FEDEX WARNS FedEx CEO: “I'm Amused Watching Observers 'Completely Underestimate' What The Export Slowdown Is Doing To China” Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 15. Global Macro Tipping Points September 19th, 2011 Rate of Global Slowdown – PMI, Exports, GDP Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 16. Global Macro Tipping Points September 19th, 2011 Rate of Global Slowdown – PMI, Exports, GDP Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 17. Global Macro Tipping Points September 19th, 2011 Rate of Global Slowdown – PMI, Exports, GDP Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 18. Global Macro Tipping Points September 19th, 2011 US DOWNGRADE US DOWNGRADED - From AA to AA- Egan Jones Downgrades US From AA To AA- 09-14-12 Egan Jones Egan Jones, who downgraded the US for the first time ever last July, two weeks ahead of S&P: Synopsis: UNITED STATES (GOVT OF) EJR Sen Rating(Curr/Prj) AA-/ N/A Rating Analysis - 9/14/12 EJR CP Rating: A1+ Debt: $15.2B EJR's 1 yr. Default Probability: 1.2% Up, up, and away - the FED's QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US. Some market observers contend that a country issuing debt in its own currency can never default since it can simply print additional currency. However, per Reinhart & Rogoff's " This Time Is Different: Eight Centuries of Financial Folly " , p.111, 70 out of 320 defaults since 1800 have been on domestic (i.e., local currency) public debt. Note, US funding costs are likely to slowly rise as the global economy recovers or the FED scales back its Treas. purchases (75% recently). From 2006 to present, the US's debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%. We are therefore downgrading the US country rating from "AA" to "AA-". Ratings History: Egan-Jones rating history for United States (Govt of). 9.14.12 AA to AA (-) 4.15.12 AA+ to AA (Negative outlook) 7.16.11 AAA to AA+ Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 19. Global Macro Tipping Points September 19th, 2011 COLLAPSING CONSUMER CONFIDENCE Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens The content of this slide should not be considered investment advice of any sort, nor should it be used to make investment decisions. Use of this slide is considered to be your explicit acceptance of the Disclosure Statement and the Terms of Use found on the last page of this document.
- 20. Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens
- 21. DISCLOSURE STATEMENT AND TERMS OF USE THE CONTENT OF THIS SLIDE PRESENTATION AND ITS ACCOMPANYING RECORDED AUDIO DISCUSSION ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY. This slide presentation and its accompanying recorded audio discussion are not a solicitation to trade or invest, and any analysis is the opinion of the author and is not to be used or relied upon as investment advice. Trading and investing can involve substantial risk of loss. Past performance is no guarantee of future returns/results. Commentary is only the opinions of the authors and should not to be used for investment decisions. You must carefully examine the risks associated with investing of any sort and whether investment programs are suitable for you. You should never invest or consider investments without a complete set of disclosure documents, and should consider the risks prior to investing. This slide presentation and its accompanying recorded audio discussion are not in any way a substitution for disclosure. Suitability of investing decisions rests solely with the investor. Your acknowledgement of this Disclosure and Term of Use Statement is a condition of access to it. Furthermore, any investments you may make are your sole responsibility. THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Listen to the original podcast for this slide at www.GordonTLong.com/UnderTheLens
Editor's Notes
- ECB - SMP 2.0 (OMT) Not Really True Sterilization 09/10/12The Truth About The ECB's Plans To 'Sterilize' Its Purchases Of Government Debt 09-09-12 BISTERILIZATIONWhen the ECB announced its new plan to buy peripheral government debt in Europe (for the purpose of reducing yields) there was some concern over the fact that the purchases were going to be "sterilized." In theory what this means is that if, say, the ECB goes out and buys 50 billion EUR worth of sovereign debt, then somewhere else it will remove 50 billion EUR from the system so as to avoid inflation (and placate the Germans).Some people wondered: What assets will the ECB sell in order to finance these purchases.But the market was clearly not worried about this sterilization news, as evidenced by the big market surge on Thursday and Friday, as investors realized that "sterilization" is mostly for show, with little real impact on the amount of money in the system.In a note from last December, JPM's Greg Fuzesi explained how the ECB engaged in bond sterilization (this was in reference to the old SMP program, but the gist is the same.When the ECB purchases peripheral government bonds through its Securities Markets Programme (SMP), it pays for these by creating new bank reserves (i.e., through the modern form of printing money). In terms of its balance sheet, both assets and liabilities increase. The purchased peripheral bonds are held as assets in the SMP category and are matched on the liability side by a larger amount of bank reserves. In the first instance, the new reserves are added to the current accounts that commercial banks hold at the ECB. In this form, the reserves are fully liquid as they count towards meeting banks’ reserve requirements and they can be used to settle interbank payments.The way the ECB has chosen to sterilize these reserves balances is to encourage banks to shift them from the fully liquid current accounts into fixed term deposits, which are just another form of reserves. The ECB could offer these at any maturity but has chosen a short maturity of just one week (likely for operational reasons). The deposits are auctioned through a tender procedure, which requires banks put in bids, stating the amount they are willing to tie down for the one week period and the interest rate at which they are willing to do so. The maximum interest rate that the ECB is willing to pay is the main policy interest rate, and it be- gins by picking the cheapest bids until it has met its target level.So basically, the "sterilization" just means that banks commit to keep some cash at the ECB for a fixed period of time, so it doesn't technically enter the system. And since that money at the ECB is liquid and guaranteed it's not a problem.As for whether the sterilization really matters, the answer is: Not really.First, it does not shrink the ECB’s balance sheet back to its original size, as would be the case if the ECB sold other assets to finance its SMP purchases. It is of course debatable whether a larger central bank balance sheet is a source of concern per se (e.g., of the inflationary sort). But, even if it is, the sterilization method used by the ECB clearly does not address this concern.Second, viewed from the perspective of the banking system, purchases of peripheral government bonds by the central bank remove a risky asset and replace it permanently with highly liquid reserves (whether these are subsequently sterilized or not). In addition, the sterilization operation ties the funds down for only a very short one-week period and these can still be used as collateral at other ECB refi- nancing operations. Hence, the sterilization itself does not neutralize the impact on the banking system’s balance sheet, which has become permanently more liquid. Whether this, in itself, encourages banks to lever up in other ways (e.g., by making other risky investments or aggressively growing their loan books) is debatable. But, in any case, the sterilization does not fully reverse the changes.So it's just technical accounting stuff. The ECB can buy unlimited volumes of sovereign debt, provided the country whose debt its buying remains in good compliance with reforms.
- ECB - OMT versus the Taylor Rule The One Chart To Explain Why Draghi's Blunt Tool Can't Fix Europe 09-06-12 Zero HedgeThe monetary policy transmission mechanism is broken in Europe; we all know it and even ECB head Draghi has admitted it (and is trying to solve it). As Bloomberg economist David Powell noted though, Draghi may have to address the economic fragmentation of the euro area before undoing the financial fragmentation of the region. The latter may just be a symptom of the former. The Taylor Rule, a policy guideline that models a monetary authority’s interest rate response to the paths of inflation and economic activity, highlights the drastically different monetary policies required across the various EU nations as a result of their variegated domestic economic conditions. This variation creates concerns over sustainability and the rational (not irrational as Draghi would have us believe) act of transferring deposits to 'safer' nations for fear of redenomination; and Draghi's bond-buying plan is unlikely to allay that fear anytime soon - as economies remain hugely divergent.David Powell, Bloomberg: Draghi's Financial Fragmentation Fight Ignores Root ProblemUnemployment rates demonstrate the divergence of the region’s economies....A Taylor Rule demonstrates the drastically different monetary policies required in those countries as a result of their domestic economic conditions. The model, based on coefficients estimated by the Federal Reserve Bank of San Francisco, signals the main policy rate should be minus 7.75 percent for Spain. It should be minus 3.75 percent for Portugal, minus 3.5 percent for Ireland and minus 10 percent for Greece. Germany is at the other end of the spectrum. It requires a main policy rate of 4.25 percent.It appears broadly the Euro-zone rate is set 'fair' which means any rate cuts will be notably euro-zone inflationary - something Draghi wants to avoid.Those economic divergences appear to have led depositors to question the sustainability of the monetary union in the absence of large-scale fiscal transfers to cushion the weakness in certain countries.Savers may be transferring their funds to the banks of the creditor nations within the monetary union. Deposit growth in Finland jumped to 10.1 percent year over year in July. The figure for the Netherlands stood at 4.8 percent and that for Germany at 4.2 percent. Those transfers allow depositors to hedge – at no cost – the risk of redenomination of their savings into weaker domestic currencies. That behavior appears completely rational, as opposed to the “irrational fears” cited by the ECB president.One of the basic principles of finance is an investor will always choose an investment with less risk than another if the levels of return are the same.Draghi will probably have to convince market participants of the economic sustainability of the monetary union before the financial fragmentation of the region is ended. The OMT is a way to achieve a more focused 'easing' implcitly as QE does in the US at ZIRP - but the conditionality removes the mechanism for that benefit to flow. The large-scale extension of central bank credit to potentially insolvent countries is unlikely to accomplish that.Source: BloombergBriefs.com
- QEX - Unlimited Quantitative Easing Arrives 09/14/12“...if we do not see substantial improvement in the outlook for the labor market, we will continue the MBS purchase program, undertake additional asset purchases, and employ our policy tools as appropriate until we do.” BERNANKE TRANSCRIPTFEDERAL RESERVE ANNOUNCEMENTTHE SKINNY :In the past, when the Fed has tried QE, it's always come with precise limits on size. So the Fed will say that it will buy $600 billion worth of Treasuries and mortgage-backed securities, but then nothing more. But the hot buzz in economics these days is that it's not the size of the program, but the commitment on the part of the Fed to keep money easy until the economy is well on the road to recovery. That's where unlimited QE comes in. The idea would be that the program would be open-ended, with ongoing bond buying until that point at which the Fed was satisfied that the economy was strong. The program is thus transformed from being a program about bond buys to a program that seems to commit the Fed to future actions. The big question is, what conditions the Fed attaches to ending the bond buying.It probably won't be an explicit Nominal GDP target or even something specific like an Evans Rule (no tightening until 7 percent unemployment or 3 percent inflation). It will likely be something softer, and more along the lines of "robust data." (Read: Tim DuyDeutsche Bank) QEx to INFINITY - The Implementation of Financial Repression 09/14/12Citigroup Analysis via Zero HedgeWhy QE3 FX impact may fizzleThere are several major differences between QE3 now and past QE. The one that is least remarked on is that the world outside the US is much less attractive now than in March 2009 or August 2010 when previous QEs were announced. In earlier QEs, EM was much more attractive, having shrugged off the debt crisis, there was an attractive destination for the liquidity the Fed was injecting into the global economy. Now the term ‘global leadership’ is linked to the US with its 2% (plus or minus) growth rate, and pessimism over Chinese, Brazilian, Indian and other major EM economies. So the downside risk is that the new liquidity sloshes around the banking system rather than being used for investment abroad. The outcome would change if China embarked on a major stimulus programme, though for now investors are not positioning themselves for such an expansion.In addition, we are struck by the somewhat skeptical reaction of investors and colleagues to the Fed’s analysis of the benefits from past rounds of QE. In particular the Fed’s benefit calculation explicitly assumes that the level of stimulus is a function of the size of the Fed’s balance sheet, so keeping the Fed’s balance sheet fixed would not result in any diminution of stimulus. Most clients and traders feel that rates would back up significantly if the Fed were to stop expanding the balance sheet. In that world, subsequent rounds of QE just keep rates where they are rather than lower them and the cumulative benefits are much less pronounced. There is a strong view in markets that 1) the Fed have to do a big QE, given the expectations that have been built up, and 2) the added liquidity will have a marginal effect. Taken together this raises the risk that the assets that will benefit are those sensitive to liquidity, such as money substitutes and Treasuries, rather than assets that are sensitive to real business cycle expansion.Two things here: Citi has finally figured out that the Fed will be unable to herd cats and instead of investors positioning to buy the assets that the Fed demands they should buy, i.e., stocks with a 100X P/E, a far simpler trade will be the one that has worked for years - to simply frontrun the Fed in what it will buy, as explained here months ago, when we showed why the performance of the long-bond has surpassed that of the S&P by a factor of almost 200%.Second, and more imporantly, let's recall that "money substitutes" = gold. So... Citi basically said that tomorrow Ben Bernanke is about to (again) become a goldbug's best friend.PEOPLE HAVE IT ALL WRONG & UPSIDE DOWN - Here is what is really happening
- FEDERAL RESERVE - Balance Sheet Growth Projections 09/14The Fed's Balance At The End Of 2013: $4 Trillion 09-13-12 Zero HedgeWhat happens next:Imminently, the Fed's Open Markets Operations desk will commence buying $40 billion in MBS per month, or about $10 billion each week. Concurrently, the Fed which is continuing Operation Twist, will still purchase $45 billion in "longer-term" Treasurys, sterilized by the $45 billion or so in 1-3 years Bonds it will sell until the end of the year at which point it runs out of short-term paper to sell. End result: every month through the end of 2012, the Fed's balance sheet expands by $40 billion in MBS.Beginning January 1, 2013 the Fed will continue monetizing $40 billion in MBS each month, and will continue Operation Twist, however it will adjust the program so that it continues to increase its long-term holdings at $85 billion per month, without sterilized as it will no longer have short-term bonds to sell. It will also need to extend its ZIRP language "through the end of 2016" so all bonds 1-3 years are essentially risk free, as they are now, in effect eliminating the need to sell them. End result: every month in 2013 the Fed will increase its balance sheet by $85 billion, consisting of $40 billion in MBS, and $45 billion in 10-30 year Treasurys, or the natural monthly supply of longer-dated issuance. The Fed will therefore monetize roughly half of the US budget deficit in 2013. Putting it all together, the Fed's balance sheet will increase from just over $2.8 trillion currently, to $4 trillion on December 25, 2013. A total increase of $1.17 trillion. This is what the Fed's balance sheet will looks like:Another way of visualizing this is how many assets as a percentage of US GDP the Fed will hold on its books. Currently, this number is 18%. By the end of 2013, the Fed's historical flow operations will be accountable for 24% of US GDP. Why is this important? Simple: when the time comes for the Fed to unwind its balance sheet, if ever, the reverse Flow process will be responsible for deducting at least 24% of US GDP at the time when said tightening happens. If ever.What is scariest, is that as of this moment, all of this is priced in. Any incremental gains in the stock market will have to come from additional easing over and above what Bernanke just announced.And finally: Fed's DV01 at December 31, 2013: ~$4 billion
- UNLIMITED QE - A Panic Reaction The Fed Panicked 09-13-12 Daily Capitalist via Zero Hedge This article originally appeared on The Daily Capitalist.Here is the Fed Open Market Committee's announcement of November 25, 2008 announcing the implementation of QE1, a $600 billion bond purchase program:This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.On March 18, 2009, the Fed announced a second phase of QE1, expanding the program by another $750 billion to bring the Fed's total to $1.25 trillion for the QE1 program. The Fed noted that:Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. ...In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. ...On November 3, 2010 they announced another round of quantitative easing called QE2 in which they purchased another $600 billion of longer term Treasurys:Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. ...To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.On September 21, 2011 the Fed announced Operation Twist in which they extended the maturity dates of $400 billion of their Treasury portfolio in order to drive down interest rates and to "support a stronger economic recovery". The Fed's reason:Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.Recall also that the Fed has kept the Fed Funds rate at almost zero rates (ZIRP) since the beginning of the 2008 crash.Today, the Fed announced an open-ended purchase of "agency" mortgage-backed securities of $40 billion per month at least until the end of the year, which along with its Operation Twist purchases, amount to $85 billion of such purchases each month. Again they wish to "support a stronger economic recovery". Their justification was:Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.This time the Fed added some significant wording:... If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. ...The bottom line is that the Fed panicked. It is extraordinary that the Fed would announce an open-ended "we'll print as much as it takes, as long as it takes" policy. Chairman Bernanke is sending a signal to the markets and to government that the economy is bad and getting worse and that the Fed will do its part as everyone expects them to do. This is a clear signal to the markets and the world that the Fed stands for monetary inflation. They don't know what else to do.As we have long been telling readers, unemployment is the key to Fed policy and they have formally made it their policy linchpin. As far back as May, 2011, on Fox Business News I said that Mr. Bernanke has no other real alternatives other than QE and that with rising unemployment, he would be pressured to "do something."One may ask why none of these policies have led to economic recovery. Why didn't QE1 work? After all they told us then that it would promote "sustainable economic growth". By the time QE2 was released we heard much of the same thing: it would "promote a stronger pace of economic recovery". Had QE1 worked as they said, why did they need QE2? Now the Fed tells us again that another round will "support a stronger economic recovery".That begs this question: If QE1 and QE2 and Operation Twist didn't work, why would QE3 work? The quick answer is that it will fail like its predecessors.I discussed this at length in my February 14, 2012 article, "Is This Recovery." In that article I anticipated that the following things would happen:1. The economic “good news” is largely based on fiat money steroids and will not last without continuous injections of new fiat money into the economy.2. The last injection of fiat money (QE2) is already wearing out and money supply is most likely declining.3. A declining MS will result in further economic weakness (stagnation) and flattening-to-increasing unemployment.4. This is likely to occur in Q2-Q3 2012.5. As soon as unemployment goes up again, the Fed will announce QE3.6. The dollar will continue to be weak.7. It is likely that price inflation will continue to be “modest” (as the Fed sees it) in light of ongoing real estate related asset devaluation. This depends on the amount of QE.The article thoroughly discusses the reasons why the economy is stagnating and why further rounds of quantitative easing will not change it. One of the charts from that article (shown below) attempts to show that each round of QE has been less effective at boosting nominal GDP. The vertical bars show the dates of QE1 (orange) and QE2 (light blue), the money supply (TMS2- aqua-blue line), and GDP (thin black line with its own scale [left]). The result is that economic growth measured by nominal GDP has been largely illusionary.The truth is that GDP is not a very good measure of economic growth, at least when the Fed increases the money supply through QE. Since GDP measures spending, if new money is injected into the economy, there will be more spending and thus GDP will increase. The second point is that "printing" money never creates organic economic growth. In fact it never has at any time in history.What can we expect the consequences of QE3 will be?1. Money steroids will give a temporary boost to the financial markets as evidenced by today's euphoric response to the Fed's announcement.2. The impact on organic economic growth will be nil even though it may slightly increase GDP by Q1 2013.3. Unemployment will remain high.4. Economic growth will stagnate, if not decline, through the remainder of 2012 as money supply growth declines (TMS2).5. Post Q1 2013, economic activity will again stagnate, assuming there are no policy changes or political changes (Romney is elected).6. Europe and the rest of the world's economies are in decline which will further depress the U.S. economy.7. Price inflation is a guessing game. My guess is that it will remain within the Fed's parameters. The key to price inflation will be credit creation through lenders and, while lending has shown some life (mainly the big banks with big companies), it is likely to flatten again as the economy stagnates, thus inflation will remain "Japanese."8. Interest rates will remain around their historic lows. While the housing market is showing some signs of life, its recovery largely depends on job growth which will remain subdued.9. How much QE is a good question. I cannot see that any Fed chairman would print endlessly to a point of high price inflation. That would require much greater amounts of QE-type monetary stimulus plus it would require banks to lend, which means businesses would be willing to borrow, thus expanding credit and money supply to much higher levels. QE is not an efficient way to price inflation, and in a stagnating economy, borrowing will remain flat.If you are a true believer and feel that the Fed is correct, you have to ask yourself hard questions about your assumptions since the Fed has been consistently wrong in their forecasts and policies. Now they insist on pursuing the same failed policies. Why would they work now?The Fed continues to follow the same wrong policies as it has since the beginning of this depression. We now have one of the longest depressions in history that has been caused by the Fed and the fiscal policies of the Bush and Obama Administrations. They are devaluing the dollar, destroying capital, thwarting growth, and cheating savers out of their hard earned money. It is a cruel blow to the 23.1 million un/under-employed in the U.S. who need economic growth to create jobs. We need a new direction.
- We would excuse Einstein if he were doing cartwheels in his grave right about now, following the BOJ's latest attempt to keep doing what has definitively failed for 30 years, hoping this time it will be different, as a result of the just announced latest expansion in the asset purchase program's size by yet another Y10 trillion, this time to a total of Y80 trillion. The expansion impacts only JGBs and T-Bills, both of which will be monetized by a further Y5 trillion. Putting this in perspective, Japan's total public debt is Y1 quadrillion, and counting very fast. All other components of the Japanese LSAP program, including CP, Corporate Bonds, ETFs and REITs (yes, unlike the Fed, the BOJ is quite open about its equity and corporate bond purchases) remain the same. Bottom Line: Just as we predicted back in July 2009, the global race to debase continues unabated, and as a result of QEternity will merely accelerate until the only true currency is gold tungsten. JPY10 Trillion Intervention Half-Life: 5 Hours; Full Fade: 9 Hours 09-19-12 Zero HedgeIt appears that the Central Banks have finally reached Peak Efficacy, after shooting themselves in the head with Bernanke's asinine QEternity which leaves nothing else to be priced in. Last night's JPY10 trillion fact (no longer rumor, whisper, or promise) of more LSAP from the BoJ had its typical knee-jerk reaction but within 5 hours it was 50% retraced and now at 9 hours the entire move (and its accompanying S&P 500 future's correlated risk-on surge) have been fully retraced. In other news, there is a rumor that the Bank of Zambia is contemplated proceeding with open-ended easing to infinity and beyond. Sadly, none of this matters at all any more as monetary policy is no longer a factor in a world in which all the future CTRL-Ping is already accounted for. Just as we said last night, minutes after the 'event':
- FEDEX - China Slowdwon Serious & Underestimated 09/20FedEx CEO: I'm Amused Watching Observers 'Completely Underestimate' What The Export Slowdown Is Doing To China 09-18-12 BI Earlier today, FedEx reported weak guidance on slowing global growth. Its stock ended down about 3%, and the transport stocks were generally big laggards. Because FedEx is considered to be such a bellweather for economic activity, its earnings are closely watched by a broad range of folks, not just FedEx investors.In that light, the comments by CEO Fred Smith on the company's call are fascinating (via Cullen Roche).First is his comment about the global economic situation: global trade is in a very rare position of growing slower than GDP:...fundamentally, what's happening is that exports around the world have contracted, and the policy choices in Europe and the United States and China are having an effect on global trade. Global trade has grown faster than GDP, except for the 2000, 2001 meltdown and 2008 and 2009, for 25 years. And over the last few months, that has not been the case. So that's what's really going on, is that exports and trade have gone down at a faster rate than GDP has.Smith also takes a shot at the Fed:Well, let me elaborate on what I said just a moment ago. I mean, systemically, the policy choices that have been made in Europe and the United States and China are having effect on world trade. The episodial product launches that you refer to, we've been talking about for 2 years. And we are carrying a huge amount of that traffic, but it is episodial. At the same time that you have that going on, you have a declining value per pound. In a lot of electronic equipment, you have fuel going up, partially in response to the quantitative easing. I mean, as the Fed puts more money out there, people put more money into commodities and drive the price up. So you have products that are getting lower in value per pound, which is the key correlation for goods being moved by air. And so they're going on the water to an improved container liner system that's been developed over the last few years. So you've got a lot of things that are going on there, and the product launch of Apple's and Microsoft is not going to provide the type of sustained growth in the international trade that the world has seen historically. So when that turns back around I think is directly related to the economic macro system in Europe, North America and particularly in China.Then later he hits on a very specific point about China:…I can tell you this on China. The locomotive that has driven China’s growth is its export industries. And with the situation in Europe and, to a lesser degree, in North America, that is a significant issue for the Chinese economy. Now the consumer consumption in China is not increasing at a significant rate contrary to everybody’s hopes. While exports from, say, the United States into China have grown, they are dwarfed by the exports from China into the United States. And as the big economies in Europe and the U.S. have grown or contracted — grown at a far lesser rate or, in the case of certain European countries, have contracted, that’s reflected in the numbers in China. And you can’t escape that. I’ve been somewhat amused watching some of the China observers, I think, completely underestimate the effects of the slower exports on the overall China economy.”