Will the Fed announce ”QE 3″ at the next FOMC meeting this month? (Jim Rogers thinks it’s already underway.)
While the market reaction Friday and many of the media headlines suggest that this is virtually a foregone conclusion, caution in assuming such makes sense to me. A much-ignored part of Ben Bernanke’s address at Jackson Hole two days ago, discussed below, offers support for an agnostic approach. The political timetable at home and, importantly, the ongoing inflationary European solution to its recession/debt mess also are restraints on an immediate resumption of Large Scale Asset Purchases (LSAP, the means by which quantitative easing is implemented).
After all, the recessionary and insolvency fires are burning in Europe, not the U.S. Spain is inexorably going the way of Ireland and Portugal toward a full-fledged bailout, which “should” mean that it will go into receivership and be given economic terms by Brussels, Frankfort and perhaps Washington (IMF); only the timing and details are to be determined (so say I and many people more knowledgeable than I). The next likely battleground in Europe is Italy, but a report out this past week suggests that an already-forgotten “bail-ee”, Portugal, may need its loans restructured yet again, so let’s not assume that what’s in the past is truly “fixed”:
Separately, Portugal’s tax revenues fell 3.5pc in July despite higher tax rates, raising concerns that the country is tipping into a contraction spiral. It is now certain that Portugal will fail to meet this year’s deficit target of 4.5pc of GDP under its €78bn rescue from the EU-IMF troika. Morgan Stanley said the country will need a “second bail-out” in the autumn.
The latest Italian economic statistics are dismal. Italy is likely to be in traders’ crosshairs (pending dramatic ECB action to forestall that). China’s economy has also slowed significantly. Both Europe and China are suffering stagflation, which limits policy choices.
In the above context, the gigantic and probably unprecedented (since WW II) yoy declines in housing prices in the Netherlands suddenly make more sense. After all, 80% of Dutch GDP is from… exports. Exports to which country? Germany and the U.S.? Not enough. The Dutch may be - given the global slowdown they did not plan for. From the WSJ:
AMSTERDAM—The slump in the Dutch housing market deepened in July as prices posted the steepest drop on record, highlighting the challenges facing the Netherlands ahead of next month’s general elections.
With prices now plumbing levels last seen in 2004, the downturn is weighing heavily on household consumption and has raised concern about the country’s huge mortgage debt pile, among the largest in Europe
House prices fell 8% from a year earlier, statistics bureau CBS said Tuesday, the largest decline in the 17-year history of the agency’s house-price index. Prices fell 4.4% in June and 5.5% in May.
Et tu, Holland?
The die may thus be cast for a major money-printing effort from the ECB, perhaps as soon as the German Constitutional Court (presumably) finds for the central planners on September 12 in a long-awaited decision about whether the European Stability Mechanism is legal under German law.
Assuming that the ECB once again creates new money, we could see the Fed “print money” as it did last fall when the ECB introduced the LTRO. This is a form of QE under a different name. To wit, the Fed could lend (“swap”, in central banker lingo) dollars (newly-created ones) to the ECB so that the lightly-capitalized ECB could then send create new euros with these borrowed, newly-created dollars. The ECB would send these new euros where it believes they are needed within the eurozone. Some of said newly-created euros, funded with newly-created dollars by the Fed, would undoubtedly find their way back to the U.S. markets and economy, thus providing “support” domestically. But it would not be “QE”. However, in conjunction with the extended, ongoing Fed “Operation Twist” (aka Let’s Twist Again, as we did in the summer of ’62), the combined effect at home could be just as “stimulative” as a formal QE 3.
The case for more money-printing in the eurozone is not clear-cut, though. Brent crude prices and gold are at or near record prices there already. The eurozone has both an unemployment problem and a price inflation problem. It is already back to the ’70s for Europe, with negative interest rates and high unemployment once again. So we shall just have to see what occurs there, and when.
The U.S. also has a price inflation problem, especially in the most visible prices, those which hurt the middle and lower classes (i.e., almost everyone) the most. Gasoline prices are 6-10% above where they were just a month ago. The trajectory of food prices was upwards before the drought. Futures traders would likely bid prices of sensitive commodities a good higher if they were convinced that a major new QE were about to get underway; that is assuming that they are independent and that no other important countervailing factors come into play, such as Israel and Iran springing a freshly-signed peace treaty upon an unsuspecting world.
If the Fed wants to put President Obama’s re-election campaign behind the 8-ball, announcing a new QE when prices are already surging in the two most visible types of expenditures, food and gasoline, that voters see almost daily is a good way to do so. Also, announcing a new QE would clearly state that the Fed sees no economic light at the end of the tunnel despite all it has done and all the deficit spending the Obama administration has approved, thus further undermining the Obama campaign’s assertion that the “Bush economy” is finally healing.
Thus I think that there are good policy and political reasons to expect the Fed to sit tight a at least a little longer.
As the Chairman stated at Jackson Hole Friday:
In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.
He has been walking, and talking, a fine line indeed. I have bolded some parts of the above for discussion purposes.
The first bolded phrase implies that QE 1 was highly effective and safe, given that it was the first one. The patient (the economy) was in monetary drought conditions; the Fed watered it. Now, following QE 2 and the ongoing “Operation Twist”, which the Fed views as having at least half the stimulative effect as QE, the patient may be well-hydrated, and more water might just create a soggy mess that might make matters worse or at least have no net positive effects to be worth the trouble of another QE.
The second and third bolded phrases may be more important. GDP reportedly has been growing faster than population; the establishment survey by the BLS has been showing positive wage growth; chain store retail sales for August were released Thursday and were much better than expected, even boom-y. So, do economic conditions warrant? The consensus last summer was that they so warranted, yet no QE ensued then. The stock market is higher, commodities prices are moving up and not down; why print now if not last summer?
Of course the Fed not only knows all of the above, it has vastly more access to up-to-the-minute information than do I. Maybe something is brewing that it knows that tells it that the U.S. is actually in a new, undocumented recession; but there has been no hint of that from the Fed that I am aware of.
Thus my humble hunch is that the Fed is probably on hold for a formal domestic QE and would like to be so until after the election, barring a drastic change in financial and economic conditions in the United States.
My further guess, perhaps even less mainstream especially in certain circles, is that Chairman Bernanke would prefer not to engage in quantitative easing ever again, meaning that he hopes that now and in the future that the high hurdle he cited for the use of unconventional monetary policy never be reached again, and certainly not in his tenure. “Hopes” is the operative word; of course another helicopter drop will occur pronto if “needed”. His high hurdle is definitely able to be jumped over.
Gold, oil, and stocks were all up in price in the U.S. markets last Friday; but bonds also rose in price (fell in yield). One of those was wrong. On the futures boards tonight, the inflationary surge is underway, yet bonds have not sold off. Does Mr. Bond know something, or is it acting this way because of Fed manipulation or fear/expectations of the same?
Strange times…
They could commit to more QE (open-ended) but won’t do any bond buying itself.
See this link.
In a slowing world, it will remain impossible for the US to be the only country not to be going into recession. I expect that Bennie and the Feds will be up to their monetary mischief in no time soon. Central planners endowed with God complex personalities can do no less you know.
hi Doc. i’m not sure that the logic behind gold/oil/stocks up and bond yields tightening, all at once, and thus one has to be wrong, is sound.
i think QE is coming, and i agree with you that the market also thinks so — more dollars, same amount of gold/oil/stocks: numerator up, denominator flat = higher quotient.
that doesn’t mean that people can’t freak out at the same time and go on their “flight to quality” mission, Treasurys. first, these are different asset classes and often inhabited by people who think differently. and second, if we believe that more dollars means higher nominal prices for gold/oil/stocks, that doesn’t mean growth should resume and result in higher bond yields. to the contrary, it may mean things are so bad that the The Bernank is desperate, he feels the need to prime the pump, and thus this information (and change from his prior words) is marginally more negative, thus yields come in.
who the hell knows, i sure don’t. one i thing i do know, pretty much for certain, is that we live in a different world now, an artificial and manipulated economy, and a debt saturated society.
yet the (mostly older) clowns keep hitting the airwaves using the old playbook, e.g., “with bond yields so low, stocks are historically cheap” … hello, ever heard of Japan? we live in 10% of GDP deficits, not 2%. the Fed is buying Treasurys and mortgage bonds. good heavens, this is not a normal scenario. the USA is a very sick patient. the 1960s entitlements are coming home to roost, and in a really big way — the old rules need not apply, in my opinion.
The market has already priced in QE3. If that is so, then the markets are set to tank. Either they sell on the news, or sell off because no QE3. You might reconsider that ‘buy safe stocks’ call. You’re bottom picking, and hopefully you’re sticking with an options strategy.
I understand your desire to trade. A long time ago in a city far far away I once actively traded, staring myopically at my screens I tried to tap into a force which would guide me to great wealth.
After many years I realized that knowing when not to trade was perhaps the most important decision I could make. Ask yourself, do you really know what makes this market tick???
On Bloomberg radio today I heard an analyst say that stocks in general were too cheap because investors were not being compensated enough for the risks they undertake when holding stocks. I understood, like a diamond bullet to the brain that his statement was insane.
The inmates are running the asylum!
but i thought we just decided it would be fairly soon…
when putting a floor under the market takes precedence over voters who must buy gasoline, that is when we will have QE3. november 7th?
A global crisis, what’s next?
My letter is about the next stage of the current crisis. Now about my forecast accuracy – as I chose a job in Scotland in 2005, I have been thinking about this crisis; I knew, that it is unexpected and that it lasts until 2020. Nouriel Roubini predicted the twelve stages of current crisis, I predicted the first eight stages – how it will start and develop in USA and UK, but I didn’t predict that it covers the whole world and in 2005 I knew that 2020 China will be the largest economy in the world.
A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis – the financial black holes – tax havens, which sucked from world economy 21-32 trillions $.
2. The decreasing dollar market share.
3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar…
4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically imposible to reform it now, as show the tax havens history.
A only way to reform the global financial system and central part of it – tax havens is crash, a only question is when?
Now, about the financial system and globalization. The crisis in 2008 showed that the world has become a gigantic financial superpower in which all countries are financially bonded together, and crisis in one big country is a crisis almost everywhere in the world. Such fact has approved the current crisis in the euro area. The money in this system is something similar to water: a small country or its currency market is like a very small body of water, and if you add a lot of water and if it is isolated, the water level rises abruptly, similarly it is with the money – if a small country prints a big number money, hyperinflation occurs, an example – Zimbabwe, a big country is like a great pond and you need a lot more water to launch a level rise, as well as lot more money to rise the inflation and if there is leak – the water flows away. Something similar happened with the convertible currencies. UK 1973 and in the years Margaret Thatcher as prime minister and USA 1983 Ronald Reagan as prezident, with help of the representatives the largest business began the reforms taking away limits amount of credit issued by the banks and taking away limits for capital flow abroad and helped create a global network of tax havens, soon followed by the main other developed countries and globalization began. The world is like a large lake, which requires a lot of water in order to launch its level to a rise, similarly the finance require a lot of money to launch a rise in level, but unlike water, for every human being the income and the amount of money in his account is very different. The peculiarity of this crisis is, that in the developed countries the money have been allocated very unevenly. During 30 years of globalization for 90% of the population real incomes increased slightly or remained the same and the illusion of the better life was created by the credits and mortgages, that triggered real estate bubble. The only winners from globalization were 10% of population and a real winner was 1% of population.
And now about what scares me, it’s not the eurozone crisis, permanent eurozone crisis is very useful for one country – Germany, a low euro rate promotes its exports, a unemployment is reduced to a record level and enables Germany to reform EU in the way they want and because of the euro collapse its interests would be seriously undermined and the crisis is easy to complete, by release the required amount of eurobonds or simply printing electronic money, as are doing the UK and the USA and not a single eurozone country’s elite, even Greece don’t want to leave euro, because new national currency will be significantly devalued and who want lose their money or receive lower wage and this crisis is creating United States of Europa, a economic system, where Spain is like California with the big problems and Greece like Montana.
Different from Eurozone banks, UK and USA banks may use the same scheme as Barclay‘s bank – after loosing 28 billion £ they called them the bad debts, set up a bogus offshore company, gave it a credit of 28 billion £, bogus company bought the bad debts and a bank loss turned into a normal credit with base percentage 0.5%. In USA it‘s even better, a base percentage is 0.0% and it will remain so for two years and this only encourages short-term speculation and financial casino. That scheme is good for increasing bank’s actives too, so that they can meet all the requirements and increase the size of issued credit. USA has a big budget deficit, commercial banks credits, quantitative easing, economic stimulus packages, trade deficit flood with dollars the world and that triggered two processes that lead to the next phase of the crisis:
1. Dollar is a central part of the world’s reserve currency and its market share in 1999 reached 71.0% and decreased in 2011 to 62.1%, this process was slowed down by the euro crisis, but from beginning of year 2012 this process has gained momentum; the BRIC and OPEC member countries and other countries signed the trade agreements to use local currencies between them. During the first four months of this year yuan part in China foreign trade increased from 0.0% to 7% and is projected to reach 50% soon. USA strengthen this trend with sanctions against Iran, which are pushing Iran from dollars market. All these measures have been taken to guard against the dollar.
2. This trend is accompanied by the second process, tightening regulation of investment, prohibition not to sell the most important companies and this trend is only getting stronger because of the recent economic stimulus packages.
USA, Germany and other countries, even the UK, as show a conflict with the Jersey, are starting to shake tax havens, but it looks like shaking a hornet’s nest: money, a lot of money, which until now was lying quietly, without making a damage, begins movement. The dollar world market share is like a lake – when it decreases, and the amount of water remains the same, the level is rising, and if more water flows, its level is still rising, similarly is with dollar, a shift from the dollar to trade in their own currency, the dollar was pushed from this market share, restrictions and regulations reduce the dollar market share, smaller market share and amount of dollars remains the same, in smaller dollar market new dollars are poured more – the budget deficit, bank credits, quantitative easing, economic stimulus packages, the result will be more regulation, more protection and these processes inevitably leads to the dollar crisis. The globalization‘s only winners in developed countries is 1% of the people and the official statistics show only visible part of their property – real estate, bank accounts, companies, shares and it is an iceberg peak, while the tax havens are the hidden part.
IMF specialists estimated that in 2010 in tax havens were 18 trillions $ and this numbers is without Switzerland, greatest tax haven in a world.The latest statistic from Tax Justice Network show that there is at least 21 trillion $, and possibly as much as 32 trillions $, but part of them are in a other currency. The tax havens, as show a their size, is a main reason for a this global crisis. In the developed countries revenue grew only for this group of people and this leads to inflation, their inflation. The houses cost 125 millions $, the yachts 125 millions $, the paintings 120 millions $ and the the stock price rose to unprecedented heights, for internet companies they pay crazy amounts of dollars, like Facebook‘s value estimated at once $ 104 billions, which last year received $ 1 billion profit, well below inflation, but since this is a very risky investment – changes in fashion, someone can find that there is a new site, which is cooler and Facebook can go after its predecessor My Space. The world’s most expensive company Apple is estimated 622 billion $ and the next Exson Mobile is estimated 405 billions $, Apple got max profit 2011, because iPad was an unique product. Apple has created at first iPod – a very small computer, then a small computer iPhone and the iPad is larger, now larger iPhone i smaller iPad, what next? These were the unique products, but now Apple only can improve existing products and profits will fall as competitors appear. The Dow Jones index reach 13 275, this is more than before the 2007 crisis and the situation is getting something like the Internet bubble in 2001, but now it covers a wider range economy’s – it is a detonator, US economy is suffering the same diseases as UK, only a milder form, financial stimulus are not working, the cuts will have the same effect, as in UK and a very large amount of money is flowing in the tax havens in USA and around USA and a result will be the second dip and it can be spark and the explosives are the hidden deposits in dollars in the tax havens – 15-20 trillions $ plus trillions $ in the commercial bank’s open accounts, it is 25-35 trillions $ in disposition of very small number of people, so we are talking about a very large deposits. The 30 years of globalization created global system of the tax havens, which become too powerful to reform, that system like a vampire is sucking money from the world economy.
The USA economic elite with help London City, through their greed, created a gigantic financial bomb, whose explosion will have unpredictable consequences and a bomb is growing a every hour, a every day, a every month, a every year, it is sufficient that a small group of global elite would panic and began change their dollars into other currencies and the situation would become out of control, because the amount of money is too big, that could intervene in the central banks, buying up dollars to keep rates, so when the dollar starts to fall down, there is no stop.
A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis – the financial black holes – tax havens, which sucked from world economy 21-32 trillions $.
2. The decreasing dollar market share.
3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar…
4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically impossible to reform it now, as show the tax havens history.
A only way to reform the global financial system and central part of it – tax havens is crash, a only question is when?
I wrote the words about EU even before the EU meeting on 30.06.2012. However, EU meeting decisions can make euro a real alternative to the dollar and that also increases the possibility of my scenario.
When I was writing this, I find Nouriel Roubini interview.
http://www.telegraph.co.uk/finance/financialcrisis/9408062/Nouriel-Roubini-sticks-to-perfect-storm-in-2013-prediction.html
A best proof, that I am right, I got from Roubini Global Economics Project, I send this letter as comment to RGE Analyst Blog, it was divided in four parts, because number words was too big and every comment must be app0roved. A first part was approved very fast, but with second part it was a long stop, you can see a result:
http://www.economonitor.com/analysts/2012/08/31/live-blogging-the-financial-meltdown-nouriels-26-early-warnings-and-predictions/#IDComment434274593
All comments appreciated, both the terse and the long ones. Link to the Rickards comment about announcing that QE is underway, to begin later- perhaps, the Chairman and his mouthpiece(s) have sort of already done that.
Re gold/Tsy’s/stocks all moving together, yes they have been moving together for some time– but at least in theory, that cannot continue “forever”. At these levels, one “should” be wrong. For those who unlike “dd” may not be thoroughly versed in financial asset theory, what he and other commenters are alluding to is that the “stock market” is “pricing in” a future of faster nominal GDP growth than the current interest rate structure is also “pricing in”. This is Jeremy Grantham’s analysis, which is that the general stock averages are equally (un)attractive as high-quality bonds (referring to US markets). So in that case, who needs the greater volatility of stocks? His analysis is also that “high quality” (he does not define) US stocks offer a much higher prospective return than either the average stock or any US bonds. I also agree with this, interim crash possibility fully understood. The DIA ETF yields 2.47% (after expenses). This beats a 10 year T-bond and almost equals a 30-yr bond. After all, total return is theoretical until one sells. Given ongoing Fed inflation, will not dividends likely rise? Whereas, a chip stock that has gone nowhere in price for eons and has never paid a dividend (the opposite of the Dow stock Intel = INTC) may continue to be nothing more than a trading vehicle. Thus my favoring of Grantham-like high quality stocks over bonds now for the long run.
However, timing-wise, yes I agree, there is a lot of risk now as I’ve discussed for a long time.
But hey- the news out of Euro-China can turn good again, can’t it?
Doc! a lower case convert, are you? (merely noting the handle, although i recall you may have mixed it up in past).
on the commentary, what you said. longer-term it is likely that some asset classes are mispriced. and with private and public credit having ripped and in some cases still ripping, plus stocks at a healthy level(IMO), given the economic conditions i think there are more pitfalls than springboards.
(A/a)gree
I wanted to add one point. As a chart in the body of this linked blog post from Acting Man shows, the smaller stocks are lagging the larger ones. http://www.acting-man.com/?p=19417
By pointing to the shares of stronger companies as perhaps being the best of a paltry set of investment alternatives, I am making no differentiation between those of large and small companies; I mentioned the DJIA in my comment only as an example. Value at the “right” price exists where one finds it. I don’t see much difference right now between the general richness of the prices of smaller vs. larger stocks.
[...] The Daily Capitalist, DoctoRx isn’t taking QE3 for granted just [...]
At the risk of simplifying things a tad. I don’t see the financial crisis as the real issue at hand. I see it as merely the first symptom, (call it a sneeze) of the real issue. Resource collapse. The Global economy has done one thing in it’s pursuit of greed and profit. Made all countries inter dependent and no single country (barring some minor exceptions) independent. Well in a capitalist system driven by the need for infinite growth with finite resources I foresee a major “problem” looming. Problem defined as driving off a 1000 foot cliff in a car with no airbags or a safety belt. The financial crisis is the obvious precursor to this. I hate to be cliche but it really is a balloon inflating above the sustainable line. The equation (Constant growth with finite resources) can only leads to one place. As countries slowly start to implode and essentially become non-self sustaining they borrow. But they borrow with no intention of repaying because they can’t. (back to the equation again). What we are witnessing is the balloon inflating. It will burst because printing money doesn’t affect the equation one iota. The overall resource value is declining relative to population irrespective of how much you print.