Posts Tagged ‘Quantitative Easing’

Now Bad News Is Bad News

Friday, September 12th, 2014

With the end of quantitative easing due to take place next month, reality may once again have an impact on financial markets.

Since QE began more than five years ago, markets have soared on bad news and dropped on good news.  That’s because investors believed that bad news would prolong QE and good news would make it unnecessary.

And there’s been enough bad news over the past five years for the stock market to repeatedly surge to new record levels.20140911_claims

With QE ending in the U.S., but probably soon beginning in Europe, the Federal Reserve Board needs a different tool to manipulate the markets.  While Chairman Janet Yellen and others have been talking about “macroprudential supervision” as the next step, that line is selling like old fish, because no one has explained what Ms. Yellen means by “macroprudential supervision.”

The good news is that good news should finally be good news.  Fundamental performance and economic recovery should mean something again.

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Less than “Less than Zero”

Friday, September 5th, 2014

In June, the ECB lowered the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.  This week, surprising just about everyone not named Mario Draghi, the ECB lowered the rate by another 10 basis points to -0.20%.

14950766600_d52f0bba78_zAs we wrote when the less-than-zero rate was announced, “banks will pay a fee on money they fail to lend out.  Whether or not that stimulates the economy, it could encourage banks to take more risk, approving loans that otherwise may not have been approved.  Isn’t that what caused the financial crisis?”

Zerohedge explained that while rates were already negative, “Now they’re even more negative. Because in the world of Central Banking if something doesn’t work at first the best thing to do is do more of it. Whatever you do, DO NOT question your thinking or your economic models at all.”

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Going Prudential In a Macro Way

Thursday, August 28th, 2014

Obfuscation is an art form in which the Federal Reserve Board excels.  It follows a few simple rules:

  • Never use a word or phrase that is simple and widely understood when a word is available that is less well known (e.g., “obfuscation” instead of “confusion”).
  • Act as though you know what you’re talking about.
  • Act as though everyone else knows what you’re talking about.
  • Ignore failure and act as though you’ve succeeded.  No one will know the difference.

The Fed’s expertise in obfuscation is clear in its choice of strategies that are allegedly designed to create economic growth, but are really designed to prop up the bloated stock market.Janet Yellen

First, we had “quantitative easing.”  The Fed couldn’t just call it bond buying.  What does “quantitative easing” mean?  Is it the opposite of qualitative easing?  Or quantitative hardening?  How does one go about easing quantitatively?  What exactly is being eased?

The Fed couldn’t just reduce its bond buying – it had to “taper” its bond purchases.

The Fed also flirted with “forward guidance,” which, as we’ve previously explained, is simply talking about what you’re going to do without doing it.  Mario Draghi, chair of the European Central Bank has perfected this technique.  Too bad The Fed hasn’t, because it could have avoided buying trillions of dollars in bonds it will soon have to sell. (more…)

Bad News – The Economy May be Recovering

Friday, August 1st, 2014

“This is what it sounds like when doves cry.”

                                                                    Prince

Imagine this.  After more than five years of mediocre economic growth and a quarter of “negative growth,” the economy grew at a rate of 4.0% in the second quarter.

At least that’s what the Bureau of Economic Analysis (BEA) said.  The BEA previously estimated that the economy shrank by 2.9% during the first quarter, but has readjusted its analysis and now says that the economy shrank by 2.1% in the first quarter.Inventory

From 2.9% “negative growth” to 4.0% positive growth is a swing of nearly 7% in a span of just three months.

That’s quite a swing … but do you believe it?  After all, Q1 growth was reported at -1%, -2.9% and finally -2.1%, so how much confidence should we have in the BEA’s first report for Q2?

Meteorologists are often criticized for erring on the weather, but they’re forecasting.  The BEA is trying to tell us what happened more than a month ago – and still can’t get it right.

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The QE Apocalypse

Friday, July 11th, 2014

The end is near.

The Federal Reserve Board has now put a date on the quantitative easing apocalypse, letting us know that bond buying will end in October – unless the central bank changes its mind, of course.

The October ending is not unexpected.  The Fed has been cutting back bond purchases by $10 billion a month since last year and it doesn’t take a math wizard to figure out that there will be nothing left to taper post-October.

Yet this news, reported in the just-released minutes to last month’s meeting of the Federal Open Market Committee, is being treated as a revelation.  It was, for example, the lead story in The Wall Street Journal, which typically doesn’t lead with news that was discussed last year and made official at a meeting that took place a month ago. Portugal

The real news, though, is what wasn’t discussed – the end of near-zero interest rates.  As a result, rather than pushing yields up and bond prices down, release of the meeting minutes had the opposite impact.

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Sprinkling the Fairy Dust of Illusory Riches

Thursday, July 3rd, 2014

When the Bank for International Settlements (BIS) calls central bank market rigging “the fairy dust of illusory riches,” it’s time to pay attention.

The BIS is the central banks’ central bank.  Its role is “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”

To provide the statement with some context, and to alert you about what else you can expect from central banks moving forward, we provide a summary of other key points made in this year’s BIS annual report, which is appropriately titled, “In Search of a New Compass.”Compass

First, there’s recognition that easy money policy has gone far enough.  That’s self-evident, but of special interest when you consider the source.  BIS notes that despite a pickup in economic growth, the world economy “has not shaken off its dependence on monetary stimulus.  Monetary policy is still struggling to normalize after so many years of extraordinary accommodation.”

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Prozac Nation

Friday, June 27th, 2014

It’s all stress-free bliss these days … at least for anyone who’s not paying attention.

Has someone been putting anti-depressants in the water supply?  That’s one way to explain Wednesday’s non-reaction to the report that the economy shrank by 2.9% in the first quarter – not the 1% drop previously reported.

It would also explain continued investor complacency reported last week, with the VIX (volatility index) approaching single digits.  And it would explain the plunge in junk bond yields to 5.6%, which is a full 3.4% points lower than the decade-long average of 9%.

GDP GrowthYet investors showed that they still have a pulse, when they took the Dow down 100 points after James Bullard, president of the St. Louis Federal Reserve, announced that an interest rate hike may take place in the first quarter of 2015.

So consider this in context.  In addition to the slumping economy, we have Russia’s continued takeover of Ukraine, which is now being overshadowed by the continued takeover of Iraq by Muslim terrorists known as ISIS and the possibility of U.S. military intervention.  We have civil war continuing in Syria and continued nuclear development in Iran, in spite of the lifting of sanctions.  We have U.S. veterans in need of medical treatment being ignored while the Veterans Administration fudges numbers.  We have the missing e-mails of Lois Lerner and six other IRS employees who allegedly targeted conservative groups.  We have continuing fallout in the healthcare industry from the pains of implementing Obamacare.  We have a stock market so overblown that price-to-earnings ratios are at levels higher than they’ve been through 89% of the history of the S&P 500.

So what’s moving the market?  A statement made by a Fed board member that repeats a statement he previously made.

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The Market’s Missing Mojo

Friday, June 20th, 2014

Easy money policy has its share of side effects.  The stock market continues to hit new highs, thanks to the Fed, but the level of risk that investors and taxpayers are exposed to also may be close to new highs.

The market for U.S. Treasuries, as one example, is a “risk on” market.  As Bloomberg put it, “Just because U.S. Treasuries look more and more stable doesn’t mean they are.”

Some may mistake a lack of volatility for low risk, but the lack of volatility appears to be the result of less liquidity, not lower risk, as the Fed has purchased trillions of dollars in bonds and banks are pulling back from debt trading. Bubble PE_0

Before the financial crisis, lower volatility resulted in more trading, but in this case trading volume has dropped.

“What’s happening instead,” Bloomberg reported, “is unprecedented central-bank stimulus has sent everyone into the same risk-on bets, while it’s also becoming more difficult to trade as banks shore up their balance sheets in the face of new regulations.”

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Translating Fedspeak

Friday, March 21st, 2014

While the week’s biggest news has taken place in Russia, Ukraine and China, it’s the news out of the Federal Reserve Board’s Federal Open Market Committee that’s most in need of translation.

The Fed regularly uses language that no one understands, because if America’s taxpayers really knew what’s been happening, they’d totally freak.  Keep that in mind and proceed with caution as we attempt a translation of Fedspeak from new Chair Janet Yellen’s first press conference:

“ … the FOMC’s outlook for continued progress toward our goals of maximum employment and inflation returning to two percent remains broadly unchanged.”

The dots are moving and we’re not achieving the results we expected, but you won’t hear it from me. Yellen 2

“Unusually harsh weather in January and February has made assessing the underlying strength of the economy especially challenging.”

The economy still stinks, but we’re going to blame it on the weather.

The unemployment rate, at 6.7 percent, is three‐tenths lower than the data available at the time of the December meeting.  Further, broader measures of unemployment such as the U6 measure, which includes marginally attached workers and those working part‐time, but preferring full‐time work, have fallen even more than the headline unemployment rate over this period.  And labor force participation has ticked up.

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Mission Not-Quite Accomplished

Wednesday, February 26th, 2014

Remember when the announced goal of quantitative easing (QE) was to reduce the unemployment rate to 6.5%?

It’s now 6.6% and heading down.  So can we expect QE to finally end?MW-BS355_CIVPAR_20140110090655_MG

Not really.  While new Fed Czar Janet Yellen talks about continuing tapering, many believe that tapering will stop and some believe she may reverse direction and increase the rate of bond buying.  Even if The Fed continues to cut back bond purchases by $10 billion a month, it will still take more than six months for QE to end.  Minutes of the Federal Open Market Committee’s January meeting, which were released this week, suggest that the final taper would take place in October 2014.

More specifically, the minutes say, “Several participants argued that, in the absence of appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting.  That said, a number of participants noted that if the economy deviated substantially from its expected path, the Committee should be prepared to respond with an appropriate adjustment to the trajectory of its purchases.”

Tapering aside, does anyone really think the unemployment rate is really decreasing?

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