Bernanke's Bluff: QE II won't Really Happen?

[karim0028]

Re: Bernanke's Bluff: QE II won't Really Happen?

Kostohryz also said he was shorting gold a year ago. But, his trading record does look pretty good besides.

I do not believe that the same skills in predicting short term market direction and predicting what the Fed will do are related. Has he made any accurate Federal Reserve predictions before?

short term trading and long term market forecasting are two VERY different things.... A trader uses risk to reward and technical analysis and on that basis keeps taking trades that have a history of winning, as long as you keep taking trades w/ the same R/R profile you can be very profitable over multiple trades.

Forecasting takes time, effort and research. Its more along the lines of game theory.

[jk]

Re: Bernanke's Bluff: QE II won't Really Happen?

Are there any immediate or nearterm signs of deflation large enough to make the FED act decisively with $1-3 trillion QE? Not even during the collapse of 2008 did the FED intervene with anything like $3 trillion. It would take something at least as bad.

the economy looks to be slowing again as the stimulus wears off.

GRG55 mentions an attempt to prevent a rise in the dollar as a reason for QE2.

devaluing the dollar is the guaranteed way to produce inflation.

I agree that they have many options, and which option or combination of options, will determine how and to what degree the economy will be impacted, and what investments will be successful.


The FEDs last move was a baby step in reinvesting proceeds from MBS to keep their balance sheet at the same level. If they decide to go with another minor QE step, it may not only be ineffective, it could crash a stock market with already high expectations built in.
.

who knows? 70% of the market volume is high freq trading. individuals are out already for the most part. it's the institutions that count, and the managers running opm. and they only care about relative performance anyway.

[Glenn Black]

Re: Bernanke's Bluff: QE II won't Really Happen?

I read both his articles. These two articles seem to make sense.

For clarity, I believe that the US Fed (and all other Central Banks) have been more or less disconnected from helping the economy. By poor policy, or poor implementation of the best policy, Central Banks can make things a lot worse, but they are helpless at making things better.

I agree that governments can think about massive stimulus programs, but the threat of following in the footsteps of Greece and Iceland chills and chastens these thoughts. So they commiserate, say pretty things, re-arrange the existing furniture, and make a few token programs, but can't make much happen.

However, Kostohryz discusses neither employment levels, nor the housing market. I believe these are the two most powerful driving forces, as they have the most direct impact on the consumer, taxpayers, and citizens.

My crystal ball says the following:

1. To deny a problem stops it from rapidly getting worse, but it also continues the problem. So we continue on with our housing market problem.
2. The employment problem is the true and best measure of an economy. Due to all of the above, employment will steadily get worse, in spite of everybody's attempts to deny, find a bright spot, or pointing to momentary blips and exceptions so as to convince the masses that there is hope, and a turn around is starting any moment.
3. Many will be hurt even worse due to their constant believing, disappointment, and re-believing.
4. As an analogy, they continue to bet red on the great roulette wheel of life, afraid to change their bet to black, in case they change at just the time when their luck come back again and red re-appears. Each loss causes then to double their previous bet, as they hope the next spin will surely be red. Unfortunately the roulette wheel spins too quickly for them to see that all the numbers on the wheel have gone black. They continue to bet red, and hope red will happen again, even though the red is all gone from the wheel.
5. Who will point out this significant change on the roulette wheel to the wayward bettors?
6. The price of things we must buy (ie. water, food, etc.) will continue to inflate in real dollars.
7. For all other goods and services (due to the impact of market size and price/volume fluctuations), these purchases (if we can afford to purchase) will either disappear from the market, deflate, or inflate; each following its own path.
8. We have enjoyed the price reductions from mass production and growing markets for many decades (T.P. Wright's Learning Curve ~8% cost reduction with every doubling of production volume). Now we will see the reverse trends: fragmented markets, dropping market penetration, and dropping demand within those markets; leading to fewer suppliers, less competition, and fewer goods manufactured with which to spread the fixed overhead costs of the supply chain. The benefits produced by the Learning Curve are swamped by the Price/Volume rules of economics (lower volume means higher prices). The price of goods inflate in both absolute and relative terms. Prices inflate in both fixed dollars of today, and inflation adjusted dollars.
9. As employment rates drop, and most people who have jobs celebrate having a job at the same wages as last year (instead of what happened to many of their family, friends and neighbours), the nation's average wage rate (factoring in all the zero wages due to unemployment) will continue to drop.
10. Therefore life will become less & less affordable, and all will have to re-align their spending priorities, or go deeper into debt (as some will choose to do). Central Banks and governments will adopt policies to enable and extend easy credit so as to prevent "worse" things from happening, so greater and greater debt will be the path of choice for many.
11. Eventually, there will be a renaissance of self-sufficiency, and self-employment by simultaneous but independent leaders, most who will gain a growing group of followers. This will take decades and generations to slowly re-ignite society, and will only be a minuscule fraction of the total population for a long period of time (spreading at 7% growth rate per year (fast for social movements), this renaissance will take 300 years to get adopted by 6 billion people. Before this spread comes to maturity, the other determining factors (population, food, &/or energy) may bring it all to an incomplete sudden stop. If these 3 other forces are defeated or avoided, in the interim most people will succumb or drift; reduced to subsistence living day-to-day for generations.
12. Where to invest now for 100 years from now? Try spare parts manufacturers & distributors, recycling, exchange, bartering, 2nd hand shops, repair services, etc. for the truly "essential services" (eg. food, cloth, clothes, leather, shoes, food cooking appliances, shelter, building material, etc.) and their essential equipment.

Have a great day (while you can)!

[medved]

Re: Bernanke's Bluff: QE II won't Really Happen?

Occasionally I read articles on Minyanville.com, some of which are quite good.

This guy is an ex-banker who has made at least two outstanding calls: (1) he called the very bottom of the equity market in Mid-March 2009, and (2) he predicted the EU Sovereign Debt Crisis about six months in advance.

I don't know if he's profited from the EU Crisis, but he sure made a lot of money by going fully invested in stocks back in March/April of 2009!

QUESTION: is he making sense in these two articles? I would like to hear opinions from this erudite and intelligent community of iTulipers.

IMHO, he is not making sense for a very simple reason. Even if the answers to his questions are right, they are irrelevant.

Keynesian socialism ran its course in all directions. There is too much debt everywhere already, the FED cannot control the economy by manipulating debt as it always did. The next step is Marxist socialism, i.e. direct and massive .gov intervention in the economy: targeted subsidies (including .gov subsidized ultra-low interest rates), takeover of “important” industries (anything AGW-related, housing, health care, education etc.). This will also include protectionism and organizing trade wars to make sure newly-printed money goes in the “right” direction etc.

Democrats will lose some power in the coming election. The next congress will pretend to enforce some minimal bipartisan “austerity”, which will fail and will be replaced by the next .gov – controlled stimulus. Stock market will move sideways for years, it is too important to be left alone and crash. I am sure the .gov learned its lessons in 2008, so we will not have big crashes anymore.

The real test for this scenario is the first sovereign default in Europe or bubble crash in China. I think, it will only prolong this mess, because most money will move to USTs again.

[Jay]

Re: Bernanke's Bluff: QE II won't Really Happen?

i hope you're right. a replay of the '70s is the most positive scenario i can imagine. [and the '70s were not so wonderful.]

Just because it may inevitable, it may not be enjoyable!

[Jay]

Re: Bernanke's Bluff: QE II won't Really Happen?

- The Dollar looks oversold imo, and if the USA economy continues to soften [Rosenberg's 4Q zero growth scenario] then it isn't hard to see another acceleration in the pace of deleveraging...which should put a bid under the US Dollar later this year or 1st Q 2011 as demand for Dollars to pay down debt increases.

- This raises a scenario whereby the Fed needs to implement QE2 in order to prevent too much of a rise [or any rise?] in the US Dollar, as opposed to trying to debase it further [as measured by the index].

- For the next couple of quarters this would seem the most benign scenario for the Fed, if it was to unfold as I have described. And I don't think the Fed is looking beyond a couple of quarters at most.

This process of deleveraging and Fed response has happened once already, and I expect we will see it multiple times in the future, yet with exponentially larger dollar figures until we have a new currency. I'm not one who thinks that we will ever get an elected legislature, united in austerity yet incorruptible, to pass serious lasting fiscal restraint. The astute and lucky might be able to trade the seesaw, I'm hunkering and not changing my allocations much. I also think this economic ping pong could last much longer than most think.

[we_are_toast]

Re: Bernanke's Bluff: QE II won't Really Happen?

This QE2 has me pretty puzzled. I have 3 questions that I can't find consistent answers.

Why?
How?

CalculatedRisk has an excellent take on this, which falls pretty much in line with some of JK's comments.

...

Remember, on August 27th, Bernanke said the FOMC would "strongly resist deviations from price stability in the downward direction". The above change to the FOMC strongly suggests additional policy action is coming.

Also - the FOMC and staff forecasts will be presented this coming month, and these forecasts will probably be revised down again. That will probably meet the "significant weakening of the outlook" criteria.
...

This probably pushes some investors into other assets as well, and historically quantitative easing has led to increases in asset prices in the short term. This is why I've been noting in the comments that "bad economic news" is perhaps "good stock market news" - since investors are now anticipating QE2 to be announced as early as November 3rd barring a sudden improvement in the news flow.

Although there will be plenty of economic data between now and the two day meeting on November 2nd and 3rd, the two key releases are the September employment report (to be released on October 8th) and the Q3 GDP advance estimate (to be released on October 29th). Barring a significant upside surprise in one or both of those reports, it appears QE2 might arrive as early as November.

http://www.calculatedriskblog.com/20...e-and-qe2.html

[herbkarajan]

Re: Bernanke's Bluff: QE II won't Really Happen?

good comments... just like Britain, indeed. And what did Britain do, when 'stretching it out' no longer made sense?

A despatch of September 17, 1931 to the New York Times reported that Sir Ernest Harvey, Deputy Governor of the Bank of England, and other financial leaders had gone that evening to the House of Commons to convey to Prime Minister Ramsay MacDonald “a grave warning that the stability of the pound was again imperiled.” “It is stated that they gave two reasons for this emergency – first, the naval unrest, and, second, the report that a general election was imminent.”
Saturday September 18 was the day the British cabinet officially decided to default on Britain’s gold obligations. MacDonald called it the most solemn conference ever held at 10 Downing Street. True to form, it was the Bank of England that proposed the abrogation of the gold standard through the mouth of its Deputy Governor, who announced that the only course of action left was for Britain to leave the gold standard. [Kunz, p. 135] Harvey deliberately created the false impression that he had discussed the situation after the close of trading on Friday with Harrison of the New York Fed. This was not true. Harvey, in response to a question from MacDonald, added that he did not think it worthwhile to raise even 100 million pounds ($450 million) if people were only going to withdraw it. MacDonald quickly agreed to default, and the rest of the cabinet meeting was devoted to technical details of how to terminate the gold standard. [Kunz, p. 135]
It was only on Saturday, September 19 that Harvey informed Harrison of the New York Fed of what the British government was now doing. Harrison was described as greatly shocked by this decision, which came as a surprise to him. Harrison persisted for a time in exploring possible alternatives to London’s default, and offered further loans. [Kunz, p. 137] But the Bank of England remained committed to immediate default. More help could have been obtained from Paris as well. Then there is the embarrassing fact that during the last week of the gold standard the Bank of England’s gold stocks INCREASED from 133,300,000 to 135,600,000 pounds. [Palyi, p. 277]
THE END OF THE WORLD

On Sunday, September 20, 1931, the British government issued its statements announcing its decision to “suspend for the time being” the clause of the Gold Standard Act of 1925 requiring the Bank of England to sell gold at the fixed price. All the other elements of the official British mythology were also present. “His Majesty’s Government have no reason to believe that the present difficulties are due to any substantial extent to the export of capital by British nationals. Undoubtedly the bulk of withdrawals has been for foreign accounts.” The bloody wogs, as we see, were once again the root of the problem. Furthermore: “His Majesty’s Government have arrived at their decision with the greatest reluctance. But during the last few days international markets have become demoralized and have been liquidating their sterling assets regardless of their intrinsic worth. In the circumstances there was no alternative but to protect the financial position of this country by the only means at our disposal.” As we have seen, there were other means. Finally, there was the obligatory stiff upper lip: “The ultimate resources of this country are enormous and there is no doubt that the present exchange difficulties will prove only temporary.” [New York Times, September 21, 1931]
The worldwide shock was severe. In the words of Jackson E. Reynolds. then President of the First National Bank of New York, “when England went off gold it was like the end of the world.”


compillied by W Tarpley 1997

[World Traveler]

Re: Bernanke's Bluff: QE II won't Really Happen?

I graduated from college in 1970. I changed jobs every couple of years during the 1970's and I was ALWAYS able to get a next, decent job. (And I was a History major undgrad). Same with my friends.

Jobs were just not that big a problem in the 1970's, despite the economic malaise and inflation. And due the the strength of unions and the fact U.S. was still primarily a domestic, manufacturing economy, wages also rose, tho obviously not as much as inflation.

That won't happen this time around. The middle class squeeze will be MUCH worse than in 1970's, via a bad job market and inflation-eroded savings. Looks like the Fed's big bet is that keeping asset prices as high as possible will off-set these. But as the ZeroHedge article points out, their strategy works best for people who already have a lot of assets, a definite minority in the U.S. And yes, some mortgagees will be helped, but not enough to offset the much larger impoverished group.

Which leads me to ponder...does the Fed serve the U.S. economy or the banks that are its shareholders? Their actions seem to clearly answer that question.

[goadam1]

Re: Bernanke's Bluff: QE II won't Really Happen?

There is too much yammering about qe2 due November 3 for it to be real.

[Rantly McTirade]

Re: Bernanke's Bluff: QE II won't Really Happen?

Which leads me to ponder...does the Fed serve the U.S. economy or the banks that are its shareholders? Their actions seem to clearly answer that question.[/QUOTE]


Sorry to be blunt.........but DUH!!!

[Glenn Black]

Re: Bernanke's Bluff: QE II won't Really Happen?

h'mm no comments by anybody? i'm disappointed

[flintlock]

Re: Bernanke's Bluff: QE II won't Really Happen?

Nice list, but you forgot HIGHER TAXES!

I think we will see increasing self-sufficiency to some degree, but also more giving up and trying to eek out an existence on the Dole. Have yourself declared "disabled" for some obscure reason, sign up for every possible assistance program, get your section 8 housing, food stamps, etc. Make a little cash on the side of course. At some point many, especially the "educationally challenged" , will say, " what's the point?" Not when open borders will continue to guarantee that any job that opens up, no matter how low paying, will go to the next illegal immigrant in line, coming from a country without a welfare state to provide a backstop. Can't blame them, they are just trying to survive. The US is a sponge. Soaking up all the world's excess humanity. Taxes will skyrocket to pay for all this. Which makes the US an even worse place to do business.

[we_are_toast]

Re: Bernanke's Bluff: QE II won't Really Happen?

This QE2 has me pretty puzzled. I have 3 questions that I can't find consistent answers.


How?
How much?

I'm not sure if this has been posted elsewhere, but it looks like the FED is leaning to a lot of baby steps rather than a big Poom. I'm not sure how markets will react to this, but there are certainly some big expectations building up.

Rather than announce massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.

...

Under the alternative approach gaining favor inside the Fed, it would announce purchases of a much smaller amount for some brief period and leave open the question of whether it would do more, a decision that would turn on how the economy is doing. This would give officials more flexibility in the face of an uncertain recovery.

...

In deciding how to resume its large-scale purchases, if it opts to do so, the Fed is considering both the potential benefits of pushing down already-low long-term interest rates and the potential risks, particularly to its credibility in financial markets about its ability and willingness to reverse course if the economy rebounds or inflation accelerates.

...

Under a small-scale approach, Mr. Bullard says, the Fed might announce some still-undecided target for bond buying—say $100 billion or less per month. It would then make a judgment at each meeting whether continued action was needed, he says, based on whether "we're making progress toward our mandate of maximum sustainable employment and inflation at our implicit inflation target."

There are many open questions. One is size. Mr. Bullard says doing more than $1 trillion of purchases per year would give him "pause" because that's how much net debt the Treasury will issue this year, meaning the Fed would be financing it all. There is also a question of whether the Fed might tie further action to movements in the unemployment rate, inflation or other metrics.

...

http://online.wsj.com/article/SB1000...145769804.html

[jk]

Re: Bernanke's Bluff: QE II won't Really Happen?

I'm not sure if this has been posted elsewhere, but it looks like the FED is leaning to a lot of baby steps rather than a big Poom. I'm not sure how markets will react to this, but there are certainly some big expectations building up.



http://online.wsj.com/article/SB1000...145769804.html

sounds like bernanke's qe version of greenspan's "baby step" 0.25 point rate changes. i expect similar efficacy. and only $100/billion/mo.