Enjoy The Ride

10 Jun 2013, 02:44 PM

Andrew, the most important factor is not the composition of assets on the Fed's balance sheet.

The effect of the Fed purchasing 85 billion dollars worth of assets is really what we should be focussed on. Bubbles have been blown in the debt markets including Junk and Sovereign (Italy, Spain, France etc). Equity markets and REIT's, just to name a few.

Sure the assets on the Fed's balance sheet may be sound, but the assets on the SIFI's the Fed will ultimately be accountable for now represent similar risks which led to the GFC. It is not a point lost on the Fed.

Andrew Judd

10 Jun 2013, 03:37 PM

All of this may well be true however i was wondering if Count could tell me why he thinks the Fed is buying risky assets, and from your reply it was not clear to me what you thought either.

Count du Monet

10 Jun 2013, 10:16 PM

The FED is buying the stinky stuff the free market won't buy, if it is such good stuff then where is the hand of the profit seeking free market? There's sellers for the shit but no buyers other than the ensnared taxpayer. And if something goes wrong they'll just suck some more blood out of the taxpayers (and in reality mainly the rest of the world that uses the USD as reserve).

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Why QE's job is almost done

Stephen Koukoulas

It's jobs, jobs and more jobs.

The US economic recovery has taken a giant leap forward with 195,000 people gaining jobs in June, the unemployment rate remains steady but is well below the recession peak of 10 per cent and the participation rate showed a ticking up for a second straight month. Also encouraging for the economic growth optimists was a lift in wages with average hourly earnings rising by 0.4 per cent in the month, a factor that will support consumer confidence and spending power.

Making matters better in the US were upward revisions of 70,000 to the level of employment in the prior two months, which means the six-month moving average for job creation is a robust 202,000 per month.

The health of the labour market will be a defining issue for the US Federal Reserve and its chairman, Ben Bernanke, as they turn their attention to the microsurgery of phasing out the current mass quantitative easing and super-easy monetary policy. It will be a long road to eventually normalise monetary policy in the US, but with each extra snippet of favourable news, the easier and closer that goal becomes.

It is now strikingly obvious that the Fed will start scaling back its QE, the only questions are when will it start and how rapid the phase out will be. The markets know this and it is being reflected in the bond market crash of the last few months. That unfolding bear market for bonds saw the 10 year government bond yield jump 24 basis points on Friday in reaction the jobs numbers to 2.74 per cent. In less than three months, the 10-year yield has risen a thumping 100 basis points and it is double the record low 1.40 per cent registered less than a year ago.

There is now no doubt yields will keep rising as the market negotiates its way around stronger economic growth, higher inflation and the absence of QE from the Fed.

The stock market had a fire lit under it with a 1 per cent gain on Friday. This saw the S&P 500 close just 2 per cent from a record high and all of the market foibles that surrounded Bernanke’s discussion of a scaling back of QE is seemingly now forgotten. Companies build profits and earnings when the economy is strong and the market is slowly realising this to be the case in the US at present, even if monetary policy is about to be tightened.

The solid employment result fits with a range of other positive news on the US economy.

Having been smashed into depressionary conditions, housing continues to move higher with prices, construction and builder confidence all lifting appreciably over the last two years. Consumer sentiment is also at five and six years highs and private demand, the engine of growth is running ahead strongly.

The improvement in economic conditions is such that the Fed is likely to be a little more forthcoming in the weeks ahead with its rhetoric surrounding the phasing out of QE. It would not be surprising to see a scaling back of the $US85 billion a month of bond buying starting soon, perhaps in the next couple of months.

A strong US economy has a range of other implications.

For the economy, it is hugely favourable. The US is still the largest economy in the world and if it can register a decent expansion, this will inevitably spill over to the likes of Chinese and European manufacturers and will likely see demand for some commodities increase.

For markets, it will probably mean the US dollar appreciates and with that, the likes of the Euro and the Australian dollar will fall further. This is happening already and in the wake of the US jobs data, the Australian dollar fell to a new three year low of US$0.9065, while the Euro is trading at 1.2825.

The US recovery from the Great Recession continues to unfold. It has been slow but has been driven by a range of quite radical policy settings. The bottom line is that these policies have worked and the economy is gaining self-driven momentum.

The time is fast approaching for these radical policies to be phased out and for monetary policy to start to normalise. We are not there yet, but it will be interesting to see when speculation is building about the Fed’s first rate hike in this cycle, simply because the time is near when zero interest rates will no longer be needed.

Read more: http://www.businessspectator.com.au/article/2013/7/8/economy/why-qes-job-almost-done

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Bank of England, ECB reaffirm easy policy

August 2, 2013 - 9:18AM

The Bank of England has left its bond-buying program on hold as Governor Mark Carney trains officials' focus on providing forward guidance on policy to cement the economic recovery.

Armed with new quarterly economic forecasts, the nine- member Monetary Policy Committee held the target of its quantitative-easing program at 375 billion pounds ($567 billion), as forecast by all but one of 42 economists in a Bloomberg News survey. It also kept the benchmark interest rate at 0.5 per cent, a record low.

European Central Bank President Mario Draghi pledged the same day to keep rates low for an "extended period". The ECB kept its key rate at a record low 0.5 per cent today, as predicted by all but one of 63 economists in a survey.

Carney took over from Mervyn King last month and will present the MPC's review of steering policy expectations next week after saying in July that changes in bets on future interest rates were "not warranted". With the UK economy strengthening and the euro-area recession showing signs of easing, that may add to the case for holding stimulus and focusing on giving companies and households certainty about rates to encourage spending.

"It was always looking likely to be a non-event ahead of the announcement about forward guidance," said Vicky Redwood, an economist at Capital Economics in London and a former BOE official. "Recent economic news has supported the MPC's forecast for a gradual recovery. Even though the committee might return to the QE option further ahead if the recovery wobbles, we think that it will prefer to wait to see what impact forward guidance has.

The pound strengthened for the first time in eight days versus the euro and erased its decline against the dollar after the decision. Sterling appreciated 0.7 per cent to 86.89 pence per euro as of 12.47pm London time, after weakening to 87.70, the least since March 12. It added 0.2 per cent to $US1.5231.

Carney's first policy decision on July 4 marked the 319- year-old central bank's first steps into guidance, with the MPC issuing a statement that investors' expectations of when the BOE would begin rate increases were premature.

The MPC's statement was a response to a jump in bond yields sparked by Federal Reserve Chairman Ben Bernanke's June 19 comments on the timing for unwinding QE in the US. The increase represented an "unwelcome tightening in monetary conditions" that could scupper the recovery, the BOE said.

The Fed said yesterday that persistently low inflation could hamper the economic expansion and pledged to keep buying $US85 billion in bonds every month.

Since the MPC's July decision, reports have shown the recovery gained traction. The economy expanded 0.6 per cent in the second quarter and unemployment claims fell at the fastest pace in three years in June. Reckitt Benckiser Group, the maker of Nurofen painkillers, said on July 29 that sales growth this year will be at the higher end of its forecast range.

A report today showed a manufacturing index rose more than economists forecast to a 28-month high in July.

Still, credit data show that lending remains weak, suggesting further measures are needed to complement the BOE's Funding for Lending Scheme. Mortgage approvals dropped in June and business lending fell 1.3 billion pounds.

Read more: http://www.smh.com.au/business/world-business/bank-of-england-ecb-reaffirm-easy-policy-20130802-2r32z.html

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Fed bubble dangers in the bargain

Robert Gottliebsen

Last night’s continuation of American quantitative easing (The man with the golden gun, September 19) means Australians are going to enjoy further share market rises and faster increases in dwelling prices.

However in the longer term a prolonged extension of American quantitative easing becomes a more dangerous game for the world because there are at least three global bubbles that could be created. One is our housing market.

New Treasurer Joe Hockey and Reserve Bank Governor Glenn Stevens have some hard thinking to do.

And Australian self-funded retirees’ hopes of better bank deposit rates have been smashed – they will be forced to go deeper into the equity markets to gain a living return.

But first let us understand why global markets completely misread the American scene and the attitude of Federal Reserve chief Ben Bernanke.

The veteran US economists Al Wojnilower was one of the few to understand what would drive the Federal Reserve so my commentary earlier this week was vital in understanding the forces affecting America (Fed nerves will extend past Summers, September 16).

In short, while QE is stimulating the US economy the American budget cuts are having the reverse effect and those budget cuts are going to be more severe. At the same time the rise in US Treasury bond interest rates, in anticipation of a tapering of QE, has curbed American home lending.

American home interest rates are tied to the long-term bonds. US government 10-year interest rates had risen from a low of 1.56 per cent last April/May to 3 per cent earlier this month – that’s a huge rise. Last night yields slumped to a low of 2.67 per cent.

Graph for Fed bubble dangers in the bargain

US 10-year bond yield, January 2012 - September 2013. Source: Bloomberg

That rise in the 10-year bond rate has reduced American mortgage refinancing as well as stunting home-building growth in the US.

These two forces have been mainstays in the recent American economic upturn. In other words Bernanke saw what the end of QE pointed to and did not like it.

To understand why the markets were wrong let’s go to the words of Wojnilower:

”All year long, many observers, including a majority of Federal Reserve officials, expected faster growth than has actually materialised. The data has dashed their hopes time and again, and probably will continue to do so. Despite optimistic readings by the media non-auto consumer outlays remain restrained, the rise in business capital spending seems to be decelerating rather than speeding up, and the surge in home building is slowing.

“Yet, all the same, longer-term interest rates keep on rising.

“Some market participants may be expecting a cresting of fiscal restraint, but it is more likely that fiscal austerity will intensify, narrowing the government deficit further. Additional sequestration is already in the law for next year, and there will probably be a compromise involving further spending cuts in order to avert the impending debt-limit confrontation.

“Spending will be reduced not only because of die-hard Republican insistence, but also because the president appears to view a tamed budget deficit as part of the legacy he wishes to leave behind.

“All in all, federal borrowing may shrink more than private sector borrowings expand, forestalling the faster rise in total credit required to speed up economic growth. Whatever the precise outcome, fiscal developments will tend to reduce rather than raise interest rates.

But prolonged American quantitative easing will have dangerous side-effects for the world:

– European banks will keep playing the yield game and stake their solvency on buying high-risk, high-yielding bonds in European economies. In time this banking bubble is likely to have a sad ending.

– Similarly high yield games will be played in emerging countries with similar long-term dangers.

– In Australia the prolonged QE will create a rush for equity assets including shares and housing. It is in housing where our prices are high by world standards and where there is most danger of a bubble – which Business Spectator documented yesterday with three commentaries:

– In Australia the higher dollar created by our interest rates and the QE driven rise in commodity prices will hollow out our employment creating industries. If the Reserve Bank lifts rates to stem housing the dollar will go through the roof, doubling the blows to employment.

But that’s down the track. It’s time to enjoy the equity rises.

Read more: http://www.businessspectator.com.au/article/2013/9/19/economy/fed-bubble-dangers-bargain