Category Archives: QE

19-May (ZeroHedge) — Last week, Bill Gross did not mince his words when he said that he now “sees bubbles everywhere” and that “when that stops there will be repercussions” but for now Benny and the Inkjets, not to mention his band of merry statist men, who take from the poor and give to the wealthy, are playing the music on Max, and so one must dance and dance and dance. And after one legacy bond king, it was the turn of that other, ascendant one – Jeff Gundlach – to share his perspectives Bernanke’s amazing bubble machine. His response, to nobody’s surprise: “there is a bubble in central banking. We are drowning in central banking and quantitative easing…. And it’s not ending until there are some negative consequences.”

What are those negative consequences? This too should be perfectly expected for regular readers: currency devaluation leads to trade wars (as either is a zero sum game, and in a zero sum game it is very easy to blame someone else for one nation’s suffering and economic malaise), trade wars lead to real wars (see the 1930s), and so on.

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17-May (The Wall Street Journal) — WSJ’s Jon Hilsenrath previews Ben Bernanke’s trip to Capitol Hill next week, and the key questions he faces: how and when to wind down the Fed’s quantitative-easing program, and how to get more Americans back to work.

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PG View: Hilsenrath says the Fed is probably “not there yet” when it comes to pullback from QE. He goes on to say that stock market gains pushes the conversation away from “good” inflation and toward risk of an “asset price bubble.”

Whoa, whoa, whoa! Did he just mention “stocks” and “bubble” in the same breath? I thought that was some form of blasphemy.

By Jon Hilsenrath
11-May (The Wall Street Journal) — Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations.

Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.

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09-May (The Wall Street Journal) — South Korea’s central bank has announced a 0.25 percentage point cut in its policy rate, to 2.5%, at a time when most observers had expected stasis for a few more months. Chalk up another knock-on effect of Abenomics in Japan.

The Bank of Korea didn’t put it that way in explaining its decision, citing instead factors such as sluggish economies in Korea’s traditional American and European export markets. To the extent the Korean won’s exchange rate and the yen warranted a mention, it was to express the standard fear that Tokyo’s ongoing yen devaluation would steal market share from Korean exports.

But Seoul has good reason to worry about Japanese Prime Minister Shinzo Abe’s monetary strategy, albeit not the reason many people think. There is little evidence that Japanese exporters are cutting their prices to gobble up global market share. The danger lies elsewhere.

Tokyo has started a new carry trade, in which global investors borrow yen at ultra-low interest rates, exchange it into other currencies and invest for a higher return. Japan has not suffered in recent years for a shortage of cash, but rather for a shortage of productive uses for capital. Absent economic reforms, much of Mr. Abe’s new liquidity heads overseas.

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09-May (The Wall Street Journal) — The Bank of England held off from injecting more stimulus into the U.K.’s fragile economy on Thursday, but incoming governor Mark Carney is expected to take action to shore up a fledgling recovery within months.

The central bank held its benchmark interest rate at 0.5% and left the size of its bond-buying stimulus program at £375 billion ($583 billion). The decision was expected and both sterling and U.K. government bonds were broadly stable following the announcement. The bank didn’t issue a statement, as is usual when it leaves policy unchanged.

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PG View: The BoE is on hold for now, but when Carney arrives, further asset purchases are widely anticipated.

07-May (Reuters) — The European Central Bank is looking into buying bad loans from southern Europe to relieve the pressure on banks in crisis-stricken countries, the German newspaper Die Welt reported.

The ECB wants to revive asset-backed securities (ABS) which allow banks to pass at least some of the credit risk on to other investors as they try to boost their capital and liquidity buffers to adapt to new regulatory standards – one reason for their reluctance to lend.

In an advance copy of a report due to be published on Wednesday, Die Welt said the ECB not only wanted to improve the framework for asset-backed securities but, citing central bank sources, said the ECB’s Governing Council was also discussing whether the central bank could itself buy these securities.

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PG View: Here we go again…

by Mohamed A. El-Erian
03-May (ProSyn) — After years of tweaks, Japan has now initiated a major shift in its policy paradigm, with reactions ranging from great optimism that the country may finally be lifted out of a quarter-century of economic stagnation, to concerns that the authorities’ dramatic change of course may in fact end up making things worse. But, while debate naturally focuses on Japan’s economic, financial, and political maneuvers, the tipping point could well lie abroad.

Prime Minister Shinzo Abe’s new government has embraced a revolutionary (rather than evolutionary) economic-policy approach that engages several initiatives, some of which were once deemed implausible, unthinkable, or even undesirable. From the doubling of the money supply to additional fiscal stimulus and wide-ranging structural reforms, the new policy paradigm is nothing less than one of the boldest economic-policy experiments in Japan’s post-war history.

To demonstrate their seriousness, Japanese officials moved quickly to commit to measurable metrics. On the policy input side, they have specified and begun to implement purchases of securities totaling $75 billion per month (three times as much, in relative terms, as the US Federal Reserve currently purchases under its unconventional monetary-policy regime). On the output side, and after many years of persistent deflation (prices fell 0.5% last month), Japan is now targeting a 2% inflation rate within two years, thus underscoring its commitment to avoid a pre-mature withdrawal of monetary support for growth.

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01-May (ZeroHedge) — With the Fed now openly warning that there may actually come a time when the ‘flow’ stops; the most recent Treasury Borrowing Advisory Committee (TBAC) report has some concerning statistics for those change-ridden hopers who see a smooth Fed exit, deficit-reduction, and blue skies ahead. While they are careful not shout ‘sell’ in a crowded bond market; hidden deep in the 126 page presentation are two charts that bear significant attention. The first shows what TBAC expects (given the market’s expectations) to happen to interest rates in the US as the Fed ‘exits’ its QE program (taper, unwind, hold) – the result, the weighted-average cost of financing for the US government will almost triple from around 1.6% to around 4.3% over the next ten years. But more problematic is that even with CBO’s rather conservative estimates of the growth in US debt over the next decade the USD cost of financing will explode from around $205bn (based on TBAC data) to over $855bn. Still convinced the Fed can exit smoothly?

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PG View: We are Japan; condemned to moribund growth and perpetual QE. I wonder if Bill Gross (see the previous post) saw the TBAC report before he summarily dismissed the prospect of eventual exit strategies in his latest Investment Outlook.

01-May (Washington Post) — The Federal Reserve on Wednesday broached the possibility of increasing its massive stimulus program if the economy weakens, suggesting it remains uncertain about the fate of the recovery.

The Fed has been purchasing $85 billion in bonds a month in an effort to keep long-term interest rates low and stoke demand. The program is tied to improvement in the labor market, and officials had begun talking about tapering it off after several strong months of job growth earlier this year.

But after its two-day policy-setting meeting wrapped up Wednesday, the central bank explicitly stated for the first time that it could increase, as well as reduce, bond purchases “as the outlook for the labor market or inflation changes.”

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01-May (CNBC) — The Federal Reserve held fast to its ultra-accommodative monetary stance Wednesday, solidified by what board members described as an economy weakened by fiscal policy.

Interest rates will remain at historically low levels as the U.S. central bank will continue its $85 billion a month asset purchasing program, the Fed’s Open Markets Committee decided at this week’s meeting.

While recent meetings have been remarkable for signs of dissent over the long-standing Fed policy, the sentiment this month turned towards concerns about slow growth.

Language in the FOMC statement after the meeting saw one notable change – a declaration that it would increase or decrease the pace of its asset purchases depending on conditions.

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PG View: One other notable change to the verbiage is that the FOMC now sees fiscal policy as “restraining economic growth,” rather than being merely “restrictive.” I read that as ‘Hey Congress and Mr. President, pass a budget with more deficit spending. You can continue to borrow money really cheap thanks to us.’