Posts Tagged “quantitative easing”
Posted by John Forman in Pips Weigh In, tags: ben bernanke, bonds, Fed, fomc, Operation Twist, QE3, quantitative easing, Societe Generale, USD/JPY, volatility
In the end Wednesday, the markets got just about what was expected from the FOMC and Fed boss Ben Bernanke. While a certain notable French bank who shall remain nameless (OK, it was Société Générale) came out with 70% odds of a $600bln round of new quantitative easing (aka QE3), that was an outlier view. Most folks in the fixed income and forex markets (we don’t pay much attention to the stock guys :) ) were looking for a continuation of the Operation Twist program in which the Fed sells short-term treasuries it owns and buys longer-term ones.
These expectations are why in the end the various global markets basically just continued on the course they had already begun earlier in the day, albeit with a little volatility after the FOMC statement and into Bernanke’s press conference. Following the extension of Twist, the Fed chief’s comments about standing ready to do whatever may become necessary were predictable. He’s been saying that for some time now. Why not? It’s true. It’s always true. The Fed will do what it thinks it needs to do when it thinks it needs to do it. Folks seem to read QE3 expectations into that every time he says it, though.
To that end, it occurred to me yesterday that the folks who keep calling for QE at the next FOMC meeting are kind of like the folks who set dates for the end of the world, then when it doesn’t happen they revise to a future date.
The thing that had me sure there was no QE3 coming this week was a comment Bernanke made a little while ago that he was seeing no signs of deflationary risks at present. Deflation risk was a big factor in the justification for QE in prior rounds, so if he’s not seeing that risk now, the odds of QE3 drop despite economic developments. Now, the Fed forecasts released yesterday did feature lower inflation expectations, but nothing leaning toward deflation. That will be something to watch morning forward.
At this stage, the bigger issue at hand is going to be the value of the signals coming from the Treasury market. As I wrote a couple weeks ago, the Fed already owns a large portion of outstanding long-term Treasury paper. The extension of Twist is only going to make that share grow. The bond market guys I work with say basically the Fed will be buying all of the long-dated paper the Treasury issues for the rest of the year. This is going to further shrink the “float” of long-dated securities, which could make the likes of US 10yr yields even more volatile because it will take increasingly smaller volume to move them around.
Considering how correlated USD/JPY tends to be to those rates, the higher volatility in yields could make for some interesting action in that exchange rate. Notice in the chart below how much time the correlation between the two markets is positive and how even when it turns negative it is just briefly and only marginally so. If the 10yr yield becomes less valuable as an indicator due to the Fed’s dominant holdings, we could see the relationship between it and USD/JPY breakdown.
Also, things could get interesting on the short end of the yield curve as well.
The Fed normally holds a lot of short-dated Treasury paper which it uses in open market operations to keep short-term yields in line with policy. The Twist operation has already seen a lot of that paper sold as the Fed has bought long-dated securities. The expectation in the bond market is that the Twist extension will result in the Fed not having any shorter-term paper left. That could create some interesting dynamics at the front end of the yield curve. Considering how important overnight interest rates are to currency exchanges rates, there is the prospect of some periods of unusual activity in the months ahead. As a result, it will be worth keeping track of what the Fed is doing.
This is one of those times when understanding structural elements of the markets can be important.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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History has taught investors to expect a sustained advance in stock prices this time of year, as the so-called Santa Claus rally takes effect. Indeed, returns in December have been positive almost three-quarters of the time over the past 100 years and, more than 80 per cent of the time since 1990. However, Father Christmas does not appear to be in a generous mood this year, as all of the world’s major stock market indices languish below their 200-day moving average.
Santa’s tight-fistedness has not just been confined to risk assets, and even gold, a traditional safe haven, has been caught up in the turmoil. Indeed, the precious metal has dropped some $300 or 16 per cent from the all-time high registered in early-September and, dipped below its 200-day moving average last week for the first time since January 2009, which brought to an end the longest ever streak – 732 days – of consecutive closes above the psychologically important level. Not surprisingly, the breakdown has prompted the precious metal’s many detractors to declare that the more than decade-long bull market in gold is over.
 pricelessgoldandsilver.com The many critics, who have been schooled to believe that gold is nothing more than a ‘barbarous relic’ with little if any intrinsic value, have consistently portrayed the precious metal’s price action as dangerous asset bubble, since it bottomed at little more than $250 per troy ounce in the summer of 1999. The misguided thinking fails to explain why gold has been ascribed value by humankind for at least the last 6,000 years and, has never become worthless. Could the long sweep of history truly be wrong?
More than a decade later and the non-believers’ message remains the same, yet investors who heeded such advice have missed the opportunity to reap a near sevenfold increase in capital invested in the precious metal over the period. Of course, past returns are no guarantee of future performance and, it is fair to say that the bull market in gold is closer to an end than it is to the beginning. Nevertheless, the underlying fundamentals suggest that there is still plenty of time for the precious metal to shine.
It is important to note that the precious metal’s stubborn critics are not the only ones to demonstrate a complete lack of understanding of gold’s attributes, as even the occasional bull has advocated investment in gold on the premise that all the ‘money-printing’ by central banks will eventually lead to unacceptably high inflation.
Such thinking is dangerously misguided, as quantitative easing and the associated increase in banking sector deposits held at the central bank will not necessarily lead to a concomitant increase in the money supply. The traditional multiplier model taught in ‘economics 101’ is wrong, since banks do not make loans according to the level of reserves in excess of statutory requirements but, on the basis of adequate levels of capital and the availability of profitable loan opportunities.
The evidence from both Japan and more recently in the US demonstrates that quantitative easing does not work through the lending channel when the banking sector is capital-constrained and the private sector is reluctant to borrow. Simply put, the large increase in consumer prices anticipated by the naïve bulls that view gold as nothing more than an effective inflation hedge, is unlikely to materialise, as deflation remains the clear and present danger and, particularly so in the euro-zone following the latest summit, which hopes to enshrine pro-cyclical fiscal policy.
Fortunately, the historical record demonstrates that gold performs equally well, if not better, in the presence of a destructive debt deflation. The logic is easy to understand. Individuals scramble for liquidity and flee financial assets during deflations, but the deteriorating credit quality of currency issuers and the resulting loss of confidence, mean that gold is typically preferred to paper currency as a hoarding vehicle, simply because the precious metal is no-one’s liability and always pays off. In essence, gold is an effective insurance policy against a black swan event such as debt deflation.
It is important to appreciate that the precious metal does not require a black swan event in order to perform well. The gold market thrives on uncertainty, something that the equity markets abhor and, typically attracts investors during periods of increased risk aversion. It is said that the only thing that rises during bouts of market turbulence is correlations but, the historical record demonstrates that gold’s correlation with stock prices turns decidedly negative when equity markets stumble. In other words, the precious metal acts as an effective portfolio diversifier and helps to mitigate losses in uncertain times.
The precious metal also serves as a viable currency alternative, which means that it competes directly with the world’s major currencies. Since gold is a non-interest bearing asset, its relative attractiveness is determined by the return available on short-term government debt instruments in each of the major currencies. As the real interest rate falls, the opportunity cost of holding gold decreases and consequently its relative appeal rises. Near-zero interest rates across the developed world combined with quantitative easing programmes that place downward pressure on the associated currencies, means that the hurdle for gold has seldom been so low.
The gold price has come under pressure in recent weeks, which has seen the stale bulls declare an end to the precious metal’s spectacular run. A closer examination of the facts however, reveals that gold is likely to glitter in 2012 and beyond. Far-sighted investors should act accordingly.
Previously posted on www.charliefell.com
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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Posted by John Forman in Events, Pips Weigh In, tags: commodity, economy, Federal Reserve, global, loans, QE2, quantitative easing, treasury, US Treasury Bonds
With the end of this month will come the end of the Federal Reserve’s second quantitative easing program, known as QE2. On Thursday Currensee will be hosting a panel discussion where the implications of the ending of QE2 will be addressed. You can learn more at http://www.currensee.com/endofqe2
In case you don’t really know what QE2 is all about, let me give you the skinny.
Quantitative easing is basically the central bank (Fed, ECB, Bank of Japan, etc.) purchasing securities from the market. This is intended to accomplish a couple of things. One is to stabilize, if not increase, the price of the securities being bought. During QE2 that’s been US Treasury bonds and notes. Because bond prices and yields move in opposite directions, rising Treasury security prices means lower interest rates. This isn’t as neat and clean as when the Fed changes the Federal Funds Rate or the Discount Rate, but at least it could be said that rates would probably be higher without the Fed buying Treasuries simply because of the demand the central bank represents.
The other thing QE does is inject money into the economy. When the Fed buys Treasury securities it “prints” money to do so. That expands money supply, at least on the base level. That’s more money that can be used by the banking system (since just about all money ends up there in one way or another) to create new loans. Of course, in an economy like the one we’re in now where banks have tightened standards and borrowers are not as interested in taking out loans, the impact of QE on loan growth isn’t much.
Where QE is seen as having a secondary impact, however, is on asset markets. The perception of many in the markets is that the increased amount of money in the system has been responsible for the big gains we’ve seen in commodity prices. Since the Fed decided to do QE2 because of the risk of deflation (the opposite of inflation), these rising prices (including those in stocks) are perceived by the market to have been the Fed’s intention. No doubt this subject will come up during the panel.
The Fed has indicated that it will conclude its $600bln of QE2 Treasury purchases this month. That isn’t to say, however, the Fed will be out of the market starting on July 1st. Quite the contrary. The Fed has indicated that it plans to continue reinvesting the principal repayments it receives (both from maturing Treasury securities, and from pre-payment and maturity inflows from all the mortgage-backed securities it bought during QE1). The plan is to keep the Fed’s balance sheet (total security holdings) at a steady level, so we will continue to see the Fed buying periodically, just not in the same volume. To that end, it could be suggested that QE2 won’t actually be over. I’ll leave the semantic decision about that to you.
What we will look to address in the panel is the implication moving forward of the end of QE2 as it relates to the global markets. Hopefully you can join us. http://www.currensee.com/endofqe2
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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This video is too funny to watch. And apparently catching Bernanke lie on National TV is a new national sport.
Apparently, for those of you who thought otherwise, the Quantitative Easing II which is the sequel to Quantitative Easing I is simply a computer adjustment. It shows companies having less debt than they actually do – sounds like money printing to me.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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This week the financial headlines seemed to all center around a handful of categories: Ireland and all the things they do wrong, Germany and what they do right, the rest of the EU scrambling in the middle, Bernanke getting flack over QE (still), and China as the next big thing.
If this week’s news stories are any indication, we’re in for a game-changing 2011. Here’s some light reading for you before Thanksgiving.
The Eurozone Shuffle:
The Bernanke Burn:
China, China:
Or, if you’re pressed for time:
If you haven’t already, check out Yohay’s recent posts on Forex Crunch on his Forex portfolio. He writes about the Trade Leaders Investment Program, and you can watch a Forex investment portfolio as it develops in real time. Pretty exciting stuff!
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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