We first proposed the idea that QE could be (but wasn’t necessarily) deflationary a couple of years ago. It was dubbed a counter-intuitive idea by Tyler Cowen.
More recently, a similar proposition has been made by Stephen Williamson — though this time using models and proper math. His view is a little different to ours because it’s less focused on the safe asset squeeze and more on the conditions that generate a preference for cash over yielding paper in the first place. Hint: you have to think the purchasing power of cash will go up regardless. Read more
The Federal Reserve’s Framework for Monetary Policy –Recent Changes and New Questions. Click to read the full doc.
Citi credit strategist Matt King has responded to our QE downsides post with some thoughtful remarks via email.
He wanted to elaborate on the relevance of this chart from his earlier presentation in the context of an eventual tapering:
For all the gnashing and wailing about the dangers of quantitative easing from some of the super rich, the fact remains that owners of capital (ie the rich) have done very well from QE.
Now, as we’ve noted before, plenty of serious people are paying attention to the inequality question, and its not clear what monetary policy can do about inequality even if it should do something about it. But news that US housing is turning frothy again, with San Francisco prices up 25 per cent over the last year, has Albert Edwards of Societe Generale reaching for the exclamation marks. Read more
As we noted in our previous post, the real significance of the Fed’s FRFARRP trial (or FARPs for short) may be that it takes us ever closer to the Widow’s Cruse economy envisaged by economist John Maynard Keynes.
Some might say that ‘QE unlimited’ was already the first step towards this world of inexhaustible monetary supply — for it created a central bank which was prepared to provide liquidity on demand for as long as unemployment remained too low. Read more
The Fed’s taper no-show this week resulted in a plethora of commentaries and articles flagging the risks of the world’s collective addiction to QE.
To name a few: Read more
Do bank failures really exacerbate output declines? Do they consequently justify extensive responses to prevent future failures?
Ben Bernanke famously argued in 1983 that bank failures did exacerbate the Great Depression because of how they impacted credit intermediation channels. His findings helped to justify much of the extraordinary intervention we have seen since 2008. Read more
Which part of future Fed tightening “is now completely up in the air”?
The answer (according to Societe Generale) is in the useful table below… click to enlarge: Read more
Scott Skyrm noted on his blog earlier this week that it took only six months of Fed QE purchases to move GC rates from an average of 0.24 per cent in December 2012 to an average of 0.05 per cent this month.
There is, consequently, a growing distortion in the short-term funding markets, which is clearly one of the first unintended consequences of the QE programmes to surface: Read more
China is leaking. It’s probably America’s fault. China is, after all, the the most exposed to the quantity effect of liquidity withdrawal due to QE tapering and may have the most difficulty dealing with it.
From Nomura on Monday, for example:
Foreign exchange purchases by financial institutions dropped by RMB41bn, despite the high trade surplus of USD27bn and strong FDI inflows of USD14bn.
Check it, from JP Morgan’s Flows & Liquidity team:
The 233 repo fails in the month of June is four times larger than the typical monthly pace of 60-70 and the trend is quite suggestive. (A fail is where one market party fails to deliver the security or cash it had promised to send to another entity within a specific time frame. It’s a problem for both buyers and sellers since it means they could have to go and buy them out in the open market for what could be a higher or lower price.)
From JPM, with their emphasis: Read more
Risk is on. The sun’s out (at least in London). Cue two fun slides from Julien Garran of UBS. Click to view.
Merrill Lynch’s Michael Hartnett sure knows how to grab the readers’ attention…
Apparently the recent sovereign bond yield spike has almost completely wiped out the Bank of England’s QE bond portfolio’s unrealised profit. As Bank of America Merrill Lynch’s John Wraith said:
…the mark-to-market gains that were previously being registered by the Bank of England’s portfolio of Gilts acquired through the UK’s QE Asset Purchases since March 2009. As recently as 2nd May, this portfolio was showing an unrealised profit of £26.8bn; this had collapsed by 24th June to just £1.2bn.
Get your pitchforks out. Read more
The working theme at FT Alphaville towers is that we’re in somewhat of a damned if we do taper/suspend QE, and damned if we keep going with it.
There is, as we’ve long been noting, good reason to suspect the economy cannot handle any more quantitative easing in its traditional form.
What’s more, we now know that even the whiff of tapering — which is anything but an unwind, as we’ve noted here – can cause undue chaos in risk assets. In which case, perhaps tapering isn’t as much of an option as many believe it to be.
After all, QE reflects the sovereign put. It’s the government subsidy which takes volatility away. If you stop dishing it out, there’s every chance bad things may happen.
And the following chart, which comes to us by way of Aurelija Augulyte, reflects this relationship perfectly: Read more
…And the treatment of public debt in the government’s books gets left in some disarray.
Remember this from the ONS, in February? Read more
Alternative title: the slow death of the money multiplier.
Bank of America Merrill Lynch’s Michael Hanson and team note on Tuesday that while the world and its dog obsess about an upcoming QE exit, things continue to look pretty bleak on the money multiplier side of things. Read more
Yes yes — suddenly, a bad last day of May for the stock market:
If or when the Fed starts to taper, where will the pain land first?
Barclays analysts Guillermo Felices, Michael Gapen and Sreekala Kochugovindan have taken a shot at answering that question expecting the Fed to start backing itself out at the start of 2014 (h/t to liuk for pointing us to the report):
From SocGen’s Andrew Lapthorne and quant team: in the first quarter of 2013, buybacks done to offset the dilution from executive stock options maturing reached near a post crisis high and ticked past the amount of buybacks done to reduce the overall share count — you know, those done to benefit the shareholders:
Behold — an illustrative chart from Morgan Stanley’s global economics team (click to enlarge):
We’re going to need a new name for junk bonds. They’re yielding less than 5 per cent for the first time ever (h/t to our own Tracy Alloway):
The 5% yield barrier has proved no match for this Federal Reserve-fueled junk-bond market, which last night reached yet another all-time record-low average yield-to-worst of 4.97%, according to the Barclays US High Yield Index. It marked a new level of market capitulation to central-bank forces as it’s the first time the index has dipped below 5% in its 30-year history (before January the market had never even fallen below 6%). The average price of 107.31 cents on the dollar also marks a record high.
With the S&P 500 making a fresh run higher at pixel time, it would be rude not to share the latest thoughts of Albert Edwards, Socgen’s Ice Age bear. Rather than gawping stocks, he reckons we should be mindful of the red metal…
Follow the money.
A central bank buys government debt. Prior holders of said debt are forced to invest elsewhere. Some are drawn to the corporate bond market, where a similar process repeats itself: corporate bond yields fall, offering cheap financing to companies, who issue fresh debt and end up holding at least a portion of QE cash. Read more
We tried to explain the QE surplus ‘raid’ before but never approached the crystal clear clarity of Thursday’s ONS release on the treatment of cash transfers from the BoE to the Treasury (the release of which accompanies the news that public finances improved in January although they were flattered by such transfers): Read more
The great debate over interest on excess reserves (IOER), base money and short term debt used ‘the floor’ analogy to describe what happens to short term interest rates. But that might not have been quite the right analogy, at least in the US case.
Izzy has already covered Manmohan Singh’s excellent paper and presentation. In it he raises a few points in regard to the supposed floor that IOER sets for rates, and it is worth exploring it a bit more. Read more
Take note. This is an important observation from TD Securities, especially in light of all the talk that US Treasury/safe haven trades are dead in the water.
Our emphasis: Read more
Obvious dovishness + Draghi’s admittance that the ECB is operationally ready for negative deposit rates = that. Read more
We’ve run a couple of posts here on FTAV recently about how cancellation of QE debt isn’t really such a big deal: more an accounting change than anything material because both treasuries and central banks are part of the public sector.
Here is an argument that this mere accounting exercise could be worthwhile — particularly if the debt-laden developed countries descend into another downturn. Read more