One of the key findings from the Jackson Hole paper by Arvind Krishnamurthy and Annette Vissing-Jorgensen is that the Fed’s US Treasury purchases “significantly raised Treasury bond prices, but have had limited spillover effects for private sector bond yields, and thus limited economic benefits”.
An interesting recent note from Jesse Edgerton of Goldman Sachs calls into question one part of the methodological approach used in the paper to arrive at this finding. Read more
Brad DeLong asks (politely) why oh why can’t we have better QE weblogging, and then issues a challenge:
Toward the end of an otherwise very good think piece, the intelligent and thoughtful Cardiff Garcia mysteriously writes: “But the downsides to continued QE aren’t trivial either.”
Which makes me ask: what are the downsides to continued QE?
Matt Klein gets in touch with Michael Woodford — macro theorist of world renown, author of a timely monetarist-cheering Jackson Hole paper, intellectual-space-provider for the NGDP level targeting movement — to ask the economist just why he doesn’t mind the Fed’s plan to begin tapering.
Klein first cites a passage from Woodford’s paper at Jackson Hole last year: Read more
There is a time for everything, and a season for every activity under the heavens:
a time to be born and a time to die,
a time to plant and a time to uproot…
a time for the Fed to take unrealised gains and a time for the Fed to absorb unrealised losses,
a time for the state to support the economy and a time for it to stay away.
We make this point because of the following chart knocked up by Scott Minerd, Global Chief Investment Officer at Guggenheim Partners: Read more
Tim Duy, professor of practice at the department of economics at the University of Oregon, is confusing Brad DeLong, professor of economics at Berkeley, with his observation that the Fed seems to be striving to change the mix but not the level of outright accommodation. This, at least, seems to be the motivation for taper talk.
We’re less confused, and quite like what Duy is saying.
Note the following (our emphasis): Read more
Another day, another Aussie GDP downgrade.
From BofA Merrill Lynch: Read more
It’s been our mantra at FT Alphaville for a while, but finally someone from the ‘serious’ analyst space seems to agree with our hypothesis that commodity collateralisation — incentivised by low rates and excess liquidity — is having a larger impact on inventories and commodity prices than most people appreciate.
Here’s an extract from one of oil market veteran Philip K. Verleger’s recent articles on the relationship between interest rates and inventories (our emphasis): Read more
Marc Ostwald at Monument Securities has spotted that an important theme is developing: a rise in the number of warnings about QE suspension and QE exit.
As he noted on Thursday regarding the recent warnings from the BIS and the IMF:
To my jaundiced eye, I would have to say that the warnings below from the BIS and IMF within one hour of each other today on QE, suggests that this is the beginning of the end for QE! Am not sure that everyone else will share that view, but this cannot be a simple coincidental warning shot that has no material consequences – watch this space!
It’s been a big day for the Bank of Japan. The QE programme was re-affirmed, as expected, and inflation and growth forecasts were raised, including a new 2015 CPI forecast of 1.9 per cent. It all looks thoroughly positive — especially if you ignore all the assumptions. Read more
This is is a guest post from Philip Pilkington, a writer and research assistant at Kingston University.
In January of this year I noted that the Japanese government was embarking on a stimulus programme and briefly enquired into whether it would likely work or not . At the time media commentary was mixed. Some were saying that it would be a complete failure while others were overflowing with optimism. I was slightly more reserved. Read more
This guest post is submitted by Donald Luskin, chief investment officer of Trend Macrolytics. A hat tip to Lorcan Roche Kelly, chief Europe strategist of Trend Macrolytics and longtime friend of FT Alphaville, for the suggestion.
An abiding narrative explaining the melt-up in US equities — despite a sluggish economy and slow earnings growth — is that quantitative easing by the Fed amounts to printing money, which finds its way into stocks. Read more
This Monday edition of rising Japanese equities/weak yen is brought to you by Haruhiko Kuroda, president of the Asian Development Bank and according to various media reports, the likely nominee for Bank of Japan governor.
Kuroda reportedly said early this month he was quite happy at the ADB and had nearly four years to serve of his third term. But to that we say: Mark Carney! Read more
Western markets were all a-jitter on Thursday. Obviously we can blame the Fed. Bickering between central bankers just doesn’t look good, whether they are American, British or continental Europeans.
An immediate question is raised: are we witnessing the end of ‘fast and loose’ policy? The quick answer is probably ‘not yet,’ although yes, it will end, and maybe sooner than some had come to assume. This presents a fresh challenge for policy markets, as noted by Lloyds’ Charles Diebel: Read more
Are the BoJ’s newly-announced measures really that dramatic?
For all Shinzo Abe’s talk of urgency in meeting the new 2 per cent inflation target, the BoJ itself doesn’t actually expect it to happen that quickly. In the forecasts accompanying today’s statement, the BoJ has maintained the 2013 CPI forecast of 0.4 per cent made back in October — which is probably fair enough as the open-ended programme doesn’t actually start until next year — and only moved its 2014 up to 0.9 per cent from 0.8 per cent. Read more
Last week, Kit Juckes at SocGen was one of many analysts who, after looking at the latest FOMC minutes, found fit to arrive at one overriding conclusion: the era of Risk-on, Risk-off (RoRo) investing is arguably coming to an end.
As he explained… Read more
A big hat tip to Climateer Investing for helping us catch up on a Telegraph story from Ambrose Evans-Pritchard on Japan’s latest plan to stimulate itself out of trouble.
It, by the way, neatly sums up the problem associated with taking QE to the next level which, of course, for the Japanese authorities might have been buying equities outright rather than buying in ETF index form, which they’ve already been doing for a couple of years or so…
Think about it — a central bank en route to becoming a majority holder in a country’s primary equity ETF, is nothing more than a central bank en route to becoming the market. 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
The Bank of Japan’s unprecedented joint statement with the Japanese government after the central bank’s October meeting raised eyebrows around the world. The BoJ was already widely seen as having come under increased political pressure in recent months as the country’s economy had slowed; so what did the joint statement mean?
The statement contained a couple of key declarations: “The Bank strongly expects the Government to vigorously promote measures for strengthening Japan’s growth potential”, and “The Government strongly expects the Bank to continue powerful easing as outlined in section 2 until deflation is overcome.” Read more
There’s something we’ve never quite got about this debate on “cancelling” all the government bonds acquired by central banks under quantitative easing, either for helicopter money or for debt relief.
Now the Governor of the Bank of England has weighed in: Read more
According to George Magnus of UBS, most of the western world has now been struck down by “most unusual monetary policies” or ‘Mumps’ for short. And — contrary to popular belief — the disease is being underpinned not by western profligacy but possibly the very phenomenon. Too much thrift. The want and need for too many savings in an economy that demands spending on available capacity and goods today — a theme also actively being explored by Paul Krugman as part of his anti-austerity reasoning. Read more
We introduced our Rubiks QE analogy on Tuesday. This post is a continuation, in which we apply the analogy to the crisis so far.
Before we go on we should point out that the Rubik’s is a simplification, as are the concepts of “tomorrow money” and “today money”. There are and will always be areas that call for further explanation, but which we haven’t covered in this post. If they’ve been left out, it’s mostly due to post-length constraints. It’s not because we are wilfully ignoring them. Read more
Today carry’s hold on FX has waned as global rates gravitate towards zero, forcing the FX market to react instead to the far more ambiguous implication of QE. By contrast, other asset classes, notably equity markets, provide a cleaner mechanistic link between a given view and a price.
The conclusion is that even if we knew the outcome of future events with certainty, the FX market is not the best place to reflect those views. We have fallen to the bottom of the food chain. Read more
This is reassuring (or not – we can’t decide). The Global fixed income strategy team at HSBC *believe* they’ve come up with a non-consensus view on the effects of QEternity:
Our non-consensus view is that QE3 will drive US Treasury yields to new lows Read more
Yes, yes, this QE ain’t the last QE and heaven knows the outcomes aren’t straightforward and depend on a shed load of variables. But a comparison is always worthwhile — or, at least, fun. So, here’s a relatively straightforward one from Deutsche Bank’s Alan Ruskin comparing the effects of QEs 1, 2 and 3.
First on the dollar index (try to spot the profit taking before the downward trend resumes): Read more
The dollar index is now up 0.4 per cent since the Fed announced QE3 and up 0.3 per cent against the euro after having lost near 1 per cent initially. The euro is now back under $1.30. Meanwhile the yen has gained 0.7 per cent against the dollar and 1.4 per cent against the euro since the Bank of Japan put its moderate amount of stimulus into the field. Go figure:
(Chart from RBC Capital Markets.) Read more
By now, everyone is familiar with the mantra that QE is [arghh!] money-printing and that a major unintended consequence could be a chronic and uncontrollable inflation. (One could call this the goldbug, Austrian, Republican case).
Less well known, perhaps, is the theory that QE could be just as unexpectedly deflationary — because long-term micro yields come to threaten a number of financial sectors outright, as well as general expectations of risk-free returns which lead to capital destructive feedback loops. Read more
This the Bank of England’s report into the distributional effects of its asset purchases. Click through the image for the full doc:
The calls for QE3 continue to rage.
But as FT Alphaville has discussed at length, QE3 in its conventional guise — freshly minted base money in exchange for US government bonds — might not really be an option due to the squeeze it causes in the US Treasury market. Read more
We’ll be back later with a proper preview of next week’s FOMC meeting, but for now here is something to argue about:
1. QE1 was more effective than QE2. Read more