QE2 article in Financial Times

[TPS]

Linked is an article on QE2 from the FT. As usual, they do a good job explaining what's expected, possible impacts, dangers, etc. In particular, the section on "Could the exercise end in disaster?" discusses some of the issues we've been debating here. Regardless of which side one takes, as the article points out, there are differences even within the FED on its impact and dangers. I would hope that some of us here would finally understand that there is no one-world view on economics, and given an uncertain future, even the insiders aren't sure what the outcome will be.

 

FT.com

[Magox]

Linked is an article on QE2 from the FT. As usual, they do a good job explaining what's expected, possible impacts, dangers, etc. In particular, the section on "Could the exercise end in disaster?" discusses some of the issues we've been debating here. Regardless of which side one takes, as the article points out, there are differences even within the FED on its impact and dangers. I would hope that some of us here would finally understand that there is no one-world view on economics, and given an uncertain future, even the insiders aren't sure what the outcome will be.

 

FT.com

Of course there is uncertainty and yesterday was a very bad day for the fed, two famed hedge fund managers including Jeremy Grantham along with Bill Gross's scathing criticism is placing serious doubt in the minds of the fed. Bernanke admits that this is a new experiment and that they aren't certain of the outcomes. As El Erian pointed out two months ago, the dilemma the fed faces is a possible "liquidity trap", where there happens to be an uneven balance of inflationary and deflationary pressures do to much slack in the economy, falling to stagnant home prices and high unemployment coupled with a falling dollar and rising commodity prices. Over a year ago, I correctly predicted that the price of oil would double within two years after the March of 09 announcement of the Federal Reserves decision to embark in QE, I also told you that the food prices would go much higher along with the CRB index. You didn't believe it, you argued that it wouldn't happen and that there wasn't enough demand for that to occur. I argued that the value of the dollar would drop as a result of QE resulting in higher inflation.

 

 

 

 

Well, the price of oil back in March of 09 was at $40 a barrel and guess what happened? The price of oil doubled, as a matter of fact it went up by 50% to $60 a barrel three months later. Why? Because the value of the dollar dropped, before QE1 was announced the value of the dollar was at 88, within 6 months it dropped down to 74. That is a 16% drop in the value of the U.S dollar.

 

I have always maintained that we would be facing serious bouts of stagflation. It definitely looks in my view that we are heading that direction. Unemployment is structurally impaired AND WILL remain high for a long time, housing prices are about to go another leg down, banks are going to be further undermined by this foreclosure crisis and terrible ground conditions for lending (not to mention that TARP never did address the toxic assets that they are still holding) which of course makes lending even more difficult. There is still more deleveraging going on not just for consumers but also now on the government level. State and local governments are going to continue to shed jobs for quite some time and I predict that Obama will pivot to the middle and austerity on the federal level will embark, albeit on a light level but the size of the Federal government I expect to shrink. So these are the deflationary pressures. Which is why the Fed's gauges of inflation are flawed the weighting is too high on housing and wages.

 

The inflationary pressures are obvious, which are the rising commodity and medical prices. CRB is near an all time high, food is soaring, energy and raw material prices are high, cotton is at an all time high along with other soft commodities. You call it speculation (which it partly is), but that "speculation" will continue until the fundamentals change and you can take that to the bank. This is mainly a currency and uneven global demand situation. EM economies continue to grow rapidly and the value of developed nation currencies continue to drop. Goldman Sachs recently said that they expect $4 trillion worth of QE before it is all said and done. I can tell you this right now, if they are anywhere near being right on this call then the value of the dollar along with other currencies will continue to fall much further relative to commodities. Why other currencies as well? Because of the currency skirmishes, it's a race to the bottom and everyone wants the export competitive advantage.

 

 

Let's not forget that the whole point of the Fed's money printing exercise isn't intended so that banks can reinvest those funds into higher yielding treasuries, the intended effect is for banks to lend more. They realize that there is a velocity problem right now and they are basically saying "well, we are just going to create so much money that we will force it into the economy". Well, they are going to get their wish, and the fed has a terrible track record of containing inflation, and I would note that this experiment has many risks tied to it that they themselves admittedly are unsure of.

 

The difference between me and you is that I go out on a limb and publicly on this message board make predictions regarding the economy, results of pending legislation, the healthcare law and effects of the Fed's and treasuries decisions. Back when the Fed (Bernanke and crew) just 6 months ago was saying that the U.S economy would grow at an annualized rate of 3.3%, I said that they would be wrong and that it would come in substantially lower than that number and one of the tards of this board David Norfolk attempted to mock my prediction and look who ended up being right. He's not saying too much now.

 

I made a thread called What to expect in the second half of the year, and I listed approximately 10 outcomes that I envisioned happening and guess what? They all happened and this was before the economy was truly beginning to show signs of slowing down. I wrote about Currency Wars and a race to the bottom, and if you look at the date of when I wrote those newsletters, you will see that I was talking about it before it became big news, all you have to do is google Currency wars and look at the dates of when it has been getting the attention and you will see this. I predicted that they would all be competing with one another to devalue their currencies and that all these developed nation economies would continue QE policies.

 

So I will go out on a limb again and say that oil prices next year will average 10-20% higher than this year and that food prices along with the CRB will continue to climb. Why? Because the value of the dollar will drop because of Fed and treasury policies along with structural trade imbalances. The only thing that I can see throwing a wrench into this is if Europe goes through another Bond crisis and causes panic in the markets causing a repatriation of the dollar through US bonds effectively raising the value of the dollar and reducing the "risk on" mentality.

[Peace]

I made a thread called What to expect in the second half of the year, and I listed approximately 10 outcomes that I envisioned happening and guess what? They all happened and this was before the economy was truly beginning to show signs of slowing down....

 

What to expect in the second half of the year:

 

1) Census workers will be coming back to the unemployment lines, or dropping out of the labor force.... See More

 

(This wasn't a prediction--just a fact.)

 

2) Weekly jobless claims numbers have been indicating an anemic private sector labor force....

 

(This wasn't a prediction--just a fact.)

 

3) $8000 tax home credit has expired, last months numbers showed a spike in sales, this will drop off dramatically in the next couple months.

 

(This was a prediction that after the $8,000 credit expired, housing sales would go down. Not exactly out on a limb.)

 

4) Consumer confidence numbers havn't yet reflected the Stock markets plunge. Those numbers will come off some.

 

Yes they have, despite an uptick this month.

 

5) The uncertainty of European contagion.

 

This wasn't much of a prediction really but this doesn't seem to have had a huge effect.

 

6) Stimulus package has already peaked and it's artificial effects will show signs of deterioration Q3 and Q4

 

Not on a limb here but correct.

 

7) China is beginning to slow down (this could be really bad if they drop off significantly).

 

Not a prediction.

 

8) Uncertainty over the November elections, and the markets hate uncertainty.

 

This one is wrong (so far). DJIA is up 10% since June.

 

9) Three voting Federal Reserve members are already suggesting that we raise rates some time soon (which I doubt will happen).

 

This was a tempered prediction but is correct.

Edited October 28, 2010 by Peace

[Magox]

1) Census workers will be coming back to the unemployment lines, or dropping out of the labor force.... See More

 

(This wasn't a prediction--just a fact.)

 

Everything is easy to say that now AFTER the fact.

 

2) Weekly jobless claims numbers have been indicating an anemic private sector labor force....

 

(This wasn't a prediction--just a fact.)

 

It was an intended prediction, which was that we would continue to see an "anemic private sector labor force", according to the W.H, this was suppose to be the "summer of recovery".

 

3) $8000 tax home credit has expired, last months numbers showed a spike in sales, this will drop off dramatically in the next couple months.

 

(This was a prediction that after the $8,000 credit expired, housing sales would go down. Not exactly out on a limb.)

 

Easy for you to say now, but the fact is that I said it would come off "dramatically" and that is what happened.

 

4) Consumer confidence numbers havn't yet reflected the Stock markets plunge. Those numbers will come off some.

 

Yes they have, despite an uptick this month.

 

Yup

 

5) The uncertainty of European contagion.

 

This wasn't much of a prediction really but this doesn't seem to have had a huge effect.

 

Oh yeah? by what metric, the stock markets reaction? Those economies and the rest of Europe will be going down in tax revenues for a long time and we haven't seen the end of this, you can take that to the bank.

 

6) Stimulus package has already peaked and it's artificial effects will show signs of deterioration Q3 and Q4

 

Not on a limb here but correct.

 

Once again, easy for you to say now after the fact. Bernanke didn't share this view, he thought GDP would be much higher.

 

7) China is beginning to slow down (this could be really bad if they drop off significantly).

 

Not a prediction.

 

 

8) Uncertainty over the November elections, and the markets hate uncertainty.

 

This one is wrong. DJIA is up 10% since June.

 

I didn't make a prediction in where the market would go, QE came into play and the market is now feeling more certainty regarding the elections going to the GOP. Just like David Tepper said:

 

"Either the economy is going to get better by itself in the next three months...What assets are going to do well? Stocks are going to do well, bonds won't do so well, gold won't do as well," he said. "Or the economy is not going to pick up in the next three months and the Fed is going to come in with QE.

 

"Then what's going to do well? Everything, in the near term (though) not bonds...So let's see what I got—I got two different situations: One, the economy gets better by itself, stocks are better, bonds are worse, gold is probably worse. The other situation is the fed comes in with money."

 

So which one happened? QE and what happened to the stock market?

 

 

9) Three voting Federal Reserve members are already suggesting that we raise rates some time soon (which I doubt will happen).

 

This was a tempered prediction but is correct.

Edited October 28, 2010 by Magox

[TPS]

Of course there is uncertainty and yesterday was a very bad day for the fed, two famed hedge fund managers including Jeremy Grantham along with Bill Gross's scathing criticism is placing serious doubt in the minds of the fed. Bernanke admits that this is a new experiment and that they aren't certain of the outcomes. As El Erian pointed out two months ago, the dilemma the fed faces is a possible "liquidity trap", where there happens to be an uneven balance of inflationary and deflationary pressures do to much slack in the economy, falling to stagnant home prices and high unemployment coupled with a falling dollar and rising commodity prices. Over a year ago, I correctly predicted that the price of oil would double within two years after the March of 09 announcement of the Federal Reserves decision to embark in QE, I also told you that the food prices would go much higher along with the CRB index. You didn't believe it, you argued that it wouldn't happen and that there wasn't enough demand for that to occur. I argued that the value of the dollar would drop as a result of QE resulting in higher inflation.

I think most keynesians have been arguing that QE is not working because of a liquidity trap, so nothing new there. Gee, you correctly predicted that within 2 years the price of oil would bounce back from the financial crisis low? I think I criticized some of your predictions based on that same math--you boldly said inflation would be higher in several years, and I said, where else can prices go when inflation was currently 0? I always argued about the overall rate of inflation, and that we wouldn't see hyperinflation that some beleived QE would create. I've always argued, like the article pointed out, that the FED can always rein things back in. I recall responding to one of your $ posts some time ago that I predicted a long term decline in the dollar back in about 2005.

 

The inflationary pressures are obvious, which are the rising commodity and medical prices. CRB is near an all time high, food is soaring, energy and raw material prices are high, cotton is at an all time high along with other soft commodities. You call it speculation (which it partly is), but that "speculation" will continue until the fundamentals change and you can take that to the bank. This is mainly a currency and uneven global demand situation. EM economies continue to grow rapidly and the value of developed nation currencies continue to drop. Goldman Sachs recently said that they expect $4 trillion worth of QE before it is all said and done. I can tell you this right now, if they are anywhere near being right on this call then the value of the dollar along with other currencies will continue to fall much further relative to commodities. Why other currencies as well? Because of the currency skirmishes, it's a race to the bottom and everyone wants the export competitive advantage.

My difference with you here is that I recognize that commodity prices rebounded from post-crisis lows (like oil prices) as EMs have provided some stability in global growth; however, the other side of my argument is that "financialization" of commodity markets has allowed speculative investment to overwhelm the underlying fundamentals.

I would say we really aren't too different here--as the article pointed out, the fear of QE2 is what investors will do with the funds? That is the key issue with QE: the FED is buying assets in exchange for liabilities; so, what will investors do with those funds? You argue that they are buying gold, oil, commodities as an inflation hedge. I agree. Now that Investors are able to plow more funds into commodity-type investments, they are driving prices higher. They are speculating on increased inflation, and that speculation creates a self-fulfilling prophecy. Why are commodity prices so volatile now? Cotton hit the downside max allowed the other day--was that due to fundamentals? I don't think so.

 

That article points out our fundamental difference: you use the term printing money and say it will cause inflation; I've tried to tell you that one has to explain the process of how that money translates into inflation. I tend to focus on the CPI, but if your definition includes asset price inflation, and you include commodities as an asset in the portfolio of weatlh holders (hedge funds, IBs, etc), then I agree. But then you would be agreeing that it is investors who are influencing those prices....

Let's not forget that the whole point of the Fed's money printing exercise isn't intended so that banks can reinvest those funds into higher yielding treasuries, the intended effect is for banks to lend more. They realize that there is a velocity problem right now and they are basically saying "well, we are just going to create so much money that we will force it into the economy". Well, they are going to get their wish, and the fed has a terrible track record of containing inflation, and I would note that this experiment has many risks tied to it that they themselves admittedly are unsure of.

I disagree on the initial reasoning for the FED swapping good for bad assets: I think it was to give the banks a stable source of income by paying interest on the $1 trillion in bank reserves the FED created by swapping for those bad assets. It was done to save the banking system. You say velocity, I say loans aren't being created--not much difference.

 

I made a thread called What to expect in the second half of the year, and I listed approximately 10 outcomes that I envisioned happening and guess what? They all happened and this was before the economy was truly beginning to show signs of slowing down. I wrote about Currency Wars and a race to the bottom, and if you look at the date of when I wrote those newsletters, you will see that I was talking about it before it became big news, all you have to do is google Currency wars and look at the dates of when it has been getting the attention and you will see this. I predicted that they would all be competing with one another to devalue their currencies and that all these developed nation economies would continue QE policies.

Does anyone know if there is a PPP archives? I was trying to go back and look at some of the old posts??

 

Export-led growth strategies have been going on for years, and the post-crisis sluggish recovery along with the falling $ has increased the competition among the countries that use it. So you picked up the terms and concepts and posted them here before anyone else; so what?

 

So I will go out on a limb again and say that oil prices next year will average 10-20% higher than this

year and that food prices along with the CRB will continue to climb. Why? Because the value of the dollar will drop because of Fed and treasury policies along with structural trade imbalances. The only thing that I can see throwing a wrench into this is if Europe goes through another Bond crisis and causes panic in the markets causing a repatriation of the dollar through US bonds effectively raising the value of the dollar and reducing the "risk on" mentality.

Despite all of my criticism, I appreciate your analyses and predictions. What you need to realize is that you are just as dogmatic in your beliefs as the rest of "us."

[Peace]

Editing into that will be a nightmare.

 

You are way defensive brother. Almost half of your predictions weren't predictive. That doesn't mean that many of them contributed to a lot of 2nd half uncertainty...and you did a good job gathering facts that contributed to some uncertainty in June-present. Chillax man.

[Magox]

I think most keynesians have been arguing that QE is not working because of a liquidity trap, so nothing new there. Gee, you correctly predicted that within 2 years the price of oil would bounce back from the financial crisis low? I think I criticized some of your predictions based on that same math--you boldly said inflation would be higher in several years, and I said, where else can prices go when inflation was currently 0? I always argued about the overall rate of inflation, and that we wouldn't see hyperinflation that some beleived QE would create. I've always argued, like the article pointed out, that the FED can always rein things back in. I recall responding to one of your $ posts some time ago that I predicted a long term decline in the dollar back in about 2005.

 

 

My difference with you here is that I recognize that commodity prices rebounded from post-crisis lows (like oil prices) as EMs have provided some stability in global growth; however, the other side of my argument is that "financialization" of commodity markets has allowed speculative investment to overwhelm the underlying fundamentals.

I would say we really aren't too different here--as the article pointed out, the fear of QE2 is what investors will do with the funds? That is the key issue with QE: the FED is buying assets in exchange for liabilities; so, what will investors do with those funds? You argue that they are buying gold, oil, commodities as an inflation hedge. I agree. Now that Investors are able to plow more funds into commodity-type investments, they are driving prices higher. They are speculating on increased inflation, and that speculation creates a self-fulfilling prophecy. Why are commodity prices so volatile now? Cotton hit the downside max allowed the other day--was that due to fundamentals? I don't think so.

 

That article points out our fundamental difference: you use the term printing money and say it will cause inflation; I've tried to tell you that one has to explain the process of how that money translates into inflation. I tend to focus on the CPI, but if your definition includes asset price inflation, and you include commodities as an asset in the portfolio of weatlh holders (hedge funds, IBs, etc), then I agree. But then you would be agreeing that it is investors who are influencing those prices....

 

I disagree on the initial reasoning for the FED swapping good for bad assets: I think it was to give the banks a stable source of income by paying interest on the $1 trillion in bank reserves the FED created by swapping for those bad assets. It was done to save the banking system. You say velocity, I say loans aren't being created--not much difference.

 

 

Does anyone know if there is a PPP archives? I was trying to go back and look at some of the old posts??

 

Export-led growth strategies have been going on for years, and the post-crisis sluggish recovery along with the falling $ has increased the competition among the countries that use it. So you picked up the terms and concepts and posted them here before anyone else; so what?

 

 

Despite all of my criticism, I appreciate your analyses and predictions. What you need to realize is that you are just as dogmatic in your beliefs as the rest of "us."

As much as we argue regarding this topic, I really don't believe we are that far off on what we believe. For instance you justify the reasoning for higher prices to "speculation" (which I agree to an extent) I justify it due to a weaker dollar. Those high prices will continue until something happens to the dollar and that still won't address the problem of higher prices completely because of the EM growth even though it will bring prices down some.

 

The markets will keep moving in the direction they are going until the fundamentals change. Look, I am not saying that these prices are going to go up forever, because they won't. At some point the party will end (which I believe the party will end when the entire developed world embarks on a sustained tightening cycle) and when that ends prices will plummet and the dollar will go sky high.

 

In regards to the cotton trade, sometimes prices don't justify fundamentals. There are all sorts of bubbles that exist, some are mini ones where short-term prices get ahead of themselves, which is what is happening to cotton right now and then there are huge bubbles that are usually created in the last phases of market runs. We aren't there yet, not even close.

 

Right now, there are a number of commodities that had or getting ahead of themselves, which is why there are those thingies called corrections. I buy on corrections that is how I approach a market that I believe in. I put my money where my mouth is, I go out on a limb and make predictions and if I'm wrong I will hear about it from my clients and I'm sure I will hear about it here when that does happen. But the point is that I do it and I'm not afraid to do it because I have supreme confidence in my analysis.

 

I think where people fail is that they go by old fixed metrics and only look at certain variables to come to their conclusions. I think it is important to look outside of the old way of looking at things (not in every sense) and to constantly readjust and add in new variables in attempting to figure things out. This is why the FED (Bernanke and crew) have consistently gotten it wrong. This is why they can't understand why unemployment is higher than they forecast, this is why they got the GDP guesstimate wrong. And it's not just them but a number of other analysts. Like David Rosenberg said: "the old rules of thumb" that don't apply this time. I agree with that, people get too caught up in looking at what use to work, the problem is that we are in different times and that means that there has to be new variables that have to be considered.

 

Editing into that will be a nightmare.

 

You are way defensive brother. Almost half of your predictions weren't predictive. That doesn't mean that many of them contributed to a lot of 2nd half uncertainty...and you did a good job gathering facts that contributed to some uncertainty in June-present. Chillax man.

Yes, even though some were statements from an isolated POV, the context of which everything was written was in the title of the thread

 

which was What to expect in the second half of the year.

 

Meaning that if I made a statement about jobless claims numbers and anemic growth, it implies that I expected to see weak job growth in the second half of the year. Right? Also, that wasn't a given whatsoever, easy to say that now. But the fact is that according to the W.H and his economic team this was supposed to be the "Summer of recovery" and according to Ben Bernanke we were going to see near 3% GDP and lower unemployment.

[HopsGuy]

Paul Tudor Jones letter to Investors

 

An aside: A friend of mine traded a portfolio for PTJ for a while. He was having back problems and Jones had him come to his monstrous home to meet with "Pete". Pete told him the same sort of advice: "You're fat. You need to lose weight, or you'll always have back problems."

[Magox]

Paul Tudor Jones letter to Investors

 

An aside: A friend of mine traded a portfolio for PTJ for a while. He was having back problems and Jones had him come to his monstrous home to meet with "Pete". Pete told him the same sort of advice: "You're fat. You need to lose weight, or you'll always have back problems."

Thanks, very insightful. Obviously he thinks that QE policies won't be effective and that they will create asset bubbles and would rather have the Chinese currency revise up their value by 30%.

 

I would say that this is all wishful thinking and that they won't do it. They are export reliant and they are very happy with their growth trajectory, I just don't see them doing that whatsoever. But I agree with his initial thoughts which were inspired by "Pete" that structural problems need structural solutions.