To be sure there has been a growing whiff of a slowdown brewing for a few weeks. The announced end of QE2 has come at a very inconvenient time. Tightening monetary policy in Europe (or the threat of it) is part of the change in sentiment. Then there is the slowdown in China. We have also come to learn that Japan, (contrary to all the initial bullish spin) is not going to be anyone’s engine for growth. And finally, we end the week with what appears to be a very significant step forward to a restructuring of Greek debt.
Has the economy hit a wall? Again? For me, this is reminiscent of last summer. That was also a period where there was evidence of a slowdown. Greenspan scared the hell out of everyone with his comment, “The economy has hit an invisible wall”.
A friend sent me this chart that looks at the equity market and the history of QE. The pattern is pretty clear. When QE is first announced stocks catch a bid and bonds trade lower. When QE is ending the opposite has happened. Stocks work lower and so do longer-term interest rates.
The market conclusion is that without a constant dose of QE the economy (AKA the Stock Market) will sputter. Maybe the market is right this time. I’m not so sure how reliable the market “view” is this Saturday given how wrong it was last Saturday.
One thing I am convinced of; there will not be a QE3 in 2011. Not even Bernanke can flip flop that fast. Having just announced the end of QE2, there is no way the Fed is going to sneak in a QE3 over the next seven months. That’s not going to happen.
If the existence of a QE program is the necessary condition for growth in the USA we are in very big trouble. We are looking at two dead ends. One is an economy that can’t grow, create jobs and pay for the $10b a day we are spending. The other is a monetary policy that will most certainly kill the country in just a few years.
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Hi,
ReplyDeleteOne thing you can see in yr Bloomberg screen is the payoff for QE pulses is diminished with each iteration. Monetary policy is reaching the point of diminishing returns if it hasn't already.
The central banks need some (effective) rate ammunition so that their role as 'lenders of last resort' can gain traction. What happens to markets when rates are super- low and reserves are high and the bids vanish across the board for whatever reason?
Am across the board restructuring/deleveraging is required, not optional. Hundreds of trillions of unserviceable credit has been created since 1980 and remains on the 'reality' books. This must be paid or written off: it's the business cycle.
The cycle has been held at bay by monetary policy and flat- out Keynesian stimulus of all kinds for decades, even as many forms of capital (resources) are 'over- extracted' with the capital gone. Both the risk and the capital are being repriced: the Fed cannot hold off this repricing. You know it, I know it, anyone with half a brain also knows it.
All the talk of inflation and 'evil Fed' is silly, even with the foot on monetary policy gas, any wrinkle in the 'debt- time continuum' results in deflationary reaction and zero- bids in critical markets. At some point all the markets will become critical, that is when the carnage is going to start and liquidity will completely vanish. The is the 'Fed Risk' ... that more easing will flop.
At that point the Fed is out of business. Are we @ this point? Not yet but endgame heaves into view ...
Steve from Va: And I thought I had a negative view of things to come.........
ReplyDeleteThe view or the "repricing" that Steve mentioned reminds me of how money vanishes in the stock market. A $100 stock becomes a $10 stock. So while the stock moves from $90 to $100, the Fed says we are doing great for the economy. But history has shown that repricing does not look at all like the Fed assumes, as Yellen was saying, nothing will happen to the stock market when they pull out QE2. Should the stock market become spooked, as it has in times past, and it takes a dive, the Fed widened the nation's balance sheet to have higher equity value, only to see equity value vanish. Bernanke feels he has to outsmart Greenspan, yet the eventual price paid may not have been worth it.
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