Wow, Quantitative Easing Here We Come...!!
A: Crazy day!! The fed just announced that it will buy $300Bln in Treasury securities and up to an ADDITIONAL $750Bln in agency debt; on top of the $600Bln in agency purchases already committed to. We are getting into some serious money printing here folks! The total approaches $1.65Trln or so, but hey, give or take a few hundred billion here and there. When the fed executes a quantitative easing strategy, they use the nuclear weaponry of their stimulative policy options available to them. There is a reason this policy is being announced last, when all other options have been exhausted. The dollar plunged, gold surged, and markets rallied on the news.
A quick explanation on what this means. When the fed buys assets from the primary dealers, via open market operations, it is pure money printing on a grand, electronic scale. At least it is for this announcement. The fed could perform debt swaps or issue debt on the shorter end of the curve to finance such asset purchases, but right now, the fed has used its reserves of treasuries to finance lending activities.
So, they click their mouse and POOF, a bank credit appears in the major money center banks' account (primary dealer) with the fed. Sound crazy? It is. Money created out of virtual 'thin air'. This is the gold trade by the way. Don't believe me? The New York Fed states it on their site in clear black & white:
Q: Will these operations be reserve neutral?This is money printing. I've discussed my feelings on a treasury bubble before, that is a longer term worry. Treasuries started to selloff a few months ago, and on February 8th I discussed, "Is the Bond Market Cooked, as Endgame Starts Early?", and stated:
A: No, these operations will be financed through the creation of additional bank reserves.
"Hmm, tough call but I honestly don't think so - especially when the fed can talk up purchases of treasuries and change investor sentiment on a dime."That was my short term thinking at the time and it appears it has just arrived. The fed is now officially announcing they will buy longer term treasuries, to keep rates down and expand the money supply at the same time. The piggy back trades get going as traders ride the coattails of the fed. I'm not messing with that, but I will continue to hold my gold as a money printing trade. Sooner or later, confidence in all fiat currencies may be pressured as global central banks 'print money' to combat the same deflationary forces. Lets see how it all plays out.
Previous posts on Quantitative Easing:
The Path of Deleveraging: Quantitative Ease Please
Fed To Begin Quantitative Easing in January
Is Helicopter Ben Printing Money or Not?
Posted by In Debt We Trust
Wed Mar 18th, 2009 09:27 PM
The goldbugs were chomping at the bit today. But that's not all that happened. The Feds invited the spec traders:
http://debtsofanation.blogspot.com/
2009/03/debts-of-spenders.html
Posted by Noah
Thu Mar 19th, 2009 08:22 AM
Yep, just wait until the shorts pile on near the conclusion of this program..at some point they will sell these securities back to primary dealers, of course that is way way down the road. But after this mess is done, we will see a long bear market in treasuries, I think. I wish I can get a glimpse of where rates will be in 2012
Posted by Bill
Thu Mar 19th, 2009 09:38 AM
I didn't really know what to think when Ben's QE announcement was first released. But now I've got my bearings. Yikes.
1) Lowering interest rates will likely have a small effect on increasing demand for houses. Look at the automakers for evidence. Zero down and free financing, yet unit sales are down 45% YOY?
2) Stuffing the banks with cash from the purchases of Treasuries is not likely to have a material effect on the demand for other, non-housing, loans, either. Demand is dead, just like MEW is dead. Banks are pulling back, rightly so, there is way too much credit risk in the system as is. Most of the demand for credit now comes from people or companies that probably don't deserve it.
3) Bank net interest margins are going to come in hard. This is not good for the banks. Not only are old loans "running off" at a faster rate than they are making new loans (credit is contracting), but now the banks will earn less on new assets they write.
4) The shadow supply of houses (and a lot of other stuff) is big. Massive excess supply trumps cheap financing. I think I'm repeating #1 above, hey that's okay, it's important IMO. I don't think a cheap mortgage is gonna get me to buy something if I think there's a good chance the price of that thing is gonna crater.
Let's see, what else...
5) Japan's experience with QE kinda bears out what we've said above. The Nikkei rallied 20% after the BOJ announced it would start QE in 2001. Four months later stocks had retraced the rally and then some. The Nikkei's level then was 12,100ish. Now, eight years later, it's 8,000ish.
6) China. Oh boy. China is pissed. China will be diversifying out of US assets. China will be selling its Treasuries. That supply, along with the $1.5T the US Treasury will be issuing this year, is a lot for the market to absorb as is. Bernanke's bid will will be sizable, yes, but not overwhelming. In fact, while I personally don't think inflation is around the corner, I suspect many others do. So why not unload any absurdly priced US Treasury assets into Bernanke's bid and get ahead of the eventual run-up in rates you anticipate? It'll happen.
7) What about risk-adjusted returns? Yeah, mortgage 'headline' rates might crumble, but if I am a banker and prime home loan's are expected to have a 10% default rate by the end of this wretched cycle, why the hell would lend mortgage money at 4.5%? Doesn't make sense, which is to say that rates will come down, but just because they are down it isn't likely that everyone will be borrowing at those lower rates.
8) Refis. Haven't talked about refis yet. I guess banks love refis, points and fees and all that good stuff for them. But wait a second, aren't a sizable portion of homeowners underwater now already? Hard to refi if your mortgage due amount exceeds your house's appraised value. Not only that, but I've read some estimates that you need to see about a 70 basis point drop in loan rates vis a vis your current rate before it makes sense to consider refi-ing (remember all those fees and points the bank charges).
9) Monetization of debt, that's QE, that's going to put a dent into the deficits the gov't can run. Pumping $1T into the system via QE limits what the gov't can spend with it's normal fiscal policy. So one arm of the gov't is in essence crowding itself out with another arm of the gov't! Nice. Not only that, but more importantly all that gov't crowding out (from both arms, fiscal policy and Bernanke's bid) is obviously crowding out the free market decisions you and I and all the other private citizens might like to make. Some of that money I could have invested how I want to invest, now that money is going to be spent as tax revenue on projects that have little 'investment' value. Bridges and roads and infrastructure plays are not investments. They're expenses. You don't get a return on capital on expenses. Houses are like that, generally, too. Anyway, the govvy is gonna tax money and misallocate it wastfully and then we'll have to work and save that much more before we can invest in new businesses properly.
10) The USD might get smoked. Clearly it did yesterday. But if the ECB and the BOE and the BOJ all are getting in on the QE fun, does it makes sense that the dollar continues to get smoked? Maybe not so much. And even if it does stay smoked, I doubt our trading partners are going to take that US-export freebie sitting down. Mexico is already imposing tariffs on certain products because the US is backing out of some free-trade-trucking zone it agreed to not long ago.
All in all, Ben's latest salvo is admirable IMO in the sense that he clearly does not want to repeat the past. But I kinda feel he's playing by a textbook that he's written himself (his doctoral thesis), and that he's ignoring the likely unintended consequences of all his good intentions. In other words, Let the market sort it out, Ben. Sadly, I don't think that will happen without the government mucking up the process.
At this point I'm with those who say that the fastest way out of this mess is through debt repayment. Gotta pay it down, get rid of it. When that's done, bank balance sheets will be clean (or will have stopped hemoraging) and bankers will be willing to make loans again to worthy borrowers. Until then it seems like we need to take the pain of a consumer base that will likely scale back from the >70% of GDP that it makes up now. So the savings rate goes up as people save to pay down debt...and folks buy less stuff. Yikes.
Posted by johnny
Thu Mar 19th, 2009 12:30 PM
The FOMC saved gold again yesterday - $300bn more cash to flow into the financial system via bond repurchases plus mortgage-backed securities up into the $trillions; these are not insignificant numbers! To see eurusd surge by 400 pts in the space of 2 hours yesterday evening was remarkable - I thought there was something wrong with my Bloomberg feed at first.
Gold jumped nearly $65 with a spike in volumes on Comex.
But has anything really changed or did that action just present us with an excellent shorting opportunity? For the euro and equities I think it will probably be the latter. For gold I'm not so sure. Concerns about future inflation have been brought to the fore once more by the Fed's action and $925 to $945 looks to be the range for now.
Silver followed gold higher but little reaction from the PGMs, which makes sense - no-one's going to rush out and buy a new car today on the back of the Fed's largesse.
Posted by johhny
Thu Mar 19th, 2009 12:31 PM
btw.... crazy is right ...yesterday was INSANE !
Posted by Noah
Thu Mar 19th, 2009 02:01 PM
I still think gold is yet to get 'silly' as an anti-fiat currency trade
Posted by artvandalay
Thu Mar 19th, 2009 02:27 PM
what does this mean for refi interest rates?? wait longer or pull the trigger now?
Posted by artvandalay
Thu Mar 19th, 2009 02:27 PM
what does this mean for refi interest rates?? wait longer or pull the trigger now?
Posted by Noah
Thu Mar 19th, 2009 02:29 PM
I would pull trigger now if you can get under 5%
Posted by Eric
Thu Mar 19th, 2009 02:58 PM
So Congress just passed a new law which taxes anyone working at a TARP firm and making over $250k with a 90% tax rate. In essence, nobody in NYC who works at any financial institution that received TARP (Merill, Citi, GS, MS, etc etc) will be making above $300k.
Any guesses what that is going to do with property values in this city. Mayor Bloomberg must be beside himself.
Posted by cfranch
Thu Mar 19th, 2009 04:08 PM
Eric: It taxes bonuses above and beyond a base salary of 250K. Instead of paying out bonuses, base salaries will simply rise. Just looks like political posturing and as a Democrat I am embarrassed by it.
Posted by Cfranch
Thu Mar 19th, 2009 06:06 PM
CRFRANCH - No, you're wrong. It taxes all income for income above $250k which includes bonus AND regular salary.
And, frankly your political views are irrelevant to my post. The point is that this tax is disasterous for this city and homeowners. The fact that you can't grasp the implications of this policy are why we as a country are increasingly screwed. It started when the Republicans had control of everything and passed a bunch of stupid policies. And now that the Democrats control everything the policies are proving to be just as stupid.
Posted by Eric
Thu Mar 19th, 2009 06:09 PM
sorry - i typed cfranch in the name section.
Posted by cfranch
Thu Mar 19th, 2009 10:23 PM
Eric: You're right, my news was from the initial story. However Obama doesn't seems cool to the idea and there is a question of its constitutionality. I think whatever becomes law will be far less punitive.
Posted by cfranch
Thu Mar 19th, 2009 10:23 PM
Eric: You're right, my news was from the initial story. However Obama does seem cool to the idea and there is a question of its constitutionality. I think whatever becomes law will be far less punitive.
Posted by Marmotton
Thu Mar 19th, 2009 11:22 PM
Not only that but it's not clear whether this is for the individual or for the household. Imagine the situation where you have 2 folks in the household. One makes $200k total comp, the other one (who works at a TARP institution) makes $50k base (not impossible). Let's say teh second individual gets $100k bonus. She only gets $10K after taxes?
In any case, if this passes, this will be the end of the TARP banks: every brain will be walking out. These banks will collapse, taking the financial sector with it. Good luck with a recovery...
Finally, it looks like the House is trying to act as some kind of a justice system (lynching), and a poor one at that.
It really looks like cold blooded pay-back time.
Posted by Thisson
Mon Mar 23rd, 2009 07:17 PM
That might be true, if there was anywhere for the talent to walk to. Doesn't seem like too many firms in NY are hiring.
I continue to believe that we are witnessing the repricing of NY labor and real estate markets.