Индивидуальные курсы Java. Обучение программированию Java в Москве и Санкт-Петербурге. |
 |
Apr-18-2011End of QE2 has some investors fearing fall in June(topic overview)
CONTENTS:
- Yellen outlined in a Feb. 25 New York speech the importance of clarifying the Fed's intentions, saying the central bank could use communications to make policy more accommodative, lower unemployment and raise the rate of inflation if financial markets expected a tightening of policy before the Fed intended. (More...)
- Darwin, like many others, has been a "reluctant participant" in the rally, and believes it will continue for a while longer. (More...)
- With interests practically at zero the Fed used quantitative easing to stimulate the economy. (More...)
- The only comfort one can take is the belief that the central banks of the world, led by the Bernanke Federal Reserve, would prudently return to some form of quantitative easing to alleviate any futher crisis. (More...)
- The statement said only that the bank would ''initially aim around 0.15 percent" and "subsequently induce further decline." (More...)
- Some investors warn that the end of the program, known as QE2, will upend the stock market and push other markets in unexpected directions. (More...)
- The proof -- if any is needed -- that cheap money fueled asset inflations do not bring sustainable prosperity lies in the still smoldering ruins of the U.S. housing boom. (More...)
- The FOMC's decision will mark the end of its quantitative easing policy aimed at spurring the economic recovery. (More...)
- Futures markets in Chicago see a 29 percent chance of a rate increase by December, and Eurodollar contracts on interbank lending predict rates of 0.5 percent by year-end -- an imminent tightening encouraged by an inflationary uptick and suggestions from some regional Fed presidents that rates should rise soon. (More...)
Selected Sources
Find out more on this subject
Yellen outlined in a Feb. 25 New York speech the importance of clarifying the Fed's intentions, saying the central bank could use communications to make policy more accommodative, lower unemployment and raise the rate of inflation if financial markets expected a tightening of policy before the Fed intended. If policy makers believe their likeliest course of action is to hold the Fed's target rate lower for longer "and market participants came to share that view, then financial conditions would become significantly more accommodative, even in the absence of any change in the current level of the funds rate," Yellen said. At its March 15 meeting, the FOMC agreed that Bernanke will hold regular press conferences after the two-day sessions. Plosser, a recurrent skeptic of Fed easing who has said interest-rate increases are "on the table" this year, told reporters after an April 1 speech that he welcomes the press conferences. "I think it's a good thing; I am a strong believer in transparency and effective communication, so I support the effort," he said. [1] "Bernanke's press conferences will help mitigate the influence of some of the FOMC members who are further away from consensus and yet very, very vocal." The briefings -- after the Fed's two-day meetings in April, June and November this year -- may allow Bernanke, like his colleagues in Europe and Japan, to steer or even correct market expectations by making him the first official to explain any central bank actions. [1]
Bernanke and his chief deputies on the Federal Open Market Committee -- Fed Vice Chairman Janet Yellen and New York Fed President William C. Dudley -- have used speeches in recent weeks to knock back investor perceptions, based on remarks by Hoenig and several other FOMC members, that the central bank may raise rates before year-end. They have countered that the committee's leadership believes the threat from accelerating prices will prove "transitory." "There has been so much confusion in markets as some of these more peripheral members of the FOMC freely air their views," Coronado said. [1] Investors have two routes to profit financially from Bernanke's determination to keep the federal funds rate near zero for an extended period, said Chris Low, chief economist for FTN Financial in New York. "Those who think the Fed is making a mistake are tending toward the inflation trade: They're favoring commodities, favoring TIPS," Low said. "Those who believe the Fed is right are going for conventional fixed-income and extending in duration." [1]
"Investors are often left with the impression, which we believe is incorrect, that the hawkish side is more influential than it actually is," said Roberto Perli, a former senior staff economist in the Fed's division of monetary affairs. "This might be one of the reasons why federal funds futures have systematically and incorrectly predicted an early policy tightening in recent years," said Perli, now a managing director at International Strategy & Investment Group in Washington. The yield on the two-year note rose 0.07 percentage point to 0.89 percent on April 1, the highest level since May 2010, after the Labor Department reported the economy added a better- than-expected 216,000 jobs in March and St. Louis Fed President James Bullard said the Fed should consider shrinking its $600 billion asset-purchase program. [1] Yields on 10-year Treasuries jumped 4 basis points on March 25 in the minutes after Philadelphia Fed President Charles Plosser said -- in a speech titled "EXIT" -- that the improving economy should prompt policy makers to detail a plan for withdrawing record monetary stimulus. He suggested the Fed sell $125 billion of assets for every quarter-percentage point rise in the benchmark rate and normalize its balance sheet in 12 to 18 months. [1]
While the spectrum of opinions on QE is extremely varied, you can roughly divide the field into four groups along two axes. The first axis is those who believe QE is a good thing versus those who think it's a bad idea. The second is those who think QE will cause the markets to rise versus those who think it will, at some point, cause a stock and/or bond market correction at best, and a crash at worst. Let's take a look at each of these four groups, bearing in mind that there are many views in between as well. Obviously, this is pretty much the view of the Federal Reserve itself. While they acknowledge that quantitative easing is an unconventional monetary tool, they contend that it is necessary to combat the deflationary forces brought on by the recent financial crisis. They believe the policy will (and has) helped the real economy by stimulating asset prices and generating a wealth effect whereby consumers and businesses feel more confident and subsequently boost the economy through increased hiring and spending. This group believes that QE was necessary to prevent a collapse of the financial system and that it has successfully levitated asset prices. It has bought us some time to try to heal balance sheets and get the economy moving under its own power. These folks, however, have their doubts over whether or not we've actually done what's necessary to clean up the problems that caused the financial crisis. [2] There's been no shortage of potentially market-moving news for investors to digest so far in 2011. From major geopolitical strife in the Middle East to the sovereign debt crisis in Europe to the multilevel Japanese catastrophe, markets have been remarkably resilient so far. Perhaps that's because these types of events aren't what's driving the markets. The only news items that seem to have any lasting impact on the stock and bond markets these days are those that pertain to monetary policy, particularly that of the U.S. Federal Reserve. [2] An end to global monetary policy easing is on the horizon, with the U.S. Federal Reserve set to signal it will cease asset purchases at the end of June. When the rate-setting Federal Open Market Committee meets on April 27, it is unlikely to limit its options by ruling out asset purchases beyond the second $600bn ���quantitative easing��� programme ''' or '''QE2''' ''' that is due to finish by the end of the second quarter. [3] THE Financial Times has a story by Robin Harding above the fold this morning, headlined, "Fed to signal end of monetary easing". When the rate-setting Federal Open Market Committee meets on April 27, it is unlikely to limit its options by ruling out asset purchases beyond the second $600bn '''quantitative easing''' programme ''' or '''QE2''' ''' that is due to finish by the end of the second quarter. [4]
The importance of the briefings likely will grow with time, said John Canally, an economist and investment strategist at Boston-based LPL Financial Corp., which oversees $315.6 billion in assets. "The April 27 presser might be a trial run to work out the kinks and how he handles the questions,'' said Canally, who added that FOMC meetings with news conferences "will take on more importance," and eventually the Fed "will do what the ECB does and have one at every meeting. [1] Dudley's remarks and similar comments from Yellen the following week were an attempt from the Fed's leaders to better manage the market's belief about the central bank's policy plans, said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago, which oversees more than $40 billion in assets. "It is to adjust expectations and say 'listen, there are voices of dissent but this is where the central Fed is,'" Swonk said. Yellen heads a subcommittee the Fed formed at its Nov. 2-3 meeting to review the central bank's communications strategy. [1]
The European Central Bank and Bank of Japan hold monthly press conferences, and the Bank of Canada and Bank of England have quarterly sessions. Both Wim Duisenberg and Jean-Claude Trichet, the first and second presidents of the ECB, have used their briefings to stress -- sometimes explicitly -- that they alone spoke for the Governing Council and investors should look to them for guidance. At his February 2006 press conference, Trichet said Lorenzo Bini Smaghi "does not speak on behalf of" ECB policy makers after the Executive Board member was reported to have said that he favored higher interest rates. Asked last August about comments on the rate outlook by Slovakia's Jozef Makuch, Trichet noted that his colleagues ''do not speak on behalf of the Governing Council. [1] I am the porte-parole.'' Bernanke's counterparts also have used their press conferences to guide market expectations. In March, Trichet indicated the ECB would raise its benchmark interest rate in April, far faster than investors had anticipated, prompting a jump in the euro. When the Bank of Japan lowered interest rates to almost zero in February 1999, it didn't announce the decision in its policy statement, explicitly because it wanted to avoid making money-market rates too volatile, according to then-Governor Masaru Hayami. [1]
April 18 (Bloomberg) -- When Federal Reserve Chairman Ben S. Bernanke convenes his first press conference next week, he may emphasize a point the markets seem to have forgotten: He's serious about keeping interest rates low for an "extended period." [1]
Darwin, like many others, has been a "reluctant participant" in the rally, and believes it will continue for a while longer. He sees the huge U.S. debt burden coming home to roost in the form of rising interest rates in the next few years. Other variations on this view see QE as ethically questionable as it tends to help those who benefit from rising asset prices while it hurts savers who are struggling to earn a decent rate of return in a record low interest rate environment. The wealthy, banks, and large corporations tend to be in the former group, while lower/middle income folks and small businesses tend to populate the latter. Jim Rickards has labeled this policy of bailing out banks at taxpayers' expense "immoral hazard" and Joseph Stiglitz recently lamented the growing wealth disparity in America due to fiscal and monetary policies of the 1%, by the 1%, for the 1%. [2] Bill Gross, manager of the world's largest mutual fund at Pimco, fears the worst. Take away the largest buyer of Treasurys and, he says, their prices are likely to fall and long-term interest rates likely to rise. That could hurt the economic recovery, and it's one reason his fund has dropped nearly all of its Treasury debt. Other investors and economists, including those at Goldman Sachs, believe QE2 will expire without a stir. [5]
Besides the odd day of'' decline,'' the market has not collapsed'' from the notion of $120 a barrel oil or the expectation of gasoline at $4.00 a gallon. Is there more complacency than fear out there?'' It's so scary a time that PIMCO's Bill Gross first sold all his Treasuries and subsequently went short, betting that interest rates are going higher and bond prices lower. [6]
The recession has been over for nearly two years now. I'm not necessarily calling for an increase to interest rates just yet, but current macroeconomic conditions seem to be far better than those that necessitated QE1. [4]
With interests practically at zero the Fed used quantitative easing to stimulate the economy. No members of the FOMC are inclined to continue, even though they will still pursue an ultra easy monetary policy. [7] If the June Fed meeting arrived and the Fed determined that QE3 might be necessary, it could hint as much and the impact would be immediate. Given that the FOMC can influence the economy relatively quickly, there's little reason for Fed officials to indicate that they're doing anything other than what they are, in fact, doing'''which is pausing while the sustainability of rising expectations remains uncertain. [4] I understand what Mr Harding is saying here. Based on recent statements from key people on the FOMC it seems clear that the Fed's intention is to complete QE2 and then stop. So long as inflation expectations are rising, I would be very surprised to see additional Fed action. (I don't necessarily agree that rising inflation expectations should stay the Fed's hand; I simply think that they will.) Yet, it's too strong to say that the Fed is signaling an end to its easing cycle. It would be more accurate to call the impending end of QE2 a pause. [4]
The end of the initial round of asset purchases did not represent the conclusion of the easing process; when global developments undermined expectations in America, the Fed responded. [4] Fed officials, however, know that announcing more asset purchases at the last minute would disrupt markets. Silence on a follow-up ''' QE3 ''' at next week'''s meeting would therefore signal that their current intention is to complete the $600bn QE2 programme and then stop. [4]
Shacknofsky, a bright, articulate money manager was talking about the immanent demise on June 30th of the $100 billion a month (QE2) pump-priming of'' the financial markets that'' made it easy the past 6 months'' to invest in risky assets stocks, commodities and currencies.'' It helped give resilience to the rally in stocks that has lasted 2 years since March, 2009 and caused a doubling'' up of'' the stock market'' indexes at their fastest pace in 75 years. Bullish sentiment'' is so high it's actually insanely bearish if you are a contrarian; bullish sentiment is 55.4%; bearish, a measly 16.3%. [6] If you really believe it was Ben Bernanke's money that made you money in stocks and commodities, maybe you should be taking some of your gains off the table. The highly respected Rob Arnot, chairman of Research Affiliates, was quoted'''' in "The High-Tech'' Strategist" as saying " The end of QE2if it's not renewed with QE3 may trigger a recession and a pull back in risk markets risk assets stocks, commodities and credit spreads-could sell off. It is a very dangerous situation." [6]
The market, and precious metals especially, seems to be pricing in a third quantitative easing program. That is the general consensus. The most common views range from Bernanke can't stop printing money because if he does everything will collapse to he'll stop for a little while before the fake economic numbers take a dive and he's forced to start up the printing press again. Less common is the view that since the U.S. dollar is the world's reserve currency, Bernanke can print as much as he wants. Whenever there's a set date by which some major market supporting activity is supposed to conclude (e.g., 2008 Summer Olympics in China, QE1, etc) the market tends to go up with investors thinking something like, "it's safe to buy." [8] You can interpret gold at $1484 and silver over $42 as evidence'' that precious metals are the only way to protect yourself against Ben Bernanke's purposeful devaluation of the U.S. dollar. The fear'' in some quarters of the coming demise of QE2 only 10 weeks from now suggests that investors should be'' discounting the coming correction, and liquidating some of their positions taking profits '' As they haven't done so in any meaningful form, maybe the markets are not going to fall apart over the apparent'' end of the Bernanke tea party. [6]
David Rosenberg recently pointed out that there has been an 86% correlation between the Fed's balance sheet and the S&P; 500 over the last 2 years. It seems logical that the biggest question facing investors these days relates to the possible next steps for Ben Bernanke and company. [2] Lowe agrees with investors who think the Fed is correct. "If you're confident that yields are not going to rise, the return on a five-year note at 2.12 percent is so much higher than the 0.69 percent yield on the two-year," so extending maturity "can pick up a lot of income," he said. While Bernanke's move marks a break with his predecessor, Alan Greenspan -- who communicated primarily through prepared speeches and congressional testimony, rarely speaking to the press -- it follows the precedent of other chief policy makers. [1]
"I wouldn't expect to see a financial market reaction to the termination of that program," said Janet Yellen, vice chair of the Fed's Board of Governors, in a speech in New York. She said that investors have already priced in the end of QE2. [5] Now Skaggs believes markets rest on more stable ground. When the Fed wraps up its program, the economy and financial markets may wind up better off if it means oil, wheat and other commodity prices drop. "I've gone from being nervous to having my fingers crossed," he says. [5] "But we haven't seen that happen yet." Another risk? Many investors believe the Fed will extend QE2, despite signs the economy is strengthening. [5] Under QE2, the Fed buys Treasurys from investors who can then put the money in stocks and other investments. [5] Many investors have become addicted to the Fed's help, says Robert Arnott, chairman of Research Affiliates, a money management firm. "Most expect it to be over but secretly hope it won't," he says. [5]
Thirty percent of the 70 economists and money managers surveyed by CNBC in March expect the Fed to keep buying. [5] Economists call it quantitative easing, and it is the second time the Fed has used the tactic. [5] "Yet again the market is running way ahead of the Fed," said Julia Coronado, chief economist for North America at BNP Paribas SA in New York and a former Fed economist. [1]
Since last August, when Fed Chairman Ben Bernanke outlined the plan, the Standard & Poor's 500 index has gained 26 percent. Many also say it's partly to blame for rising commodity prices on everything from silver to cotton. "It's the most important factor that explains markets the way they are now," says David Rolley, co-head of global fixed income at the fund manager Loomis Sayles. [5] When Ben Bernanke hinted that QE2 was forthcoming in a speech last August, markets responded immediately and strongly, even though the actual policy announcement didn't occur until November. [4]
The only comfort one can take is the belief that the central banks of the world, led by the Bernanke Federal Reserve, would prudently return to some form of quantitative easing to alleviate any futher crisis. [6] The answer likely hinges on what happens after the Federal Reserve's $600 billion effort to boost the economy expires. [5]
Oil is over $100 a barrel, and gas prices in most areas in the U.S. are over $4 a gallon. While Morgan Stanley says this isn't bad for the economy, one may wonder just how long this "wealth redistribution" can last given that rising oil prices are like an additional tax on the public, which must drive or use public transportation to get to work, if they even have a job. [8] Copper, another early economic indicator, may be turning over, according to Goldman Sachs ( GS ). Goldman should in no case be blindly trusted, the thieves that they are, but they do occasionally dispense accurate information to their clients. That the economy is much worse than we're told and that copper prices are perhaps too high might be gleaned from an indirect source: people are now stealing the metal to make money. Another indication of the same thing is that the nickel, the $0.05 denominated U.S. coin that is composed of 75% copper and 25% nickel, as of April 15, 2011, has a melt value of $0.068. That's 36% higher than its face value. [8]
Maybe the bulls are confident that the economic recovery that is proceeding apace will continue to create more jobs and raise the income of consumers. That corporate earnings will continue to roll merrily along, spurred by a lower dollar that'' makes export sales easier. That the market is essentially cheap at 13.3 times earnings. That banks are healthier today with more capital and are not going to undermine the whole economy. It is amazing that the market has shrugged off the Japanese earthquake and the civil war in Libya, as well as unrest in another dozen nations in the Middle East.'' [6]
Yellen has presented a contrasting scenario with a five-year time line for unwinding the central bank's unconventional asset holdings. [1] Dudley, in San Juan, Puerto Rico, spoke shortly after the jobs report, saying the recovery is "still far from the mark" of the central bank's goals of price stability and full employment. [1]
The statement said only that the bank would ''initially aim around 0.15 percent" and "subsequently induce further decline." Speaking at his monthly news conference four days later, Hayami said a "zero rate would be O.K.," prompting investors to bid down interbank overnight rates to almost zero. [1] Bond markets may force rates higher, causing massive disruptions in the credit and currency markets. This "X Day" hasn't happened, but Hayman and others think it's coming. Who's Right and What Can Investors Do about It? It seems to me that it's possible that each of these perspectives may be correct at some point. [2] QE2 is supposed to end in June. Will investors start to sell before that date? I think it's quite possible. Another possibility is that they'll continue pricing in QE3. [8] How likely is QE3? Most observers seem to think that QE3 is not necessary at the moment, but we heard the same thing about QE2 as QE1 wound down. Once the markets and economy started to falter last spring and summer, everyone seemed to change their minds very quickly, proposing that QE2 was necessary to juice the markets and thereby support the economy. [2]
The differential may simply be a matter of timing. QE2 may appear to be a good thing in the short term, but its longer term consequences are far from clear and may end up causing a good deal of pain in the markets as well as the real economy. If any or all of these perspectives end up playing out as QE2 ends, how should investors react? David Rosenberg suggests we look at what happened to the markets last year as QE1 was about to end: the S&P; 500 fell, defensive sectors like utilities, telecom services, consumer staples and health care performed best. [2] If the root causes of the crisis are not addressed, then the economy and the markets will falter once the QE crutch is removed. This is an interesting view that was recently articulated in a guest post by Darwin at Investor Junkie. [2]
Some investors warn that the end of the program, known as QE2, will upend the stock market and push other markets in unexpected directions. [5] "The past doesn't really repeat itself," Skaggs says. Earlier this year, Skaggs was worried that the Fed's bond-buying was causing stocks to rise too quickly, setting the stage for a fall in June. [5] The article posits that the real reason you should be bullish on stocks has nothing to do with the strength of free market capitalism and everything to do with asset-goosing monetary policy. [2] The 2-year yield dropped 0.09 percentage point, wiping out the earlier gains. Dudley continued to clarify his point, saying in a Tokyo forum April 11 that "we're probably going to have excess slack in the U.S. labor market at least through the end of 2012, and that's one reason that colored my view that we shouldn't be overly enthusiastic about tightening monetary policy too early." [1]
The proof -- if any is needed -- that cheap money fueled asset inflations do not bring sustainable prosperity lies in the still smoldering ruins of the U.S. housing boom. They acknowledge that excessive leverage created an asset bubble of generational proportions, but they do everything possible to prevent rational deleveraging. Interestingly, equities continue to march higher in the face of European sovereign spreads remaining near their widest levels since the crisis began. It is eerily similar to July 2007, when equities continued higher as credit markets began to collapse. He sees the ZLB (Zero Lower Bound) as a trap. Many countries, including the U.S. and Japan, cannot afford to leave the ZLB because of the tremendous amount of debt they are servicing. [2] The U.S. dollar firmed while 10 year yields fell. It's important to note that all of the above trades reversed pretty hard once Mr. Bernanke and company started telegraphing QE2 in August of 2010. [2]
A Bernanke press conference "keeps the markets focused on the core message." He will speak at 2:15 p.m. after the April meeting, and the statement will be released at 12:30 p.m. Statements after one- day meetings will continue to be released at 2:15 p.m. [1]
The FOMC's decision will mark the end of its quantitative easing policy aimed at spurring the economic recovery. [7] I am sure that the FOMC is keeping a close eye on falling projections for first quarter output and on the potential threats to a self-sustaining recovery represented by Europe, commodity prices, and the global swing toward policy tightening. [4]
Futures markets in Chicago see a 29 percent chance of a rate increase by December, and Eurodollar contracts on interbank lending predict rates of 0.5 percent by year-end -- an imminent tightening encouraged by an inflationary uptick and suggestions from some regional Fed presidents that rates should rise soon. [1] If that's the case, whatever the Fed announces in June (QE3 or no more QE) will likely produce a sell off if one hasn't already occurred by that time. Of course, this comes with the often repeated caveat that the market will do what it wants regardless of the could'a, would'a, should'a. [8]
SOURCES
1. Bernanke Briefings May Offset Fed Hawks With Words as New Tool - Businessweek
2. What Happens After QE2? - Seeking Alpha
3. FT.com / US / Economy & Fed - Fed to signal end of monetary easing
4. Monetary policy: Is the Fed finished? | The Economist
5. The Associated Press: End of QE2 has some investors fearing fall in June
6. Say Goodby To The Stock Market's Safety Net - Robert Lenzner - StreetTalk - Forbes
7. AGI News On - FED TO ANNOUNCE STOP TO JUNE BOND PURCHASES
8. Looking for a Near-Term Top - Seeking Alpha
GENERATE A MULTI-SOURCE SUMMARY ON ANY SUBJECT IN SECONDS! - Use a bunch of the powerful iResearch Reporter tools from Power Text Solutions.
Try out this innovative free service today! |
|  |
|
