QE still driving portfolio shifting

I’ve been watching for a ‘buy the rumor sell the news’ ‘risk off’ reversal, but it happened at best only momentarily after the Fed announcement, when the 10 year tsy note dipped to maybe 2.62 very briefly, stocks dipped, the dollar sort of held, gold was off a touch, etc. But now it looks like it’s ‘risk back on’ with a vengeance as both believers in QE and those who believe others believe in QE are piling on.

The fact remains that QE does nothing apart from alter the term structure of rates.

There are no ‘quantity’ effects, though from the following article and market reactions much of the world still believes there are substantial quantity effects.

And what we are seeing are the effects of ongoing portfolio shifting and trading based on the false notions about QE.

To review,

QE is not ‘money printing’ of any consequence. It just alters the duration of outstanding govt liabilities which alters the term structure of risk free rates.

QE removes some interest income from the economy which the Fed turns over to the Tsy. This works against ‘earnings’ in general.

QE alters the discount rates that price assets, helping valuations.

Japan has done enough QE to keep 10 year jgb’s below 1%, without triggering inflation or supporting aggregate demand in any meaningful way. Japan’s economy remains relatively flat, even with substantial net exports, which help domestic demand, a policy to which we are now aspiring.

QE does not increase commodity consumption or oil consumption.

QE does not provide liquidity for the rest of the world.

QE does cause a lot of portfolio shifting which one way or another is functionally ‘getting short the dollar’

This is much like what happened when panicked money paid up to move out of the euro, driving it briefly down to 118, if I recall correctly.

No telling how long this QE ride will last.

What’s reasonably certain is the Fed will do what it can to keep rates low until it looks like it’s meeting at least one of its dual mandates.

Asians Gird for Bubble Threat, Criticize Fed Move

By Michael Heath

November 4 Bloomberg) — Asia-Pacific officials are preparing
for stronger currencies and asset-price inflation as they blamed
the U.S. Federal Reserve’s expanded monetary stimulus for
threatening to escalate an inflow of capital into the region.

Chinese central bank adviser Xia Bin said Fed quantitative
easing is “uncontrolled” money printing,
and Japan’s Prime
Minister Naoto Kan cited the U.S. pursuing a “weak-dollar
policy.”
The Hong Kong Monetary Authority warned the city’s
property prices could surge and Malaysia’s central bank chief
said nations are prepared to act jointly on capital flows.

“Extra liquidity due to quantitative easing will spill
into Asian markets,”
said Patrick Bennett, a Hong Kong-based
strategist at Standard Bank Group Ltd. “It will put increased
pressure on all currencies to appreciate, the yuan in particular

has been appreciating at a slower rate than others.”

The International Monetary Fund last month urged Asia-
Pacific nations to withdraw policy stimulus to head off asset-
price pressures, as their world-leading economies draw capital
because of low interest rates in the U.S. and other advanced
countries. Today’s reactions of regional policy makers reflect
the international ramifications of the Fed’s decision yesterday
to inject $600 billion into the U.S. economy.

Bullard/Fed


Karim writes:

Bullard

  • Definitely out there on his own. FRB would certainly not communicate policy shift through him
    • Also, everyone has different reasons why QE works. Most of the Fed leadership thinks just via interest rate channel and announcement effect. Bullard thinks through monetary channel, which makes him a minority.

GDP Data: Something for everyone; capex recovery intact; consumer spending sluggish; net exports a large drag; inventories an offset

  • Annualized gwth at 2.4%; Q1 revised from 2.7% to 3.7%; Prior data revised lower
  • Private consumption 1.6% vs 1.9% in Q1; Investment up 28.8% vs 29.1% in Q1
  • Business capex (equipment and software spending) up 21.9% vs 20.4% in Q1
  • Residential fixed investment (housing) up 21.9% (aided by expiring tax credit)
  • Exports and imports both up in double digits, but net exports a drag on growth of -2.78%
  • Inventories contribute 1.05%

China and the $US


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Looks like China is pretty much keeping its currency stable vs the dollar and depreciating against the rest of the world, probably to support it’s exporters.

(Note the recent rise in exports and rhetoric regarding the importance of exports.)

This means if the currency is ‘naturally’ strong China is buying $US financial assets to keep it fixed to the $US. The second chart shows holding of tsy secs but China could also be adding agencies and other $US financial assets now that ‘agency credibility’ has been restored.

Seems they are quietly testing the waters to see if Geithner will come down on them as Paulson did.

If we had an administration that understood the monetary system we’d encourage them to do this and export without limit, while sustaining domestic demand with fiscal adjustments (lower taxes and/or higher spending, depending on your politics) which obviously ‘good things’ (again, if you understand the monetary system).

In fact, with the entire world seeming desirous of exporting to the US if only we would let them, a serious level of prosperity is there to be had.


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Europe Posts Trade Surplus in May


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Both imports and exports continued to fall in May as nothing there seems to be going right.

Europe Posts Trade Surplus in May as Imports Fall

By Emma Ross-Thomas

July 17 (Bloomberg) — Europe posted a trade surplus for a second month in May as exports declined less than imports.

Shipments from the 16-nation euro area fell a seasonally adjusted 2.7 percent from April, when they dropped 0.7 percent, the European Union’s statistics office in Luxembourg said today.

Imports slipped 2.8 percent, swelling the trade surplus to 800 million euros ($1.1 billion) in May from 700 million euros.


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Trade/Michigan


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Karim writes:

  • Trade improves both in balance and direction, likely benefitting from inventory restocking as goods balance improves much more than services balance
  • Exports up 1.6% and imports down 0.6%
  • Real trade balance narrows by 3.9bn; will likely boost Q2 GDP estimates by 0.25-0.50% (median estimate now -1.8%)
  • Import prices up 3.2%, 0.2% ex-petroleum and -0.1% from China (now -2.4% y/y)
  • Michigan survey much lower than expected (64.6 vs prior 70.8) and at lowest level since March
  • Consistent with other surveys (ABC, Conf Board)
  • Lower gas prices may help in weeks ahead but still strong headwinds from labor market


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