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Message
Confessions of a Quantitative Easer
Posted on 11/13/13 at 8:58 am
Posted on 11/13/13 at 8:58 am
LINK
Interesting that this is coming out now. Preparing the public for removing the punch bowl perhaps?
My GUESS is that we have until at least March 2014 before tapering starts, with the December Fed meeting being the earliest time. When tapering does come, my GUESS is that the following 10-18 months will be ugly, as in 50%+ correction ugly.
Interesting that this is coming out now. Preparing the public for removing the punch bowl perhaps?
My GUESS is that we have until at least March 2014 before tapering starts, with the December Fed meeting being the earliest time. When tapering does come, my GUESS is that the following 10-18 months will be ugly, as in 50%+ correction ugly.
5
Posted on 11/13/13 at 9:06 am to LSU0358
quote:
My GUESS is that we have until at least March 2014 before tapering starts, with the December Fed meeting being the earliest time. When tapering does come, my GUESS is that the following 10-18 months will be ugly, as in 50%+ correction ugly.
When you add in the average 250% increase in monthly health premiums for much of middle America... what do you think next years economy looks like?
Posted on 11/13/13 at 9:30 am to LSU0358
Surprised this wasn't posted earlier. The only part of his piece that I 100% agreed with was this:
Everything else is based on an old Wall Street executive being used to things happening in an instant with results. The growth projections quoted were using the assumption of a stable economy with no QE, which actually makes the Fed's projection of 2% increase in GDP growth that much more dire of a view of the underlying economy. There's also the negated negative growth argument from QE, but even though somewhat I agree with it you're still arguing in the world of hypotheticals. The costs versus benefits argument is a very valid argument that many Fed officials are on strong sides of, but it is very apparent which side Andrew is on.
Regardless, tapering will happen next year, whether it be March, May, June, etc. it will happen next year. Markets are frothy but are correcting slowly with expectations of tapering. That's perfectly fine, what is bad is a shock event like May-June was this year. Leverage isn't as high as it was in May, REITs aren't 30 to 1 levered on duration, so we won't see the same type of technical selling we saw outside of a huge left tail event (thank god). Equities may take a hit because they've been so resilient and retail investors have poured in the past couple weeks, but it shouldn't be too bad.
In this same breath, this is an I did like that takes a critical view of central bank policies, isn't as angled, but definitely echoes some of my own personal fears.
quote:
it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy.
Everything else is based on an old Wall Street executive being used to things happening in an instant with results. The growth projections quoted were using the assumption of a stable economy with no QE, which actually makes the Fed's projection of 2% increase in GDP growth that much more dire of a view of the underlying economy. There's also the negated negative growth argument from QE, but even though somewhat I agree with it you're still arguing in the world of hypotheticals. The costs versus benefits argument is a very valid argument that many Fed officials are on strong sides of, but it is very apparent which side Andrew is on.
Regardless, tapering will happen next year, whether it be March, May, June, etc. it will happen next year. Markets are frothy but are correcting slowly with expectations of tapering. That's perfectly fine, what is bad is a shock event like May-June was this year. Leverage isn't as high as it was in May, REITs aren't 30 to 1 levered on duration, so we won't see the same type of technical selling we saw outside of a huge left tail event (thank god). Equities may take a hit because they've been so resilient and retail investors have poured in the past couple weeks, but it shouldn't be too bad.
In this same breath, this is an I did like that takes a critical view of central bank policies, isn't as angled, but definitely echoes some of my own personal fears.
This post was edited on 11/13/13 at 9:34 am
Posted on 11/13/13 at 10:05 am to LSU0358
quote:
My GUESS is that we have until at least March 2014 before tapering starts
I've read several articles and heard on the radio that the Fed actually doesn't expect to start tapering until June/July 2014. With Yellen being appointed some people expect her to actually do the opposite.
My question is, if the tapering does occur and couple that with the Obamacare bullshite starting cause ripple effects ... when should I pull my money?
Or is this the wrong way to look at it?
This post was edited on 11/13/13 at 10:10 am
Posted on 11/13/13 at 10:09 am to LSU0358
quote:Nah, probably more like 15%. Still a correction but not a crash.
as in 50%+ correction
Posted on 11/13/13 at 10:18 am to TexasTiger34
quote:
I've read several articles and heard on the radio that the Fed actually doesn't expect to start tapering until June/July 2014. With Yellen being appointed some people expect her to actually do the opposite.
The Fed hasn't dictated a time period at all for tapering. Everything is just speculation, even from some of the closest Fed watchers.
quote:
My question is, if the tapering does occur and couple that with the Obamacare bullshite starting cause ripple effects ... when should I pull my money?
Markets are pricing in tapering as we speak, by the time the announcement is made (outside of a December announcement), the markets will have already moved. If you're in equities, the markets are pretty frothy so I'd start realizing gains now. However, just to be clear I thought they were overpriced in May as well but the difference now is retail has poured a lot of money in equities recently. That's usually when you should pull out (giggity).
Posted on 11/13/13 at 10:30 am to LSURussian
quote:
Nah, probably more like 15%. Still a correction but not a crash
dont see how you could be right on that... 25-30 is more likely.
Dow 12,000 is the real number... In My Opinion.
Posted on 11/13/13 at 10:34 am to LSU0358
It was a good article. We discussed it on the political board the other day, so I'll just paste my same comments from there:
On whether I believe QE has helped corporations generate organic growth, or rather just been a benefit to their financials:
Response to another poster asking what QE is:
And then what El Erian said (which has also been said by others) really puts things into perspective (albeit still speculative):
On whether I believe QE has helped corporations generate organic growth, or rather just been a benefit to their financials:
quote:
It benefitted firms in a number of ways but, yes, the primary way was by giving corporations access to extremely cheap capital they could then use to refinance higher-interest debt and/or buy back shares, each of which have the effect of increasing earnings per share. So if you've been paying attention the past few earnings seasons, corporations (in general) have grown earnings faster than the pace of revenue growth, while revenue growth has generally been below average. (It should also be noted a third use of cheap paper would be to engage in M&A, which would also yield higher revenue. But I wouldn't include that as net revenue growth (to the economy as a whole) because it's simply the sum of the two firms' prior revenue streams. A fourth use would be through the payment of dividends, though that, too, has nothing to do with revenue or earnings growth.)
This results in higher corporate earnings and, thus, higher stock prices, assuming no multiple contraction (which is typically not what you expect when earnings are growing). The fly in the ointment here is that earnings growth without revenue growth is not sustainable long-term. So while people point out that current S&P price-to-earnings ratios are relatively in-line or below historical price-to-earnings ratios (thereby claiming stocks are still cheap), they fail to take into account those very price-to-earnings ratios are based on a level of earnings growth that is essentially the product of financial engineering and is otherwise not sustainable.
So I would agree with you. The financials of Wall Street (more accurately, corporations in general) have been aided. These firms would be much better off if there was sufficient demand to warrant expansion of their capital base via business investment or labor base via increased hiring. That simply hasn't been the case, partly due to the extremely weak state of the consumer, who is being continually squeezed between higher taxes (payroll taxes) and higher costs (price inflation outpacing wage inflation and, now, higher health care costs).
Response to another poster asking what QE is:
quote:
Quantitative Easing, or the Fed's asset purchasing program in which Treasuries and Mortgage-Backed Securities are purchased (to the tune of $85B per month) on the open market in order to drive interest rates down. This has had the effect of stimulating demand for real estate (that can be purchased at historically low interest rates) and increasing the price of assets (including stocks), both of which it is hoped will stimulate further economic recovery.
The success, of course, is hotly debated, particularly considering we're five years "out of" the recession and the economic environment is still so weak the Fed doesn't even feel like the $4T it's injected into the economy to date is enough yet.
The "QE is helping Main Street" argument would be that low interest rates are beneficial to consumers. The argument against QE would be that the positives don't outweigh the negatives. My argument would be that QE becomes more or less irrelevant (in terms of its ability to produce a net benefit to the economy) when you have a fiscal and regulatory environment that are as horrid as ours is today. Indeed, I believe fiscal policy is the far more important point of discussion as activist monetary policy is really only designed to manage the respective extremeties of the business/economic cycle. What happens between "peak and trough" is more closely linked to fiscal policy, with respect to which this current Administration's is a complete non-starter (or, even worse, an outright inhibitor of economic growth).
And then what El Erian said (which has also been said by others) really puts things into perspective (albeit still speculative):
quote:
Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP
Posted on 11/13/13 at 10:37 am to RedStickBR
quote:
And then what El Erian said (which has also been said by others) really puts things into perspective (albeit still speculative):
That was me.
It was a good read. I believe the author was on tv to further discuss his op-ed.
Did anyone see it?
Posted on 11/13/13 at 12:44 pm to Meauxjeaux
The 2014-2015 time frame could be nasty IMO.
Posted on 11/13/13 at 12:55 pm to BennyAndTheInkJets
quote:
table economy with no QE, which actually makes the Fed's projection of 2% increase in GDP growth that much more dire of a view of the underlying economy. There's also the negated negative growth argument from QE
I think improving the economy itself was a secondary goal of QE. The main purpose was to recapitalize the banks. I think we are to the point that has occured. The next move down won't be accompanied by the news of large banks failing.
Posted on 11/13/13 at 12:59 pm to LSURussian
quote:
quote:
as in 50%+ correction
Nah, probably more like 15%. Still a correction but not a crash.
Just realized something. When I'm saying 50% correction, I meant ~50% correction of the move up from the 2009 lows. So assuming (and we all know what that does) an 1800 - 1850 S&P high sometime next year, that would put the S&P in the 1100 to 1200 range. So total market % correction would be more in the 30% range.
Again, just a WAG on my part, but I'm thinking removing QE will shock the market pretty hard.
Posted on 11/13/13 at 3:25 pm to LSU0358
quote:
Again, just a WAG on my part, but I'm thinking removing QE will shock the market pretty hard.
I agree a correction could be forthcoming, but for a different reason. I don't necessarily buy into this illusory shock that ending QE would have on the market. That may just be a lazy way to explain what could actually happen.
More accurately, corporations have been juicing earnings through buybacks and by retiring higher-interest debt. When QE begins to be tapered, long-term rates are likely to rise, thereby making the capital companies have been using to do this much less cheap and, hence, much less likely to be utilized. At that point, they'll have to either grow the top-line or cut costs further. Since top-line growth has been hard to find (on a relative basis) and since ending QE is not likely to reverse that, I think a return to robust revenue growth in the near-term is unlikely at this point. Further, companies are already extremely lean, so I don't see where they have much further room to cut costs either.
This brings us to the chicken/egg question of, "What will it take for companies to see top-line growth again?" On the one-hand, revenue growth could theoretically be achieved by expanding a firm's labor force and/or its capital base. On the other hand, both of those events would likely hinge on the consumer being strong, which is precisely not the case (even barring some improvement in consumer confidence).
Since the 1960s, personal consumption (C) has grown from roughly 55% of GDP to over 70% today, as our economy has increasingly come to rely on the consumer. If you think about the remaining components of GDP, private investment (I) has been minimal as corporations are not prone to spend while the consumer is so weak; as always, we're still running trade deficits (X-M); and pressure is being put on the government to curtail spending (G).
With C weak, and with I dependent in part on C, where else is growth supposed to come from? This is one reason I think the fiscal and regulatory policies of recent years have been so harmful to our economy. Consumers are experiencing price inflation outpace wage inflation, their taxes have gone up (payroll tax expiry), and costs continue to rise (particularly health care costs). That explains why the consumer is still only spending on non-discretionary items such as automobiles (the age of the U.S. fleet is as old as it's ever been) and housing. Yet interest rates going up is likely to pull the rug from underneath housing, so we can't even count on the housing sector to pull us out of this economic rut we're in. Likewise, the auto market has also shown some recent sensitivity to interest rates, too.
I will say this (and this is not political; it's an economic judgment of a political decision), the one thing you don't do in an environment like this is a massive overhaul of 1/6 of your economy. You should instead be bending over backwards to give small business as much visibility as you possibly can, whether with respect to fiscal or regulatory policy. Things like Dodd-Frank and Obamacare do precisely the opposite.
Posted on 11/14/13 at 8:08 am to LSU0358
quote:
The main purpose was to recapitalize the banks.
QE1, yes. The others had different reasons.
QE2 and OpTwist2 were economically defensive in nature. One measure the Fed looks at is the 5-year, 5-year forward breakeven rate (USGG5Y5Y Index if you have Bloomberg). You can look at it as what 5-year inflation expectations are expected to be 5-years from now. This level has only touched or fallen under 2% 3 times, 2008, the middle of 2010, and the summer of 2011. As soon as this touched or crossed the 2% level, the Fed announced a QE program.
QE3 and QE4 were economically offensive in nature, 5Y-5Y forwards were around the 2.3% range. This was the Fed trying to jump-start the economy rather than save it from going under. Has it worked? I don't know, you can make an argument for and against very easily. I'd definitely say it hasn't worked as well as the Fed wanted it to so far, but until we have confidence in businesses, they won't hire.
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