Archive for the ‘Intervention’ Category

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Measuring QE2 Effectiveness

Thursday, December 9th, 2010

In announcing QE2 in their November 3 FOMC meeting, the statement contained the following excerpt:

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.”

There are many different ways one could use to gauge whether QE2 is successful.  Of great significance, I am not aware of any official statement that specifically states the goals (and metrics of such) of QE2.

However, lowering of interest rates, especially the 10-Year Treasury, appears to be a/the primary goal.

Below is a chart of the 10-Year Treasury yield, starting on November 3, the date of the announcement.  The actual asset purchases began on November 12:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

As one can see, the 10-Year Treasury Yield has risen substantially over this period.

As for the goal of (modestly) increasing inflation, there are no daily CPI values available for this period.  However, if one uses values from the Billion Prices Project (which I discussed in the November 24 post) as a proxy, the index values have actually decreased.  The index was 100.76 on November 3; 100.6679 on November 12; and 100.51 on December 7.

It will be very interesting to see whether QE2 seems to meet its objectives.  Of course, if QE2 fails to reach its objectives, perhaps the foremost question would appear to be why this is so.  I plan on further commenting upon QE2 and its apparent effectiveness in future posts.  (posts on Quantitative Easing can be found here)

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A Special Note concerning our economic situation is found here

SPX at 1232.55 as this post is written

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Nassim Taleb Quote On Bernanke

Tuesday, November 30th, 2010

In the November 22 – November 28 Bloomberg BusinessWeek, p23, Nassim Taleb is quoted as saying the following, which I find interesting:

“Bernanke is someone who talks about returns without talking about risk.  It’s identical to a pilot who talks about speed but not about safety.  The measures he is using may work, but should they fail, the risks are humongous.”

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A Special Note concerning our economic situation is found here

SPX at 1187.76 as this post is written

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George W. Bush / Larry Kudlow Interview November 2010

Monday, November 29th, 2010

Last Monday, CNBC aired a recent interview (with a transcript) of former President George W. Bush by Larry Kudlow.  The interview focused on George W. Bush’s recently published book (“Decision Points”) and the Financial Crisis of 2008-2009.

I found various comments by George W. Bush to be interesting.  In many instances I disagree with what he said.  For now, I will briefly highlight a few items and may extensively comment about this interview later.

Particularly notable is George W. Bush’s comments about TARP, interventions, and government involvement.

However, two of his phrases really stand out above all others.  I find them of the utmost importance.  The first is:

“I had to abandon free market principles in order to save the free market system.”

The second is (with regard to the need for action during the Financial Crisis):

“…there’s not a lot of time for theoretical debate.”

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A Special Note concerning our economic situation is found here

SPX at 1189.40 as this post is written

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Ben Bernanke November 6, 2010 Remarks On QE2

Wednesday, November 10th, 2010

On Saturday (November 6) Ben Bernanke took part in a panel discussion.  This was part of The Federal Reserve conference “A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve.”

I found these comments, pertaining to QE2, to be highly notable:

Ben Bernanke:

“There is not really, in my mind, as much discontinuity as people think.  This sense out there, that quantitative easing or asset purchases, is some completely far removed, strange kind of thing and we have no idea what the hell is going to happen, and it’s just an unanticipated, unpredictable policy – quite the contrary.  This is just monetary policy.”

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A Special Note concerning our economic situation is found here

SPX at 1213.40 as this post is written

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Ben Bernanke On QE2

Friday, November 5th, 2010

Ben Bernanke wrote an op-ed in The Washington Post yesterday titled, “What the Fed did and why: supporting the recovery and sustaining price stability.”

I could write very extensively about this piece as it is highly notable on several fronts.  For now, I will limit my comments.

My analysis indicates that the risks of QE lack recognition.  As well, the benefits appear highly overstated.  As such, we (as a nation) appear to have a mistaken understanding of the risk-reward ratio of large-scale QE.  This is especially problematical as I expect additional large-scale QE will be done in the future.  This belief is echoed by other prominent parties.

What I find interesting about Bernanke’s (and other Fed members’) comments about QE is that they seem very limited in discussing risks of QE.  This begs the question as to whether Fed members don’t think there is much risk in QE.  From what I have seen, the main risk Fed members have discussed is money supply issues / future inflation as well as the ability to gracefully (i.e. non-disruptively) exit such QE efforts.  Bernanke briefly mentions both of these items in his above-mentioned Washington Post op-ed.

However, I view those risks as being only two among a multitude of others.  As I wrote in the August 13 post, “There are an array of risks embedded in such QE efforts.”  In that post I discuss QE risks to the U.S. Dollar and QE’s role in fostering asset bubbles.

Another risk that receives little recognition is the risks embedded in the ever-increasing size of the Fed’s portfolio.   This is a very complex potential risk, entailing both large potential capital losses (driven in large part by rising interest rates) as well as other unintended (negative) consequences.  The potential capital losses aspect is well-documented in a Wall Street Journal editorial of today titled “High Rollers at the Fed.”

Both of these risks, as well as the multitude others, will only grow in importance if, as I suspect, additional (over and above Wednesday’s $600B announcement) large QE is performed in the future.

A Special Note concerning our economic situation is found here

SPX at 1222.43 as this post is written

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Quantitative Easing – Varied Thoughts

Tuesday, November 2nd, 2010

There has been an immense amount of material written about additional Quantitative Easing (QE2).

Here are some of the works that I have found among the most interesting (although I don’t necessarily agree with what is being said):

“Guidelines for Global Economic Policymaking,” (pdf) Gregory Hess, Shadow Open Market Committee, October 12, 2010

Investment Outlook, November 2010, Bill Gross

“Night of the Living Fed,” (pdf) Jeremy Grantham, GMO, October 2010

“What’s Ahead for the Fed,” Roubini Global Economics, October 27, 2010

excerpted material, Contrary Investor, October 14, 2010 commentary

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As for my own thoughts on the issue, I have written about QE2 directly in the August 13 post, and have written extensively about interventions in various posts.  As well, two articles focus on interventions, “Intervention’s Potential Blindspots” as well as “My Overall Thoughts On The Bailouts, Stimulus Measures, and Interventions.”

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A Special Note concerning our economic situation is found here

SPX at 1193.59 as this post is written

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S&P500 Vs. Consumer Confidence

Sunday, October 31st, 2010

The following commentary and chart is excerpted from the October 14, 2010 ContraryInvestor.com commentary.  I find it interesting in a variety of different ways, and it raises a lot of questions with regard to the stock market, consumer confidence, QE1, and QE2…

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“We have not touched on consumer confidence for a good while, but now is the time.  It’s time because of the certainty of QE ahead.  Again, absolutely key question being, will QE2 positively influence the real economy?  QE I was a strike out.  And what of QE2?  We believe a key indicator to watch as to whether QE2 will transmit to the real economy is the present conditions component of the headline consumer confidence index.  Clearly the aim of QE2 is to inflate asset prices even further, let’s not beat around the bush about it.  QE I inflated financial and commodity prices, but left real world prices of leveraged residential real estate and commercial real estate untouched.  Moreover, QE I did not help headline consumer confidence recover.  We’ll spare you the chart, but headline consumer confidence continues to rest at levels historically consistent with recession.  Very quickly, the headline consumer confidence report is driven by two subcomponents that are present conditions and future expectations.  Historically, the present conditions component of the headline number has been highly directionally correlated with the equity market over time.  You can see exactly this in the chart below.  Of course without the Fed overtly telling us this as a driver of their QE2 decision making, they are implicitly hoping higher stock prices (the assumed wealth effect) will engender accelerating consumer confidence, thereby motivating consumers to borrow and spend (or at worst just spend).  This likewise had to be a key rationale of QE I as the Fed is surely aware of this prior cycle linkage between stock prices and confidence in present conditions.

But what stands out like a sore thumb in the chart above is that the present conditions component of the confidence report never recovered at all even as equities experienced one of the greatest 13 month rallies in history under QE I (exactly as we marked in the chart) from March of 2009 through April of this year.  Moreover, and as is also clear, even as heavy Fed POMO was kicked off in August and September that lifted stocks to their greatest September gain in over seven decades, the present conditions component of the consumer confidence survey continued to deteriorate up through the most recent numbers.  Message being?  At least for now consumer confidence is not being bolstered by financial asset price inflation.  A complete anomaly relative to historical experience.  QE2 is clearly a bet this anomaly will fall back in rhythm with historical experience.  So, we need to intently watch the present conditions component of the consumer confidence report ahead for clues as to whether QE2 will positively impact the real economy through bolstering consumer confidence, or otherwise.”

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A Special Note concerning our economic situation is found here

SPX at 1183.26 as this post is written


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Additional Quantitative Easing – Comments

Friday, August 13th, 2010

Monday’s (August 9) Barron’s had an article titled “Time to Print, Print, Print.”

The article provides an overview of the concept of Quantitative Easing (QE) in the context of our current economic situation.

I don’t agree with many of its conclusions and insinuations, however.  In particular, the article seems overly positive on the idea of Quantitative Easing and its supposed positive effects, without providing significant discussion of its risks.

Quantitative Easing is an especially important concept now as I believe additional large-scale QE will continue to occur.  There are an array of risks embedded in such QE efforts.  Perhaps chief among these risks is the risk that excess “money-printing” poses to the currency.  The Barron’s article does acknowledge this by saying “Promiscuous growth in the money supply, of course, can both fan inflation and debase the currency.”  Although there has been virtually no commentary on the vulnerability of the US Dollar to substantial declines, I believe that such vulnerability does exist, as I discussed in the July 30 post.

Another large risk to QE efforts is that should QE prove successful in driving down interest rates, such a policy foments asset bubbles.  This is especially notable as many believe the housing bubble is but one example of an asset bubble that was caused by ultra-low interest rate policies.  My numerous posts concerning asset bubbles can be found under the “Bubbles (Asset)” category.  Asset Bubbles, and their future resolution, are an epic problem.

Most people fail to acknowledge the current existence of asset bubbles.  The Barron’s article seems to imply that no bubbles exist when it says “Damn the risks of triggering a bit of inflation and some modest investment bubbles.”

I will likely comment more upon the idea of QE once it is further implemented.

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SPX at 1083.61 as this post is written

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Blinder And Zandi Paper – My Comments

Sunday, August 1st, 2010

Alan Blinder and Mark Zandi released a paper dated July 27 titled “How The Great Recession Was Brought To An End.” (pdf)

From the report, page 1: “In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.”

my comments: Needless to say, I don’t agree with many aspects of the report’s conclusions, focus and methodologies.

Much of my thoughts on intervention efforts, which includes stimulus, can be found under the “Intervention” category.

The main reason I highlight this report is for reference purposes.

I think the report will prove highly memorable, an iconic piece of the period.

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SPX at 1101.60 as this post is written

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Multipliers Used In Stimulus Plans

Tuesday, June 1st, 2010

John Taylor’s May 21 blog post discusses the stimulus multiplier used for the ARRA and new research from the IMF with regard to actual stimulus multipliers.

The chart shown has immense significance on a variety of fronts, assuming that the IMF research is representative of the effectiveness of stimulus spending.

We, as a nation, do ourselves no benefit by continually overestimating the (gross) benefits to be derived by stimulus actions.

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As I’ve previously commented, I don’t believe the concept of stimulus spending is well understood.  My previous writings on stimulus can be found here.  Stimulus spending is of particular noteworthiness as I believe that we will continue to enact stimulus spending in significant amounts.

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SPX at 1089.41 as this post is written

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