Bernanke’s QE2 Averts Deflation, Spurs Rally, Credit

[Tsing Tao]

Quote from Martinghoul:

Erm, it's trivial, really... Does correlation always imply causation? Has the Fed changed its monpol stance in the past couple of weeks?

correlation implies causation, and historical correlation over long periods of time is essentially how we reach our conclusions in the markets. isn't just about every economic theory supported in that manner on the lowest level? we see something that we believe might be a result of a particular action, and we see it again and again, and eventually we go "this causes that". of course, unless you're going to throw in the "this time is different" clause

as for the fed changing it's liquidity stance, no it has not in the last few weeks. although the market - a forward looking mechanism - IS reading that the fed is going to be changing it's liquidity access quite shortly - with no QE 3 coming either (at least not yet).

add to this the margin hikes (which reduce the effect of liquidity to spike the system) and voila.

or do you, as a supply and demand guy (blame china, india, etc) , think the demand picture has changed so drastically in the last few weeks? i would be very curious to hear your take if that is what you believe.

 

[Butterball]

Quote from Tsing Tao:

i do not understand how you can say CBs cannot do much about the prices of food an energy, given the correlation we have seen in commodities and the federal reserve's monetary policy stance. i just dont get it.

If it's so trivial then why don't you tell us what central banks can do to "control" soybean, heating oil or sugar prices?

 

[Larson]

Quote from Martinghoul:

Erm, it's trivial, really... Does correlation always imply causation? Has the Fed changed its monpol stance in the past couple of weeks?

Supply and demand factors have always been No.1, but that was before the vast monetization from the US we are seeing today, which is distorting the pricing mechanism. Your take? I am interested, in an objective economic opinion from someone besides myself and the one- track- mind fed apologists on this board.

 

[Martinghoul]

Quote from Tsing Tao:
correlation implies causation, and historical correlation over long periods of time is essentially how we reach our conclusions in the markets. isn't just about every economic theory supported in that manner on the lowest level? we see something that we believe might be a result of a particular action, and we see it again and again, and eventually we go "this causes that". of course, unless you're going to throw in the "this time is different" clause

No, that's not how it works. Correlation is necessary, but certainly not sufficient to prove causation. There's a plethora of ways you can convince yourself of that.

as for the fed changing it's liquidity stance, no it has not in the last few weeks. although the market - a forward looking mechanism - IS reading that the fed is going to be changing it's liquidity access quite shortly - with no QE 3 coming either (at least not yet).

add to this the margin hikes (which reduce the effect of liquidity to spike the system) and voila.

OK, does that mean then that you originally mis-spoke when you implied that it was the Fed's monpol stance that caused commodity price moves? Are you now suggesting that it's smth else altogether, i.e. the mkt's fwd expectations of the Fed's liquidity regime and/or the exchange margins?

or do you, as a supply and demand guy (blame china, india, etc) , think the demand picture has changed so drastically in the last few weeks? i would be very curious to hear your take if that is what you believe.

Well, I do think the demand picture has been changing over the past few months. However, I don't quite see what bearing this has on the subject we're discussing.

 

[Martinghoul]

Quote from Larson:
Supply and demand factors have always been No.1, but that was before the vast monetization from the US we are seeing today, which is distorting the pricing mechanism. Your take? I am interested, in an objective economic opinion from someone besides myself and the one- track- mind fed apologists on this board.

It's complicated... You sure you want me to wax poetic on this subject?

 

[Tsing Tao]

Quote from Butterball:

If it's so trivial then why don't you tell us what central banks can do to "control" soybean, heating oil or sugar prices?

you quoted me, but i never said it was trivial. martinghoul did. who are you trying to get a response from?

 

[Tsing Tao]

Quote from Martinghoul:

No, that's not how it works. Correlation is necessary, but certainly not sufficient to prove causation. There's a plethora of ways you can convince yourself of that.

i didnt say correllation was everything. its the red flag that can begin the process.

Quote from Martinghoul:


OK, does that mean then that you originally mis-spoke when you implied that it was the Fed's monpol stance that caused commodity price moves? Are you now suggesting that it's smth else altogether, i.e. the mkt's fwd expectations of the Fed's liquidity regime and/or the exchange margins?

how did i mis-speak? liquidity is the primary driver in the speculation. both actual and perceived.

Quote from Martinghoul:

Well, I do think the demand picture has been changing over the past few months. However, I don't quite see what bearing this has on the subject we're discussing.

the bearing it has is that you either believe commodities are being driving by supply and demand, or speculation. is there a third option somewhere?

 

[Martinghoul]

Quote from Tsing Tao:
i didnt say correllation was everything. its the red flag that can begin the process.

I don't understand this. What process? Let me reiterate:
- I said there's not much that a CB can do about the prices of food and energy.
- You said (my interpretation): correlation between the Fed's "loose" monetary policy stance and and rising commodity prices implies that the former causes the latter. Therefore, the Fed can directly affect commodity prices.
- I said I don't agree with your conclusion above because correlation doesn't always imply causation, so there's no way of knowing whether the implication holds in our case (without more information/evidence/thought).

I am not sure whether you agree or disagree with my last point. At first, I thought you disagreed, but now you seem to say that "correlation isn't everything", which I presume means you agree.

how did i mis-speak? liquidity is the primary driver in the speculation. both actual and perceived.

You didn't say liquidity. You said the correlation between commodities and the Fed's monetary policy stance. If you meant "liquidity" more generally, I'd be happy to talk about that, but we'll have to be more precise about defining it.

the bearing it has is that you either believe commodities are being driving by supply and demand, or speculation. is there a third option somewhere?

No, there's not even two. Prices of everything are driven by supply and demand, period. Pls feel free to define for me how you distinguish between "supply and demand", on the one hand, and "speculation", on the other.

 

[Tsing Tao]

Quote from Martinghoul:

I don't understand this. What process? Let me reiterate:
- I said there's not much that a CB can do about the prices of food and energy.
- You said (my interpretation): correlation between the Fed's "loose" monetary policy stance and and rising commodity prices implies that the former causes the latter. Therefore, the Fed can directly affect commodity prices.
- I said I don't agree with your conclusion above because correlation doesn't always imply causation, so there's no way of knowing whether the implication holds in our case (without more information/evidence/thought).

I am not sure whether you agree or disagree with my last point. At first, I thought you disagreed, but now you seem to say that "correlation isn't everything", which I presume means you agree.

You didn't say liquidity. You said the correlation between commodities and the Fed's monetary policy stance. If you meant "liquidity" more generally, I'd be happy to talk about that, but we'll have to be more precise about defining it.

No, there's not even two. Prices of everything are driven by supply and demand, period. Pls feel free to define for me how you distinguish between "supply and demand", on the one hand, and "speculation", on the other.

we got off on a correlation discussion which, in of itself, is not relevant. the topic is whether the Fed is responsible for commodity rises. or whether they can do anything to affect commodities or not (in the discussion you and i are trying to have). if that is not the correct discussion, please feel free to adjust me.

when i say "monetary policy" i refer to the easing or tightening of the money supply. how can you say this does not have anything to do with liquidity? as monetary policy is loosened, is liquidity not increased?

from wiki:

Types of monetary policyIn practice, to implement any type of monetary policy the main tool used is modifying the amount of base money in circulation. The monetary authority does this by buying or selling financial assets (usually government obligations). These open market operations change either the amount of money or its liquidity (if less liquid forms of money are bought or sold). The multiplier effect of fractional reserve banking amplifies the effects of these actions.

Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate.

The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals.

http://en.wikipedia.org/wiki/Monetary_policy

now, if you are trying to get me on some semantics argument, i'm not going to waste my time. just point out where i am incorrect, professor, and we'll move on.

as for the argument on supply/demand and speculation, you are being pedantic (again). i am more than aware that technically in all cases, there is a buyer and seller. hence, on the most basic level, it is all supply and demand. i am referring to supply and demand based on fundamentals (actual physical supply of, say oil, versus the consumption demand) versus a speculative purchase (or sale) of those assets just because the belief of the prices in those assets will move one way or the other.

are you doing this on purpose, trying to see how much you can get me to explain? you are perfectly capable of understanding what i mean in my conversation.

to get back to my original argument, it is that the Fed is to blame for rising commodity costs because of the flood of money into a system that is already overflowing from it. the money must go somewhere, and it does. into commodities (because of speculative fervor or a hedge against inflation) and other asset classes, driving up price. hence, turn off the money and the asset classes fall. turn it on, they rise.

hence, what the Fed (which is a CB just in case you wanted to make sure i explain that) can do is to tighten and drain liquidity.

 

[Martinghoul]

Firstly, I am not trying to "get" you on anything. I am trying to arrive at a common denominator in terms of the terminology used, so that we can have a meaningful discussion.

The correlation discussion is only relevant because you suggested that correlation between the Fed's loose monetary policy stance and commodity price rises implies that the Fed can affect commodity prices. I am simply saying that this reasoning is plain wrong. If you want to drop correlation as an argument, I am happy to do so, since it's a poor one and not at all interesting.

I am happy to discuss the liquidity issue. In answer to your question, if monetary policy is loosened, central bank liquidity doesn't necessarily increase. In general, CB liquidity and monetary policy are quite distinct and you can observe that by looking at the European Central Bank. The ECB has done nothing in terms of monetary policy between May 09 and Apr 11, but it did a LOT to affect the liquidity conditions. Most recently, the ECB acted in the traditional monetary policy sense, but those actions had virtually no effect on CB liquidity. So monetary policy doesn't translate one-to-one to CB liquidity. Furthermore, CB liquidity doesn't necessarily translate into mkt liquidity. If it did, there would have been no credit crunch.

As to speculation, I am not being pedantic. I am actually curious how one could ever distinguish "fundamental" demand from "speculative" demand. Obviously, there are some simple cases, but I don't see how you could easily formalize this. For example, if I am not a jeweller and I buy gold, does it mean my demand is a priori speculative? Or should I fill out a questionnaire before I buy this gold to inform the mkt that I am buying for "speculative" purposes? If I trade some Eurodollar/Trsy futures to hedge the interest rate exposure of my mtge, how you're gonna distinguish my "fundamental" demand from the times when I just feel like a bit of "speculative" punting? I have the same problem with the authorities (US Congress, the EU, BaFin) trying to go after the "evil" speculators.

Now as to your final point, that's the crux of the matter. Shock & horror, I actually agree with you that low policy rate in the US "encourages" certain capital allocation decisions. Specifically, out of cash/trsy bills and into "assets". This isn't a secret, but rather an explicit goal of current monetary policy. However, who decides which assets should capital be allocated into? Surely, it's the investor, not the Fed. For example, why don't the US investors put this "overflowing" money into Las Vegas and Florida real estate? Why in Japan, with their chronically low rates and abundant liquidity, do households and institutions overwhelmingly allocate capital into govt bonds? I propose to you that the decision to allocate capital into commodities specifically and the resulting price dynamic ultimately reflects a certain widely held consensus view, rather than an overabundance of liquidity.

Does that make sense?