Bernanke’s QE2 Averts Deflation, Spurs Rally, Credit

Quote from Martinghoul:

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.
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I don't want to interrupt this discussion. I just want to highlight this paragraph because politicians make me sick when they rail against the "evil speculators" without thinking things through.

It is impossible to distinguish.
 
Quote from Martinghoul:

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?
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i dont agree with some of what you said in the unquoted portion, but i'll follow my own advice and try not to deviate the argument away from the discussion point that really matters.

it is absolutely the "investor" (which, in this case, is the primary dealer banks) that decides where to put the money. you are correct. since, however, it is the primary dealers, they want the most liquid of investments they can get (and they have enough real estate anyway on their books) which correspond the best to inflationary forces. hence, equites, commodities, etc. bonds because that just happens to be what the Fed is buying. and since the dollar is the proxy by which all of these things climb and it is the perfect carry, the same goes with high(er) yielding currencies and emerging market assets/currencies.

but it is still ultimately the Fed that creates the environment that is so lucrative for this type of speculative orgy. thus, it is the Fed that is at fault.
 
Quote from Tsing Tao:
i dont agree with some of what you said in the unquoted portion, but i'll follow my own advice and try not to deviate the argument away from the discussion point that really matters.

it is absolutely the "investor" (which, in this case, is the primary dealer banks) that decides where to put the money. you are correct. since, however, it is the primary dealers, they want the most liquid of investments they can get (and they have enough real estate anyway on their books) which correspond the best to inflationary forces. hence, equites, commodities, etc. bonds because that just happens to be what the Fed is buying. and since the dollar is the proxy by which all of these things climb and it is the perfect carry, the same goes with high(er) yielding currencies and emerging market assets/currencies.

but it is still ultimately the Fed that creates the environment that is so lucrative for this type of speculative orgy. thus, it is the Fed that is at fault.
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Right, so you make a few points here...

Firstly, you agree that the investor in question makes a certain decision. The criteria, if I understand you correctly, is that a) the asset has to be liquid; and either b) the asset has to offer an attractive return in an inflationary environment; or c) in the special case of bonds (which offer sh1t returns in an inflationary environment), it's gotta be bonds that the Fed's purchasing. Now, from what I can see, the Fed can affect the investor's decision inputs only in the c) case. For a), it's unclear to me what the Fed has to do with forcing an investor towards a certain place in the liqudity spectrum. For b), nobody, not even the Fed, knows with certainty whether the future holds inflation or deflation, so this criterion is based on a forecast, which may or may turn out to be correct. You could make an indirect argument about inflation expectations, I suppose, but it's gonna be quite roundabout and tenuous, in a variety of ways. So, apart from bonds, where I see a direct incentive, I don't see how you can argue that the Fed is forcing investors into particular assets.

Secondly, I don't understand what the whole dollar thing has to do with it? Are you now arguing that the value of these assets is going up not because investors are allocating capital into them, but rather because USD is falling? Or is it both? I also have no idea what "dollar is the perfect carry" means. If you buy EM/higher yielding ccies, surely you must mean that USD is the funding ccy and offers, relatively speaking, very poor carry? As to the EM assets, I think that belongs in the previous paragraph.

Now, the most interesting part of your argument is the suggestion that all these investors aren't the households, corps, etc, but rather banks, esp the primary dealers. Lemme ask you a question... What sort of evidence would be required for me to be able to disabuse you of this funny notion? If I offer you some hard numbers, are you willing to change your mind?

As to your last passage, it's very nebulous and I don't like it. We're discussing the specific features of this "environment" that the Fed creates and the "speculative orgy" that ensues. Why don't we keep doing that, rather than discuss general vague concepts and labels?
 
Quote from Martinghoul:

Right, so you make a few points here...

Firstly, you agree that the investor in question makes a certain decision. The criteria, if I understand you correctly, is that a) the asset has to be liquid; and either b) the asset has to offer an attractive return in an inflationary environment; or c) in the special case of bonds (which offer sh1t returns in an inflationary environment), it's gotta be bonds that the Fed's purchasing. Now, from what I can see, the Fed can affect the investor's decision inputs only in the c) case. For a), it's unclear to me what the Fed has to do with forcing an investor towards a certain place in the liqudity spectrum. For b), nobody, not even the Fed, knows with certainty whether the future holds inflation or deflation, so this criterion is based on a forecast, which may or may turn out to be correct. You could make an indirect argument about inflation expectations, I suppose, but it's gonna be quite roundabout and tenuous, in a variety of ways. So, apart from bonds, where I see a direct incentive, I don't see how you can argue that the Fed is forcing investors into particular assets.

Secondly, I don't understand what the whole dollar thing has to do with it? Are you now arguing that the value of these assets is going up not because investors are allocating capital into them, but rather because USD is falling? Or is it both? I also have no idea what "dollar is the perfect carry" means. If you buy EM/higher yielding ccies, surely you must mean that USD is the funding ccy and offers, relatively speaking, very poor carry? As to the EM assets, I think that belongs in the previous paragraph.

Now, the most interesting part of your argument is the suggestion that all these investors aren't the households, corps, etc, but rather banks, esp the primary dealers. Lemme ask you a question... What sort of evidence would be required for me to be able to disabuse you of this funny notion? If I offer you some hard numbers, are you willing to change your mind?

As to your last passage, it's very nebulous and I don't like it. We're discussing the specific features of this "environment" that the Fed creates and the "speculative orgy" that ensues. Why don't we keep doing that, rather than discuss general vague concepts and labels?
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alright, i'm not sure what you're talking about when you refer to nebulous arguments, but i am open to discussing the features as you wish. and of course, if you show me evidence to the contrary in something, and i cannot contradict it, i will certainly change my mind. that is called "learning" and i'm always open to it. i just wonder if the evidence you can supposedly provide is credible or not - that will be the deciding factor. you certainly wont be able to use fed or govt data, because i'm not going to buy that anymore than i would buy the BLS data. i am also hesitant opening myself up to this opportunity with you, because insofar as i can tell from watching your commentary on this entire website, you have never, ever admitted to being wrong about anything - regardless of how strong or flimsy your arguments have been.

but back to the meat of your response...

i am generalizing when i speak of who the "investor" class is, and i am also generalizing the reasoning based on why they choose the assets they do. but the i believe it is wholly accurate. and it is the fed's relentless quantitative easing - the providing of all this money - that is linked to commodities, equities, etc. going up. it's not just because they're buying the same thing (in "c" above) but these "investors" know that by printing like mad, inflation is a real threat, and the hedge for that is anything that tends to provide protection - assets, etc.

which is why all Benny had to do in jackson hole last year is strongly hint to a QE2, and everything took off to the races and the dollar was clobbered. all benny had to do is indicate that the fed was interested in keeping the equity markets going up because of the "wealth" effect, and everyone took it as license to buy risk. if benny had come out and said "we are no longer going to buy assets, and are going to begin to shrink our balance sheet", you cant tell me all of this stuff wouldn't tank - it would.

Secondly, I don't understand what the whole dollar thing has to do with it? Are you now arguing that the value of these assets is going up not because investors are allocating capital into them, but rather because USD is falling? Or is it both? I also have no idea what "dollar is the perfect carry" means. If you buy EM/higher yielding ccies, surely you must mean that USD is the funding ccy and offers, relatively speaking, very poor carry?
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when i say the dollar is the perfect carry, i meant it provides itself as the perfect vehicle to carry, ie, it is the funding currency for everything. just like the yen was for a while (and still is to a major extent).
 
You're hard to please, but I will do my best to find some data that's up to your exacting standards.

As to me never being wrong, that could be for two reasons, right? Could be that I am just that good, no :)? At any rate, you can relax. I can actually point you to a thread here where I talked sh1t, realized I was wrong, was thoroughly humbled and apologized. So it has happened, although, to be fair, it almost never happens on ET and is more likely on the other forums I participate in.
 
Quote from ElCubano:

good stuff guys....thanks for keeping it cool headed and for taking the time.
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martinghoul is very intelligent, so it's easier to keep cool when someone responds in kind. i don't always agree with stuff he claims as correct, but he's not a Fed apologist. i think he might be an ECB apologist, though. :)
 
Thank you for the compliment...

I am no apologist and certainly not where the ECB is concerned. In fact, I think the ECB has a LOT more to answer for than the Fed.
 
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