Global Macro Trading Journal

[ralph00]

Quote from Daal:

Hilsenrath piece was hilarious. He spent half of the article throwing arguments on why QE3 is not likely anytime soon and yet the takeway from most people is that QE3 is coming in a emergency meeting within 24 hours

Opening sentence: Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe's fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery

That's straight from Bernanke to Hilsenrath's laptop. The rest of the piece is just fluff to make it look like a real news article.

You also throw up a straw man argument (designed to make yourself look smarter, I guess) about an emergency meeting within 24 hours. I haven't seen that mentioned in even one place. Action is coming later this summer if conditions stay on their current trajectory.

 

[darkhorse]

Can someone elaborate on what QE3 is supposed to do, with long bond yields already at multi-century lows?

 

[Daal]

Quote from darkhorse:

Can someone elaborate on what QE3 is supposed to do, with long bond yields already at multi-century lows?

I'd suggest you read Scott Sumner blog. Econ profession is too obsessed with interest rates and thus miss out on a lot of stuff, its all about expectations

 

[Daal]

It seems to me that the more unconventional stimulus the fed does, all else being equal, the less stimulus they will provide in the future. This is due the following factors
-The conservative way they behave the bigger the balance sheet goes
-They take more criticism they have to take
-The shortfall in aggregate demand gets smaller overtime as the economy adjusts and grows

Yet the market seem to be missing that. They are starting to expect action from the Fed at earlier and earlier levels in terms of declines in iexpectations, stock prices and econ data.

According to Fed's thinking, QE2 was worth 75bps(Bernake's own words), OT was worth 50bps(Bernake's own words). OT2 is likely to be more conservative(Due the factors mentioned earlier), probably something like 25bps yet people are all excited

It seems that the market doesn't realize that it will have to get very sick along with the economy for the Fed to come in with the medicine they crave

 

[darkhorse]

Quote from Daal:

I'd suggest you read Scott Sumner blog. Econ profession is too obsessed with interest rates and thus miss out on a lot of stuff, its all about expectations

I understand the dynamics of the debate, the difference between policy impact and psychological impact, the MMT stuff, and so on.

I'm curious as to whether someone can explain in plain English, in a few sentences, what the Fed would expect QE3 to accomplish and why.

As far as I can tell -- and I'm just a simple caveman trader -- QE3 would do piss-all at this point because long rates are already rock bottom, and attempts to provide additional liquidity as a means of economic boost are somewhat pointless in a deleveraging cycle, because the problem is not availability of credit but overhang of existing debt, coupled with general bank unwillingness to lend (except to cash rich entities that don't need to borrow).

In a deleveraging cycle, QE is like offering food after Thanksgiving dinner. The problem is bloating and indigestion after too much gorging, not a hunger for more food (credit / liquidity etc).

My suspicion is that there is no rational justification for QE3 -- that it's a bunch of hail Mary b.s. -- but again, I am wondering if anyone knows how a Fed official would explain it, i.e. what their logical path of reasoning would be, were they to undergo QE3, and what they would expect it to accomplish.

p.s. And don't tell me they would simply hope for a stock market wealth effect by boosting confidence and lifting the value of paper assets. If that is the only QE3 rationalization left, then the current state of academia vis a vis economics, and central bank policy making, is even more fucked than the most cynical would guess.

 

[Specterx]

Quote from darkhorse:

Can someone elaborate on what QE3 is supposed to do, with long bond yields already at multi-century lows?

Presumably the same thing achieved by QEs 1 and 2, as well as Op Twist.

 

[Specterx]

Quote from darkhorse:

My suspicion is that there is no rational justification for QE3 -- that it's a bunch of hail Mary b.s. -- but again, I am wondering if anyone knows how a Fed official would explain it, i.e. what their logical path of reasoning would be, were they to undergo QE3, and what they would expect it to accomplish.

p.s. And don't tell me they would simply hope for a stock market wealth effect by boosting confidence and lifting the value of paper assets. If that is the only QE3 rationalization left, then the current state of academia vis a vis economics, and central bank policy making, is even more fucked than the most cynical would guess.

My suspicion is you're right. But then Greenspan really signed the death warrant for academic economics when he deliberately blew the housing bubble, even if Bernanke has been the one to command the firing squad.

I imagine QE3, if it comes, will be justified along the lines of "the recovery was bumping along just fine until the Europeans came and derailed everything, and this new shock necessitates additional policy support." Yet another 'shock' just arriving from the blue that couldn't possibly have been foreseen, like a tornado or an earthquake. Definitely not the entirely predictable and predicted results of years of malfeasance by politicians and policymakers.

 

[Specterx]

Quote from Daal:

Yet the market seem to be missing that. They are starting to expect action from the Fed at earlier and earlier levels in terms of declines in iexpectations, stock prices and econ data.

This is because each new flood of money expansion is having less and less of an impact on stocks and economic data indices - both in magnitude and duration. I suspect they can only carry this game for one more round before the rules need to be changed again - presumably either nominal GDP targeting or an explicit inflation target, with a commitment to print whatever money is required to sustain the targets.

If the Fed goes forward with something like this I'm going to consider it the first step towards a major inflation problem and dispose of my free cash as quick as I can, and additionally take on as much fixed-rate debt as I can to invest in rental properties. But frankly I'd be surprised if the Fed actually does anything meaningful before the market and economy get much worse.

 

[darkhorse]

Quote from Specterx:


If the Fed goes forward with something like this I'm going to consider it the first step towards a major inflation problem and dispose of my free cash as quick as I can, and additionally take on as much fixed-rate debt as I can to invest in rental properties.

But what would be the catalyst for inflationary breakout? Loss of faith? In which case, reference Japan... if the Fed fails in their final mission utterly, one could just as easily make the case for the Hugh Hendry "bond supernova" scenario, where long rates get cut in half yet again, oil falls to $50 per barrel, and lenders pretty much start hiding under rocks. "Big inflation" might have a multi-year if not multi-quarter lag behind a failed QE3.

Also, re, rental properties, can you assume rental properties are cheap, or even good values right now? Rental income has been booming as an investment idea for a good while now. A savvy property buyer I know is frustrated beyond belief by all the irrational bids making profit margins paper thin.

 

[ralph00]

Quote from darkhorse:

But what would be the catalyst for inflationary breakout? Loss of faith? In which case, reference Japan... if the Fed fails in their final mission utterly, one could just as easily make the case for the Hugh Hendry "bond supernova" scenario, where long rates get cut in half yet again, oil falls to $50 per barrel, and lenders pretty much start hiding under rocks. "Big inflation" might have a multi-year if not multi-quarter lag behind a failed QE3.

Also, re, rental properties, can you assume rental properties are cheap, or even good values right now? Rental income has been booming as an investment idea for a good while now. A savvy property buyer I know is frustrated beyond belief by all the irrational bids making profit margins paper thin.

I've been involved with rentals for over 25 years - worked my way up from slums and student housing to nicer suburban properties where 99-100% of the rent due shows up in my post office box within the first 3 days of the start of the month.

Assuming one has access to reasonable financing, the returns available from rentals are outstanding right now. If you can by something with a cap rate 200 basis points over your financing cost, that's a no-brainer. More than 200 basis points is a gold mine. Financing is available at 4% now - there is plenty of good stuff on offer at over a 6 cap in the Phila area.