1635 GMT [Dow Jones] Fed's Evans, a non-voting FOMC member this year, calls for "much more" Fed easing in WSJ interview. Says he might support inflation above 2% for a time. Says he wants lower real rate to fight liquidity trap and sees core inflation at 1% in 2012, below 1.5% in 2013. Evans will be a voter in 2011. Comments come as investors continue to focus on chance of more Fed QE, or bond buying, to help economy improve.
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The Credit Crisis Financial Stocks Short Journal
- Thread starter Daal
- Start date
Evans addressing what I have been pounding on the table for months
"Where is the common ground on the committee right now?
Evans: The statement is fairly clear on that. We see the economy is recovering. We see inflationary pressures lower and we see the unemployment rate high and it is going to be slower to come down. With the funds rate already at zero, there is a pretty valid question as to how accommodative is monetary policy. Some people would point to the size of our balance sheet and say there is an enormous amount of accommodation. Just look at the amount of excess reserves in the system. Milton Friedman looked at the U.S. economy in the 1930s and he saw low interest rates as inadequate accommodation, that there should have been more money creation at that time to support the economy. That wasnât based upon the narrowest measure of money, like the monetary base or our balance sheet. It was based on broader measures like M1 and M2 and how weak those measures were. Iâve come to the conclusion that conditions continue to be restrictive even though we have a lot of so called accommodation in place. An improvement would be a dramatic increase in bank lending. That would be associated with broader monetary aggregate increases. Then we would begin to see more growth and more inflationary pressures and then that would be a time to be responding."
Its good to finally hear from a member the truth and not hide behind their traditional talk
"Where is the common ground on the committee right now?
Evans: The statement is fairly clear on that. We see the economy is recovering. We see inflationary pressures lower and we see the unemployment rate high and it is going to be slower to come down. With the funds rate already at zero, there is a pretty valid question as to how accommodative is monetary policy. Some people would point to the size of our balance sheet and say there is an enormous amount of accommodation. Just look at the amount of excess reserves in the system. Milton Friedman looked at the U.S. economy in the 1930s and he saw low interest rates as inadequate accommodation, that there should have been more money creation at that time to support the economy. That wasnât based upon the narrowest measure of money, like the monetary base or our balance sheet. It was based on broader measures like M1 and M2 and how weak those measures were. Iâve come to the conclusion that conditions continue to be restrictive even though we have a lot of so called accommodation in place. An improvement would be a dramatic increase in bank lending. That would be associated with broader monetary aggregate increases. Then we would begin to see more growth and more inflationary pressures and then that would be a time to be responding."
Its good to finally hear from a member the truth and not hide behind their traditional talk
Evans is now effectively saying the Fed is now changing its policy from target ing interest rates to targeting the money supply, like Volcker did for different reasons. Of course, Bernanke wont admit that in public, it could fuel Japanese expectations but I bet they are watching M2 figures very carefully
Also the bank lending boom Evans talks about I expect not to happen, just the opposite, if Case Shiller tanks like some expect in the coming months, the Fed Senior Loan Survey might turn back to tightening
Also the bank lending boom Evans talks about I expect not to happen, just the opposite, if Case Shiller tanks like some expect in the coming months, the Fed Senior Loan Survey might turn back to tightening
Quote from ralph00:
Defying everyone's expectations, the RBA did not hike interest rates last night. Aussie 90 day bills had a nice little "rate hike panic" in September - a combo of the "risk on" trade and a bs goldman report saying they expected the RBA to hike 125 bp over the coming 12 months.
While there is an undeniable mining boom going on in Oz thanks to China, the housing market and consumer spending numbers show a good deal of weakness. One could even say that housing in Oz has rolled over. I suspect the RBA will take a wait and see attitude for some time.
They will probably be 'late' (according to the prevailing wisdom that monetary policy should be used, that is). Even the Bank of England, the most dovish central bank, were late to cut in 2008. Australia is not in a stagnation like most of the west. However when the tipping point comes they may reverse fast like the BoE. The fear of a repeat of 2008 domestically will scare the crap out of them.
Australia should tip over the edge like the USA and EU housing markets did. We should see one or two horrible earnings results from leading-edge housing bubble stocks, a big market selloff on the news, and that will be the first indication that things are going wrong. 2007 saw first developers and sub-prime lenders announcing shortfalls, then 6-12 months later it spread into bad bank earnings releases. I assume a similar pattern will occur this time. So, look at the developers and secondary finance stocks, wait for the bad news to come out in their data, and then short aggressively...then slowly move on to the banking sector.
Australian housing stock is now over 3 times national GDP (Japan in 1989-90 reached 3.9x), and they have a huge debt to foreigners. Unless it's going to be a bigger bubble than Tokyo 1989 - which was by far the biggest housing bubble of all-time - then the end should be coming fairly soon. If so, then we should expect a collapse of the banks similar to places like Ireland, worse than the UK or USA. Also with a non-major currency, and massive foreign liabilities, Australia may end up with a whiff of Iceland about it - currency devaluation along with financial collapse. If that happens, the Aussie dollar could retest the 1998 lows of around 48 cents to the US $, or in a worst case, even go crashing through to new depths.
Short-term, with all the USD bearishness and QE fears, I suspect AUD could pop up to parity. It would just be such a classic headfake to break parity briefly, get reported in all the Australian and even international press, sucker in the last of the dentists, squeeze the last of the weak shorts, and then move back down in the beginning of a long-term collapse. Something like that would confuse so many people that it almost has to happen!
Quote from ralph00:
LOL at the BOJ which is at it again. Last night, they announce a rate cut and their own QE - the Yen immediately fell about 50 pips on the news, but has now recouped the entire drop and more.
Do you think more Yen should be bought now by traders, or wait for their next proper intervention?
If they follow the SNB model, they will intervene a couple more times at lower prices to save face, and then give up. So pretty much each intervention will give a low-risk entry point with nice upside.
Quote from Ghost of Cutten:
They will probably be 'late' (according to the prevailing wisdom that monetary policy should be used, that is). Even the Bank of England, the most dovish central bank, were late to cut in 2008. Australia is not in a stagnation like most of the west. However when the tipping point comes they may reverse fast like the BoE. The fear of a repeat of 2008 domestically will scare the crap out of them.
Australia should tip over the edge like the USA and EU housing markets did. We should see one or two horrible earnings results from leading-edge housing bubble stocks, a big market selloff on the news, and that will be the first indication that things are going wrong. 2007 saw first developers and sub-prime lenders announcing shortfalls, then 6-12 months later it spread into bad bank earnings releases. I assume a similar pattern will occur this time. So, look at the developers and secondary finance stocks, wait for the bad news to come out in their data, and then short aggressively...then slowly move on to the banking sector.
Australian housing stock is now over 3 times national GDP (Japan in 1989-90 reached 3.9x), and they have a huge debt to foreigners. Unless it's going to be a bigger bubble than Tokyo 1989 - which was by far the biggest housing bubble of all-time - then the end should be coming fairly soon. If so, then we should expect a collapse of the banks similar to places like Ireland, worse than the UK or USA. Also with a non-major currency, and massive foreign liabilities, Australia may end up with a whiff of Iceland about it - currency devaluation along with financial collapse. If that happens, the Aussie dollar could retest the 1998 lows of around 48 cents to the US $, or in a worst case, even go crashing through to new depths.
Short-term, with all the USD bearishness and QE fears, I suspect AUD could pop up to parity. It would just be such a classic headfake to break parity briefly, get reported in all the Australian and even international press, sucker in the last of the dentists, squeeze the last of the weak shorts, and then move back down in the beginning of a long-term collapse. Something like that would confuse so many people that it almost has to happen!
I am currently long a batch of AUD Dec $0.80 puts. I will be buying some Mar puts soon as well. If the AUD hits parity with the USD, even better. Ideally, I'd like to buy puts 9-12 months out, but the volume in these is low to non-existent. If anyone knows of a better way to do this, I'm all ears. I'm risking less than 1% of my assets, but the payoff could be 10x, 20x, 30x, or more that amount.
You alluded to it, but I'm not sure folks understand how much the Aussie banks rely on offshore funding. If the housing market and economy begin to suck wind, the banks and then the currency will have the rug pulled out from under them mighty quick. This guy does a good job of showing how reliant the banks are on offshore investors and the lengths they will go to juke the numbers to make things seem healthier than they are.
http://www.unconventionaleconomist.com/2010/09/cba-desperately-seeking-housing.html
Quote from ralph00:
I am currently long a batch of AUD Dec $0.80 puts. I will be buying some Mar puts soon as well. If the AUD hits parity with the USD, even better. Ideally, I'd like to buy puts 9-12 months out, but the volume in these is low to non-existent. If anyone knows of a better way to do this, I'm all ears. I'm risking less than 1% of my assets, but the payoff could be 10x, 20x, 30x, or more that amount.
You alluded to it, but I'm not sure folks understand how much the Aussie banks rely on offshore funding. If the housing market and economy begin to suck wind, the banks and then the currency will have the rug pulled out from under them mighty quick. This guy does a good job of showing how reliant the banks are on offshore investors and the lengths they will go to juke the numbers to make things seem healthier than they are.
http://www.unconventionaleconomist.com/2010/09/cba-desperately-seeking-housing.html
Yeah I saw that. My only issue is I think it will probably take a lot longer than 3 or 6 months for this to happen. Even once the US and EU housing bubbles went pop, it took 2 1/2 years from the peak (mid/late 2006) to the bottom (early 2009). Some markets like GBP took until early 2008 before they started going down, and it lasted about a year to the bottom.
Westpac and CBA are both on the "World's Safest Banks" list (http://topforeignstocks.com/2010/09/05/the-worlds-50-safest-banks-2010) so it may take quite a while for them to tumble if the bubble pops. Investors perhaps won't flee en masse until they are literally forced to by giant earnings misses and write-downs. I mean, look at how investors stayed long WFC and even pumped it to new highs (!) in September 2008 before the collapse.
An ideal position would be credit default swaps but they are hard to get if you aren't a big institution. I like the rate futures play, but it's risking 100 basis points to make 300 - nice but not exactly a Paulson-type skewed risk/reward. If anyone knows of a good trading vehicle for betting on bank & developer blowups, i'm all ears.
In 2007-08 the best was to wait for the bubble to actually start bursting, the numbers to come through much worse than expected, and then initiate shorts/puts then. You entered at worse prices but your timing was better and you had to wait 12-24 months at most to see a total collapse. If you bought puts on Jan 06 you were near the top but probably didn't get paid.
Actually, it might be a good idea to start a "Australian housing bubble stock short journal", just dedicated to finding then monitoring and playing the best trading vehicles for playing a collapse.
Quote from Ghost of Cutten:
Actually, it might be a good idea to start a "Australian housing bubble stock short journal", just dedicated to finding then monitoring and playing the best trading vehicles for playing a collapse.
I'd encourage someone to do this. I dont follow Australia much and would be interested in finding out if they are really going into a US type financial crisis
Jan Hatzius
"Most observers probably think of the Fedâs commitment to keep the federal funds rate at âexceptionally low levelsâ¦for an extended periodâ when they think of communication. In this regard, the committee has already taken a significant step toward QE2 in our view, though not one that has been widely recognized in market chatter. In particular, by saying explicitly that inflation is too low relative to its mandate, we believe that the FOMC has effectively defined âextended periodâ to be a lot longer than many probably assume. After all, even if one assumes that they can successfully raise short-term rates before shrinking the balance sheet, why would they start to do so when inflation is too low? In this regard, an observation toward the beginning of Mr. Sackâs speech is noteworthy:
âIndeed, according to their most recently published forecasts, most FOMC members expect the unemployment rate to remain above 8.25 percent through 2011 and the inflation rate to remain below its mandate-consistent level through 2012. In addition, the economy remains vulnerable to downside surprises that could take both output and inflation further away from the FOMCâs objectives.â
Now, Mr. Sack doesnât sit on the FOMC, and he doesnât speak for the committee either. But he does make a valid point about the likely behavior of inflation over the next two to three years. If the committee already sees inflation as too low through 2011 at a minimum, and unemployment at a level that is clearly too high, then why wonât that extended period extend well into 2012, if not beyond?"
Looks like next year my main trade will be long Fed futures again. Although currently I think they are so high I wouldn't switch out but I hope they fall big time at some point so I can load up
"Most observers probably think of the Fedâs commitment to keep the federal funds rate at âexceptionally low levelsâ¦for an extended periodâ when they think of communication. In this regard, the committee has already taken a significant step toward QE2 in our view, though not one that has been widely recognized in market chatter. In particular, by saying explicitly that inflation is too low relative to its mandate, we believe that the FOMC has effectively defined âextended periodâ to be a lot longer than many probably assume. After all, even if one assumes that they can successfully raise short-term rates before shrinking the balance sheet, why would they start to do so when inflation is too low? In this regard, an observation toward the beginning of Mr. Sackâs speech is noteworthy:
âIndeed, according to their most recently published forecasts, most FOMC members expect the unemployment rate to remain above 8.25 percent through 2011 and the inflation rate to remain below its mandate-consistent level through 2012. In addition, the economy remains vulnerable to downside surprises that could take both output and inflation further away from the FOMCâs objectives.â
Now, Mr. Sack doesnât sit on the FOMC, and he doesnât speak for the committee either. But he does make a valid point about the likely behavior of inflation over the next two to three years. If the committee already sees inflation as too low through 2011 at a minimum, and unemployment at a level that is clearly too high, then why wonât that extended period extend well into 2012, if not beyond?"
Looks like next year my main trade will be long Fed futures again. Although currently I think they are so high I wouldn't switch out but I hope they fall big time at some point so I can load up