Why Quantitative Easing Won't Happen Now

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Quantitative easing is off the table for the Fed at the moment because of Friday's GDP report. According to the Commerce Department U.S. second quarter GDP growth was 1.5%, which is mediocre, but not bad enough to justify another round of money printing stimulus.

The stock market has been juiced up on a number of occasions since June on rumors of impending QE3.  There is always connected to phrase like "the Fed will do more to help the economy." The mainstream press never raises the question of why does the Fed need to do more to help the economy. If its program worked, the economy should have recovered. If they don't, doing more of the same thing isn't likely to accomplish much. A need for a third round of QE certainly implies that the first two weren't effective — at least in creating economic growth.  Could it be that printing money out of thin air doesn't really create lasting wealth?

All the U.S. fans of quantitative easing should look across the pond at what is taking place in the UK. Its second round of QE was started last October. Yet, Britain has fallen into and remains in recession. It doesn't look like it will exit the recession by the end of the year either. So much for QE being a panacea for saving an economy.

The best case for the ineffectiveness of QE though comes from Japan. Japan has maintained a zero interest rate policy since 1999 (the U.S. had done so since 2008). After ten years of economic decline and malaise Japan began implementing quantitative easing in the early 2000s. The ten years that followed were also a period of economic decline and malaise. The Japanese stock market peaked in 1989 and over twenty years later it is still down more than 75% from its high (investors who fought the Bank of Japan are glad that they did). The various stimulus programs raised stock prices temporarily, but they eventually fell to lower lows.

The stimulus bag of tools that central banks use is meant to be effective when there is a cyclical downturn in the economy. However, they will not work if the problem is structural — and that is exactly what Japan has been dealing with since 1990 and Europe and America are dealing with today (and probably since 2000). We are at the end of the Keynesian era, where credit can no longer be extended to greater levels without creating a subsequent collapse and the economy can't grow without continual stimulus from the central banks and massive government deficits. This is sharply evident in the case of Greece and Spain at the moment, but it is just as true in the U.S., UK and Japan.

The Fed can't just cavalierly decide to engage in more QE as is. It will need to do so if there is a major financial incident in the EU and it can't waste its bullets. It is inevitable that there will be such a crisis, and the Fed knows it. Mario Draghi's assertion on Thursday that the ECB will do everything possible to save the euro was nothing but meaningless bravado. The crisis in Europe has been going on for over two years now and despite numerous bailouts and half a dozen support schemes it keeps getting worse. During the entire time, the powers that be in the EU have said that they will do everything to save the euro. Sometimes "everything" isn't enough. 

The Fed also has the problem of looking political if it acts before the election. While it is true that the Fed has acted before elections in the past, it actions weren't being closely scrutinized back then. Nor were its policies politically controversial. The House of Representatives just passed the Federal Reserve Transparency Act of 2012 by 327-98. This legislation would produce a full audit of the Fed. While it might not pass the Senate this time around, eventually it will.

While the Fed will almost certainly be doing quantitative easing again, but it won't happen until either  the problems in Europe become a full-fledge global credit crisis or the U.S. economy is in an obvious recession. In either case, it will not be something to cheer about. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Inflation Picking Up Globally Leading to Stagflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Britain shocked the markets on October 18th when it reported an inflation rate of 5.2% for September. This was up from 4.5% the previous month and well above government projections. Inflation isn't just rising there, but higher prices are a global phenomenon.

The world seems to be entering a new period of stagflation similar to the 1970s. Stagflation is high inflation and low GDP growth. This is very evident in the UK where GDP growth for the second quarter was only 0.2% — a full 5% lower than the current CPI (the difference between the UK Retail Price Index is even greater).  The only surprising thing about the UK inflation rate is that the official rate is so low given the amount of money printing done through quantitative easing in 2009 and 2010.

Despite the low growth and high inflation that has resulted from it, the Bank of England (BOE) has just started another round of QE. BOE Governor Mervyn King recently stated, "Without monetary stimulus  — low interest rates and large asset purchases — there is a risk that growth will stall and inflation fall below our symmetric 2 percent target." As of September, the UK inflation rate has been above the bank's target rate for 22 months in a row. This is happening even though unemployment is also at a 17-year high. Central bankers have consistently maintained the inflation can't be elevated if the economy is weak. They have apparently managed to do so because they don't let real world observations intrude on their thinking.

Inflation is also rising elsewhere as well. On the European continent, the official EU rate rose from 2.5% in August to 3.0% in September. GDP increased by 0.2% there in the second quarter. Inflation has already been elevated in China and India for some months. China's inflation rate in September was 6.1% with food prices increasing at 13.4%. The price of necessities is rising faster there than the price of other goods. This is a common pattern in a number of countries. The yearly inflation rate in India was 9.0% in August.

In the U.S., the CPI for September indicated a 3.9% year over year rise in consumer prices.  This rate severely underestimates actual inflation. According to the alternative numbers produced by Shadow Stats, the current U.S. inflation rate is approximately 11% (Shadow Stats calculates its numbers with the formulas utilized by the U.S. government in the 1970s and this is the only way to get valid comparisons of U.S. inflation numbers across time). Official U.S. GDP growth for the second quarter of 2011 was 1.3% — well below even the government's reported inflation rate.
Even though a clear picture of stagflation is emerging globally, expect this to be continually denied by mainstream news sources. Even yesterday in its reporting on U.S. producer prices, one of the major news services stated, "the strong rise in wholesale prices last month is unlikely to prompt a broad increase in inflation pressures given the weak economy." This is actually pure misinformation. There is a long, long history of high inflation throughout the world during periods of low economic growth or even severe decline. One of the most recent cases historically was in the 1970s when inflation skyrocketed in 1974 during the worst economic downturn since the 1930s depression. Both  Fed Chair Ben Bernanke and BOE Governor Mervyn King were around at that time, but apparently can't seem to recall it. Perhaps if central bankers had better memories, they wouldn't be repeating the mistakes of the past today.

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security

Wishful Thinking on Economy and Europe Driving Markets

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


U.S. stocks had a major rally on Columbus Day based on the French and German leaders' mystery plan to recapitalize EU banks and on raised forecasts for U.S. economic growth in the second half of 2011. While both news items seemed to contain nothing but wishful thinking, that's often enough for short-term traders.

The Dow Industrials closed up 3.0% and Nasdaq 3.5% on low trading volume. Big moves in the market are more likely when many traders are away and the people who want to move the market know this. Huge rallies under such circumstances are common in severe bear markets. Nasdaq  for instance went up 4.9% on Friday July 5th in 2002 when almost everyone was off on a four day weekend. The market then had an ugly selloff later in the month and an even bigger drop in September and October.

It shouldn't be surprising that "good" news on the economy appeared on Columbus Day. The timing had probably been carefully planned. Goldman Sachs and Macroeconomic Advisers raised their growth forecasts for third quarter U.S. growth to 2.5 percent from about 2 percent and this created the predictable cheerleading coverage from the mainstream media that the U.S. was avoiding a recession. While it is certainly possible that the government will report GDP growth of 2.5% in the 3rd quarter, this does not mean that the U.S. is avoiding a recession, or even that the U.S. isn't currently in a recession. The original GDP numbers at the beginning of the Great Recession weren't that bad either, but they have since been revised down.... again ... and again ... and again. This is how GDP reporting works in the United States. Good numbers are released when everyone is watching and the downward revisions, which can go on for years, are reported when no one is paying attention.

Adding juice to the rally was the news that the German and French had a plan to recapitalize the EU's crumbling banking system. No details of the plan were available however. The lack of information can mean only one of three things. The first possibility is that there is no plan at all or the details are so sketchy that releasing them would make it clear that nothing significant had occurred. Alternatively, there might be a plan that could work, but the chances of getting it approved by everyone involved are close to nil. Or there could be a plan that has a good chance of being approved, but wouldn't be very effective. Regardless, there was no good reason for a market rally from this "recapitalization you can believe in" piece of news.

The EU banking/debt crisis has no easy solutions and will have an ugly ending of some sort despite the mainstream media's constant stream of upbeat "things are getting better" articles. ECB president Trichet admitted today that the EU's debt crisis has become systemic and has moved from the smaller countries to the larger ones.  The rumors of a possible 60% haircut on Greek debt (reported by the Helicopter Economics Investing Guide on Monday and in the financial pages throughout the EU on Tuesday) may even be optimistic. When Luxembourg's Prime Minister Juncker was interviewed on Austrian TV late yesterday about the rumors of a 50% to 60% reduction in Greek debt having to be taken, he replied "we're talking about even more."

A credit crisis can have a devastating impact on the global economy as was made quite evident in 2008. While a case can be made that the monetary authorities have learned how to handle a credit crisis from their recent experience, they have less to work with than they did three years ago. Fed funds rates have already been close to zero for almost three years in the U.S. Quantitative easing has already been done twice in the U.S. and is on its second round in the UK, although it's already run into a glitch there. The BOE refused to buy gilts for the first time ever on Monday because they were too expensive. Maybe money printing isn't the panacea it's supposed to be after all. If not, the global financial system is in a lot of trouble.

Disclosure: None.

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

BOE Kicks Off New Global Money Printing Cycle

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Markets like money printing. The Bank of England (BOE) today announced its own QE2.  Statments from Fed Chair Ben Bernanke and talk of the EU recapitalizing its banks was already juicing up global stocks before the BOE took this earlier-than-expected action.

In its latest round of quantitative easing, the BOE will be purchasing 75 billion pounds in bonds. While some news reports euphemistically described this action as the BOE will be "spending" the money, the correct phraseology is that it will be "printing" this money. The BOE has previously printed 200 billion pounds to buy bonds starting in 2008 during the first credit crisis. The U.S. Fed has already engaged in two rounds of quantitative easing (only one of many ways that money can be printed) and a third should be expected.

Stocks had already turned around on Tuesday with big rallies. Fed chair Ben Bernanke made a statement that he was willing to do more to help the economy. Bernanke has been "helping" the economy since he started lowering the fed funds rate in September 2007. While he has helped the economy, the U.S. has experienced the worst recession and worst bear market since the Great Depression in the 1930s, the official unemployment numbers have remained close to double digits, the U.S. has had the largest number of bank failures since the Savings and Loan crisis, and thanks to his quantitative easing, the U.S. has been able to run a series of trillion dollar plus budget deficits that are going to lead to serious problems in the future.  Why shouldn't markets rally with more of that in prospect?

In the short term, markets don't care about dire consequences that are somewhere down the road. They rally based on liquidity and money printing provides it for them. While the news that the EU is going to recapitalize its banks sounds positive, there is little if any discussion in any article about where the money is going to come from. For the answer, picture a giant printing press spewing out fresh euro bills at break net speed. Investors should also expect a lot of nationalizations as part of this process. Belgium has just announced it will take over failed bank Dexia (described by the news media as "troubled"). Dexia is the largest bank in the country.

Market volatility is common during credit crises. Investors should expect continued market selloffs interspersed with big rallies. Ultimately, money printing will not save the day however because real value can't be created out of thin air. The day that will happen, is the day that PIIGS will fly. 

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

What's Driving Today's Market Rally

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Major European stock indices were up two to three percent today after Asian indices rose around one percent last night. The U.S. markets then had a strong opening after the three-day holiday weekend. Mainstream media is citing bargain hunting as the source of the rally, whereas money-pumping operations to support the euro is likely the major contributor to the market's bullish behavior.

Stocks were devastated in the last two weeks and some rally at this point is reasonable in order to resolve an oversold condition. Strong buying in the U.S. though would be inconsistent with the bear market signal being giving by the S&P 500 on Friday and the small cap Russell 2000 having experienced a bear market loss of over 20% the same day. This is not the type of market environment that traders can't wait to plunge into on the long side. Liquidity pumping by the major central banks would be most effective (and likely) at a key market juncture like this however.

Central bank efforts to support a faltering global financial system began in earnest on Sunday May 9th after the Flash Crash three days earlier. The EU announced its $915 billion euro rescue plan and at the same time the U.S. Fed opened unlimited liquidity swap facilities with the European Central Bank, the Bank of England and the Swiss National Bank. A swap facility up to $30 billion was opened with the Bank of Canada. The Fed stated, "These facilities are designed to help improve liquidity conditions" and that the Bank of Japan was considering similar measures. The swap arrangements were authorized until January 2011.

Stock markets around the world then skyrocketed on Monday, May 10th since increased liquidity shows up immediately in stock prices. Investors should expect intermittent market impact both from euro rescue money and swap generated liquidity for the next few months. For the full text of the Fed's announcement, see: http://www.federalreserve.gov/newsevents/press/monetary/20100509a.htm.

It is fortunate for the markets that liquidity is on tap when needed. Not only is the technical picture of the market deteriorating, but the economic news isn't supporting stocks either. Little noticed last Friday was the announcement of a decline of 1.4% in U.S. industrial production. The ISM Manufacturing index for June, which came in at 56.2, indicated a slowing expansion (over 50 indicates growth). Almost every component, except for those related to inventories, was down. New orders, an indication of future activity, dropped 7.2 from the previous month. The ISM Service index fell to 53.8, which was below forecast. The employment component was 49.7 dropping below 50 and indicating job losses. The service sector is four times bigger than the manufacturing sector in the U.S.

Investors should enjoy the rally while is lasts. The rally after the flash crash in May lasted four days. Within ten days, stocks were lower than they had been during the crash. Liquidity induced rallies can be powerful, but they don't last very long.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Quantitative Easing Today, A $50 Cup of Coffee Tomorrow

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

This morning, the Bank of England (BOE) lowered interest rates (already at 300 year lows) to 0.5% and the European Central Bank (ECB) lowered them to 1.5%. Like the U.S. Fed, both central banks are worried about deflation, which is like someone in the Amazon worrying about the next blizzard. The Bank of England even announced it was embarking on a quantitative easing program (as if this is something new) that would purchase $106 billion of commercial paper and government bonds. British gilts soared on the news (interest rates went down) and inexplicably the pound rose and then more logically fell. Why someone would buy a currency, just after the issuing government announces it's embarking on a currency debasing program is something to ponder.

Quantitative easing is the creation of money out of thin air by a central bank, followed by its injection into the country's banking system. Central banks can accomplish this by using the new money to buy government bonds in the open market, lending the money to banks, or buying assets from banks in exchange for currency. It is not the only form of new money creation, just the most extreme. Quantitative easing causes government bond rates to go down. It should also lower the value of a country's currency.

The U.S Fed has effectively been using quantitative easing since late 2007. Note that government bond interest rates have gone down substantially during this time (and the U.S. dollar had a massive sell off from the fall of 2007 until spring of 2008). Records also indicate that only 20% of U.S. treasuries are in private hands. The rest are held by the Fed, its subsidiaries and foreign central banks. The U.S. government has essentially been printing money and then buying its own bonds with this newly printed money. According to many economic experts, including noble prize winners, this is somehow not going to lead to inflation.

The thinking (or lack thereof) of central bank heads on the deflation issue was demonstrated clearly in the rate cut announcements this morning. Both the ECB and BOE are worried about inflation rates falling below 2%. Trichet the ECB head, admitted that the a sharp drop in commodity prices was the cause of this 'deflation' (although official inflation rates in the Eurozone are still above 1%) and apparently he thinks commodity prices can continue falling below the cost of production and there won't be any reduction in supply (did he take economics 101?). This argument is used by the U.S. as well, along with the 'inflation can only happen if wages are rising' line of reasoning. That argument is false as well and is based on the interpretation of the mechanism of the course of inflation in the U.S. in the 1970s. Even if this wage rate argument was true, revised figures came out this morning showing U.S. wages actually rose sharply in Q4 2008, instead of falling as had originally been 'mistakenly' reported by the government.

Ultimately, inflation comes down to whether of not the value of a country's currency is maintained and all other issues are secondary. When countries issue money faster than justified by economic growth, whether in the form of actually printing it as hyperinflationary superstar Zimbabwe has done or by using the more sophisticated tricks of the U.S Fed, the value of that country's currency declines against hard assets and consumer prices rise. Only if the money does not flow into the greater economy because it gets stuck in banking system because you have continual recession/depression, can you avoid inflation. Either way you lose.

NEXT: U.S. Unemployment reaches 15%

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Only TARP Recipients Should Worry About Deflation

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

Finally some minor logical restriction has been added to the historically wasteful TARP program. TARP is essentially welfare for Wall Street and companies receiving welfare should be forced to live like people who used to receive it, if they want the handouts. The $700 billion of taxpayer money was supposed to be used for lending, but nothing in the bill mandated that would happen. There aren't even records of where the money is going, although maintaining exorbitant executive salaries and bonuses is obviously one of destinations for the funds. President Obama has now restricted these salaries to a still generous $500,000 (the President of the U.S. is paid only $400,000). Stock options are allowed, but only once the U.S. is paid back the money it has given to these financial companies. This is only likely if major inflation reduces the debt (and your savings and retirement payments) to essentially nothing.

Anyone who reads this blog is well aware that we have been predicting just such an economic scenario for a long time. Central banks throughout the world are engaging in policies that will insure massive inflation is inevitable and they are covering their irresponsible policies by waving the threat of deflation flag. The Bank of England just cut rates to 1.0%, down from 1.5% (which was already the lowest since the late 1600s - yes, 1600s). The BOE has more than hinted that this is just another step on the way to ZIRP (zero interest rate policy), which now exists in the U.S. and Japan. It also stated that it WILL BE expanding the money supply (as if somehow they haven't already been doing this). Like the U.S. central bank, the BOE claims that it is worried about deflation, even though the official inflation rate in Britain is 3.1% (you may assume the actual rate is somewhat to a lot higher) and the pound is dropping precipitously, which is highly inflationary. Lower interest rates and increased money printing will only weaken the currency further. Yet the BOE is worried about deflation.

Central banks are taking the disastrous decisions to create inflation in a desperate attempt to prop up their collapsing economies. The true depth of the economic downturn is being hidden from the public by manipulation of the data and a compliant press that fails to question even the most absurd claims of the government statistical offices. As an example, the U.S. Labor Department released productivity figures for Q4 2008 today. Productivity (the amount of output per hour of work) was allegedly soaring at the end of last year. The claim is that the number of hours worked is dropping a lot faster than output. The alternative (and correct) explanation is that the government has lied about output and overstated it considerably. While there is a lot of evidence to support that U.S. GDP is being overstated, you will not see it in mainstream press coverage of the Productivity story... just an emphasis on the ridiculous headline numbers.

The press articles on Productivity are also being used to prop up the deflation bogeyman. One AP article (likely to be reprinted in hundreds of papers across the U.S.) stated, "The results underscore how the deepening recession has removed the threat of inflation". No AP, the results underscore the depth of lying that the U.S. government will engage in to hide the real economic story from the American public.

NEXT: U.S. Unemployment Rate Rises to 13.9%

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.