Daily: My thoughts on QE3
Here are some quick thoughts on QE3. Central banks around the world are taking the lead on reflation where fiscal agents refuse to do so. And the policy stances have become increasingly aggressive. Right now, every major central bank is supporting domestic growth with very aggressive monetary and currency policy. In Europe, the ECB is doing “whatever it takes” by offering unlimited liquidity in support of periphery debt. In Britain, the Bank of England has repeatedly added liquidity in the form of government debt purchases despite above-target inflation rates. In Japan, the Bank of Japan is still in the midst of a decade long easing campaign as the economy fights deflation. In Switzerland, the Swiss National Bank has renewed its pledge to support the economy by pegging an upper bound on the Swiss France – Euro exchange rate, with unlimited intervention if necessary. This is the most aggressive monetary blitz the world has ever seen.
As for the Fed, it is taking a four-pronged attack:
- Lengthen maturities: The Fed indicated it would continue to lengthen the maturities in its Treasury bond portfolio until the end of the year. Ostensibly this will put downward pressure on bonds at the longer end of the curve, and therefore bring down interest rates across the economy.
- Buy mortgages: Bill Gross has hinted he thought the Fed would choose mortgage-backed securities as its vehicle of choice for QE3 and so the Fed has. It will buy $40 billion worth of agency paper every month. Mortgage-bonds are now at record high levels as mortgage rates have plunged to record lows. Given the resurgent housing market, this will be huge ammo to spur house purchases.
- Keep buying: significantly, the Fed has added language that these efforts to buy mortgage bonds will continue indefinitely – at least until unemployment levels drop. In my view this was the biggest change in Fed policy and it definitely represents an aggressive stance.
- Extend zero: Finally, the Fed decided to extend its commitment to zero rates out to mid-2015, meaning that we have about 3 more years of zero rates, bringing the total to at least seven, from 2008.
In isolation, any of these policies would have been deemed extraordinary before the financial crisis. Taken together as a package, they represent the most aggressive easing we have witnessed by the Federal Reserve.
Will it work? It will certainly boost asset prices and put a floor under yields. And if the Fed’s goal is to keep this up indefinitely, yes it will work in maintaining that floor. That said, we do know that QE2’s results were underwhelming.. So the fiscal cliff can still derail this. The Fed is not the master here. It can only do so much.
“More than 1.3 million U.S. homeowners who owed more on their mortgages than their homes were worth have regained equity this year, Santa Ana-based data firm CoreLogic says.
Increases in home values are giving homeowners not only more equity but the ability to refinance. Nationwide, home values saw the biggest annual gain in almost six years, according to a CoreLogic index released earlier this month.
About 600,000 underwater borrowers hit positive equity in the second quarter, according to the report. That followed more than 700,000 in the first three months of the 2012.”
“Greece’s Finance Minister on Thursday denied a report citing the country’s representative to the IMF as saying Athens would need a third bailout package.”
“As financial markets anxiously await an announcement of another round of quantitative easing, it’s important to keep in mind that QE2 didn’t work the magic the Federal Reserve hoped for in 2010.”
The Dutch election result can be seen as a historic win for Mark Rutte’s VVD party. It was also a big comeback for the second place PvdA, the traditional labour party in the Netherlands and a big lost for nationalist leader Geert Wilders party. All in all, t should be considered a win for pro-European sentiment in the Netherlands, if with a austerity-supporting line.
“MARIO DRAGHI seems more sorcerer than central banker. Since the boss of the European Central Bank (ECB) said in late July that he would do “whatever it takes” to save the euro, Spanish two-year bond yields have fallen from 7% to 3%. Equity markets have rallied; credit-default-swap spreads have tightened (see chart); and the euro has climbed.”
“Marriner Eccles was Chairman of the Federal Reserve under President Franklin D. Roosevelt. This note consists of excerpts from an address he gave to the US Senate’s Committee on Finance in 1933 before he was called to Washington for public service by FDR. The original address contained in the Congressional Records has been reduced from over thirty pages (including questions and answers) to only three pages here that contain his essential message. The address has been edited by Thorvald Grung Moe, Visiting Scholar at Levy Economics Institute. Some parts have been slightly modified to fit the current time and crisis. Additions or alteration to the text has been marked by square brackets. All original figures used by Eccles in the address have been inflated by a factor of 16.4 according to the official US CPI index.”
“Italy sold €6.5bn of bonds on Thursday at some of the lowest yields in more than two years in the first long-dated auction since the European Central Bank outlined plans to buy an unlimited amount of eurozone sovereign debt.
The Italian treasury sold €4bn in three-year debt at an average yield of 2.75 per cent, which is the lowest since October 2010 and down from 4.7 per cent in July. The bid-to-cover ratio, a measure of demand, was 1.5.”
“Spain’s Treasury said on Thursday it will issue 3 billion euros ($3.87 billion) through a private placement with Spanish banks aimed at offering struggling regions access to lower borrowing costs through its emergency liquidity fund (FLA).”
Apparently, the CDU realises that its FDP coalition partner will not make the 5% hurdle in next year’s elections and so they have started a detente of sorts with the SPD. This Handelsblatt article points to the two putting out feelers. This could mean that the German positions start to migrate toward a less dogmatic stance on European issues. Time will tell, especially since the SPD is also pro-austerity for the time being.
This post demonstrates that the iPhone 5 is not a breakthrough device. The interesting thing will be to see how it sells because it’s not about specs, it’s about user experience and brand. And Apple still has brand going for it, so there will be a lot of people in the Apple ecosystem that will have been waiting for this phone. The problem is in new adoption. That’s where specs may matter given the price of Apple’s handsets.
“Market research firm IHS iSuppli estimates that by 2013, cumulative shipments of Android smartphones will exceed 1 billion units. Handsets shipping with Google’s (GOOG) mobile operating system are expected to reach 451 million units in 2013, an increase from 357 million in 2012, and approach 3 billion cumulative units in 2016. For comparison, cumulative shipments of Apple’s (AAPL) iOS platform are estimated to reach 527 million units in 2013 and aren’t expected to surpass 1 billion units until 2015. “The Androids are taking over the world of smartphones,” said Daniel Gleeson, mobile analyst for IHS. “We expect the Android operating system to become the first to reach the milestone of 1 billion shipments during its lifetime.” “
The ECB has calculated that public debt in Spain would surpass 100% of GDP if the country is unsuccessful in completing its structural adjustment program. The worst of the possible trajectories outlined in the ECB September bulleting was for debt to rise to 104% of GDP in 2016. Before the crisis government debt in Spain was only 35% of GDP.
“”I saw the statement he put out last night and I thought it was maybe a low-level press person who put this out and today they would correct the damage,” Darrell West, vice president of Governance Studies at the Brookings Institution, told CBS News. “Instead they’re digging the hole deeper. I mean you can’t really play partisan politics in U.S. foreign policy.” “
German government debt is expected to reach 2.2 trillion euros by year end, putting German government debt to GDP at a record 83%, a full 23% over the Maastricht hurdle. The main reason for the increase has been bank bailouts. This Handelsblatt article cites the wind down of WestLB as a main contributor. The article also mentions contributions to the EFSF and ESM bailout funds.
“according to longstanding tax laws, if a company files for bankruptcy or is taken over, it loses the ability to use its net operating losses. A.I.G. would fit that profile perfectly: on the verge of bankruptcy, the federal government took control of A.I.G., exchanging its bailout billions for shares in the company.”
Everywhere in France house sales slowed down in the second quarter in France according to this Figaro article. As you know, sales lead price declines when housing markets do start declining. So this is something to watch as France moves into austerity mode.