I am still deciding what this week’s weekly post will be on. Clearly, I need to write a bit more substantively about QE3 than I have so far. And I have two media appearances from last week to use to update you on my viewpoint.
The broad gist of what I think is that QE3 is a nice backstop for risk assets, especially mortgage-backed securities. But, ultimately it has limited feed through into the real economy. Without any fiscal action to add to it, the economy is likely to keep on a slow growth path until the fiscal cliff is decided. It still looks to me like the fiscal cliff will add a contractionary impulse to the US economy and tip it into recession.
At that point, the market monetarists and all the other people screaming for the Fed to do more will have to face up to the fact that the Fed just doesn’t have the power they want the Fed to have. Could I be wrong? Could the Fed engineer recovery without the aid of fiscal agents? I don’t see it, but if it does happen, I would be the first to admit I’m wrong. Analogously, I would like to see the market monetarists admit they’re wrong when the Fed does not save the day. I suspect they won’t however. They will probably say that the Fed just needs to do more, like buying equities or real assets.
Within the next six months, we should know for sure. I will say this: ideologically, I am opposed to an activist Fed and an activist Congress. My preference would be to have the Fed do nothing accept act as a bank lender of last resort. To the degree we need stimulus, it should come from more robust automatic stabilizers. I doubt my non-interventionist ideology will win the day though. So in terms of what has happened, the question is about cause and effect.
Depressions, stimulus and its effects
New Breed of MLP: Sky-High Yields and Increased Risk – WSJ.com
“Private-equity firms, eager to offload assets, are turning mountains of sand, gas stations and coal mines into a special type of security that offers investors annual yields as high as 19% for years to come. That far exceeds the average dividend yield of Standard & Poor’s 500-stock index companies of about 2%, and even the 6% or so offered by an average junk bond.
Also, these securities come in the form of an investment known for a predictable income stream and relative safety: master limited partnerships.”
Japan and UK economies have ‘eerie parallels’ – Telegraph
“Japan’s economic problems are well-rehearsed. The world’s third largest economy has national debt of 236pc of GDP, and a budget deficit of 10pc. The UK, by comparison, is a bastion of fiscal rectitude, with national debt of 88pc and an 8pc budget deficit, using International Monetary Fund numbers.
If that was not unsustainable enough, Japan’s ageing population is piling even more pressure on the public finances.
A decade ago, social security expenditure was 12pc of GDP, it’s now 24pc. In the same time, tax receipts have dwindled from 30pc to 28pc as the workforce has shrunk.”
Now We Wait – Tim Duy’s Fed Watch
“this policy shift indicates that Federal Reserve Chairman Ben Bernanke has repudiated at least two of his earlier views.
The first is his belief that the stock of bond purchases was more important than the flow. Obviously, the focus is now on the flow of purchases, reflecting the importance of managing expectations in the implementation of policy. The shift to a flow-based policy removes the unnecessary uncertainty surrounding the intent of policymakers that was associated with previous, stock-based policy.
Second, notice that with his new found focus on the importance of weak labor market conditions, Bernanke returns to his former self. It has long been something of a mystery of what happened to the Bernanke who offered advised to the Bank of Japan back when he was a Federal Reserve Governor. “
QE3 will have limited short-term effect on housing – Real Estate Weekly – MarketWatch
“let’s be realistic. It’s not mortgage rates that have been keeping people out of the housing market.
“While QE3 certainly won’t hurt the housing market, its short-term effect will likely be limited,” said Richard Green, director of the University of Southern California Lusk Center for Real Estate, in a statement. “The constraint that is keeping people out of the housing market is absence of equity. The drop in house prices means that many borrowers are underwater on their houses, and high unemployment has prevented potential first-time buyers from accumulating down payments.“”
Junk-Bond Bears Squeezed With Fed Unleashing QE3: Credit Markets – Bloomberg
“Ben S. Bernanke is sending junk- bond bears into hiding.
The number of shares borrowed to bet against State Street Corp. (STT)’s exchange-traded high-yield bond fund has plunged 49 percent since Aug. 30, pushing its price to a 15-month high, according to data compiled by Markit Group Ltd. The most distressed securities are outperforming the highest speculative- grade tier this month by the most since February, Bank of America Merrill Lynch index data show.”
What if Fed’s QE3 falls short? | Economy | News | Financial Post
““I was really scratching my head as to why the Fed was so determined to provide stimulus at this point in time,” said Craig Alexander, chief economist at TD Economics.
“I don’t believe quantitative easing is going to have a big impact on the U.S. economy. Lowering mortgage rates [through Operation Twist] a little bit from current levels is not going create a lot of jobs,” he said.
“[And] what happens if it proves to be ineffectual, because then the confidence factor can swing around and be an impediment. Then it will be concerns that the Fed promised it would do whatever is necessary to create jobs, and it didn’t work. That would be a very bad outcome.””
The Federal Reserve launches QE3: The power of positive thinking | The Economist
“Fed insiders, notably Charles Evans of the Chicago Fed and Janet Yellen, the vice-chairman, put forth close substitutes: commit to easy policy until the economy was much closer to full employment. Importantly, this would allow inflation to wander temporarily above its 2% target without requiring a departure from that target. Today’s statement is Evans-lite: it does not state a numerical target for unemployment or a tolerance level for higher inflation, but it comes close. “
TheMoneyIllusion » The Bernanke press conference
“Speaking of NGDP targeting, Bernanke brought up the idea (without any prompting by reporters) and talked about Woodford’s plan for NGDP level targeting. He didn’t endorse it (how could he when the Fed only recently adopted a 2% inflation goal) but he certainly wasn’t critical of Woodford. I had the impression that if he wasn’t constrained by being head of the Fed right now, he’d be pretty sympathetic to Woodford’s proposal. And why do I have to call it “Woodford’s proposal?”
5. I’ve gotten a lot of criticism from people, even my friends in the blogosphere, for going too easy on Bernanke. Talking about how he’s well-intentioned, etc. I think this press conference shows that my comments were justified. “
United States
U.S. retail sales: High gas prices mask modest growth | Economy | News | Financial Post
“The rise in sales last month was led by gasoline stations, reflecting a 28 cents per gallon increase in the pump price. Gasoline sales surged 5.5%, the largest increase since November 2009, after rising 0.4% in July.
Automobile sales increased 1.3%, the most since February, after gaining 0.1% in July.
Excluding gasoline and autos, retail sales edged up 0.1% after rising 0.8% the prior month.”
JPMorgan shows fighting complexity is futile – FT.com
“JPMorgan’s trading loss points to the challenge of managing and regulating these incredibly complex companies. It is complexity that in good part defines Wall Street and forms some of finance’s highest barriers to entry. “
A Warning on Bank Complexity, From Someone Who Would Know – NYTimes.com
Europe
Rutte retains power in Dutch elections – FT.com
As I said yesterday, this is a clear victory for pro-European parties in the Netherlands: “The far-right eurosceptic Party for Freedom of Geert Wilders saw its vote share cut nearly in half while the far-left Socialist party, which voted against eurozone rescue measures and led in polls over the summer, ended with the same share as in previous elections.
Meanwhile, the Liberal and Labour parties, which backed eurozone rescue packages over the past two years, saw their shares rise to levels neither had reached in more than a decade.”
Bankia pagará el 8% de interés a su matriz por recibir 4.500 millones | Economía | EL PAÍS
Bankia will pay 8% interest for the 4.5 billion capital loan it gets from the Spanish government. Apparently, the funds they receive will be considered tier 2 capital though. I am guessing this is a preferred share arrangement where the preferreds get 8% interest in perpetuity and can be converted into common if necessary.
Technology
Twitter turns over OWS tweets after threat from judge — Tech News and Analysis
“Faced with a harsh contempt of court threat, Twitter today surrendered the tweets of an Occupy Wall Street protestor to a Manhattan judge.
The tweets belong to Malcolm Harris, who was among hundreds arrested last year during a protest that spilled onto the Brooklyn Bridge.”
Are iPhone Average Sales Prices Increasing? | asymco
Asymco is a big fanboy of Apple but Dediu does deep dives into the data in a credible way. This analysis would be the best rebuttal to those like myself that anticipate Apple margin or earnings growth shrinkage.
“The Munich Regional Court found that a number of Motorola devices made unsanctioned use of Apple’s intellectual property, among them the Motorola Milestone XT720, the Atrix and the XOOM. And it granted Apple’s request for a preliminary sales ban on those devices.”
iPhone 5 Unlocked U.S. Pricing: $649 (16GB), $749 (32GB), And $849 (64GB) | TechCrunch
“Apple’s website now shows the unlocked pricing for the iPhone 5 in the U.S. Using the site’s compare tool, you can see that the 16GB model starts at $649, with the 32GB version costing $749, and the 64GB top-tier configuration running $849.
That’s the same that the iPhone 4S used to cost unlocked, and it’s a considerable additional expense above and beyond the on-contract price”
Apple Maps In iOS 6: What Happens When You Take A Step Back With User Experience? | TechCrunch
“Apple’s replacement, its own house-built (with a little help from TomTom, Waze and others) Maps.app, just isn’t at the same level as Google’s solution, and for good reason. As was discussed in the panel I hosted yesterday at TechCrunch Disrupt (embedded below), Google has had a huge head start on maps, having worked on Google Maps since the kernel behind it was acquired when the company bought Where 2 Technologies in 2005.”
iPhone 5 won’t support simultaneous voice and data on Verizon or Sprint | The Verge
“Apple’s new iPhone 5 features support for LTE networks across the world, but it won’t be able to offer simultaneous voice and data on all of them. The Verge has confirmed with Verizon Wireless that the iPhone 5 won’t support the feature when it’s on the carrier’s cellular network, even if it is connected to LTE. This is in contrast to the rest of the LTE phones in Verizon’s lineup, all of which support simultaneous voice and data when connected to LTE.”
Other Links
Dans 40 ans Paris-New York en une heure – Libération
Study for super-fast commercial planes is beginning. n the US, most of this is for military application. In Europe, it is for commercial purposes. Concepts for Mach 5 and Mach 8 planes have been launched by the European Space Agency. The big obstacle is financial not technical. Very cool stuff.
Laser-powered ‘needle’ promises pain-free injections
“A new laser-based system, however, that blasts microscopic jets of drugs into the skin could soon make getting a shot as painless as being hit with a puff of air.”
BBC News – Brazil cuts growth forecast to 2% for 2012
“Brazil has cut its growth forecast for this year as the global downturn hits exports and rising local debt levels weigh on consumption.”