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O. Young Kwon

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  • The Bloom Is Off All Roses [View article]
    Hi, IT. It’s another timely lucid peach on the major ballpark where QE, Recovery, and Inflation are playing.

    IT -- “The Bloom is Off All Roses’? Oh, Come-on, Rhododendrons are Off, but Roses just start Blooming. You might pick a wrong one!

    (a) The debate about a possibility of “QE3” is over. Neither QE nor QT will be seen in the short run.

    (b) The Apparel Inflation is marching forward, dragging retail sales down further. The Imports prices keep rising – It’s a main force for the headline inflation.

    IT – “…Stocks are in a bad place, and for Treasuries appears glorious.”

    Yes, it is in your time frame, perhaps in three to six months --, but in a longer run – say, six month or longer -- it might be the other way around.

    Jun 16, 2011. 05:17 AM | 1 Like Like |Link to Comment
  • Don't Count Bill Gross Out Just Yet [View article]
    IT – It’s an excellent post at a tricky time when the head line inflation and the core inflation have the divergent signals – a better perspective for head line while a worse outlook for core.

    IT -- “The 10y TIPS yield at 0.77% is very low…”

    Jason Zweig (WSJ April 30 – May 1) reported “SEC rules…show a wide range of yields from minus-0.77% to 5.58%, with Pimco 15+ Year U.S. TIPS Index leading the pack at 6.07%.” How does your yield stand at 0.77%?

    IT -- “…probably near-instant vindication for on Bill Gross…”

    “Fund Giants Take Competing Stands On Bond Outlook”: “…Mr. Rieder said BlackRock has been buying Treasuries and will step in again if rates move higher…he considers 3.75% on the 10-year note…Mr. Gross has been betting against government securities…yields on the 10-year note should be closer to 5%. (WSJ on Apr.25)

    Even after his “May Shower” (WSJ, Ben Levisohn, June 2), I still dwell on his 5% yield target on the 10y nominal Treasury. Even if he might have a different time frame, I hardly see a chance of that high in my time frame yet.

    Jun 15, 2011. 09:01 AM | 2 Likes Like |Link to Comment
  • Retail Sales: The Consumer Economy Remains in a Recession [View article]
    Doug – It’s a pessimistic but informative post. The criterion of per capita real retail sales seems to be too stringent so that a “retail-sales recession” would likely deepen further because:

    “Higher import prices from the emerging world will be one of the biggest inflation pressures this year…highlighted rising import costs for apparel…pointing to apparel import prices that are approaching 1980s levels, prompting retailers to warn of large price increases later this year.” (WSJ, June 14, p. C2)

    This imports inflation not only augments the deflator – CPI -- but lessens retail sales themselves directly due to a shift in the supply curve to the left.
    Jun 14, 2011. 05:17 PM | Likes Like |Link to Comment
  • QE2 Didn't Help the Economic Recovery - Why Would QE3? [View article]
    Wildebeest – My “comment" you refer to is my opinion of this article, based on my own view: the analysis is faulty and the conclusion is misguided. Why do we need a “debate”? A productive argument can be made on a mutually agreeable topic (e.g., QE, recovery, or inflation) on an agreeable ground.

    Here, unfortunately, is no such a matter. All we have is a correlation-based and chart-reading writing, which bears no meaningful discussion from my viewpoint. For example, if A (i.e. QE2) and B (i.e., the growth rate of the inflation-adjusted GDP) loosed their close correlation, then A “didn’t help” B, according the chart. AND THEN “Why Would” A? It’s too mechanical.

    Jun 14, 2011. 10:39 AM | Likes Like |Link to Comment
  • Treasury Yield Snapshot: The Final Weeks of QE2 [View article]
    The Treasury Yield Curve clearly shows (a) the so-called PIMCO effect (the difference between the green line and the red – oversold Treasuries, inversely, over-shot yields) and (b) the correction of the PIMCO effect (the difference between the green line and the blue – bought back or closed shorts of Treasuries, inversely, falling yields, thinking about “May Shower of PIMCO” reported by WSJ).

    As a result, the yield curve has been normalized. Currently no irregular movement of yields is observed due to the end of QE2. The Permanent Open Market Operations (POMOs) has been a new daily routine monetary policy tool since Dec. 2010. In that sense, “QE2” is completely different from “QE1.” The former is more smooth and more often than the latter. They are just the second round and the first round of quantitative easing.

    Jun 13, 2011. 04:50 AM | Likes Like |Link to Comment
  • QE2 Didn't Help the Economic Recovery - Why Would QE3? [View article]
    This article is surely one of the worst because not only the analysis is faulty but it draws a wrong and misguided conclusion at a critical time -- right before the end of QE2. The reasons are:

    (a) Fed’s buying Treasuries cannot contribute to the “real economy” immediately. The line of “…economy wasn’t collapsing as QE2 was beginning, but weakened as the program progressed…” doesn’t make any sense. QE can affect the financial sector with a relatively short time lag, but can do the real sector (production and employment) with far much longer time lag and through a complex loop tangled with other endogenous and exogenous variables such as decisions of banks, businesses, and consumers, or supply disruptions, or geopolitical unrests, or European debt crisis, or global growth slowdowns, etc..

    (b) The causation from QE to the “real economy” has not been proved yet. The multivariable models include not only liquidity, production, inflation but also other many variables. Therefore, any causality between any two variables (e.g., QE and GDP) cannot be successfully tested. Any simple model (which this article is implicitly based on) also cannot offer any easy way to find the causality. It requires a sophisticated statistical test.

    (c) QE may or may not “contribute to a massive surge in speculation…” In fact, causes of speculation are still debatable, but any consensus view has not been established yet. As a result, any relationship among QE, GDP, and inflation (GDP deflator, CPI, or CORE) should be based on “hunch’ or “guess” at best, leaving all relevant complex interactions among all variables and with various time lags.

    (d) The conclusion of this article – “if the evidence appear to point…QE2 didn’t help the…recovery then why…would anyone…consider QE3?” – is nonsense. The Permanent Open Market Operations (POMOSs) are a new monetary policy tool authorized by the FOMC last year. POMOs (which is a daily routine quantitative easing or quantitative tightening by the New York Fed) is NOT just support recovery. The goal of POMOs is to do the Fed’s dual mandates with a close coordination with other monetary policy tools.

    Jun 12, 2011. 07:05 PM | Likes Like |Link to Comment
  • Market Valuation Indicators Continue to Signal Caution [View article]
    PompanoFrog – “This is ridiculous… I couldn’t figure out how his data differed so much from my conclusion…”

    Perhaps your conclusion may be a “short-run” view. Doug showed a “long-run” view with “estimated” data such as Tobin Q. P/Es are also the estimated data so that I don’t follow them closely.

    In the long run, “we are all dead,” as John M. Keynes said. It means that some long-run views might be “ridiculous,” in some short-run perspectives.

    Jun 12, 2011. 07:07 AM | Likes Like |Link to Comment
  • Weighing the Week Ahead: Fears Worse Than Fundamental Conditions [View article]
    Jeff – “The bearish viewpoint is that the economic weakness is…possibly augmented by the end of fresh QE II purchases. This conclusion is quite extreme given the actual data…the Fed is continuing ease through this month and will maintain this position – the easiest money in history – for the indefinite future…It is attractive to invest when fears are worse than fundamental conditions.”

    It is a unbelievably lucid and correct statement and conclusion. That’s why a lengthy quote is made. The market already has been oversold for five weeks or so. It’s time to load up gradually.

    Jun 12, 2011. 06:37 AM | 8 Likes Like |Link to Comment
  • As POMO Power Loses Punch, Primary Dealers Will Notice [View article]
    Lee – “When that unique buyer goes away, the $100 billion a month in new supply will still there and the market will seek to return to a normal equilibrium.” It’s true, BUT:

    In the PRIMARY market, the marginal (“new”) $100 billion supply and the marginal (“new”) demand determine an equilibrium price. Considering (a) the deep pockets of the central banks of trade-surplus and oil-exporting countries and (b) major primary dealers (who have a high level of excess reserves and the ability to borrow through discount window, possibly, with more favorable terms and conditions) would sufficiently fill the gap after the Fed stops buying.

    Even if “a normal equilibrium price” fails to prevail in the PRIMARY market, in the SECONDARY market, if other things being equal, (in other words, the inflation risk premium or the prospect of economic growth and government deficits/debts remain the same), no SHIFTs in the demand and supply schedules would occur. Therefore, a depressed price (or inversely, a higher yield) in the PRIMAY market creates an excess demand in the SECONDARY market. The excess demand would bring a higher price (or inversely, a lower yield) ALONG the sustained demand and supply curves.

    As a result, the un-equilibrium price due to the mismatch of $100 billion generated in the PRIMARY market would be “quickly” adjusted in the SECONDARY market where all global Treasury mutual/hedge funds participate with many central and commercial banks.

    Jun 11, 2011. 05:18 AM | Likes Like |Link to Comment
  • Jobless Claims Inched Higher Last Week [View article]
    James – “…chatter has shifted to…QE3. The odds don’t look…high…but that may change, depending on where the data go.”

    The consensus views don’t see any chance of “QE3,” even if the employment/unemployment data would deteriorate a bit further. It’s a time to chat about when quantitative tightening will start in the down road. yk
    Jun 10, 2011. 06:00 AM | Likes Like |Link to Comment
  • Market Valuation Indicators Continue to Signal Caution [View article]
    Doug – It’s an excellent quantitative summary, showing clearly a long-run market direction – a cautiously optimistic trend. Thank you. yk
    Jun 10, 2011. 04:18 AM | Likes Like |Link to Comment
  • The New Decline in the Inflation Forecast [View article]
    James – “…the message in the implied inflation forecast…2.26%, down sharply from the post-recession peak of 2.64% set on April 8…”

    The “breakeven rate” is just a proxy of inflation expectations. It’s available by just comparing yields between nominal and inflation-protected Treasuries. It , however, isn’t a good forecasting tool for future inflation.

    The recent rally after April 8 was a significant correction of the overshooting yields (or, inversely, the oversold prices) of nominal Treasuries, initiated by PIMCO in December last year.

    Jun 9, 2011. 08:16 PM | Likes Like |Link to Comment
  • The Stock Market Is Still Thinking Positively [View article]
    James – “…there’s still a fair degree of forward momentum…offering at least one reason for thinking positively.”

    It’s an excellent call at a critical moment when we completely lost any market direction. After this article was posted on June 6, the market continued to drop until yesterday (June 8). Still I am cautiously optimistic in a relatively short run (three to nine months).

    Jun 9, 2011. 03:45 PM | Likes Like |Link to Comment
  • As POMO Power Loses Punch, Primary Dealers Will Notice [View article]
    Lee – Thank you for your comments.

    Perhaps the Fed wouldn’t need “a plan.” Also, I don’t expect a crash at all. The reason is:

    The Treasury Securities secondary market is the largest security market in the world. The outstanding of marketable Treasury securities was 4.6 trillion dollars (and total outstanding was 9.4 trillion) as of April 2008. (Currently it becomes much bigger.)

    As a result, the impact of “a mismatch of double-digit billion dollars a month” in the primary market to Treasury yields (only considering the Fed’s buying and Treasury’s selling, without other market participants such as foreign central banks and dealers) would be minimal.

    Jun 9, 2011. 01:28 PM | Likes Like |Link to Comment
  • As POMO Power Loses Punch, Primary Dealers Will Notice [View article]
    Lee -- “…we will see a return of a modified QE in the not too distant future…”

    Replacing “any maturity paper…with additional Treasury purchases” is not a “modified” Quantitative Easing. It is a daily routine performance of Permanent Open Market Operations (POMOs), which were authorized to the NY Fed by the FOMC last year. POMOs are one of monetary policy tools, similar to traditional Open Market Operations (OMOs). The difference between POMOs and OMOs is the length of maturity and the scope of bonds: the former deals with much longer maturities and much broader category than the latter.

    The only relevant concern is a mismatch between “the Fed buying $10-15 billion” and the expected $100 billion…of new treasury” a month in coming months.. I believe that the Fed must have a plan for “smooth” POMOs with a close coordination with other traditional tools such as OMOs, changing the terms and conditions for borrowing through discount window, adjusting reserve requirements, and another new tool – changing interest rates of excess reserves.

    Jun 8, 2011. 08:06 PM | Likes Like |Link to Comment