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Tales From The Future
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I look at value and contrarian ideas as well as emerging technologies worldwide, both on the long and short side. I also like to discuss the influence of monetary policy on stock markets. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at... More
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  • David Einhorn On The Dangers Of Current FED Policy 4 comments
    Oct 31, 2013 3:47 PM

    David Einhorn doesn't just have a strong opinion on GMCR. An interesting excerpt from his latest letter to investors (dated October 15, 2013) discussing the FED and its monetary policy:

    "The amount of media and market attention focused on whether the Federal Reserve will taper its quantitative easing (QE) would border on comical if it weren't so serious. In August, the San Francisco Fed published an economic research paper that estimated that the $600 billion spent on QE2 added a meager 0.13% to real GDP growth in late 2010 (about $20 billion) and that the benefit fades after two years. [1]

    Given that, what practical difference does it make whether the Fed
    buys a monthly $85 billion or $75 billion or no additional securities at all for that matter?

    We maintain that excessively easy monetary policy is actually thwarting the recovery. But even if there is some trivial short-term benefit to
    QE, policy makers should be focusing on the longer-
    term perils of QE that are likely far more important. Here are some questions that come to mind:

    How much does QE contribute to the growing inequality of
    wealth in this country and what are the risks this creates?

    How much systemic risk does the Fed create by becoming what Warren Buffett termed "the greatest hedge fund in history"? [2]

    How might the Fed's expanded balance sheet and its failure to even begin to "normalize" monetary policy four years into the recovery limit its flexibility to deal with the next recession or crisis?

    No one is sure what the Fed is focused on. After spending several months bracing the market for fewer QE donuts, the Fed decided that it was premature to taper. Even a token reduction (from a baker's dozen to a dozen?) was ruled out despite the fact that the economic trajectory has not materially changed. We responded the next morning with our own stimulus by ordering jelly
    donuts for the entire office. "

    [1] www.frbsf.org/economic-research/publicat.../

    [2[ www.bloomberg.com/news/2013-09-20/buffet....htm

    Every long-term investor should ponder the three questions raised quote above in italic.

    Remember that policies like QE1/2/3 in the U.S. and "Abenomics" in Japan may appear sound and "working" in the short term but prove disastrous in the long run.

    Countries with their own currency can just maintain the "bubble game" for longer than countries with no national "printing capability" of their own (e.g. Greece as member of the EURozone).

    PS: As for people who argue "there is no inflation, so what do we care" please read this article:

    "Hey, whatever happened to inflation?"
    Source: bit.ly/Hfr3C0 (copy and paste if the link doesn't work)
    Themes: monetary policy, FED
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  • Tales From The Future
    , contributor
    Comments (4086) | Send Message
     
    Author’s reply » Another voice on the topic:

     

    Barry Sternlicht Warns "Everyone Is Holding Cash Because They Know When It Ends It's Gonna Get Ugly"

     

    "The Fed is playing a very dangerous game," Starwood Capital's Barry Sternlicht warns,"and they need to stop." Sternlicht has quadrupled his firm's net worth in this time and, to the incredulity of the CNBC anchors, warns, "this is bad, this is a heroine addiction.. and now they are printing more money than the deficit." The outspoken CEO of the $29 billion fund, noted "all my friends who are money managers.. are much closer to the sell button than they ever were before," adding that "everyone's holding cash," since if they start to get nervous "volatility will come back instantly." Simply put, he concludes, "you know when this ends, it's gonna get ugly."

     

    http://bit.ly/1cCaS04
    5 Nov 2013, 11:47 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (4086) | Send Message
     
    Author’s reply » And what HD Bridgewater has to say about QE:

     

    "The basic issue is that quantitative easing is a much less effective tool when asset prices are high and thus have low expected returns than it is for managing financial crises. That's because QE stimulates the economy by (1) offsetting a panic by providing cash to the financial system when there's a need for cash, and (2) by raising asset prices, and driving money from the assets they buy into demand and investment, creating a higher level of future economic activity. So, the policy was particularly wise and most effective (in the sense of impact per dollar) at the height of the financial crisis when there was both a desperate need for cash and when extremely depressed asset prices were heavily weighing on demand and investment.

     

    Now, there is a flood of liquidity and asset prices are high relative to underlying fundamentals. So the impact of additional asset price increases on demand is much less (as high asset prices and low future returns make assets more interchangeable with cash).

     

    Quantitative easing today is driving asset prices to unsustainable levels, without stimulating much additional activity. That leaves a much clearer tradeoff between driving up asset prices today and lowering future returns (the price of which will be paid in the future). During the crisis period, that was much less the case, because pulling forward returns from the future (i.e., raising prices) was then also creating future earnings growth (by helping to normalize the economy).

     

    The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up, in that interest rates are at zero and US asset prices have been driven up to levels that imply very low levels of returns relative to the risk, so there is very little ability to stimulate from here if needed. So the Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions.

     

    We think the question around the effectiveness of continued QE (and not the tapering, which gets all the headlines) is the big deal. Given the way the Fed has said it will act, any tapering will be in response to changes in US conditions, and any deterioration that occurs because of the Fed pulling back would just be met by a reacceleration of that stimulation. So the degree and pace of tapering will for the most part be a reflection and not a driver of conditions, and won't matter that much. What will matter much more is the efficacy of Fed stimulation going forward.

     

    In other words, we're not worried about whether the Fed is going to hit or release the gas pedal, we're worried about whether there's much gas left in the tank and what will happen if there isn't."

     

    The last sentence is especially important imho.

     

    http://bit.ly/HRjL7s (Ray Dalio's Bridgewater On The Fed's Dilemma: "We're Worried That There's No Gas Left In The QE Tank")
    11 Nov 2013, 07:51 AM Reply Like
  • Alex123456789
    , contributor
    Comments (122) | Send Message
     
    hi Gaiden ;)

     

    zerohedge link does not work

     

    cheerio
    12 Nov 2013, 03:06 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (4086) | Send Message
     
    Author’s reply » Thank you.

     

    The SA article editor sometimes does funny stuff with links. I have fixed it with a bit.ly link.
    12 Nov 2013, 11:46 AM Reply Like
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