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Dalio: No gas left in QE tank

  • Not worried about whether the Fed will taper or not, Ray Dalio's concern is whether the Fed even has any bullets left to use. Asset purchases work decently when asset prices are low, but with valuations high, QE is far less effective, he argues, meaning the central bank has far less power to affect the economy now.
  • Put another way, at this point Fed policy is generating a large financial asset bubble in order to get just a small pickup in the economy.
  • "The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up" - interest rates are zero and asset prices so high that low relative levels of return are nearly assured. "The Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions. ... 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."
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Comments (18)
  • American in Paris
    , contributor
    Comments (5504) | Send Message
     
    What asset bubbles? Certainly not stocks or real estate.
    11 Nov 2013, 01:45 PM Reply Like
  • Jack Hutchison
    , contributor
    Comments (338) | Send Message
     
    Treasury Bonds are the asset bubble. The Fed has been buying them up with funny money in order to hold interest rates down.

     

    At close to zero percent interest there is no upside to buying bonds, only downside. If and when the real economy recovers interest rates will kick up in spite of the Fed's best efforts with their Ponzi scheme.

     

    With over 17 trillion dollars in debt US debt service will overwhelm the Treasury's ability to pay the interest when rates increase back to historical norms. Makes you wonder if anyone in Washington has thought through this deficit spending binge initiated by Bush and run rampant by Obama.

     

    The only hope is to grow ourselves out of the mess, but that won't happen until Obama is out of office, and a farsighted Libertarian or Republican is elected.
    11 Nov 2013, 02:35 PM Reply Like
  • Jason Burack
    , contributor
    Comments (1718) | Send Message
     
    There's no revenue growth to justify even these stock price valuations for many of the larger caps. Free money from the Fed to buy back shares to boost EPS. Are we are in bubble to the levels of 1999 where large cap stocks were trading at 30 times earnings? Not yet but we are on our way.
    11 Nov 2013, 02:48 PM Reply Like
  • notta lackey
    , contributor
    Comments (131) | Send Message
     
    Actually this is a brilliant policy, not a mistake. The Fed is a corporation owned by America's banks. QE has created excellent spreads for his stockholders and the asset bubble has bailed out their bad loans.

     

    But, since I am in the unfortunate majority who is not a banker, if I outlive him, I intend to poop on his grave.
    11 Nov 2013, 03:13 PM Reply Like
  • berloe
    , contributor
    Comments (1574) | Send Message
     
    If I thought large caps were on the way to 30X earnings I would be loading up.
    11 Nov 2013, 03:38 PM Reply Like
  • wealthmony
    , contributor
    Comments (3) | Send Message
     
    Stock price valuations are not determined by gross revenues. They are determined by earnings. Earnings are at an all-time high. PEs are not at all time highs. IBES 12-mo forward earnings for the S&P 500 are at $119 and the forward PE is 14.8x. It was double that in 1999-2000.

     

    The question is whether or not companies will be able to sustain these earnings. There is huge pent up demand in the economy. GDP growth over the last 4 years has been pathetic. Unemployment is high. We need a major change in fiscal policy to get this economy going up to speed. I would expect growth to remain somewhere between 1-3% until the current administration is replaced with a pro-growth president. If it is Hillary Clinton, let's hope her husband has influence with her, and if it is a Republical, let's hope it is a strong growth oriented individual.
    12 Nov 2013, 03:06 PM Reply Like
  • wealthmony
    , contributor
    Comments (3) | Send Message
     
    I am a senior citizen who has studied investment and economics for five decades.
    12 Nov 2013, 03:07 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8139) | Send Message
     
    But the question is:

     

    Where will you be when the bubble pops?
    11 Nov 2013, 02:35 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8139) | Send Message
     
    The bubble is in Fed asset purchases.
    12 Nov 2013, 09:45 AM Reply Like
  • Gary Jakacky
    , contributor
    Comments (2397) | Send Message
     
    Tbonds are not in a bubble, they are in a bear market. They have been falling for over a year. And the FED has no power to control it.
    11 Nov 2013, 03:08 PM Reply Like
  • tribeca18
    , contributor
    Comment (1) | Send Message
     
    ABSOLUTELY CORRECT ! We are in bear market. Be flat or short.
    11 Nov 2013, 05:35 PM Reply Like
  • jsds
    , contributor
    Comments (71) | Send Message
     
    Some air is coming out of the bubble. The hole may widen and go swoosh... or.... if we are lucky it continues to leak slowly. If you are correct that it is only a bear market, I expect it will last for years as yields continue to move up. It is possible that they burst forward with a boom. jmho
    12 Nov 2013, 09:19 AM Reply Like
  • Grey Swan
    , contributor
    Comments (42) | Send Message
     
    Tail wag the dog policy: Fed gooses asset prices first to boost employment/ growth rather than foster a stable environment that produces healthy employment and wages that in turn boost asset prices. Completely backwards.
    11 Nov 2013, 03:48 PM Reply Like
  • Kyle Spencer
    , contributor
    Comments (998) | Send Message
     
    The Fed can stay irrational longer than you or I can stay solvent.
    11 Nov 2013, 03:55 PM Reply Like
  • jsds
    , contributor
    Comments (71) | Send Message
     
    Yes, but if the FRB finds itself with a hole in their balance sheet, the people may finally come to grips with the problems that they have thrust and exacerbated on not only the US but the world economies.
    11 Nov 2013, 09:41 PM Reply Like
  • sethmcs
    , contributor
    Comments (3068) | Send Message
     
    Fed out of bullets? Maybe in the medium or long term but want to bet the market does not make new highs tomorrow when $4.75 - $5.75 billion hits the market on Nov 12?
    http://bit.ly/bwlr02
    11 Nov 2013, 09:54 PM Reply Like
  • RM13
    , contributor
    Comments (710) | Send Message
     
    Since big money is watching Fed purchases like a hawk, what happens when those stop or slow down to a trickle? We have seen effect of hints of QE ending on the stock market and the answer is steep corrections. So, if QE comes to an end without underlying economic recovery (last one not happening under Obama), we'll be in bear market fast.

     

    Market tops have come in the past within one year of interest rate cycle rises. Market top this time will come within weeks of QE taper/end, if not immediately.

     

    Of course, Fed policy then will be to flood market with more money. I don't see how this game doesn't end with devaluation of dollar and hyperinflation.
    11 Nov 2013, 10:44 PM Reply Like
  • EK1949
    , contributor
    Comments (1479) | Send Message
     
    "The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up"

     

    "The Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions. ... 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.

     

    This is probably right. We have about 8 more years of additional fiscal drag ahead of us, every year more drip drip drip of poison into the economy from taxes and spending cuts. Against that the Fed has very little it can do other than keep rates pinned down, which it will.
    11 Nov 2013, 11:20 PM Reply Like
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