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  • The Myth Of 'Quantitative Tightening'  [View article]
    "QE is really just an asset swap."

    QT is really the same thing in reverse.

    QE might not be all that "easing," in fact some argue the money supply is too tight despite quantitative easing. Maybe they could call it "quantitative not to hot, not too cold, but just about right," maybe.

    "This is the idea that a Central Bank that unwinds its expanded balance sheet must necessarily have a contractionary effect on the economy."

    Well, the Fed is really not unwinding it's balance sheet at all, but the effect is the same. It can't unwind really, if it wants to begin a "rate hike" before it's holdings mature. But, it is capturing some Fed funds liquidity (the stimulus part), but that may or may not have an effect on global dollar liquidity or the economy. Maybe it could be considered more of a "quantitative (full allotment) short term freezing of highly liquid cash assets" as the Fed begins auctioning savings accounts in lieu of selling off their balance sheet. In other words, QT for short.

    Basically, during QE, the Fed bought bonds. In QT, the Fed is auctioning it's own tools in lieu of it's bond portfolio. Whether or not that has a tame effect on the economy, like easing didn't really have (IMO, and that of others), remains to be seen and is probably irrelevant to the process of swapping safe assets for cash.

    "So, the clear conclusion here is that domestic QT can't be "tightening" unless you believe that QE is a powerful form of "easing." The evidence on that is weak at best."

    Like QE, even if it's a misnomer, QT is what it is in that the Fed is tightening a little bit of it's own supplied liquidity. You can sell an asset, or use it as collateral, but you cannot lend money tied up in that asset. QE paid savers not to save, QT pays them to save, again.

    In any case, a $300 billion full allotment (notwithstanding Skeptical Investor's informed insight), is a tiny move off the $4.5 trillion balance sheet. It's just not as tiny as, say, a 25bps point hike in the funds rate putting us on par with the Bank of England.

    But, the "rate hike" is really the misnomer, here. The Fed told us the funds rate will remain low for a considerable period. What they seem to be doing as early as September with RRP and term deposits is tying up a tiny bit of excess cash. If you follow John Mason, he shows how the Fed is removing (and sometimes adding, because the system is flexible) reserves to the banking system. That is what these tools do.
    Aug 31, 2015. 06:25 AM | Likes Like |Link to Comment
  • This Is Not A Game The Federal Reserve Wants  [View article]
    "...then shut up and do it when those targets are met."

    I guess I somewhat agree with your interpretation of noisy rhetoric. Its it helpful? Well, it can be, I guess, since it gives a look into that they are thinking. Even if each is thinking differently. As you say, it does not make for policy, just commentary. Policy comes with a single mouth formed by many mouths.

    Are they sent out there to speak to the markets? Good question. They know people are listening for any hint. I would not doubt it if some commentary is geared to the moment to jawbone whatever ails us.

    But, the Fed backed away from a threshold form of guidance a while back. It turned out not to be so appropriate. They are more or less observers than scientists. Data can be flexible.
    Aug 31, 2015. 06:03 AM | Likes Like |Link to Comment
  • How The Upcoming Fed Interest Rate Hike Will Move Stock Prices - What You Need To Know  [View article]
    "An increase of .25 to a Zero percentage after all these years is what? IMHO it is a drop in a very large bucket."

    It simply puts on par with the Band of England at 0.5%. They may hike soon enough, too.
    Aug 31, 2015. 05:46 AM | Likes Like |Link to Comment
  • A Fed Rate Hike In September? No... Yes... Maybe?  [View article]
    Good point, SI. Capital constraints are a player here, as well.

    Still, the rate hike is to about 0.5bps in line with the bank of England. The $300 billion "full allotment" of bids for safe assets is a tightening of the money supply, though. It seems the best they can do keeping the balance sheet expanded. So, of the two things going on here, a small rate hike plus some tightening of fed funds, the tightening seems the most influential. I think this is why EM is reeling over the tightening more so that the funds rate.
    Aug 30, 2015. 07:28 PM | Likes Like |Link to Comment
  • This Is Not A Game The Federal Reserve Wants  [View article]
    "To me the interesting take-away from the markets this past week was just how much wailing and tooth-gnashing followed a 5% decline in stocks. The s&P is only down 3% for the year, but the Fed , the media and others are treating it as a financial crisis."

    Sure. I mean, it certainly began to look ominous. But, if you step back and take a deep breath, it doesn't make it go away but it may help calm nerves when we see what caused the swoon.

    I think this is a healthy correction on China's slowing, made evident by the currency devaluation and liquidity injection (as opposed to the greater pegged range for the IMF vote on the SDR.) I think that is what spooked the markets above and beyond Fed forward guidance.

    China's PBoC may have acted ahead of the Fed rate hike to add stimulus helping to soften a potential hard landing as China tries to mature from a very large emerging market to a slower growth developed market with a free floating currency.
    Aug 30, 2015. 04:46 AM | 1 Like Like |Link to Comment
  • This Is Not A Game The Federal Reserve Wants  [View article]
    "But it begs the question, what will the stock and bond markets do on September 17th after the Fed announcement?"

    Maybe they've already responded. China may have moved ahead of the Fed to ease conditions toward a softer landing as the USD carry unwinds.
    Aug 30, 2015. 02:17 AM | 1 Like Like |Link to Comment
  • This Is Not A Game The Federal Reserve Wants  [View article]
    Well said, Obi Wan. That is why I do not feel the Fed is bluffing. I guess we all have to "bet on" the rate hike. A task not made easy by the volatility and loss of the wealth effect.

    I think it helps to sort through the weeds of what QE is and where the volatility emanates from. It's not from the US under the Fed's watch. But, so many folks believe the Fed should ease on China's slowing. I don't. That task belongs to the PBoC. However, the global wealth effect wiped out, especially that of US stocks on the back of Chinese growth prospects, muddies the waters.

    So, as a result, you get calls for more QE from the Fed. That begs the question why? Will ramping up monetary policy provide more earnings for US companies operating in a slowing Chinese economy? The very event that caused a correction in equities in the first place? Chinese growth is PBoC, even though cheap dollar policy has assisted. It could well be China eased "ahead of the Fed" rate hike announcement (which is really a quantitative tightening of the USD carry trade than it is an actual rate hike cooling US consumer lending.)

    China may well learn the art of forward guidance, as well. Bottom line, US equities might better state the earnings of US companies domestically and abroad, but I do not believe this rout was a sign of a recession in the US as much as it is a sign of China itself slowing from a very large emerging market to a more sustainable growth developed market. The US economy is already there. The lost wealth effect may or may not be a game changer. But, it may warrant waiting until December so as not to roil the markets.

    "If it's based on economic data like housing, inflation, consumer confidence and GDP, they would raise in Sept no question. But if it's based on stock prices and market volatility, they get skiddish. Not the data they should be dependent on IMHO."

    Again, well said, unless of course US earnings are falling on US fundamental data. I don't think that's the case.
    Aug 30, 2015. 02:14 AM | 1 Like Like |Link to Comment
  • The Dollar: Now What?  [View article]
    Thank you, Mr Chandler, always nice to hear what you have to say. A lot to absorb and debate during the recent weeks. We do live in interesting times.

    I am not sure the Fed can, nor should, do much to stem China's slowing growth. After all, it seems the responsibility of the PBoC to cushion a hard landing. I believe the market correction adjusted to slower growth in China wiping out a large chunk of the wealth effect globally. They seemed to move ahead of the Fed "rate hike" announcement and gradually tightening of liquidity to reinvigorate their own economy on the gradual unwinding of the dollar carry trade. Pull the nose up and add power...

    What's interesting is, the yuan fell to (and maybe below) the new pegged trading range. That suggests capital outflows are trying to happen on Chinese slowing, but it's a necessary step it seems to getting the yaun into the SDR. So is maturing from a very large emerging market with phenomenal growth and earnings, into a more stable slower growth developed economy. That may be a few years away, I don't think they will make it with confidence by October. That would be quite a feat for any economy, but if successful a real achievement for a centrally planned one, or so they say.

    In any case, I don't see the yuan in the SDR until the financial crisis and China's volatility have all but abated. I would not be surprised if the yuan became part of the SDR at a much lower exchange rate, and it will grow gradually from there. Conversely, I argue policy divergence is good for the US economy. It could increase inflation expectations on capital inflows and sustained, resilient growth.

    I am sure the Fed would love to see equities rally back restoring some lost wealth effect. I am not convinced additional or prolonged US easing will achieve it without reaching parity with the yen (insert irony here.) Our expansive monetary policy seems to have run it's course leaving the zero bound to do the heavy lifting. The Fed may well be right to "quantitatively tighten" excess liquidity. The draw back, as we all seem to be aware, will be in EM exacerbated by a slowing Chinese economy, but not so much in US employment, growth, and eventually inflation.

    I see a gradually stronger dollar against EM on tightening in the same way the USD lost ground on easing. The rally of the euro was interesting. But, I also see a strong (or stronger) dollar against the euro, and to some extent the pound, until Europe begins to grow and offer higher than negative rates on it's own growth and risk on. This may leave the US with a larger share of global investment opportunities. Eight years seems to be quite a long monetary lag.
    Aug 29, 2015. 11:05 PM | 1 Like Like |Link to Comment
  • What Every Investor Needs To Know About The Dollar  [View article]
    Eight years is one hell of a monetary lag.
    Aug 29, 2015. 10:44 PM | Likes Like |Link to Comment
  • What Every Investor Needs To Know About The Dollar  [View article]
    Lastly, its capital inflows that stimulate an economy, not necessarily Fed easing beyond the zero bound of aggregate demand. Capital inflows, in net, mean a stronger dollar. They also mean trickle down stimulus is more effective giving rise to higher inflation expectations. When an economy falters, massive easing sends stimulus abroad seeking higher returns. It increases the wealth effect and wealth gap, but not necessarily stimulating the domestic economy.

    Consumption means higher commodity prices. Even though low commodity prices are weighing on inflation, it takes aggregate demand to drag commodity prices higher. No amount of cheap dollar stimulus will increase commodity prices absent demand. In fact, cheap funding may over stimulate production, and that is deflationary.

    If we resort to the last ditch effort to stoke inflation doing battle with our own currency with massive easing, we will become Japan with nothing to show for it but a constant threat of deflation. This, in my view, will make the dollar worthless in a perpetual state of low domestic investment demand. That would be a crime, one might suppose. The time for low rates and excess liquidity is over, in my view. Inflation will come on sustained growth, employment and wages, the zero bound FFR, and domestic investment - not on a cheap dollar that does not trickle down into it's own economy.
    Aug 29, 2015. 10:42 PM | Likes Like |Link to Comment
  • What Every Investor Needs To Know About The Dollar  [View article]
    As to whether the dollar rises or falls depends a lot on where you look. One should expect the dollar to rise as the carry trade winds down, but generally only those growth regions where the carry trade sought yield primarily in EM and maybe frontier markets.

    The dollar may strengthen on a tightening money supply, but only gradually. It could fall on global import consumption as the US economy continues to heal. It will adjust to consumption outflows and a reduction of cheap investment outflows. That balance will strike the dollar price.

    In EM and Asia, China's trading partners, the dollar should strengthen as China's influence slows. There are still returns to be had in EM, it will just cost a little more relative to (elevated?) risk. In general, slowing growth will be less attractive in EM and probably Australia on commodities and trade with China. But dollar strength in this region is not reflected in the index.

    In Europe, it depends on the level of risk and reward, which are not currently attractive in my view (outside of Germany and a select few.) The risk is high and the reward is negative to some extent. For the dollar to loose ground against the Euro, and to some extent the pound, Europe has to grow and probably solve the Greek problem supplanting depression with growth. I suspect the dollar index will rise gradually making European developed export trade more attractive. This may spur growth in the Eurozone. If it does, then risk on in Europe's developed economies will cause the dollar to moderate.

    I am not sure the idea the Fed rate hike will cause a slowing of the US economy thus causing the dollar to plummet holds water. We already went through this phase in 2007/8. The US is on firmer footing. And, by the way, as mentioned above, global growth regions will have more of a tantrum than the US economy does on a gradual hike in rates.

    After all, it's not so much of a "rate hike" of the funds rate as it is a "quantitative tightening" of excess liquidity no longer needed as US domestic employment reaches a new critical mass and sustained and resilient growth. There is a reason EM is reacting to the Fed, likely more so than the US economy itself.
    Aug 29, 2015. 10:27 PM | Likes Like |Link to Comment
  • Fed's Incredible Stock-Market Levitation Of Recent Years Is Failing  [View article]
    Great point, Peter. I am not sure the IMF really wants a currency in the SDR that has a peg in place, regardless of the easing range of trading. What was amazing, to me, is the Chinese currency fell to the lower end of that range and China injected liquidity. The former suggests capital outflows, possibly investment outflows on slowing, and the latter suggests a response to that slowing. The market rout, in my view, was also a correction on Chinese slowing.

    Certainly, China wants to be part of the SDR, and rightfully so in my view. No doubt broadening of the trading band, and eventual free float, is a step in that direction. China will have to evolve from a very large emerging market into the world's second largest developed economy, in my view, before they are accepted in the SDR. I think that is a few years away, at least, and probably post crisis.

    So, yea, the widening of the yuan trading bank is exactly as you say. What caught my eye was the response to the yuan and the correction in the market. It suggests a slow down in China, which of course is probably required to mature into a developed economy. China needs to stabilize in order to get into the SDR and to price equities on slower growth.

    If China fell to a more stable 3 to 4% growth by October, that would be a real feat and a victory for central planned economies. It would wipe out a lot of global wealth effect in the process, it already has. I am not sure the Fed can do anything about it other that stay the course. China does not need more USD stimulus, apparently. Maybe the US doesn't either.
    Aug 29, 2015. 09:54 PM | 1 Like Like |Link to Comment
  • What Every Investor Needs To Know About The Dollar  [View article]
    Hi Net, great point. EM, and very likely China, will feel a drop off in stimulus as the US economy reaches some level of employment. Was thinking China's recent easing may be in response to the unwinding of the dollar carry "ahead of the Fed" meeting.

    Folks talk about a slowing of the US economy on the rate hike. EM has a tantrum on tightening, not the funds rate. That's really what the Fed is doing, "quantitatively tightening" rather than hiking rates significantly. It seems to affect them more so that it does our own economy (outside of the lost wealth effect on China's recent correction.)

    I am not sure even the omnipotent Fed can, or should, do anything about that equity correction. That correction happened on falling Chinese growth expectations and easing under the watch of the PBoC. The US economy is still okay, for now.
    Aug 29, 2015. 09:32 PM | Likes Like |Link to Comment
  • A Fed Rate Hike In September? No... Yes... Maybe?  [View article]
    "...the ceiling for the TFFR band is meaningless, since the objective of tightening is to enforce a floor on rates, not a ceiling."

    "The Fed already recognizes that the RRP rate can only serve as a firm floor on rates if it is unlimited in scope."

    "So tell me again how the Fed will fight inflation if it ever should threaten while the trillions of dollars of excess reserves remain in the banking system."

    All great points. As I recall, you argued the difficulty in enforcing the range. I guess I do not know how that will work out with an expanded balance sheet. You may be right. You are definitely right, tightening with an expanded balance sheet presents problems. I don't know the answers. I trust the committee of academics and central bankers will work it.

    It may have something to do with the expanded list of counter parties who are lending at rates lower than IOER eligible for RRP and term deposits. It may have something to do with the idea reserves are not really necessary for lending, but credit worthiness, risk, and inflation are. Consumers do not borrow at the FFR, only banks do.

    I believe the Fed is looking for inflation from the consumer side in bank credit creation, so banks actually determine the rates at which they will lend regardless of the funds rate. So, it seems the market will put a dampening on inflation.

    I see the "rate hike" as a "quantitative tightening" of loan funds more so than an actual hike in the funds rate. This is why, in my view, the Fed is getting ahead of inflation even while the threat is still non existent, apparently. It is tightening the balance sheet while the FFR remains low for a considerable period.

    Bottom line is, SI, you make some great arguments. It may be less about actually controlling the funds rate that is it about a "quantitative tightening" of excess liquidity. I mean, this is why EM is in a tantrum and possibly China's recent easing may have been in response to the unwinding of the carry trade (I presume) "ahead of the Fed."
    Aug 29, 2015. 09:14 PM | Likes Like |Link to Comment
  • Fed's Incredible Stock-Market Levitation Of Recent Years Is Failing  [View article]
    "Back in December 2008 the Fed implemented its zero-interest-rate policy in response to that year's once-in-a-century stock panic."

    I don't understand, well I do but I don't buy into it, this non existent equity centered Fed policy objective. Sure, the Fed wants the wealth effect and a rising equity market.

    But, as above, the Fed does less outright manipulation of the market than it does making money available to stimulate conditions for (global) growth that brings a rising market. The Fed began easing as early as late 2007 in response to the impending financial crisis, the stock market's "once in a century panic" resulted from the crisis.

    I believe you are right, though and apparently as a result of the crash, there was a lot of exuberance. Especially on the high rate of Chinese and EM growth. This is why EM shuddered during the taper and maybe why the PBoC eased "ahead of the Fed" rate hike.

    Fed policy was geared to conditions causing the credit crunch, not the fall of equities, per se. The Fed does have your back, but indirectly through the free market. So, what now that China is slowing. Do we expect the fed to pump more money into China? I would not think so, Chinese growth belongs to the PBoC.
    Aug 29, 2015. 08:44 AM | 1 Like Like |Link to Comment