QE2 is not only a mistake “it’s criminal” says Vitaliy Katsenelson: Tech Ticker
by ilene - December 9th, 2010 12:00 pm
The Treasury market is rebounding Thursday. Yields have fallen from a six-month high, reached Wednesday, but are still up from where they were earlier in the week. Yields on the 10-year are trading at 3.23% today.
This is not what the Federal Reserve had in mind when the central bank announced the plan to purchase $600 billion in Treasury bonds — a move that was hoped would lower rates and stimulate the U.S. economy.
Of course, there are many critics of the Fed who say the second round of quantitative easing is wrong and even harmful. "The failure of QE2 doesn’t worry me, it’s the success that worries me," says Vitaliy Katsenelson of Investment Management Associates.
"I think it’s criminal," he tells Aaron in the accompanying clip. "They’re forcing people that should not be taking risk to take risk." The fear is the Fed is repeating its past mistakes — helping to build an asset bubble that will eventually burst with grave consequences.
More here: qe2 is not only a mistake "it’s criminal" says vitaliy katsenelson: Tech Ticker, Yahoo! Finance.
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THE MYTH OF THE GREAT BOND “BUBBLE”
by ilene - August 19th, 2010 4:47 pm
THE MYTH OF THE GREAT BOND “BUBBLE”
Courtesy of The Pragmatic Capitalist
There is increasing chatter of the great “bond bubble” as U.S. Treasury bonds surge ever higher and deflation fears rise. This is just one more myth that has persisted in recent years (decades really) due to mass misconception of the way the bond market actually operates and this propensity to label everything as a “bubble”.
Before we dive into the real meat of the argument it’s important that we define what a market “bubble” is. A “bubble” occurs when market forces combine to generate a highly unstable position. This results in the system entering an extreme disequilibrium and ultimately failure. The causes of this “bubble” (or extreme disequilibrium) can be many – though primarily psychological any number of exogenous factors can contribute to the instability of the system (government policy for example). The psychological aspect of a bubble is well explained by analysts at BNP Paribas:
“When interacting agents are playing in a hierarchical network structure very specific emerging patterns arise. Let us clarify this with an example. After a concert the audience expresses its appreciation with applause. In the beginning, everybody is handclapping according to their own rhythm. The sound is like random noise. There is no imminence of collective behavior. This can be compared to financial markets operating in a steady-state where prices follow a random walk. All of a sudden something curious happens. All randomness disappears; the audience organizes itself in a synchronized regular beat, each pair of hands is clapping in unison. There is no master of ceremony at play. This collective behaviour emanates endogenously. It is a pattern arising from the underlying interactions. This can be compared to a crash. There is a steady build-up of tension in the system (like with an earthquake or a sand pile) and without any exogenous trigger a massive failure of the system occurs. There is no need for big news events for a crash to happen.
Financial markets can be classified as open, non-linear and complex systems. They also exhibit emanating patterns as a result of which the “invisible hand” can be very shaky. More then 40 years ago Benoit Mandelbrot described the fractal structure of cotton prices and the emanating properties of fat tails and volatility clustering and Hyman Minsky proposed a theory for endogenous speculative bubble formation.
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TIPS Like Sugar
by ilene - August 18th, 2010 10:08 pm
TIPS Like Sugar
Courtesy of Joshua M Brown, The Reformed Broker
The ‘Treasury Bonds are a Bubble" meme has been going around and building intensity for months now, but we’ve finally seen the definitive article written on the subject in the Wall Street Journal.
Jeremy Siegel and Jeremy Schwartz frame the story in a context that the investor class will truly understand – they compare it to the dot com bubble. I had front row seats for that show as a young stockbroker ten years ago and, like anyone else that was there, I have injuries so visceral that I can actually sense when rain is coming.
Of particular importance is their comparison of tech stocks then with TIPS now…
We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.
The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.
The rush into TIPS has felt mind-boggling to me, in spite of the fact that this trade has "continued to work". With the Professor in agreement, I feel (only slightly) better about my reluctance to participate.
Meanwhile, The Boss has been making the media rounds talking about the bond bubble story all week, on MSNBC and Fast Money last night, on Bloomberg Radio this morning. This long-simmering story is finally getting some real attention.
Felix Salmon and Vince Fernando have had a highly important back-and-forth on what exactly the TIPS Spread is pricing in and Eddie Elfenbein picked up on the fact that JNJ was able to price a 10-year bond with a yield under 3% while it’s common stock pays a 3.6% dividend yield.
The disgust for the growth prospects of equities is palpable as money flies out of stocks and piles into bonds of every stripe. Here’s the WSJ on these inflow/outflow stats:
Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds
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The Ecstasy of Empire
by ilene - August 17th, 2010 4:42 pm
The Ecstasy of Empire
Courtesy of PAUL CRAIG ROBERTS writing at CounterPunch
The United States is running out of time to get its budget and trade deficits under control. Despite the urgency of the situation, 2010 has been wasted in hype about a non-existent recovery. As recently as August 2 Treasury Secretary Timothy F. Geithner penned a New York Times column, “Welcome to the Recovery.”
As John Williams (shadowstats.com) has made clear on many occasions, an appearance of recovery was created by over-counting employment and undercounting inflation. Warnings by Williams, Gerald Celente, and myself have gone unheeded, but our warnings recently had echoes from Boston University professor Laurence Kotlikoff and from David Stockman, who excoriated the Republican Party for becoming big-spending Democrats.
It is encouraging to see some realization that, this time, Washington cannot spend the economy out of recession. The deficits are already too large for the dollar to survive as reserve currency, and deficit spending cannot put Americans back to work in jobs that have been moved offshore.
However, the solutions offered by those who are beginning to recognize that there is a problem are discouraging. Kotlikoff thinks the solution is savage Social Security and Medicare cuts or equally savage tax increases or hyperinflation to destroy the vast debts.
Perhaps economists lack imagination, or perhaps they don’t want to be cut off from Wall Street and corporate subsidies, but Social Security and Medicare are insufficient at their present levels, especially considering the erosion of private pensions by the dot com, derivative and real estate bubbles. Cuts in Social Security and Medicare, for which people have paid 15 per cent of their earnings all their lives, would result in starvation and deaths from curable diseases.
Tax increases make even less sense. It is widely acknowledged that the majority of households cannot survive on one job. Both husband and wife work and often one of the partners has two jobs in order to make ends meet. Raising taxes makes it harder to make ends meet--thus more foreclosures, more food stamps, more homelessness. What kind of economist or humane person thinks this is a solution?
Ah, but we will tax the rich. The rich have enough money. They will simply stop earning.
Let’s get real. Here is what the government is likely to do. Once Washington realizes that the dollar is…
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Will Quantitative Easing Spur Inflation? Job Creation? Credit Expansion? Do Anything?
by ilene - August 6th, 2010 11:14 am
Will Quantitative Easing Spur Inflation? Job Creation? Credit Expansion? Do Anything?
Courtesy of Mish
St. Louis Fed James Bullard’s proposal to start "quantitative easing" is creating a stir. Chris Ciovacco at Ciovacco Capital Management (and many others) propose the Fed can and will use quantitative easing to induce inflation. I disagree.
The following are snips from Chris Ciovacco’s article, Reading Between The Lines: James Bullard’s Seven Faces of “The Peril” followed by my point-by-point replies.
The titles in "bold red" below are questions Chris Ciovacco proposed and answered. My answers are quite different.
What could all this mean to me and my investments?
Chris Ciovacco: Let’s start with quantitative easing, where the Federal Reserve buys Treasury bonds. Using a hypothetical example to illustrate the basic concepts, assume a typical American citizen has some Treasury Bond certificates in a shoebox under their bed. If the Fed offers to buy those bonds, they will be exchanging paper money, not currently in circulation, for a bond certificate. After the transaction, the American citizen has newly printed money and the Fed now has a bond certificate. It is easy to see in this example the Fed has increased the money supply by buying the bonds. The Treasury Bond represents an IOU from the U.S. Government. When the Fed buys bonds in the open market, it is like the government buying back its own IOU with newly created money. This is about as close to pure money printing as it gets.
Mish: The typical American citizen does not have Treasury Bond certificates in a shoebox, under their bed, or anywhere else. Those who do have treasury bonds, more than likely have them in a mutual fund portfolio or treasury EFF and they probably do not even realize they have them. The very few who hold treasury bonds outright, are highly unlikely to sell them.
How is this policy any different from lowering interest rates or increasing bank reserves?
Chris Ciovacco: Lowering interest rates and flooding the banking system with cash has one major drawback; if the banks won’t issue loans or customers do not want to take out loans, the low rates and excess bank reserves do little to expand the supply of money in the real economy. Therefore, these policies can fall into the "pushing on a rope" category. Quantitative easing, or Fed purchases of Treasury bonds, injects cash directly into…
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Why Interest Rates Will Rise in 2010
by ilene - December 26th, 2009 10:11 pm
Why Interest Rates Will Rise in 2010
Courtesy of Charles Hugh Smith, Of Two Minds
Interest rates, artificially suppressed by the Federal Reserve and China, are about to start rising, and will continue rising for a generation.
On Christmas Eve 2009, I wish I could parrot the "happy-happy" Party Line that interest rates and mortgage rates will stay low for essentially ever, but that would require lying. The truth is the drivers of super-low interest rates are diminishing, and the forces of higher rates can no longer be restrained.
There have two primary drivers of super-low interest rates: The Federal Reserve and the Chinese buying Treasury bonds.
The Fed has created massive artificial demand for more U.S. debt in two ways; by direct purchase of bonds being auctioned (During the first 2 months of the new fiscal year, the Federal Reserve grew its balance sheet by about $65 billion, in effect purchasing about 22% of the federal government’s new debt) and by secretly buying Treasury bonds from "primary dealers" (banks) a few days after the auction.
This way, it appears for propaganda purposes that some private parties are actually buying T-bills to hold, when in fact they are only temporary proxies for cloaked Fed purchases.
The entire "package" of Fed buying of Treasury debt to keep interest rates low runs in the hundreds of billions--The Fed’s balance sheet ballooned to $2.24 trillion in assets as of last week, up 142 percent from the beginning of 2008. The Fed purchased outright $300 billion of longer-term Treasury securities, $1.2 trillion toxic-garbage mortgage backed securities no sane investor would touch, and hundreds of billions more in Treasury debt via proxy buyers.
And now as the Fed ends some of its lavish support of the Treasury debt, Congress and the Obama Administration are stepping up their borrowing to unprecedented levels:
Taxpayer Burden Eases to $8.2 Trillion as Obama Supplants Fed.
So just as the Fed cuts back its purchases of massive new Federal debt, the Federal government is borrowing more? And who, pray tell, will be the "buyer of last resort" as the Fed trims its buying?
Not the Chinese Central Government: China’s Dumping Of The Dollar Has Begun.
Here is the key dynamic to China’s purchases of Treasury debt: when China’s trade surplus with the U.S.…
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Insatiable Demand For US Debt, or Something Else?
by ilene - October 2nd, 2009 3:31 am
Courtesy of Chris Martenson
Recently the Fed reiterated that their $300 billion program of buying long-dated Treasury Bonds would end on schedule, meaning as soon as it hit $300 billion. Well, that’s been achieved so according to recent Fed statements, the program is over.
This is a critical development because the ability of the US government to continue to fund its massive deficits (at favorable rates) requires that each Treasury Auction be "well bid." The Fed has been a major participant, and so we might reasonably wonder who will fill the Fed’s shoes.
This is critical because the US government continues to float weekly auctions of Treasuries in quantities that just a few short years ago would have been unthinkable.
Exhibit A: Next week’s schedule:
Monday (Oct 5), 10 year TIPS: $7 billion
Tuesday (Oct 6), 3-Year notes: $39 billion
Wednesday (Oct 7), 10-Year notes: $20 billion
Thursday (Oct 8), 30-Year Bonds: $12 billion
That’s $78 billion dollars over the course of just four days.
While not record-breaking compared to amounts offered (and snapped up) in early 2009, for perspective $78 billion is equivalent to the entire yearly economic output of Bangladesh, a nation of some 160 million souls. Let’s be honest, $78 billion is a lot of money, it really is, although I will understand these days you’ve become numb to such staggeringly large numbers. I know I have.
If we go to the Federal Reserve website we can see that over the course of 28 weeks the Federal Reserve has already accumulated slightly more than $300 billion in its Long-Term Treasury Purchase Program:
(Source)
So according to its recent statements the Fed is all done buying long-dated Treasuries. I say ‘apparently’ because the Federal Reserve website just announced its next raft of Long-Dated Treasury Purchases.
(Source)
I am still baffled as to why the Fed is both showing that it has bought more than $300 billion in Treasuries and has scheduled more purchases. I assume there’s some sort of clever distinction that excludes some purchases (TIPS perhaps?) from the "official total" of the Long-Term Treasury Purchase Program.
It’s either that or the Fed (as predicted here long ago) is going to continue buying Treasuries and other US paper assets in whatever amounts
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The Shell Game – How the Federal Reserve is Monetizing Debt
by ilene - August 26th, 2009 8:31 pm
Fascinating! H/t to Zero Hedge for finding this excellent article by Chris Martenson. (See also Tyler Durden’s "Is The Fed Enabling Foreign Central Banks To Swap Out Their Agency Debt Into Treasuries?") And welcome to Chris Martenson of ChrisMartenson.com!
The Shell Game – How the Federal Reserve is Monetizing Debt
Courtesy of Chris Martenson
Executive Summary
- The Federal Reserve and the federal government are attempting to "plug the gap" caused by a slowdown of private credit/debt creation.
- Non-US demand for the dollar must remain high, or the dollar will fall.
- Demand for US assets is in negative territory for 2009
- The TIC report and Federal Reserve Custody Account are reviewed and compared
- The Federal Reserve has effectively been monetizing US government debt by cleverly enabling foreign central banks to swap their Agency debt for Treasury debt.
- The shell game that the Fed is currently playing obscures the fact that money is being printed out of thin air and used to buy US government debt.
The Federal Reserve is monetizing US Treasury debt and is doing so openly, both through its $300 billion commitment to buy Treasuries and by engaging in a sleight of hand maneuver that would make a street hustler from Brooklyn blush.
This report will wade through some technical details in order to illuminate a complicated issue, but you should take the time to learn about this because it is essential to understanding what the future may hold.
One of the most important questions of the day concerns how the dollar will fare in the coming months and years. If you are working for a wage, it is essential to know whether you should save or spend that money. If you have assets to protect, where you place those monies is vitally important and could make the difference between a relatively pleasant future and a difficult one. If you have any interest at all in where interest rates are headed, you’ll want to understand this story.
There are three major tripwires strung across our landscape, any of which could rather suddenly change the game, if triggered. One is a sudden rush into material goods and commodities, that might occur if (or when) the truly wealthy ever catch on that paper wealth is a doomed concept. A second would occur if (or when) the largest
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site