Tag: QE

QE could drive populism rather than the economy

The Reserve Bank will consider quantitative easing once rates fall to 25 basis points. It’s a tool that has been used by other countries, often with devastating consequences for society. Via InvestorDaily.

Australia is in uncharted territory, economically speaking. We’re latecomers to the low-rate party and we’re still getting used to it. Home owners are loving it but retailers are not. Unemployment is low but a record number of Aussies want to work more. It’s a strange time. 

The Reserve Bank of Australia only has a few options left if it fails to hit its inflation target and lift economic growth. It can continue to reduce the cash rate and even go into negative rates, as the European Central Bank (ECB) had done. The ECB benchmark deposit rate was cut by 10 basis points in September to negative 0.5 per cent. The ECB also reintroduced its quantitative easing program of buying 20 billion euros ($32 billion) worth of government and corporate bonds every month in an effort to prevent the European economy from sliding off a cliff. 

The ECB has been using QE on and off since 2009 in an effort to lift inflation. In 2015 the central bank began purchasing 60 billion euros worth of bonds each month. This increased to 80 billion euros in April 2016 before coming back down to 60 billion a year later. 

In the UK, the Bank of England bought gilts (British government bonds) and corporate bonds during its QE program during the global financial crisis in 2009. QE programs also took place in 2011 and 2016.

Meanwhile, the US Federal Reserve has undertaken three separate rounds of QE, the last of which it began tapering in June 2013. The US halted its program in October 2014 after acquiring a total US$4.5 trillion of assets. 

When a QE program takes place, a central bank begins buying securities with money that didn’t exist before the QE process began. They are essentially printing money and giving it to large corporates and the government through the purchase of these bonds, the logic being that the proceeds will be used to buy new assets (like mortgages) and invest, which in turn will drive the economy. 

The money doesn’t directly hit the wallets of consumers. Unlike “helicopter money”, which the Rudd government dished out during the financial crisis, QE has a much more indirect impact on consumers. Financially speaking. 

But the broader political and social impacts have had a lasting psychological effect on the populations of Europe and the US.

“If we look at the experience offshore, QE has been great at raising the level of assets in conjunction with a permanently lower interest rate,” Fidelity International’s Anthony Doyle said this week. 

“QE has stimulated asset price growth. The ‘haves’ have benefited compared to the ‘have nots’; income inequality has grown across the economies that have implemented quantitative easing and socially we have seen big shifts to the Right or to the Left in terms of the political spectrum. 

“If you think about Donald Trump, Elizabeth Warren, Bernie Sanders, Jeremy Corbyn, Brexit, Boris Johnson. The next decade could be characterised by moves to the Right or Left here as well if we follow a path that other economies have pursued.”

AMP Capital chief economist Shane Oliver told Investor Daily that QE “probably helps people who have shares and property more than it does people who have bank deposits.”

Prior to the election of Mr Trump in 2016, Luis Zingales of the University of Chicago Booth School of Business told Bloomberg that central bank policies are largely to blame for the rise of populism. 

Here in Australia, the Reserve Bank will have to consider the impact that QE could have on a society that has witnessed a banking royal commission that exposed widespread misconduct within the financial services industry.

If the impact on Europe and the US of QE on the people is anything to go by, Australia is well placed to split down the middle and begin gathering on the far edges of the political spectrum.

We were late to the low rate party. We might just be late to the populism party too.

Kitchen Sink From The Fed – Up To $365 Billion In The Next Month!

The Fed appears to be concerned about end of the year liquidity, judging by their latest statement on their repo operations.

The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has released the schedule of repurchase agreement (repo) operations for the monthly period from December 13, 2019 through January 14, 2020.  In accordance with the most recent FOMC directive, the Desk will conduct repo operations to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures around year end that could adversely affect policy implementation.

The Desk will continue to offer two-week term repo operations twice per week, four of which span year end. In addition, the Desk will also offer another longer-maturity term repo operation that spans year end. The amount offered in this operation will be at least $50 billion.    

Overnight repo operations will continue to be held each day.  On December 31, 2019 and January 2, 2020, the overnight repo offering will increase to at least $150 billion.  In addition, on December 30, 2019, the Desk will offer a $75 billion repo that settles on December 31, 2019 and matures on January 2, 2020. 

The Desk intends to adjust the timing and amounts of repo operations as needed to mitigate the risk of money market pressures that could adversely affect policy implementation, consistent with the directive from the FOMC.

Detailed information on the schedule and parameters of term and overnight repurchase agreement operations are provided on the Repurchase Agreement Operational Details site.

So, the NY Fed will continue to offer two-week term repo operations twice per week, four of which run across the end of the year end. Plus, they will also offer another longer-maturity term repo operation that spans year end. The amount offered in this operation will be at least $50 billion.

Beyond that, they announced that the overnight repo offering will increase to at least $150 billion to cover the “turn” in a flood of overnight liquidity.  And on December 30, 2019, the Desk will offer a $75 billion repo that settles on December 31, 2019 and matures on January 2, 2020.

And they leave the door open to more if need by saying “intends to adjust the timing and amounts of repo operations as needed to mitigate the risk of money market pressures that could adversely affect policy implementation, consistent with the directive from the FOMC.”

So in essence, as well has growing the size its overnight repos to $150 billion, the Fed will run nine term repos covering the year-end turn from Dec 16th to Jan 14th, 8 of which will amount to $35 billion and the first will be $50 billion, for a total injection of $365 billion in the coming month.

This is what the Fed Balance Sheet might look like. If this is not QE, I do not know what is….

The core question is what are they afraid of?

QE Is Likely To End Badly

From Zero Hedge

As the WSJ reports, prominent hedge fund managers have joined an increasingly bigger and louder chorus which says central bank bond buying programs that are pumping trillions of dollars into global markets will end badly.

In yesterday’s main event, the ECB said it would extend its asset purchase program to the end of next year, buying bonds at a reduced rate. As the following chart from BBG projects, at the ECB’s revised rate of bond purchases, its balance sheet will soon surpass that of the Fed.

So what happens next? Prominent managers have told The Wall Street Journal in recent interviews of their doubts about the endgame for quantitative easing around the world.

“There’s no non-messy way out of this,” said Luke Ellis, chief executive of Man Group, one of the world’s biggest hedge-fund firms with $80.7 billion in assets. “There’s two versions” of how this ends, he added. Either central banks could move to so-called ‘helicopter money,’ where they buy debt from the government, which then spends the proceeds or gives it to the population to spend. This “for a few years looks golden then leads to hyperinflation,” he said. Or the speed at which money circulates within the economy could grind to a halt. “Then you effectively have a barter economy,” he said.

In a series of exclusive interviews with the Journal, hedge-fund executives overseeing around $280 billion in total highlighted a range of problems created by quantitative easing. The problems they highlight are precisely those that QE was designed to solve, and are exactly the same problems we warned about since the 2009, for which we have been repeatedly branded some variation of “fake news.” Now the skepticism has become mainstream. This is what, according to the hedge fund managers interviewed by the WSJ, will happen:

Damage to economic growth

Rather than kick-starting growth, quantitative easing may do the reverse. Some managers fear it distorts financial markets and undermines capitalism. That system relies on profit-hungry investors to differentiate between strong and weak companies—funding the strong while letting the weak die. QE, say some managers, doesn’t differentiate.

For instance, the Bank of England is buying the debt of firms it deems make “a material contribution” to the U.K. economy. That has led some investment banks and companies to create new debt especially for it to buy. The ECB has bought €48.2 billion ($51.2 billion) of corporate debt since June, but the hoped-for private-sector investment hasn’t materialized.

“What does a market do? It’s a voting mechanism,” said Michael Hintze, billionaire founder of hedge fund CQS, which runs around $12 billion in assets. “Instead you’ve got this 800-pound gorilla out there who’s hoovering up assets. “There’s a misallocation of capital and an opportunity cost to the real economy,” added Mr. Hintze, whose portfolio is up 30% this year, ranking it one of the world’s top-performing hedge funds. “It means GDP is not growing as much as it might.”

Some put it even more strongly. “It’s definitely destructive of economic growth,” said Crispin Odey, founder of Odey Asset Management, which runs $8.2 billion in assets.

“Capitalism dies a death,” said Mr. Odey, who sees government policy as the main factor influencing markets. His fund, a top performer after the credit crisis, is down sharply this year because of being too bearish. “It’s all policy. It’s the Kremlin. And I’m in the gulags.”

Damage to society

In her speech to the governing Conservative Party conference in October, U.K. Prime Minister Theresa May spoke of “some bad side effects” from quantitative easing as people with assets got richer while those without them suffered. U.S. President-elect Donald Trump has said low rates have robbed savers. Those side effects include “envy and distress” within society, “as people think ‘I can’t get out of where I am,’” said Andrew McCaffery, group head of solutions at Aberdeen Asset Management, who looks after $170 billion in assets.

Ultralow interest rates mean the large part of the population with few financial assets begins to despair of how to generate income to fund retirement, he said.

“People see a developing black hole,” he said. This “increases the sense of there being little to lose for many” people.

Andrew Law, chief executive of New York-based Caxton Associates LP, which runs around $7.8 billion, said quantitative easing averted economic depression after the financial crisis.

But he added: “The losers of QE are society, and democracy is also a loser, because central banks are not publicly elected officials.”

Deflation

Quantitative easing was also introduced as a way of increasing private-sector spending and raising inflation. Some investors even worried it would spark hyperinflation and rushed to buy gold. Instead, say some managers, it has led to deflation.

“It took me a long time to work it out,” said CQS’s Mr. Hintze. “It’s a very complex issue.” He said that massive amounts of liquidity mean that “liquidity’s not worth much anymore,” which leads to negative interest rates. “I do think it [QE] is a massive deflationary force. The reason is because money is worth less but the price of real assets goes up.”

Mr. Odey said quantitative easing leads to deflation because weaker competitors are kept alive by cheap debt as “zombie” companies.

Hard stop

Finally, hedge-fund managers see difficulty in ending quantitative easing.

“Central banks are sadly helping to create the ‘black hole,’ and the sucking noise and pull is getting bigger,” said Aberdeen’s Mr. McCaffery, “but you just have to keep going as your alternative options as a central banker are just too unpalatable to consider.

Using an analogy we first came up with in 2009, McCaffrey slammed the use of a drug placebo to keep the system intact: “More methadone is not going to help, a form of cold turkey [is] needed, but no central bank is going to do that,” he added. He warns governments’ debt-to-GDP levels have risen.

The punchline:

“In the long term, it implies rates can never go up, as the damage will be extraordinary in nature,” he said, as they struggle with their debt loads. For now, however, the market which moments ago hit new all time highs, is blissfully ignoring all of the above.

FED Ends Bond By-Back Programme

Just released. Sufficient signs of recovery mean the FED will end QE this month. Interest rates will remain low for now.  One of the biggest economic experiments in history moves to a new phase.

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee’s longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.