The Impact of Federal Stimulus Measures on the Price of Gold

The Impact of Federal Stimulus Measures on the Price of Gold

 

Historically, the value of gold and fluctuations in its price have been linked directly to the wider economic performance. As a general rule, the value of gold tends to be most resolute during periods of recession, as investors look to commit their capital into physical assets that deliver genuine financial security.

 

The most recent statistics underline this trend, with the price of gold set the retreat from a near three-month high in the face of measured stimulus tapering in the U.S. A string of poor data releases had forced the government to initially reconsider their approach to stimulating economic growth, only for the Federal Reserve to reaffirm their commitment to restoring long-term growth.

 

The Facts and Figures: Gold Values in 2014

 

It was during the last week that the price of gold hit a three-month high, amid rising global shares and continued economic uncertainty in the U.S. While the Federal government had spoken at length during the first financial quarter about tapering their stimulus measures and laying the foundations for more sustainable, long-term growth, underperformance within the labour market has persuaded them to reconsider their stance. As a result on this, investors were encouraged to believe that the ultra-easy stimulus policy would continue for the foreseeable future.

Incoming Federal Reserve Chair Janet Yellen performed a sharp-about turn this week, however, by reiterating the U.S. Central Bank’s commitment to a measured tapering of its gold-friendly stimulus policy. While Yellen has stated that has a strong belief in the current bullion and monetary policy measures, however, the sudden drop in gold prices has forced many to question the wisdom of her decision making. More specifically, it could trigger a sudden rise in interest rates and force investors to develop a more risk-averse approach in the financial markets.

Does Gold Represent a Good Investment in 2014?

The decision to taper bullion stimulus measures will only serve to undermine the appeal of gold as an investment opportunity still further. While the presence of under-employment may have caused growth in the labour market to slow, investors have continued to disregard this and similar macroeconomic factors as being insufficient to derail the tentative global recovery. This has had a direct impact in reducing the appeal of gold, and the sudden depreciation in value will force a growing number of investors to consider alternative precious metals and commodities.

If it would be fair to say that gold holds minimal investment appeal as we approach the second financial quarter of this year, however, it is worth considering the performance of additional market options such as silver and platinum. The former, which has experienced considerable growth during the last eighteen months fell by 0.3% in the wake of recent events, while the latter gained a respectable 0.1% amid global political issues. The upshot of this appears to be that investors are likely to avoid the precious metal market for the foreseeable future, at least until the U.S. economy has adapted to its new monetary policies.

QE 4 Update/ Review

English: President Barack Obama confers with F...

English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

The Big Picture

Link to The Big Picture

  • Our market letter will return in the New Year
What Is The Purpose of QE?

Posted: 25 Dec 2012 02:00 PM PST

As detailed earlier in the month, the Federal Reserve announced more stimulus, otherwise known as QE4, at its recent meeting.

Lots of the discussion thus far has focused on whether or not QE will happen and not on the purpose of QE.

What we discuss below is a good example of economists discussing the probability of QE rather than why QE is necessary or what it will accomplish.

So, what is QE supposed to do?  Bernanke told us in his speech over the summer in Jackson Hole:

“After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful.

LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.

While there is substantial evidence that the Federal Reserve’s asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual–how the economy would have performed in the absence of the Federal Reserve’s actions–cannot be directly observed. If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economyModel simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.15

This is not the first time the Federal Reserve has laid out this argument.  In a November 4, 2010 Washington Post op-ed, the day after QE2 was approved, Ben Bernanke defended their actions with the following passage:

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Federal Reserve Board Chairman Ben Bernanke said Thursday that a controversial $600 billion bond buying plan has contributed to a stronger stock market. “Our policies have contributed to a stronger stock market just as they did in March 2009 when we did the first iteration of this program,” Bernanke said at a Federal Deposit Insurance Corp. forum on small businesses. “A stronger economy helps small businesses more than larger businesses. Interest rates are higher but that’s mostly because the news is better. It has responded to a stronger economy and better expectations.”

To sum it all up:

• The Federal Reserve buys Treasury bonds in order to push down interest rates, making them an unattractive investment (last shown here, page 6) .

• Investors respond by moving out the risk curve and buying assets like corporate bonds and stocks, pushing them higher.  The Federal Reserve believes this happens via the portfolio balance theory.

• But according to the Federal Reserve, moving out the risk curve does not include buying agricultural or crude oil futures, so do not blame them for higher food or gasoline prices.

• Higher asset prices create a wealth effect, which increases spending and confidence and improves the economy. The Federal Reserve believes this has helped create 2 million jobs.

We agree with half of what is written above.

• QE does produce lower interest rates, or at least the belief that rates are too low.  This then pushes investors out the risk curve which is why stocks have such an immediate and positive reaction whenever QE is speculated.

• The Federal Reserve is playing politics in regards to the effect of QE on commodity prices.  There is no reason to believe the risk curve ends at low-rated stocks.  How much QE affects food and gasoline prices can be debated, but to argue there is no effect at all, and will never be an effect under any scenario, merely because the Federal Reserve does not want to answer for these higher prices, is just wrong.

• The argument that higher asset prices produce a wealth effect is only partially correct.  Two conditions must be met for a wealth effect to ensue.  Net worth must reach a new high and it must be perceived to be permanent.  This is why housing produced such a powerful wealth effect before 2006.  Home prices always went up and their gains were perceived to be permanent.  Currently we have a retracement of losses and a widespread distrust of financial markets.  These conditions will not produce any wealth effect and we believe they have not.

QE is great for Wall Street as it produces more volatility (brokers like this), higher stocks prices (fund managers like this) and draws lots of attention (analysts like this).  It is not good for Main Street because it does not create wealth.  QE’s effects are not perceived to be permanent, so it does not lead to higher GDP or job growth.

What Will The Federal Reserve Do?

In Septmber we noted that the median expectation in a survey of primary dealers calls for $500 billion of additional purchases heavily tilted toward mortgage-backed securities.   If the purpose of QE is to push stock prices higher, then the Federal Reserve has to deliver at least $500 billion in purchases.  Otherwise it will disappoint risk markets.

Right now, if we have to guess, we believe the Federal Reserve will announce purchases of less than $500 billion. In January the Federal Reserve adopted an inflation target of 2.0%.  As we detailed in a conference call last month (transcripthandoutaudio), inflation expectations are running well above this target.  One measure of inflation expectations, the 10-year TIPS inflation breakeven rate, is shown below.  Further, in April, when Bernanke was asked if he would adopt a suggestion from Paul Krugman to expand the target to 3%, he flatly rejected the idea (explained here).

The hawks will argue expected inflation is too high to add more stimulus, an argument which will carry some weight.  The compromise will be a program of less than $500 billion in purchases which will disappoint the markets.

Click to enlarge:

Source: Arbor Research

 

 

 

 

 

 

Rumors of QE4

Go Away Federal Reserve System!

Go Away Federal Reserve System! (Photo credit: r0b0r0b)

The Federal Reserve will hold its last policy meeting of the year next week, and two key issues are expected to dominate the gathering and the market’s attention — the expiration of “Operation Twist” and a potential change in interest rate guidelines.

Implemented in September 2011, Operation Twist was designed to lower rates for mortgages and corporate bonds. The program, which expires at the end of this month, entailed the Fed buying $667 billion (roughly $45 billion per month) in longer-term Treasuries above 6-year durations, while selling the same amount in shorter-term securities under 3-year durations.

The goal of the monetary twist has been to lower long-term rates to fuel consumer and corporate borrowing and spending.

“With Operation Twist ending, that means they’ve run out of short-dated securities to sell in order to purchase more [longer-term securities], so what they’ve got to move to now is buying up pure $40 billion per month of mortgage-backed securities [QE3],” says Andrew Wilkinson, chief economic strategist at Miller Tabak. “They probably have to compensate for that loss of $40 [billion] to $45 billion per month.”

Rumors of QE4

Wilkinson is touching on concerns that have recently been addressed by various Fed governors. That is, that simply carrying out the third round of quantitative easing is not enough to boost the economy. QE3 is an open-ended program that has the Fed buying $40 billion per month in mortgage-backed securities.

So will the Fed turn Operation Twist into another outright securities purchasing program, essentially becoming QE4? Or are they more confident in the economy given the improvement in the November jobs report?

The market will be watching very closely to see if the Fed changes its tune. The decision on handling Twist’s expiration will be very telling as to how the committee views the recovery and how much stimulus will be pumped into the economy in 2013.

 

FOMC Rate Policy: Debating Numerical Thresholds

“There’s something else on the table with the Fed though,” says Wilkinson. “They may move to targeting a specific rate of unemployment as a guarantee to when they can stand by the promise of low interest rates.”

The Fed’s current policy is to hold rates near zero through mid-2015. Chatter is growing louder that the Fed will change its guidelines, and instead of tying interest rate policy to a calendar date, they will link it toward set goals for the unemployment and inflation rates. This would directly link rates to the Fed’s dual mandate to promote maximum employment and price stability.

Fed Vice Chairman Janet Yellen recently joined several other Fed officials calling for specific thresholds to guide policy. These thresholds would not be triggers to change policy, merely guidelines for debate.

“For now, it doesn’t really matter,” Wilkinson says of the possible shift. “As next year progresses we’ll hear more in terms of jawboning from the Fed, how it’s going to go about this process, how it’s going to anchor its inflation expectations, and whether we should be focused on more than purely employment. Inflation is equally important, but there’s a lid on it at around 2%, according to the Fed’s projections. We also have to factor in GDP as well.”

The Fed’s gathering will end Wednesday with a 12:15 p.m. ET policy statement, and a press conference with Fed chief Ben Bernanke will follow a short time later.

Nomura Forecasts A Market Spike Then A Dramatic Fall

English: A frame from a screencast from the US...

English: A frame from a screencast from the US House Financial Committee full committee hearing “An Examination of the Extraordinary Efforts by the Federal Reserve Bank to Provide Liquidity in the Current Financial Crisis which took place Tuesday, February 10, 2009, 1:00pm, 2128 Rayburn House Office Building. The frame shows Chairmen Ben Bernanke responding to a question posited by John E. Sweeney Full Committee (Photo credit: Wikipedia)

Nov 13

Nomura’s bearish macro strategist, Bob Janjuah, is out with his latest update on the stock market in nearly two months. 

Nothing has changed about his long-term view–he is still very pessimistic on markets and the economy.

However, Janjuah thinks we could see a major move higher in the over the medium term, owing to some sort of fiscal cliff deal that kicks the can and full-blown QE from the ECB.

Here’s what Janjuah has to say in his note:

If I look out 3-6 months I am open to the idea of one last parabolic spike higher in risk-on markets in this interim timeframe. I think we will eventually get fiscal and debt ceiling fudges in the US. Of course long-term credible solutions are needed, but are the most unlikely outcome.

Instead we may well be ‘forced’ to celebrate another round of horrible fudges which DO have a consequence. Namely, that the private sector continues to ignore Bernanke and the Washington elite (who between them continue to enjoy printing significant sums of money and/or spending way beyond their means) by instead doing the exact opposite, which means holding onto/building cash and savings, delaying spending/investment/hiring and thus hurting growth.

Markets will I think worry about these negative consequences eventually (see paragraph above), but in the interim the knee jerk reaction of markets to fiscal/debt ceiling fudges will likely be positive. Furthermore, and again on a 6 to 12 month interim timeframe, I think we could also see the ECB finally move to all out QE driven by another round of eurozone panic and driven in particular by the strong deflationary data trends that are emerging in the eurozone and which we in GMS think will get much stronger.

A combo of ECB QE and fiscal/debt ceiling fudges in the US – perhaps also complimented by a short-lived centrally planned but debt fuelled and ultimately wasteful China uptick – could even cause a parabolic spike powerful enough to take S&P – briefly – into the 1500s, before resuming the longer-term march over the rest of 2013 and 2014 to the 800s.

However, for the rest of 2012, in the short-term, Janjuah still remains bearish.

Bill Gross of PIMCO : BUY Gold

The Federal Reserve: The Biggest Scam In History

Sept. 17

Gold (GC : NASDAQ : US$1,774.50)

The cult of bonds is dead. The cult of equity is dying. Buy real assets…gold…a house?

 

PIMCO boss Bill Gross said in his September Investment Outlook,:

The age of credit expansion, which led to double-digit portfolio returns is over. The age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price – both stocks and bonds.” On Friday, Gross tweeted, “#Fed to buy mortgages ‘til the cows come home. Think 7% unemployment, 2.5% inflation targets.

Buy real assets…gold…a house!” In an interview with Bloomberg TV on September 5, Gross said, “Gold can’t be reproduced. It can certainly be taken out of the ground at an increasing rate, but there’s a limited amount of gold and there has been an unlimited amount of paper money over the past 20 years to 30 years and now…central banks are at their leisure in terms of basically printing money…You know, I am not a gold bug. I am just suggesting that gold is a real asset and will be advantaged if the Federal Reserve or the ECB central banks start to write checks in the trillions. So what my objective is, I am not sure. I just think it [gold] will be higher than it is today and certainly a better investment than a bond or stock, which will probably return only 3% to 4% over the next 5 to 10 years.”

 

 

How Bernanke Is Pushing Stocks Higher

1-fed

1-fed (Photo credit: Wikipedia)

Sept. 17

 

Stocks Get A Double Kick

The Fed is enlarging the duration of its balance sheet and thereby altering the market’s clearing mechanism. Thus, long duration asset prices are expected to rise. That means US treasury bond yields are expected to fall. But global sellers may have other things in mind. They now suspect the US dollar will weaken and therefore they want to exit their holdings. When they do that, the yields on those instruments will rise and the prices fall if the global sellers sell more in a given period than the Fed is buying. This is the tradeoff we cannot estimate. Only time will tell.

So the volatility in the bond market is rising and will continue to do so. That is what happens when you mess around with duration.

Stocks are a very long duration, variable rate, asset class. They also have the ability to adjust to the inflationary outcomes that this extraordinary Fed policy can deliver. American stocks can state their foreign earnings in US dollar terms. Therefore a weakening US dollar means they will report higher earnings. Thus stocks get a double kick from this policy. They benefit from the weak dollar earnings translation and they benefit from the Fed duration switch.

That explains the market’s reaction to the Fed’s announcement. US long treasury yields rose, not fell. Stocks rose.

We can affirm this reaction by digging into the market.

The cap-weighted S&P 500 average was up 4.49% from Labor Day weekend until the September 14 close. The top 100 are found in an ETF; its symbol is OEF. It was up 4.30%. Remember, it is the larger companies that get the biggest kick from the weaker dollar. So we would expect OEF to trade closely with SPY (the symbol for the S&P 500). It did.

Contrast that with RWL. It is the symbol for the revenue-weighted S&P 500. These are same stocks but with a different weighting method. If the Fed’s policy is expected to result in more inflation, there will be a greater impact on the revenue side, with top-line growth. We should see that expectation show up in the market, where we track revenue weightings vs. cap weightings. It did. RWL was up 5.13% vs. SPY up 4.49%. Note also that risk-taking is broadening in the stock market. We see that by examining RSP. It is the equal-weighted version of the 500 Index. It was up 5.61%.

Let me be very clear. I disagree with this Fed policy move. It was not my first choice. I think the Fed is now playing with fire. But our job is to manage portfolios and not to make policy. If the Fed is now in QE infinity and if the Fed is now buying duration from the market at a rate faster than the market is creating it, then we want to be on the bullish side of that trade. Our US stock accounts are nearly fully invested. Our bond accounts are avoiding the longer-term treasuries and are using them as hedging vehicles. Our international accounts have been realigned accordingly.

The Bible says that Job was tested to his limits. In the next few years the financial and investing world will be tested, too.

Euro Zone – ” Doomed ” : Jim Rogers

ECB

ECB (Photo credit: AlphaTangoBravo / Adam Baker)

Septemebr 10

A “terrible price” will be paid for the euro zone crisis eventually, whether the European Central Bank (ECB) embarks on mass bond purchases or not, Jim Rogers, investor and co-founder of the Quantum Fund with George Soros, told CNBC Monday.

Rogers said: “These guys have been saying the same old garbage for a long time. It’s not a game-changer – it’s good for the market for maybe a month. The debt keeps going higher and higher and eventually we’ll all going to pay a terrible price.”

He warned that the market rally, which many have seen as an opportunity to get back into riskier assets, would only be a short-term rebound. (Read More: ECB Setting Markets Up for Let-Down)

“It’s not an opportunity to make money for me. This is not good for the market and it’s not going to last. Every three or four months they (euro (EUR) zone politicians) have a summit and they say: Ok guys, everything is ok now. The market goes up. But we’re getting a little tired of this and the market is getting a little tired of this,” Rogers argued. (Read More: ECB Plan Comes Too Late)

There should be some opportunity to make money in the short term, Peter Toogood, director of investment, Old Broad Street Research, said.

“There is a little window for risk trade – not a sustainable one, but there’s some stability to the short-term outlook,” he argued. He pointed out that ECB President Mario Draghi “has already been expanding the balance sheet through disguises.”

Some point out that the ECB will hold off on the bond-buying program – known as Outright Monetary Transactions (OMT) – which will raise its balance sheet, until there are much firmer conditions imposed. This makes it less like classic inflationary money printing. (Read More: Italy Has no Plans to Access New ECB Plan: Monti)

Carl Weinberg, chief economist, High Frequency Economics, said that he doesn’t think the ECB will print money in Europe any time soon.

“We’re going to have the same old, same old all over again. It’s just another twist on the same old story, but right now they’re not doing anything,” he said.

“Draghi couldn’t get past the Germans for an inch if he didn’t agree to sterilize the proceeds.”

Opinion is also divided on how the potential to buy (rephrase?) huge tranches of the bonds of shakier economies, to try and keep their borrowing costs at sustainable levels, will affect the commodities markets.

Weinberg pointed out that the OMT plans are probably on too small a scale to affect the commodity markets long term. While they have been described as “unlimited”, countries which apply for the assistance have to meet certain conditions for their budget and fiscal reform.

Rogers, famed as a long-term commodities bull, said there was no reason to correct this stance. (Read More: Jim Rogers on Commodities)

“The bull market in commodities will end some day – but some day is a long way away,” he said.

“Commodities have been correcting for a while. Now everybody knows they’re throwing money into the market, and history tells you that when they do this the way to protect yourself is to own real assets whether it’s silver or rice. If the world economy gets better, I own commodities because there’s shortages developing. If it doesn’t they’re (central banks) all going to print money. It’s the wrong thing to do, but it’s all they know to do.”

Peter Schiff Forecasts An Inflationary Recession

Ben Bernanke, Vampire Chairman

Ben Bernanke, Vampire Chairman (Photo credit: DonkeyHotey)

September 7th column by Shiff

As far back as his time as an academic, Bernanke made clear that when the going got tough, he wouldn’t hesitate to fire up the printing presses. He specialized in studying the Great Depression and, contrary to greater minds like Murray Rothbard, determined that the problem was too little money printing. He went on to propose several ways the central bank could create inflation even when interest rates had been dropped to zero through large-scale asset purchases (LSAPs). Sure enough, the credit crunch of 2008 gave the Fed Chairman an opportunity to test his theory.

All told, the Fed spent $2.35 trillion on LSAPs, including $1.25 trillion in mortgage-backed securities, $900 billion in Treasury debt, and $200 billion of other debt from federal agencies. That means the Fed printed the equivalent of 15% of US GDP in a couple of years. That’s a lot of new dollars for the real economy to absorb, and a tremendous subsidy to the phony economy.

This has bought time for President Obama to enact an $800 billion stimulus program, an auto industry bailout, socialized medicine, and other economically damaging measures. In short, because of the Fed’s interventions, Obama got the time and money needed to push the US further down the road to a centrally planned economy. It is also now much more unlikely that Washington will be able to manage a controlled descent to lower standards of living. Instead, we’re going to head right off a fiscal cliff.

The Fed Chairman even admitted to this reality in his statement. Here are two choice quotes:

“As I noted, the Federal Reserve is limited by law mainly to the purchase of Treasury and agency securities. … Conceivably, if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery.” [emphasis added]

“…expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time. … such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability.” [emphasis added]

So we all agree that the prospect of inflationary depression was made worse by the Fed’s actions – but at least Ben Bernanke has pleased his boss. As a guaranteed monetary dove, Ben Bernanke appears to be a shoo-in if Obama is re-elected.

Meanwhile, Mitt Romney has pledged to fire Bernanke if elected. While I am not confident that Mr. Romney has the economic understanding to appoint a competent replacement – let alone pursue a policy of restoring the gold standard or legalizing competing currencies – he may well be seen as a threat not only to the Fed Chairman’s self-interest, but also to his inflationary agenda.

Given this background, let’s look at Bernanke’s quotes that have been the focus of media speculation for the past week: the US economy is “far from satisfactory,” unemployment is a “grave concern,” and the Fed “will provide additional policy accommodation as needed.” These comments seem designed to reassure markets (and Washington) that there will be no major shift toward austerity in the near future. The party can go on. But they also hint that Bernanke might be planning to double down again. I have long written that another round of quantitative easing is all but inevitable. It now seems to be imminent.

In reality, when the money drops may have more to do with politics than economics. The Fed may not want to appear to be directly interfering in the election by stimulating the economy this fall, but there are strong incentives for Bernanke to try to perk up the phony recovery before November and deliver the election to Obama. However, if Romney wins, Bernanke can at least fall back on his appeal as a team player as he lobbies for another term.

For gold and silver buyers, either scenario is likely to continue to stoke our market in the short- and medium-term. As the past week’s rally indicates, there is no longer a fear that the Fed has had enough of money-printing – in fact, it looks prepared for much more.

 ( for gold stock reviews please see www.ampgoldportfolio.com )

Doug Kass : Plans On Shorting Stocks ( Response to Draghi / Euro Zone Crisis)

European Central Bank

European Central Bank (Photo credit: jurjen_nl)

Sept. 6

“I plan to sell/short this news for several basic reasons,” writes Doug Kass, President of Seabreeze Partners

In a new note published on The Street, Kass writes that he’s not very impressed by Mario Draghi‘s announcement that the ECB would begin unlimited bond-buying program.

“Not only is Europe slipping more rapidly into a deeper recession but the implementation of serious and effective longer-term policy responses remains unlikely. Band-Aid policy measures of providing liquidity (which aids the transmission of monetary policy) remain the operative palliative, and they will likely continue for some time to come.”

And he argues that the U.S. serves as a pretty good model for what’s to come:

“…we can look at the massive doses of monetary stimulation in the U.S. as a template. Despite unprecedented easing, we are now more than three years after the Great Recession of 2008-2009, and the domestic economic economy is growing (in real terms) at only 1.8%. Given the more dire state of the eurozone (accelerating inflation, decelerating economic growth and rising unemployment), how will it be possible for Europe to grow out of its debt problem? The answer is that it won’t be able to without the heavy lifting and unpopular policies that could encourage growth by cutting expenditures and balancing trade.”

Bottom line, he says: “There will be many more Thursdays with Mario.”

Read the whole post at TheStreet.com.

What Draghi said:

  • Transparency: Purchases to be revealed on a weekly and monthly basis.

Basically, so long as governments submit to outside observation of fiscal consolidation plans, the ECB will buy 1-3 year debt in unlimited levels.

You can read the full press release on it here.

If this really goes operational (which will require the full activation of the bailout schemes, and the willingness of countries like Spain to submit to outside review) the ECB then has the firepower to take tail risk off the table.

In fact, Draghi specifically said that was the goal: Taking tail risk off the table.

The big question is: how will this different than past bond buying programs? One reporter during the Q&A noted that the ECB has done this twice before.

Draghi’s basic answer: Countries will be subject to conditionality (making bond purchases part of fiscal consolidation) and it will be unlimited. Also it will be transparent.

The mos tension during the Q&A came when German reporters pestered Draghi about the legitimacy of the program, and whether this is really legal under the ECB’s mandate.

Draghi insists it is. He says that it’s consistent with the mandate for price stability and that even in the origanl ECB charter, bond purchases have been anticipated.
ECB press conference was the first time that the bank was expected to announce a real game changer for the euro crisis.

The reason? For the first time, it looks like the ECB is seriously going to open up its unlimited pocketbook and buy bonds agressively to depress yields.

Usually the ECB disappoints when it has a press conference, but this time the markets seem to like what happened. European bond yields are falling, and the Dow is up 130.

The hallmark news of the day was the existence of a new plan: The OMT, which stands for Outright Monetary Transactions.

Previously, when the ECB did bond buying it was under a program called the SMP: Securities Market Program.

The new plan rests on 5 pillars:

  • Conditionality. Strict and effective conditionality is attached to ECB purchases of sovereign debt. What this means is: No country gets to have their bonds purchased unless they submit to outside oversight on fiscal matters. IMF observation will get re-elected. Draghi threatens to terminate actions in non-compliance.
  • Unlimited purchases of 1 to 3 years.
  • ECB is no longer senior. ECB expects the same Pari Pasu treatment.
  • Sterilization: The liquidity created through outright transactions will be sterilized.
  • Transparency: Purchases to be revealed on a weekly and monthl
    • basis.

    Basically, so long as governments submit to outside observation of fiscal consolidation plans, the ECB will buy 1-3 year debt in unlimited levels.

    You can read the full press release on it here.

    If this really goes operational (which will require the full activation of the bailout schemes, and the willingness of countries like Spain to submit to outside review) the ECB then has the firepower to take tail risk off the table.

    In fact, Draghi specifically said that was the goal: Taking tail risk off the table.

    The big question is: how will this different than past bond buying programs? One reporter during the Q&A noted that the ECB has done this twice before.

    Draghi’s basic answer: Countries will be subject to conditionality (making bond purchases part of fiscal consolidation) and it will be unlimited. Also it will be transparent.

    The mos tension during the Q&A came when German reporters pestered Draghi about the legitimacy of the program, and whether this is really legal under the ECB’s mandate.

    Draghi insists it is. He says that it’s consistent with the mandate for price stability and that even in the origanl ECB charter, bond purchases have been anticipated.

    The market seems to like it: The Dow is surging 150 points, hitting the highest level in 52 weeks.

     

Damn Inflation And Run The Printing Press ; Part 5678

Fed. Res. Board:  P. Warburg, J.S. Williams, W...

Fed. Res. Board: P. Warburg, J.S. Williams, W.G. Harding, A.C. Miller, C.S. Hamlin, W.G. McAdoo, Fred. Delano (LOC) (Photo credit: The Library of Congress)

Septemeber 2

for gold prtfolio ideas see www.ampgoldportfolio.com

Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

Jonh Mauldin comments:

“No very deep knowledge of economics is usually needed for grasping the immediate effects of a measure; but the task of economics is to foretell the remoter effects, and so to allow us to avoid such acts as attempt to remedy a present ill by sowing the seeds of a much greater ill for the future.”

– Ludwig von Mises

We heard from Bernanke today with his Jackson Hole speech. Not quite the fireworks of his speech ten years ago, but it does offer us a chance to contrast his thinking with that of another Federal Reserve official who just published a paper on the Dallas Federal Reserve website. Bernanke laid out the rationalization for his policy of ever more quantitative easing. But how effective is it? And are there unintended consequences we should be aware of? Why is it that the markets seem to positively salivate over the prospect of additional QE?

I missed the part where Congress gave the Fed a third mandate, to target the stock market. But Bernanke not only takes credit for the stock market, he points out that the rebound in the housing market is also due to Fed policy, because it fostered lower mortgage rates. Which it did. But let’s also remember that it was Fed policy that helped create the housing bubble to begin with. Which I don’t remember Bernanke taking credit for, even though he was on the Fed then and up to his eyeballs in supporting that policy.

Joan McCullough, in her own irreverent style, gave us a few must-read paragraphs this afternoon:

“And then [Bernanke] has the sand to make a public comment that stocks go up when he prints money because discount rates have gone down and the economic outlook has improved on account of it? This is what makes the hot dogs run stocks up the flagpole when The Bernank saddles up? Better economic outlook? Amazing.

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