Fed Acts - Likes Rising Stock Prices
A: 'Asset price inflation' is what the fed is hoping for, and it seems to be working. Its nice to know that when underlying fundamentals and market forces signal one thing, the fed can simply come in and re-engineer the environment to something else. What we have here is a continuation of a fed-engineered bank recapitalization environment, where a steep yield curve will help banks profits and wall street will push money towards anything risky that offers higher yield. Crazy times indeed.
Bernanke's Op-Ed in The Washington Post says it all, "What the Fed did and why: supporting the recovery and sustaining price stability":
The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.The reason hyperinflationists have it wrong is because they think this money printing fed is dumping '100 dollar bills' onto the streets for all of us to pick up and spend! Not so. Instead, the fed is buying assets from Primary Dealers at the POMO desk of the NY Fed, buying these assets with funds that didnt exist before. Its called monetizing the debt - as the government is issuing the debt (treasuries) to finance operations and the fed is then buying these assets with a mouse click via Permanent Open Market Operations. The money is being hoarded by banks and money centers in excess reserves, and its not being lent out and multiplied (think credit creation) by our fractional reserve fiat based system. This is why hyperinflationists have it wrong, why credit creation is non-existent, and why money is simply not sloshing through our main street economy.
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. 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.
Here is a chart showing Excess Reserves of Depository Institutions, with just under $1,000,000,000,000.00 hanging around:
The fed is trying to reflate asset prices, so we can grow our way back to prosperity that way, and engineer an environment where banks can recapitalize and carry trade their bad assets away. Period. Wall street is riding it BIG TIME and all this liquidity is looking for higher yielding assets. There will definitely be new bubbles blown and future bubbles burst as an unintended consequence of these policy actions to stem deflationary pressures. In meantime, consumers continue to delever and pay down debt while businesses that can, are scrambling to raise new capital. The party goes on until it doesn't. My concerns are commodity inflation that crunches wallets/margins and ultimately, what happens when the masses take a rush for the exits. Who will be holding the bag when the music stops?? In the meantime, all the stuff that we need to live and the metals will see higher momentum at a time when unemployment is high and debt levels still a burden.
Posted by AvUWS
Thu Nov 4th, 2010 04:43 PM
I heard (bloomberg radio, don't remember the analyst/commenter) that what to look for is cash-based items increasing in value in real terms (inflation). meaning commodities, especially everyday needs like food/energy. And that assets priced based on borrowed money will have deflation in real dollars (houses, construction, etc.).
I think QE is really really dangerous. Not because it is immediately dangerous in the way gold-bugs panic, but in that we don't know where the new $'s and the inflation will end up. In inflation you almost never do. It is like we throw the money out there saying that there is an output gap (theoretical capacity vs used) and deflating asset values and that the QE will solve those problems. But what if the money lands elsewhere?
Posted by urbandigs
Thu Nov 4th, 2010 05:13 PM
i think that is exactly right..and it is really dangerous. There are no free lunches. But it tells you how bad the banks balance sheets must be if we continue to see these policies even after such a huge runup in asset prices..politically, with high unemployment, they can get away with it. They think they NEED to do something. They dont. Thats the thing about liquidity, you dont know where it will end up. And the fed cant control where it ends up. For now, they can just keep an environment that is good for banks to carry trade their way out of terribly mismarked toxic assets held on and off balance sheet. Ive always said inflation will first show up in food, energy, health care, metals, and all the stuff we need to live on. It will come at the worst time and will squeeze consumers wallets and crunch companies margins. Oil is $14 from $100 again..thats damn close!
Great to see you here AvUWS..I know its a new system, and Im hoping to get the old community back talking again!!
Posted by UPennAlaskan
Fri Nov 5th, 2010 04:28 PM
You don't know where the QE money went? One sec, lemme login to my Bank of America account. :-)
When it is NOT your money, the political correct term is called stimulus or QE...I prefer the more common name: stealing/thievery.
Posted by urbandigs
Fri Nov 5th, 2010 04:32 PM
didnt it go to junk bonds?