10/28/10 St. Louis, Missouri – As we draw closer and closer to the FOMC meeting next week, the clearer the markets believe they are to figuring out what the FOMC might do with regards to quantitative easing (QE)… So, I found some quotes from bond king, Bill Gross, and analyst, Mark Gilbert, regarding what they see. You won’t want to miss their quotes!
The currencies and precious metals are seeing some healing this morning. The US traders haven’t been kind to these risk assets lately, so it’s certainly possible that the US traders remove the tourniquets, and halt the healing. The big news this morning surrounds QE… Apparently the Fed Heads are asking dealers to estimate the scale and impact of QE… Hmmm… Yes siree Bob! Bloomberg got a hold of the survey given to NY bond dealers…
Actually, I like the idea of surveying bond dealers, but five days before your meeting? Shouldn’t this have been done a couple of weeks ago when the FOMC first indicated they would be implementing QE once again? Oh well…
I gave an interview to US News & World Report yesterday, and told the writer there that each $500 billion of QE would be equivalent to a 50 or 75 BPS Fed Funds Rate Cut… Fed Head, William Dudley, who is vice chairman of the Fed, said he expects the FOMC to announce $500 billion in “initial buying”…
Here’s the problem I see with doing the QE in smaller pieces… The FOMC would do this in an attempt to pull the wool over the markets’ eyes… But, for the last couple of weeks, the markets have believed the amount would be $1 trillion (I think $2 trillion, and Goldman thinks $4 trillion)… So, if the FOMC comes out next week and says something less than $1 trillion, the markets will be disappointed, and begin to wonder just how deep this QE is going to be when it’s all said and done!
Here’s Mark Gilbert from Bloomberg last night on QE…
Albert Einstein defined insanity as doing the same thing repeatedly and expecting different outcomes. The crazy gang at the Federal Reserve should heed those words when debating how much more market manipulation to inflict on the world of fixed income.
The worrisome thing about so-called quantitative easing – a concept still novel enough to mean whatever the Humpty-Dumpty’s in central banking want it to – is that its consequences remain unquantifiable, and the perceived need for more central-bank purchases of securities should make investors uneasy.
And here’s Bond King, Bill Gross on QE…
We are, as even some Fed Governors now publicly admit, in a “liquidity trap”, where interest rates or trillions of QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole.
Bill Gross then went on to say, “Check writing in the trillions is not a bondholder’s friend, and, if truth be told, somewhat of a Ponzi scheme.”
WOW! Both Bill Gross and Mark Gilbert doing their best Aaron Neville, and telling it like it is!
OK… How about we stop with the QE talk for today? It’s beginning to give me a rash!
Yesterday, we saw both Norway’s Norges Bank and the Reserve Bank of New Zealand keep their powder dry, and pass at this meeting at a chance to raise rates. First, the Norges Bank left rates unchanged, but the Norges Bank Governor said at a press conference that “Norway’s normal rate is 5%.” So, if that’s what he truly believes, he has some work cut out for him!
The Reserve Bank of New Zealand (RBNZ), Governor Alan Bollard said, “Despite some data turning out weaker than projected, the medium-term outlook for the New Zealand economy remains broadly in line with that assumed at the time of the September Monetary Policy Statement.”
You might recall that the September MPS in New Zealand was the thing that got me all lathered up about another rate hike… So, something is keeping Bollard from hiking rates, and I think I know what it is… In fact, I think Bollard took a swipe at the US/FOMC and their plans for QE… Let’s listen in, and see if you hear what I hear… “Downside risks to the outlook for global growth continue, with high public and private debt inhibiting recovery in many developed economies. Moreover, it is unclear how further policy support would impact on the outlook for growth in our Western trading partners. Offsetting this weakness, strong growth continues in China, Australia and emerging Asia.”
You tell ’em, Allan!
Well… I saw this yesterday, and just shook my head in disgust… Finance chiefs from South Korea & South Africa signaled that they may act to slow gains in their currencies… Hmmm, didn’t the G-20 just agree, no pledge, to NOT do this? I guess if you’re not a part of G-20, then you’ve got no problem selling your currency to keep it weak!
OK… the euro (EUR) is a bit stronger this morning, actually, very near where it was yesterday morning, when I came in, but then saw it lose ground all day… The single unit received some wind for its sails this morning when the latest Business Confidence, as reported by the think tank IFO, printed, and showed a rise to a 12-month high (index # .98, with the consensus at .79)…
And overall for the Eurozone, the outlook is feeling like it’s getting better, according to the latest European Confidence and Economic Outlook reports. Eurozone manufacturing, led by Germany, was very strong in October, which is a good thing, given that the euro was inching higher all month. The European Confidence Index rose to 104.1 from 103.2… That’s the highest this index has been since December of 2007!
I know, and realize that confidence doesn’t exactly feed into economic activity, but Shoot Rudy, if you’re not confident, how are you going to spur activity? So… I like this number from the Eurozone…
And in Japan… The land of QE and stimulus… The Bank of Japan (BOJ) left rates unchanged last night, and set out details of their next attempt to stimulate their economy with 5 trillion yen QE… You may recall me telling you that they had approved this at their last meeting… I would have to think that Mark Gilbert’s comment above about Einstein’s definition of insanity would apply to the BOJ, eh? I mean, come on… the BOJ has been implementing QE for over a decade… Sure has worked out well for them, eh?
Gold really took it on the chin yesterday, with silver following… But, as I said at the top, they are seeing some healing today. I have to say that I truly believe that the weakness we’ve seen in the currencies and metals this past week is directly tied to investors, traders, hedge fund managers, etc., taking off their dollar short positions ahead of the QE announcement next week, for they just don’t know what to expect from the FOMC…
So… What that does is give everyone that was on the sidelines a chance to pick up their fave currency or metal at cheaper prices! For the negativity toward the dollar has backed off… For now… Of course that’s just my opinion of what’s going on, as I view it from the cheap seats… I could be wrong…
My beautiful bride of 34 years will tell you that she can’t believe I would say that “I could be wrong”… HA!
Today’s data cupboard only has the Weekly Initial Jobless Claims on its shelves… Tomorrow, we get to see the first estimate of third quarter GDP, which the experts are forecasting to be right at 2%… I’m of the thought that it will be south of that number…
Then there was this… Ahhh… you knew this would happen, right? Here’s the skinny… Yesterday, I told you that CFTC member, Bart Chilton, said that, “there have been repeated attempts to influence prices. There have been fraudulent efforts to persuade and deviously control that price.” So, knowing this… The lawsuits against the banks many feel are to blame for these allegations are beginning…
Two large banks (I won’t mention their names) were sued by an investor claiming they manipulated silver futures and options prices in violation of US antitrust law by placing “spoof” trading orders.
For those of you who have never heard of “spoof” trading orders… They are “the submission of a large order which is not executed but influences prices and is then withdrawn before it reasonably can be executed.”
It’s just beginning folks… Bart Chilton opened Pandora’s Box of law suits… Not his fault, he was only stating the facts as he found them! In fact, I think that Bart Chilton should get a medal for his bravery, for it couldn’t have been easy to make those statements…
To recap… The currencies and precious metals are seeing some healing this morning, knowing all too well that the US traders have not been kind to these two risk assets lately. The Fed has passes around a survey to NY bond dealers, regarding QE… Chuck did a long interview with US News & World Report yesterday on QE and currencies, for it’s all about QE these days… 24/7!
Chuck Butler
for The Daily Reckoning
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
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Bill Grose is not exactly an objective figurehead. He’s got bond holdings larger than most countries so naturally his priority is maintain value of these. If QE will steepen the yield curve then so be it. This country needs jobs and real interest rates should not be negative. Print lots and print quick!