The Condundrum, Mk. II

The number of words that Ben Bernanke has written explaining why market interest rates are so low in his new blog: 2,560

Mentions of "asset purchases":   0

Mentions of "QE": 0

Mentions of "regulation": 0
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Patrick G
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April 1, 2015 at 1:30 PM ×

QE. It's just another tool in the toolkit. It's temporary. In the long run that is. When we're all dead. So who needs to mention that?

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Anonymous
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April 1, 2015 at 1:37 PM ×

"Planned oil industry layoffs in the U.S. are approaching 100,000 in the past four months with more likely to come."

http://www.usatoday.com/story/money/business/2015/03/31/oil-job-cuts/70683670/

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washedup
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April 1, 2015 at 2:02 PM ×

whats the conundrum? he probably suspects QE will be remembered as not particularly effective at best, and a disaster at worst, in a few years, and wants to distance himself from that legacy.
someone should mail him a link to red tube - bye bye blog, and no loss to the world.

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Error403
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April 1, 2015 at 4:13 PM ×

Two ways to deal with an unpleasant truth:

1. Easiest way: ignore it.

2. Plan B: complicate and obfuscate.

Bubbles is starting the easy way, but eventually we'll see complication and obfuscation.

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Dan
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April 1, 2015 at 5:04 PM ×

What BSB has shared is this: the Fed follows the market.

The better question to ask yourselves is what would the front-end of the curve be priced at if the Fed wasn't paying interest on reserves?

If the UST had not run a deficit the QE would have been relevant at all, but if the UST had not run a deficit what would that have meant in terms of all those refunds of prior-years taxes that corporation received post-2008? What would that mean for the biotechs and energy complex? What would it mean for the banks that held HARPed paper? Where would Apple, AMZN and NFLX be without loose student loan policy?

The equity market is just the second most liquid savings class of the wealthiest institutions and individuals and the creditor class is senior to the equity class. Any subsidy given to the poorest demographic quickly ends up in the pocket of the owner of wherever they spend their subsidy at. All subsidies are subsidies to the asset owners.

Deficit + QE pumped equities and until the snake (interest-bearing debt) swallows its tail, bonds are still in a bull.

The Fed is the premier insider and it is massively long an asset, what, theoretically, do you think happens to that asset?

It's not like banks have to settle for the 25bps at their friendly FRB. They can lend if they want to!

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washedup
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April 1, 2015 at 5:13 PM ×

Dan - therein lies the rub, because the fed, by keeping interest rates low, actually ended up subsidizing shale prospecting which unleashed a supply response - the key change in the last 10 years vs say the 80's and 90's is that on the margin, lower rates hasten technological innovation and outsourcing to EM, and therefore deflation, much quicker than they expand consumer credit. The Fed and other CB's, to their detriment, haven't yet figured out this rather profound difference. Everything else (including the asset inflation vs wage income divergence is essentially a corollary.

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Dan
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April 1, 2015 at 5:17 PM ×

Deficit = Credit Instrument Supply
QE = Public Sector Demand

The private sector had no money to buy the deficit issuance without selling everything they had. By virtue of collateral/M2M values, that is a reflexive negative spiral and the private sector would quickly have had nothing of any marketable value to sell and buy a single bond with.

Dumping that deficit supply on the market would've spiked rates, imploded all leveraged asset values and crushed the economy running all people into treasuries until the end.

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wcw
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April 1, 2015 at 5:18 PM ×

Wait, what? Rates didn't spur the shale revolution. Prices did. Rates were a rounding error.

If it had been rates, you wouldn't be watching the North American rig count crater as we speak.

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Dan
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April 1, 2015 at 5:21 PM ×

How quickly we seem to have forgotten that the entire social order would have ceased to be order without all of the bailouts and the massive UST deficits.

Apart from laundering money through AIG, FNM, FRE, TARP and ARRA, it was all over.

Donezo.

People will argue the virtues of the money laundering for another generation, or so, but where we were is not really an open question anymore.

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Anonymous
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April 1, 2015 at 6:32 PM ×

Dan - you have a lucid perspective. What is the end game?

Do we get slugs of QE every few years in perpetuity?

Is there a non-linear event out there that forces all CBs to back off the pedal? Chinese/Japanese/European crisis?



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Mr. T
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April 1, 2015 at 6:34 PM ×

the key change in the last 10 years vs say the 80's and 90's is that on the margin, lower rates hasten technological innovation and outsourcing to EM, and therefore deflation...

This is an interesting thought, but what is the supporting evidence? Productivity gains are slowing, not rising. It seems easier to me to support a philosophy that does not involve major regime changes - namely that low rates has the effect of pulling demand from the future. Technology progresses mostly irrespective of rates. So if we are 7 years into zirp etc, we are well into that period that we already pulled demand from, which in combination with technical progress increasing supply has the effect of lowering prices.

NA shale was driven by oil prices reflecting demand pull from QE/Zirp moreso than by low financing costs. For supporting evidence, look at for example OAS notes issued 7/16/2014 - damn near the top. They have a coupon of 6.875% - thats not zirp financing. Even now with lots of asset impairment they are yielding ~7.4%. Debt financing is certainly important for these guys, but nowhere near as important as selling product at 100 bucks.

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washedup
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April 1, 2015 at 6:35 PM ×

wcw - prices came first, but low rates created a reach for yield that financed many projects that otherwise wouldn't have gotten done. Now the next part of the game will be finding a way to make money at sub $60, which, as the recent record equity and credit issuance that has been eagerly lapped up by investors would indicate, will be financed, ironically by the same guys who were financing things at $80 assuming they were going to $120.
So my advice to you would be - look at the rig count reductions in NG circa 2009 and how much of an influence that had on supply.

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Anonymous
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April 1, 2015 at 6:41 PM ×

Stunning...
Q1's Corporate Bond Issuance:

2013 --> $448B
2014 --> $429B
2015 --> $496B

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Bruce in Tennessee
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April 1, 2015 at 6:51 PM ×

Well, conundrum or not, this seems to me to be a particularly easy time to lose money...

There are some very bright people here, but it is probably easier than ever to over think the markets here with this much volatility...

And I don't mean general volatility..I mean additive volatility in many areas: oil, Greece, EU, QE vs tightening, China, and etc.

Multiple years of ZIRP, and we think we know what is ahead?

...Danger Will Robinson...

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FunnyMoney
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April 1, 2015 at 6:54 PM ×

MM correctly points out that BB's blog contains:
Mentions of "asset purchases": 0
Mentions of "QE": 0
Mentions of "regulation": 0

and I would add...
Mentions of "debt": 1

Clearly Mr Dalio is wrong in his "great deleveraging thesis". I shall write and tell him so, citing the incredible Ben Bernank.

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Dan
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April 1, 2015 at 8:22 PM ×

@washed

BSB is actually saying that the Fed has artificially held rates above the market, not below (or low as many put it).

@anon 6:32

The fed will need to pay more interest on reserves than it can afford. BSB uses the quaint description of the equilibrium real interest rate, and references Wicksellian. Those interest payments are coming out of its SOMA proceeds. That means Janet can start selling/running-off SOMA assets to keep yields positive if demand gets too frothy until the interest payment on reserves gets to be too much.

If the Fed doesn't make those interest payments on reserves, rates go negative and savers (banks) shift to alternative stores of wealth.

ie - unencumbered/unleveraged, and, desirably, liquid in terms of exchange acceptance and portability.

If/when the Fed normalizes SOMA with respect to the currency in circulation that it secures, they would likely terminate the interest on reserves and advise the UST it is time to do some deficit spending or the alternative stores will get a huge bid.

At that point, I don't believe the Fed will need to do QE because the equity markets are so rich and the Fed isn't paying IOR, so the savers will step-up for the treasury issuance.

Over 0% and political stability are the enemies of gold bugs.

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Anonymous
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April 1, 2015 at 8:59 PM ×

Shale = subprime. Driven by prices, fueled by low rates, modelled on continuous prices with no accounting for a significant drop in prices. One is reminded of the Rating Agencies models during subprime.

QE encouraged Hedge Funds to buy equities, companies to borrow to buyback these equities.
It encouraged funds to buy up tranches of property to avail of rental yield bringing a new player to the property market.
Then there's the inflation exported to EM.

Is this asset price inflation, this feeling of wealth, fair value?

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washedup
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April 1, 2015 at 10:07 PM ×

@T - don't know if we aren't saying the same thing - just making the point that (as you say) QE/zirp if working as advertised would pull forward demand with no supply response leading to nominal deleveraging, but the impact in the last few years in simultaneously lowering the supply curve for commodities has been higher than you would expect.
As for the impact on technology, all I know is that share buybacks, M&A, and acquiring startups by big tech and big pharma has led to the old valley game of starting a business with 4 guys and hoping that yahoo or google buys you - some of these teams have actually even build useful things - not related to low rates? maybe not directly, I suppose.

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Anonymous
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April 2, 2015 at 12:17 AM ×

It didn't take long...

Nomura’s Janjuah: QE4 may loom if US consumer stays weak

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Anonymous
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April 2, 2015 at 1:35 AM ×

CMI (NACM's business-to-business credit report)

"Suddenly companies are having a very hard time getting credit."

http://web.nacm.org/cmi/PDF/CMIcurrent.pdf

Start of a credit crunch?

If you can't get credit you run to the bank.

And running they are... H8.

http://imgur.com/SWRifcN

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