As long time readers know, I am a big fan of Greg Weldon. This week he has very graciously allowed me to reproduce his client letter from last Thursday on some of the issues of Bernanke and Quantitative Easing 2. It prints a little longer than usual because of his format and all the charts, but this is one letter you should take the time to read.
You can get a free trial (his service is not cheap but if you are a global macro fund or trader, you really should have it!) by going to www.weldononline.com.
Sadly, this weekend was not a good time for Dallas. The Rangers dropped two and now have to win in Tampa Bay and the Cowboys were simply awful. The first time in 50 years that I get season tickets and they are just not fun. I was thinking they get to the Super Bowl and it is in Dallas this year and the tickets get me in. Clearly, I need to keep my day job.
Oh, well, the Mavericks are in town and the NBA will soon crank up. Oh, wait a minute. Everyone we wanted went to Miami. We are not that much better than last year. Sigh. Oh, well. It could be worse. I could be in Cleveland. (Sorry, Mike!)
Your hoping Cliff Lee pitches a shut-out analyst,
Everywhere I turn is another article about Quantitative Easing Part 2. Will they or won’t they? My question last week was will it make any difference? After I sent my letter out, I came across this missive from the always fascinating Ed Yardeni. I like to read Ed because he is not afraid to take an out of consensus call. He is his own man, something of a rarity in the world of economists.
He highlights a report from the Fed on the problem with the money multiplier. It has gone away. (Really? You think?) If you took Econ 101 this was a basic staple.
He writes: “Fed officials are clueless about how quantitative easing is supposed to impact the economy. They aren’t even sure if it has any effect on the economy. The Fed study cited here confirms this known unknown.”
I include the rest of his letter to let you know what type of material he does daily, as some of you might want to take a closer look at his service. ( www.yardeni.com). I really liked his take on housing. This is an excellent choice for Outside the Box.
I am starting to adjust from the travel. Have a great week!
Your ready for some NBA basketball to start analyst,
This week’s Outside the Box is an incendiary blog written by Steve Keen on debt deflation and GDP growth. I am not certain as to his math (is he double counting debt and consumer spending?) but he does illustrate very well the problem of a deleveraging recession, which I have been writing about for a long time. This is just a different type of recession we are in. So rather than fret over the absolute certainty of the math, read this for an understanding of the nature of the problems we face. He has the direction right, I think, which is the important part for us to grasp.
Then he just now posted a second blog on Quantitative Easing, which he ends with pointing out why it might “work” but also suggests that it would lead to yet another financial bubble. Again, very Outside the Box thinking. It has me going ‘hmmm.”
Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney, and author of the popular book Debunking Economics. He has won numerous awards and is widely published in academia. Seems quite the serious guy. You can read his material at http://www.debtdeflation.com/blogs/.
Your working on Labor Day analyst,
There is the strong possibility that policy makers in the US and UK will not time the transition from the current quantitative easing to a more tightened monetary policy. That is not because they are no competent. It is because the task is very tricky and there is no play book outlining the steps. This is not Tom Landry (former Dallas Cowboy coach) pacing the field with a play for every situation already planned and practiced well in advance.
The odds favor they will either be too late or too early. Getting it "just right." The Goldilocks play, would be more than fortunate. In fact, there may be no right play to call. They may be forced to choose between a slower economy and/or inflation/deflation. And as this week's Outside the Box authors note, there is also the possibility of yet another asset bubble, making the choices even more risky.
Those who are absolutely positive about which of a variety of outcomes will emerge have a level of clairvoyance with which I am not familiar. It makes risk asset (like stocks) investing particularly tricky right now. This is a time to be nimble and avoid creating opportunities for large losses if you are wrong.
We will start this week's OTB with a few paragraphs from the Bank Credit Analyst about the Great Depression and then move on to a piece from the London office of Morgan Stanley on the problems facing central bankers.
And on a less ominous but more important note, the Muscular Dystrophy Association (MDA) has issued a warrant for my arrest which goes into effect on August 26th! I will be held at the PM Lounge in the Joule Hotel from 3-6. My bail is set at $2,400, which will benefit local families living with neuromuscular disease. No one person can set me free. It will take a little help from all of my friends, family, colleagues and enemies! Please use the link below to visit my Bail Page and help me post my bond by contributing in any way that you can. Thank you for having a big heart! And come see me in jail!
And now, the thoughts from BCA.
About a month or so back I wrote about some of my thoughts regarding interest rates and monetary policy being affected by both velocity and the money supply (see When Will the Fed Stop?). In my letter, I highlighted some exceptional research performed by my good friends at GaveKal. Well they have done it again, this time turning their attention towards Japan and the global economy.
Founded in 1999 by Charles and Louis-Vincent Gave and Anatole Kaletsky, GaveKal is a global investment research and management firm that provides an array of financial services worldwide. They are best known for their study of monetary policy, fiscal policies, secular trends, technical analysis and asset class valuations which they use to form a unique perspective on the relationship between the financial markets and the global economy.
In "What We Missed: Japanese Liquidity Flows," we are presented with an in-depth analysis of the role of Japan amongst the growing interconnectedness of today's financial markets. Both the past and current decisions of Japan's policy makers have had a profound effect on the global economies that has produced a new metric which they call the "international yield curve." I think that you will find this study to be as equally intriguing as I have. It is, indeed, outside of the box thinking.