With The G-4 Central Banks "All In", Pimco Speculates When QE Finally Ends
With economic analysis no longer a relevant consideration in the New Normal as Jeff Gundlach explained yesterday, the only real question since the advent of global QE, first in the US, then in Japan, soon everywhere else, is when does the Fed stop. And not just Taper, because while the Fed may slow down the flow pace of liquidity injection one month, it will promptly reaccelerate it just after when risk tumbles, but the structural, and terminal end of QE.
Our previous speculation on this topic has focused on the eventual increase in interest on reserves, both in a rising rate environment and simply from perpetuation of reserve expansion, as well as the Fed's relentless monetization of duration risk: recall that Bernanke owns 30.5% of all 10 Year equivalents currently, a number which is set to hit 100% by 2018, but which will break the bond market long before that. In brief: open-ended QE is anything but, at least until the Fed breaches it mandate and start "monetizing" outright risky assets just like the BOJ - a step it very well may be forced to engage in.
So to supplant the critical perspective on when/if the Fed finally pulls the plug we present the following observations by Pimco's Richard Clarida who looks at the end of QE from a more conventional macroeconomic perspective. His thoughts are presented below in their entirety.
But before absorbing the full analysis, here is Clarida's punchline distinguishing between those who believe the Fed is doing something positive, versus those who, correctly, understand it is Ben Bernanke's own fault for clogging up the monetary transmission mechanism, and for de facto "breaking the market" which is now - like a liquidity-addicted drug addict - impossible to visualize a world in which the Fed does not provide zero-cost training wheels from here until eternity:
QE detractors... see something quite different. They see QE as not responding to the collapse in the money multiplier but to some extent causing it. In this account QE – and the flatter yield curves that have resulted from it – has itself broken the monetary transmission mechanism, resulting in central banks pushing ever more liquidity on a limper and limper string. In this view, it is not inflation that’s at risk from QE, but rather, the health of the financial system. In this view, instead of central banks waiting for the money multiplier to rebound to old normal levels before QE is tapered or ended, central banks must taper or end QE first to induce the money multiplier and bank lending to increase.This is absolutely spot on, but unfortunately this "liquidationist" path to fixing a problem that should have been addressed five years ago is now a dead end, as Bernanke knows he can not end QE in some interim phase without achieving (runaway) inflation or all that he has "accomplished" for the market, if not the economy will be undone. Even if, ironically, the market crash that results, would be just the debt-liquidating economic catharsis the developed world has been begging for since the advent of central planning....MUCH, MUCH MORE
And from 2011, "PIMCO's Bill Gross Tells Investors About The Time He Acted Like A Cheap Prick To A Waitress":
Last year we had Mr. Gross turning down loan requests from Warren Buffett and Sam Walton.
Now this, from DealBreaker:
As most of civilized society knows, it’s considered pretty classless to mistreat waiters or waitresses, and a pretty fool-proof indication of your character. In fact, there’s only one acceptable way to act like an insufferable prick to a person waiting on you, and that’s beginning a meal by whipping out a stack of singles and telling the server, “Let’s establish something. You are, I assume, expecting a tip? This pile of one dollar bills represents your potential tip. Every time you please me, you’ll see the pile grow. However, if I am unsatisfied...MOREMarketBeat picked up on the waitress story but appears to take particular umbrage at the very notion of Mr. Gross' literary stylings:
Bill Gross: His Most Obnoxious Note Ever!
Where should we start? Bond king — or former bond king? – Bill Gross is out with his monthly investment outlook note. Mr. Gross is not merely satisfied managing the world’s largest bond fund. (Pimco Total Return Fund: $240.7 billion in assets in December.) Nay, he fancies himself something of a scribe, and his monthly investment outlook is where he talks his book for a few hundred words spicing it up with some belabored metaphors and a self-serving analogy, or several. But there are a few things that stick in our craw about this month’s note....MOREThat is professional pixilator Matt Phillips.
[Don't mind Mr. C, he's trying to combine the computer science term pixelate with a word for whimsical/bemused. el vs. il. I prefer the second of these definitions -ed]
