PIMCO's Bill Gross – No QE3 Right Away, but a Few Weak Employment Reports Brings It

Monday, April 30th, 2012

PIMCO's Bill Gross has a wide rang­ing inter­view on Bloomberg dis­cussing all sorts of top­ics from more QE, the Fed fol­low­ing the Bank of England's plan to ignore any infla­tion as 'tem­po­rary' so they can con­tinue ultra easy poli­cies, the dys­func­tion in Europe, the poten­tial for reces­sion, among other topics.

9 minute video – email read­ers will need to come to site to view

Tags: All Sorts, Bank Of England, Bill Gross, Bloomberg, Employment Reports, Europe, inflation, PIMCO, Qe, Qe3, Recession, Video Email
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Jeff Gundlach Explains Biflation

Thursday, April 26th, 2012

Appro­pos Bernanke's razor's-edge tight-rope-walk fence-sitting as the not-too-cold-not-too-hot econ­omy reduces the Fed's abil­ity to do any­thing, Jeff Gund­lach of Dou­ble Line pro­vided a suc­cinct expla­na­tion of the the 'uncom­fort­able posi­tion' the place-of-confusion Fed finds itself in. Sim­pli­fy­ing the dilemma to: the Fed can­not raise rates as the dra­matic impli­ca­tions for the huge debt load (and implictly the inter­est expense sav­ing the bud­get deficit) of the US Gov­ern­ment are unten­able while at the same time infla­tion (in the things we need — not just want) is ris­ing notably. How­ever the new bond-king notes rather sar­cas­ti­cally, that the Fed can show that there is only mod­est infla­tion thanks to hous­ing and wage growth (and here­lies 'the bifla­tion'). The old-school-Fed's efforts at pre-emptive strikes against infla­tion is sim­ply not going to hap­pen, he states, cit­ing an "inten­tional attempt to sup­press national income — an attempt to stop nom­i­nal GDP grow­ing too much — sim­ply won't be tol­er­ated until infla­tion moves into the 4–5% cat­e­gory".

Tags: Budget Deficit, Confusion, Debt Load, Dilemma, Dramatic Implications, Emptive Strikes, Fence, GDP, Gundlach, inflation, Interest Expense, New Bond, Nominal Gdp, Old School, Razor, Rope Walk, Succinct Explanation, Tight Rope, Uncomfortable Position, Us Government
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WSJ's Hilsenrath: Fed Will Stay Pat

Tuesday, April 24th, 2012

Before we get to Fed talk in the early action we've obvi­ously seen the S&P 500 break through 1370 (with vigor), and last week's lows of 1365s. The pre­vi­ous week's surge down to 1357 is the next key level. Now of course with sharp sell­offs there can be large reflex­ive bounces along the way – we saw that last Tues­day when the mar­ket sky­rock­eted on the back of Apple, but all that led to was more choppy action the rest of the week and then today's smack to the face. So unless one's timetable is mea­sured in hours it's a mar­ket com­plex­ion one does not want to be deal­ing with much.

Off to Fed speak… as long time read­ers know the Fed has its spe­cial lit­tle birdies in the media that it likes to speak to us through, and Jon Hilsen­rath is among the most promi­nent. Not sur­pris­ingly Jon says the Fed will stay pat at this meet­ing – I believe the key one shall be mid June as Oper­a­tion Twist fin­ishes up, and they need a replace­ment pro­gram. Any good cor­rec­tion in the mar­ket will also help as the Fed now believes their trans­mis­sion pol­icy for Fed can largely come through the tran­si­tory "wealth effect" of the stock mar­ket – even if that ben­e­fit accrues to a rel­a­tively small por­tion of soci­ety. [Nov 10, 2010: Who Will Any Form of Inter­me­di­ate Term Wealth Effect Really Help? Not the Masses] On that end, we're prob­a­bly half way to the point Ben will feel he must step in to make sure the "free" mar­ket goes up.

• If the Fed expects eco­nomic growth to slow, infla­tion to fall, or unem­ploy­ment to stall at high lev­els or rise, it will be inclined to do more to sup­port growth with new pro­grams to reduce inter­est rates. If it sees the oppo­site, the con­ver­sa­tion turns toward rein­ing in credit. The chang­ing fore­cast will be one of the most impor­tant top­ics of dis­cus­sion at the cen­tral bank's pol­icy meet­ing Tues­day and Wednes­day, when offi­cials will update their quar­terly eco­nomic projections.
• It's pos­si­ble to hand­i­cap the Fed's chang­ing fore­cast in part because offi­cials are becom­ing open about it. And the out­look doesn't look like it's shift­ing in a way that would sup­port new ini­tia­tives to boost eco­nomic growth. The new fore­casts could project a lit­tle more infla­tion in 2012 than the Fed fore­cast in Jan­u­ary, thanks in part to a recent rise in gaso­line prices. It could also project a lit­tle less unem­ploy­ment for 2012, thanks to recent declines in the job­less rate.
• But with many offi­cials still doubt­ful about the dura­bil­ity of the recov­ery and expect­ing infla­tion to recede, the broader view at the Fed seems likely to favor stick­ing to their plan to keep rates low until late 2014.
• Taken alto­gether, the econ­omy doesn't seem to be break­ing in a way right now that would cause the Fed to shift the stance it laid out in Jan­u­ary. Investors expect­ing a sig­nal of an early rise in rates are likely to be dis­ap­pointed. And those expect­ing a new bond buy­ing pro­gram are likely to be dis­ap­pointed too. The Fed is on hold until its fore­cast shifts more clearly.

Tags: Amp, Bounces, Complexion, Economic Growth, Economic Projections, inflation, interest rates, Last Tuesday, Little Birdies, Lows, Rest Of The Week, Selloffs, Small Portion, Stock Market, Time Readers, Timetable, Unemployment, Vigor, Wealth Effect, Wsj
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The Economy and Bond Market Radar (April 23, 2012)

Sunday, April 22nd, 2012

The Econ­omy and Bond Mar­ket Radar (April 23, 2012)

Trea­suries were more or less unchanged this week. U.S. eco­nomic data was broadly in line with esti­mates and Trea­suries didn’t move around much this week. One inter­est­ing data point that was released this week was hous­ing per­mits, which rose faster than expected to 747,000 (sea­son­ally adjusted annu­al­ized rate). This can be eas­ily seen in the chart below and has finally bro­ken out of the range that it occu­pied for the past three years. This appears to be a very favor­able devel­op­ment, as new hous­ing activ­ity looks as if it is finally pick­ing up.

Strengths

• As men­tioned above, hous­ing is show­ing some signs of life and appears to be pick­ing up.
• India’s cen­tral bank cut inter­est rates this week and China has indi­cated a will­ing­ness to ease mon­e­tary pol­icy in the near future. The global eas­ing cycle continues.
• Retail sales rose a very strong 0.8 per­cent in March, well ahead of expec­ta­tions and with broad-based strength.

Weak­nesses

• Span­ish 10-year bond yields rose above 6 per­cent this week as the mar­ket rotates through south­ern Europe, with the cur­rent focus on Spain.

• Weekly ini­tial job­less claims rose to 386,000 this week, con­tin­u­ing the recent trend of higher readings.

• The Bank of Canada has become more hawk­ish and indi­cated that rates may be headed higher on better-than-expected eco­nomic growth and higher inflation.

Oppor­tu­nity

• After a dis­ap­point­ing first-quarter GDP result, the Chi­nese are likely to ease mon­e­tary pol­icy as early as this quarter.

Threat

• Ris­ing oil and gaso­line prices com­bined with liq­uid­ity impli­ca­tions of global eas­ing, led by Europe, may raise the prospect of a reap­pear­ance of higher infla­tion going forward.

Tags: Bank Of Canada, Bond Market, Bond Yields, Economic Data, Economic Growth, First Quarter, Gasoline Prices, GDP, inflation, Initial Jobless Claims, liquidity, Market Radar, Monetary Policy, Quarter Gdp, Retail Sales, S Central, Signs Of Life, Southern Europe, Treasuries, Willingness
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Still in Holiday Mode (Tchir)

Monday, April 9th, 2012

by Peter Tchir, TF Advi­sors

With Europe effec­tively shut down today it looks like it will be a dull day.

Chi­nese CPI came in a bit higher than expected at 3.6%, and was largely a result of food infla­tion, tem­per­ing the hopes that China would ease more aggres­sively. PPI came in as expected at –0.3% sig­nal­ing that the pro­duc­tion slow­down continues.

Por­tuguese banks bor­rowed a new record from the ECB. The path and tra­jec­tory seem clear and a Greek-like restruc­tur­ing seems the only likely out­come. Euro­pean politi­cians remain afraid of let­ting the “con­ta­gion” spread, but the real­ity of the sit­u­a­tion seems pretty obvi­ous, let for­eign banks take a loss now on Por­tuguese bonds, or shift more of the bur­den to tax­pay­ers while Por­tu­gal con­tin­ues to dete­ri­o­rate – mak­ing the final cost higher, and let­ting the peo­ple who orig­i­nally made the mis­take avoid the losses.

The only thing the mar­ket here really has to focus on today is the jobs sit­u­a­tion and what it means for QE. There is a fair amount of “spin” out there today show­ing that the job data wasn’t out so bad. Frus­trat­ingly, at least for me, is the num­ber of peo­ple who denied the weather effect or sea­sonal adjust­ment prob­lems, who are now talk­ing about those fac­tors as though they believed in them all along. Clearly econ­o­mists didn’t believe them, or else expec­ta­tions wouldn’t have been 100,000 higher than the actual number.

The job report was not hor­ri­ble, but not only had expec­ta­tions out­paced real­ity, a hous­ing recov­ery had dri­ven by the increase in jobs had become con­ven­tional wis­dom. With poor hous­ing data all year long, and this sub­par jobs report, the hope for a mate­r­ial bounce in hous­ing has dimin­ished greatly – or at least it should have. The shat­ter­ing of the myth of the jobs led hous­ing recov­ery is hav­ing a big­ger impact on the mar­ket and is more impor­tant than just miss­ing on jobs alone.

The weird thing about March is that the weather was also great. Those who are now blam­ing the weak­ness on ear­lier great weather seem to be miss­ing the point that March had a lot of great things going for it as well. The weather was great, and it should have been less affected than Jan­u­ary and Feb­ru­ary by cap­i­tal goods tax breaks that expired in year end. Think­ing that March cov­ered the “weather and sea­sonal adjust­ment” pull­back is likely wrong, and the April num­ber could be down­right scary.

We haven’t heard the QE argu­ments yet, but that is likely to start in earnest. Big firm after big firm is likely to send out a report dis­cussing how the masses had not only writ­ten off QE3 pre­ma­turely in any case, but this NFP num­ber bol­sters the case for early action. If Ben alone could make the deci­sion, I would fully agree, but in spite of his power, there seems to be enough dis­sent to the pol­icy that maybe, just maybe, he will need some­thing worse than 120,000 jobs to make a com­pelling case for another round of bal­ance sheet infla­tion and degra­da­tion (increas­ing the size of the bal­ance sheet with more risky assets).

Look for a bounce at some point today. The fact that the futures haven’t really been able to bounce, and in fact have traded in a very nar­row range despite the size of the ini­tial gap lower, makes me think stocks them­selves will strug­gle more on the open. With short cov­er­ing and some real last “buy the dip” attempts, using the “not so bad” and “QE” chat­ter as jus­ti­fi­ca­tion, we prob­a­bly see lev­els bet­ter than the cur­rent lev­els at some time today. I will be look­ing to add some risk around the open, par­tic­u­larly in SPX, IG18, and HYG.

Tags: Contagion, Conventional Wisdom, CPI, Dull Day, ECB, Economists, European Politicians, Foreign Banks, inflation, Myth, Ppi, Production Slowdown, Qe, Restructuring, Seasonal Adjustment, Taxpayers, Tf, Trajectory, Weather Effect, Weird Thing
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Positioning a Portfolio for Rising Rates (Morillo)

Monday, April 9th, 2012

With the recent sell­off in the US Trea­sury mar­ket we have received numer­ous ques­tions on how to posi­tion a port­fo­lio in the face of ris­ing inter­est rates. To answer that ques­tion, it’s impor­tant to first look at what fac­tors are caus­ing rates to rise.

In a typ­i­cal eco­nomic cycle, rates rise as eco­nomic activ­ity improves, rais­ing demand for credit as well as increas­ing expec­ta­tions for future infla­tion. The Fed then attempts to keep the econ­omy from over­heat­ing by rais­ing short-term rates to match the improved eco­nomic prospects. In this sce­nario fixed income instru­ments gen­er­ally per­form poorly as the higher rates paid for newly issued debt makes exist­ing debt less attrac­tive par­tic­u­larly at longer matu­ri­ties. Simul­ta­ne­ously, the improved eco­nomic con­di­tions will gen­er­ally result in equi­ties per­form­ing well as they reflect expec­ta­tions for earn­ings growth and increased pric­ing power across the economy.

I believe this sce­nario is, by far, the most likely to play out in the medium term, and it is cer­tainly the sce­nario that has the most exten­sive his­tor­i­cal prece­dent. With that in mind, how could an investor repo­si­tion a port­fo­lio to nav­i­gate this sce­nario? I would advo­cate some real­lo­ca­tion from fixed income to equi­ties. Look­ing at data since 1975[1], a real­lo­ca­tion in the 10–20% range appears to be a rea­son­able com­pro­mise between the increased risk to the port­fo­lio from a larger hold­ing of equi­ties and the goal of pro­tect­ing against the poten­tial for rais­ing rates.

Within the fixed income com­po­nent of the port­fo­lio the improv­ing eco­nomic con­di­tions will gen­er­ally result in dimin­ish­ing con­cerns of credit default. That pro­vides some boost to returns of credit instru­ments, which can poten­tially make up some of the neg­a­tive effects of ris­ing rates.

There are, how­ever, two addi­tional poten­tial “tail risk” sce­nar­ios that can also cause rates to rise:

1: In the “pol­icy error” sce­nario, the Fed allows improv­ing eco­nomic con­di­tions to sig­nif­i­cantly over­heat the econ­omy. This results in a mate­r­ial increase in infla­tion expec­ta­tions as well as long-term rates, which may even­tu­ally require a painful inflation-fighting con­trac­tion. There is only one period in the last 100 years of US his­tory that plays out this way — dur­ing the 1970s “stagfla­tion”. Given the sig­nif­i­cant atten­tion that pol­i­cy­mak­ers have placed on the risks of asso­ci­ated with this sce­nario, I believe it has a low prob­a­bil­ity of tak­ing place.

2: In a “loss of con­fi­dence” sce­nario, rates rise in the absence of improv­ing eco­nomic con­di­tions sim­ply as a result of cred­i­tors pulling away from the mar­ket due to con­cerns about the US gov­ern­ment and/or the economy’s abil­ity to meet its oblig­a­tions. There is no prece­dent for this sce­nario in US his­tory, and I believe it to be highly unlikely in the medium term.

For investors who are con­cerned with these “tail risk” sce­nar­ios, a shift to equi­ties may no longer make sense. Instead, a shift to TIPS or other inflation-hedging instru­ments in the case of sce­nario 1 or to cash in the case of sce­nario 2 could be warranted.

Investors should dis­cuss their own port­fo­lio allo­ca­tion with their advisors.

Past per­for­mance does not guar­an­tee future results.

TIPS can pro­vide investors a hedge against infla­tion, as the infla­tion adjust­ment fea­ture helps pre­serve the pur­chas­ing power of the invest­ment. Because of this infla­tion adjust­ment fea­ture, infla­tion pro­tected bonds typ­i­cally have lower yields than con­ven­tional fixed rate bonds and will likely decline in price dur­ing peri­ods of defla­tion, which could result in losses.

Tags: Compromise, Credit Default, Credit Instruments, Earnings Growth, Economic Activity, Economic Conditions, Economic Cycle, Economic Prospects, Fixed Income Instruments, Income Component, inflation, Investor, Maturities, Medium Term, Reallocation, Rising Interest Rates, Risk Scenarios, Selloff, Treasury Market, Us Treasury
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Emerging Markets Radar (April 9, 2012)

Sunday, April 8th, 2012

Emerg­ing Mar­kets Radar (April 9, 2012)

Strengths

• The Hun­gar­ian PMI surged above expec­ta­tions in March to 56.8, the strongest read­ing in the last thir­teen months, reflect­ing the pos­i­tive impact of the open­ing of the brand new Daim­ler AG plant. The Czech man­u­fac­tur­ing PMI has also improved.
• Brazil’s con­sumer prices rose 0.21 per­cent in March from Feb­ru­ary, the government’s sta­tis­tics agency said in a report dis­trib­uted in Rio de Janeiro today. Econ­o­mists sur­veyed by Bloomberg had expected infla­tion of 0.37 per­cent, accord­ing to the median fore­cast of 50 analysts.
• Chilean con­sumer prices rose 0.2 per­cent in March from the pre­vi­ous month, less than ana­lysts’ fore­cast, bring­ing annual infla­tion back within the cen­tral bank’s tar­get range for the first time in four months.
• China offi­cial March PMI was 53.1 ver­sus the esti­mate of 50.8, ris­ing 2.1 from Feb­ru­ary; new orders were up 4.1 points at 55.1 per­cent. Nev­er­the­less, due to sea­son­al­ity, March’s PMI is usu­ally 3 points bet­ter than February’s, there­fore, the mar­ket is cau­tious about the better-than-expected PMI for last month. PMI above 50 indi­cates indus­trial activ­i­ties are expanding.
• China’s March non-manufacturing PMI was 58 ver­sus 48.4 in Feb­ru­ary, indi­cat­ing con­sumer con­sump­tion may be resilient.
• Philip­pines infla­tion eased to 2.6 per­cent on a year-over-year basis in March from 2.7 per­cent in Feb­ru­ary. A base-year com­par­i­son sug­gests infla­tion in the coun­try will remain sub­dued in April. How­ever, infla­tion trends should turn up from mid-year dri­ven by a resumed rise in oil and com­mod­ity prices and strength­en­ing domes­tic demand.
• March hous­ing trans­ac­tions increased 40 per­cent in Bei­jing, and sim­i­lar increases were also seen in other tier 1 and tier 2 cities. Some ana­lysts say buy­ers are encour­aged by the fact that the Chi­nese gov­ern­ment had his­tor­i­cally failed in curb­ing hous­ing prices, but oth­ers say March sales vol­ume is always the equiv­a­lent of com­bined sales of Jan­u­ary and Feb­ru­ary in the year and March of this year didn’t see bet­ter vol­ume than prior years.
• Indonesia’s par­lia­ment did not pass the fuel raise bill which was to remove the fuel sub­sidy and raise fuel prices by 33 percent.

Weak­nesses

• The Russ­ian cen­tral bank chair­man said the liq­uid­ity deficit faced by the finan­cial indus­try is the “new norm” this year. One of the rea­sons is a con­tin­ued cap­i­tal out­flow. Rus­sians spent $12 bil­lion on for­eign prop­erty last year, com­pared with $5.5 bil­lion a year in 2007 and 2008, accord­ing to the chairman.
• Colom­bian pol­icy mak­ers meet­ing last month were divided over the need to raise inter­est rates fur­ther to keep infla­tion in check. Ana­lyst Brian Lesmes, at Grupo Ban­colom­bia in Bogota, said that though infla­tion and credit demand have eased, fur­ther tight­en­ing may be needed to cool house­hold demand.
• Thai­land infla­tion edged up to 3.4 per­cent year-over-year in March from 3.3 per­cent in Feb­ru­ary, but base-year com­par­i­son sug­gests infla­tion in the coun­try will remain sub­dued in April.
• Indone­sia is to dis­cuss an export tax on coal and base met­als, which is neg­a­tive for local mate­ri­als com­pa­nies but good for global coal and base metal producers.
• Tai­wan may imple­ment a cap­i­tal gains tax on stock trad­ing profits.

Oppor­tu­ni­ties

• Cit­i­group Inc. raised South African equi­ties to over­weight, the equiv­a­lent of a buy, on expected strong earn­ings growth and com­pa­nies’ expan­sion into Africa’s fast-growing fron­tier mar­kets, the bank said.
• In the last decade, Indone­sia has restored sta­ble eco­nomic growth and, there­fore, has improved its wealth. With oppor­tu­ni­ties to build vast infra­struc­tures and indus­trial com­plex, for­eign direct invest­ments (FDI) now are return­ing to the coun­try. The increas­ing FDI has dri­ven up demand for indus­trial estate and build­ing mate­ri­als, such as cements.

Threats

• Brazil's tax agency said on Wednes­day that intra-company com­modi­ties exports and imports by multi­na­tional traders must be set­tled using inter­na­tional prices. The country’s Fed­eral tax author­ity said the mea­sures are aimed at end­ing "price manip­u­la­tion" of inter-company imports and exports that allow multi-national com­pa­nies to evade local taxes.
• Peru is rene­go­ti­at­ing with Mex­ico to cut nat­ural gas ship­ments after allo­cat­ing gas reserves to its domes­tic indus­try, a Peru­vian gov­ern­ment offi­cial said. Approx­i­mately half of the ship­ments will be cut, the pres­i­dent of state oil con­tract­ing agency Peru­petro said this week.
• The Chi­nese econ­omy is still in the process of a soft land­ing, but the pol­icy response may fall behind the curve. In 2012, cor­po­rate rev­enue growth is pre­dicted to be much slower than 2011, with gross mar­gins also expected to be lower due to weaker demand and a rise in input costs.

Tags: Beijing, Brazil, China, China Official, Chinese Government, Commodities, Commodity, Commodity Prices, Consumer Consumption, Daimler Ag, Economists, Emerging Markets, Four Months, inflation, Philippines, Pmi, Radar, Rio De Janeiro, Russia, Sales Volume, Seasonality, Statistics Agency, Target Range, Thirteen Months, Tier 2
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The End of the 30-year Bond Bull Market?

Thursday, March 29th, 2012

Is the great 30-year bull mar­ket in bonds com­ing to an end? Yes, per­haps — or maybe not: It depends on whom you ask and how flex­i­ble your tim­ing is.

While many peo­ple think of bonds as con­ser­v­a­tive hold­ings, they have pro­duced stel­lar returns for decades, thanks to the tam­ing of infla­tion and other fac­tors. A bas­ket of stocks would have returned a mere 19% from the start of 2000 through 2011, for exam­ple, while a bas­ket of bonds would have returned about 113% through a com­bi­na­tion of ris­ing prices and inter­est earnings.

But many experts say eco­nomic recov­ery could now reverse the process by dri­ving inter­est rates higher, caus­ing bond prices to fall. Yield on the 10-year U.S. Trea­sury rose to around 2.25% in March, after hov­er­ing around 2% for four months. "I think bonds are less attrac­tive than they have been for a long time," says Scott Richard, Whar­ton prac­tice pro­fes­sor of finance.

But ris­ing rates and falling prices are not nec­es­sar­ily com­ing so soon, accord­ing to Whar­ton finance pro­fes­sor Franklin Allen, who notes that short-term rates in Japan have stayed extra­or­di­nar­ily low for many years. Though the odds favor a rise in rates, strong demand for high-quality bonds, par­tic­u­larly U.S. Trea­suries, could per­sist for some time, he says, keep­ing prices high and yields low. "I think [Trea­suries] are still very much a safe haven, and that's why inter­est rates are so low, even though there are many things to worry about." He adds that there is a chance they will stay low "for a very long time."

How­ever, accord­ing to Whar­ton finance pro­fes­sor Krista Schwarz, "It's vir­tu­ally impos­si­ble to fore­cast future yields. One can talk about risks to the upside and risks to the down­side, but both risks always exist."

From Bull to Bear

Clearly, the U.S. econ­omy is gain­ing steam, though slowly. Typ­i­cally, that causes inter­est rates to rise, which dri­ves bond prices down — turn­ing a bull mar­ket into a bear. But the econ­omy has had false starts in the past. Signs were good early in 2011, but progress stalled amid the Euro­pean debt cri­sis and the tsunami and earth­quake in Japan. Most experts agree that eco­nomic signs are even stronger this year, but many warn that progress could be derailed by gov­ern­ment debt prob­lems in the U.S. and Europe, ris­ing oil prices and rip­ple effects from a slow­down in China and other emerg­ing mar­kets. In the U.S., the trou­bled hous­ing mar­ket con­tin­ues to dampen recovery.

Uncer­tainty dri­ves investors to pur­sue safety, which pushes busi­nesses, indi­vid­u­als and for­eign gov­ern­ments to stock up on U.S. Trea­sury secu­ri­ties, the mod­ern world's safe haven. The Trea­sury mar­ket is big enough to soak up world­wide demand, and safe because it is backed by the government's power to tax. High demand has dri­ven bond prices up and forced yields to extra­or­di­nary lows.

Still, bond mar­ket experts point to a sim­ple, undis­puted fact: Yields on Trea­suries and other highly rated bonds are so low they can­not go much lower. His­tor­i­cally, they have been much higher, and the law of aver­ages says they should rise again. Cur­rently, the 10-year U.S. Trea­sury note yields a mea­ger 2.25%, down from around 5.25% before the finan­cial cri­sis struck in 2008. It has not been lower since the 1940s, and has spent most of the past seven decades in the 4% to 8% range, peak­ing at more than 14% in the early 1980s.

Low inter­est rates are won­der­ful for bor­row­ers but tough on indi­vid­u­als who count on inter­est income from bank accounts and bonds, such as retirees. Ris­ing inter­est rates can be very hard on investors who already own bonds or bond mutual funds, because they drive down the value of older bonds that pay less, poten­tially caus­ing sub­stan­tial losses. A 30-year bond can lose 10% of its value for every one-percentage-point rise in pre­vail­ing rates.

Ris­ing rates would also be hard on U.S. tax­pay­ers, who would have to pay more to finance the government's $15 tril­lion debt. "When rates rise, the bor­row­ing costs on our deficits are going to rise sub­stan­tially, and that's going to restrain the abil­ity of future admin­is­tra­tions to do things," Richard warns. The major­ity of fed­eral debt matures in less than five years, mean­ing the gov­ern­ment must con­stantly sell new bonds to pay off old ones, shoul­der­ing higher inter­est costs as rates rise.

The Fed's Influence

The bond mar­ket is extra­or­di­nar­ily diverse and com­plex, includ­ing cor­po­rate and munic­i­pal bonds as well as Trea­suries issued by the U.S. gov­ern­ment. But all bonds are loans from the investor to the issuer. Buy a $1,000 bond yield­ing 4% for 10 years, and you will receive $40 a year in inter­est and get your $1,000 back after a decade.

Before that matu­rity date, how­ever, the bond price can fluc­tu­ate as mar­ket con­di­tions change. If newer bonds yielded only 2%, investors would pay a pre­mium for the older bond that paid 4%. In other words, the older bond's price would rise until the $40 in annual inter­est earn­ings equaled the 2% yield offered by newer bonds — so the bond's price would rise from $1,000 to $2,000. Price changes due to rate changes are more extreme for bonds with more time to matu­rity, because the investor would expe­ri­ence the effects longer. Of course, the process also works the other way, with ris­ing rates dri­ving prices down.

While the process is more com­pli­cated in real life, and the price changes are gen­er­ally less extreme than in the above exam­ple, this is the prin­ci­ple that pro­duced the great bull mar­ket in bonds. Begin­ning in the early 1980s, the Fed­eral Reserve — first under Paul Vol­cker and then Alan Greenspan — worked suc­cess­fully to reduce the annual infla­tion rate, which peaked at nearly 15% in 1980 and now stands below 3%. The Fed tack­led infla­tion by rais­ing short-term inter­est rates. That raised bor­row­ing costs, which reduced spend­ing. The result­ing drop in demand helped restrict price increases, and infla­tion fell. Grad­u­ally, inter­est rates were ratch­eted down, boost­ing bond prices.

The Fed's main tool is its strong influ­ence over short-term inter­est rates, such as the Fed funds rate that banks charge each other for overnight loans. The Fed does not have as much direct con­trol over long-term rates, which usu­ally are higher because investors demand a pre­mium for the risks they face, such as higher infla­tion, when they tie their money up for longer peri­ods. But long-term rates are in part a bet on what short-term rates will be in the future, so the Fed's down­ward pres­sure on short-term rates puts down­ward pres­sure on long-term ones as well.

Other mar­ket forces, such as the demand from investors seek­ing "safe" hold­ings, have a strong role in gov­ern­ing long-term rates. And because the mar­ket for Trea­suries is so large, Trea­sury yields influ­ence other inter­est rates, such as those charged by mort­gages and cor­po­rate and munic­i­pal bonds. "Every­thing moves rel­a­tive to Trea­sury rates," says Richard.

Many experts have crit­i­cized Greenspan for con­tin­u­ing the Fed's low-rate pol­icy early in the 2000s, when he was try­ing to encour­age lend­ing to stim­u­late the econ­omy after the Internet-stock bub­ble burst. Low rates, crit­ics say, fueled the lend­ing binge that caused the hous­ing bub­ble, which burst in 2008, caus­ing the Great Reces­sion. The Fed has main­tained its low-rate pol­icy under chair­man Ben Bernanke, who took office in 2006. His goal was to encour­age lend­ing to spur eco­nomic growth. Cur­rently, the Fed funds rate is zero, down from more than 5% before the reces­sion. "This is the first time in the post-war period that we have had the Fed funds rate at zero," Richard notes.

Other Trea­sury yields are also at near-record lows. Even the 30-year U.S. Trea­sury bond yields only 3.3%, despite the pre­mium that investors demand for tying their money up for so long. Low-rate pol­icy has dri­ven the stan­dard 30-year fixed-rate mort­gage down to about 4%, from over 6% before the reces­sion. Inter­est earn­ings on bank sav­ings are near zero.

To fur­ther stim­u­late the econ­omy, the Fed has resorted to try­ing to reduce long-term rates by pur­chas­ing long-term bonds, which increases demand and raises prices, but this is only mod­er­ately effec­tive, Richard says. "I believe Bernanke kept us from going into a deeper reces­sion, or even a depres­sion," he adds. "The Fed acted in an excel­lent way, in my opin­ion.... [Bernanke] has responded with every bit of artillery that he has, and he just doesn't have any more. Another round of eas­ing won't do any good."

The Fed's prob­lem — run­ning out of ways to stim­u­late the econ­omy — means Trea­sury yields have effec­tively hit bot­tom, or come so close that, in the long run, the odds of drop­ping fur­ther appear to be vastly out­weighed by the odds of going up. "Math­e­mat­i­cally, you would expect that they would go up, since they are at all-time lows," Allen notes.

When Rates Rise

If the econ­omy strength­ens, the Fed may some­day become more con­cerned about infla­tion and start nudg­ing inter­est rates up to cool growth. Bernanke has said this will not hap­pen until late 2014 at the ear­li­est, but some experts think the econ­omy will start grow­ing fast enough to force his hand sooner.

"The key fac­tor that could cause Trea­sury yields to rise is an improv­ing eco­nomic out­look," Schwarz says. "This would work in two ways. First, it would bring for­ward the time of pos­si­ble tight­en­ing of mon­e­tary pol­icy by the Fed. Second, investors would be will­ing to buy riskier assets, push­ing Trea­sury yields higher as investors shift out of Trea­suries and into these other assets. Indeed, this is pre­cisely what has been hap­pen­ing so far this spring." But eco­nomic prob­lems, or a dip in infla­tion below the Fed's 2% tar­get rate, could put the Fed back into a rate-cutting mode, Schwarz adds. "And if things in Europe take another turn for the worse, or there are some other strains on global mar­kets, then this would cause safe haven flows into Trea­suries, sup­port­ing prices and bring­ing yields lower."

What would the world look like if rates did start to rise? Bor­row­ing costs would prob­a­bly go up, mak­ing it more expen­sive to buy things like homes, cars and appli­ances. Yields would prob­a­bly rise on interest-bearing accounts, such as bank sav­ings and money-market funds. That would be good for savers, assum­ing the gains were not devoured by higher infla­tion. But bond investors could be hit hard, ana­lysts note, as higher yields on new bonds would drive down val­ues of older, stingier bonds already in investors' port­fo­lios. The great bull mar­ket could turn into a great bear market.

If this hap­pened, an investor who owned an indi­vid­ual bond would face an unpleas­ant choice: sell at a loss to rein­vest for a higher yield, or con­tinue receiv­ing a below-market yield by keep­ing the bond to matu­rity, when the bond would be redeemed at full face value. Either way, the investor who owns a bond when yields rise would be worse off than one who had stayed in cash. The cash holder, hav­ing avoided the price drop, could then buy a new bond with a higher yield.

The prob­lem is par­tic­u­larly dif­fi­cult for peo­ple who invest in bonds through mutual funds. Because funds con­stantly replace the bonds they hold to main­tain the aver­age matu­rity promised to investors, the fund itself has no fixed matu­rity date — matu­rity is always five years from the present, for exam­ple. If rates rise, the fund will likely sell some bonds at a loss, and see the ones it retains fall in price, caus­ing a drop in the fund's share price. Over time, the higher yields earned by newer bonds added to the fund will help repair the dam­age, but there's no escap­ing the fact that a sharp rise in inter­est rates could cause deep losses for many bond fund investors. Unlike own­ers of indi­vid­ual bonds, fund investors can­not sim­ply wait for the matu­rity date to redeem at full value.

Many experts are warn­ing that bonds — and bond funds — are riskier than they have been in recent decades. The risk can be reduced by own­ing bonds and funds with shorter matu­ri­ties, since those hold­ings would suf­fer less from ris­ing rates: Even if rates were to dou­ble or triple overnight, a $1,000 bond matur­ing the next day would still be worth $1,000, while a bond that wouldn't mature for 10, 20 or 30 years would col­lapse in value.

Unfor­tu­nately, bonds and funds with shorter matu­ri­ties, while mit­i­gat­ing the prob­lem of interest-rate risk, cur­rently offer very low yields. An investor who took the short-maturity route would regret it if yields did not rise. And that does remain a pos­si­bil­ity, Allen says, argu­ing that per­sis­tent eco­nomic prob­lems around the world could fuel high demand for Trea­suries and other highly rated bonds for years, keep­ing rates low.

Flock to Stocks?

If eco­nomic con­di­tions improve and bonds seem too risky, investors may turn to stocks, which have done well in recent years. Prince­ton econ­o­mist Bur­ton G. Malkiel, author of A Ran­dom Walk Down Wall Street, argued in a recent edi­to­r­ial piece in The Wall Street Jour­nal that stocks are a safer choice now than bonds. "Bonds are the worst asset class for investors," he wrote. "Usu­ally thought of as the safest of invest­ments, they are any­thing but safe today. At a yield of 2.25%, the 10-year U.S. Trea­sury note is a sure loser." After infla­tion took its share, that bond would effec­tively yield noth­ing, he added.

If investors fol­low Malkiel's advice, a flood of money to stocks from bonds would under­mine bond prices by reduc­ing demand.

For small investors, bonds could con­tinue to pro­vide diver­si­fi­ca­tion in the port­fo­lio, one of the chief rea­sons for own­ing them, and bond losses, if there were any, could be off­set by stock gains. Many experts say ner­vous investors can reduce their bond hold­ings, but elim­i­nat­ing them entirely could actu­ally add risk by putting more eggs in the bas­ket of stocks.

Allen points out that there are many poten­tial eco­nomic prob­lems that could under­mine stocks and make bonds a safe haven. "I think [bonds] are still a good place to have a chunk" of the port­fo­lio, he says.

Tags: Bond Prices, Bonds, Downside, Economic Recovery, Finance Professor, Four Months, Franklin Allen, inflation, Interest Earnings, interest rates, Krista, Many Things, Odds, Practice Professor, Professor Franklin, Safe Haven, Steam, Treasuries, U S Treasury, Wharton
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Inflation Inferno? Maybe in 2013 and Beyond

Thursday, March 8th, 2012

In a con­tro­ver­sial new paper, a staff econ­o­mist at the Fed­eral Reserve Bank of St. Louis warns that con­di­tions are ripe for a spike in infla­tion. The econ­o­mist, Daniel Thorn­ton, argues that the Fed’s pol­icy of pro­vid­ing liq­uid­ity has “enor­mous poten­tial to increase the money sup­ply,” result­ing in what The Wall Street Journal’s Real Time Eco­nom­ics blog calls “an infla­tion inferno.”

While I share many of Thornton’s con­cerns, I think it’s too soon to make sig­nif­i­cant changes to a port­fo­lio based on infla­tion fears. Given the recent rise in bank lend­ing, growth in the money sup­ply and unprece­dented nature of the Fed’s mon­e­tary exper­i­ment, infla­tion is cer­tainly a sig­nif­i­cant risk. How­ever, in my opin­ion, it’s not an immi­nent one and is more of a risk for 2013 and beyond.

While there is a healthy the­o­ret­i­cal debate on whether increases in the money sup­ply lead to infla­tion, I believe the logic is sim­ple. As the sup­ply of money goes up, the value of money drops, caus­ing inflation.

To be sure, the Fed is likely to try to use tools in its arse­nal to com­bat the real­ity of this sim­ple the­ory. Accord­ing to The Wall Street Jour­nal, the Fed is con­sid­er­ing imple­ment­ing a new bond-buying pro­gram along with future pos­si­ble stim­u­lus to “relieve anx­i­eties that money print­ing could fuel infla­tion later.” How­ever, this pos­si­ble approach, like other recent Fed tools, is untested and it’s unclear how it would work in real­ity if it were implemented.

What’s cer­tain is that his­tor­i­cally, rapid increases in the money sup­ply have his­tor­i­cally led to infla­tion in the United States, though there typ­i­cally is a lag between money cre­ation and infla­tion. His­tor­i­cally, it gen­er­ally has taken two to three years before growth in the money sup­ply has trans­lated into a mean­ing­ful accel­er­a­tion in infla­tion. Take the mid 1970s, when U.S. infla­tion spiked, despite a weak econ­omy, after a double-digit expan­sion of the money sup­ply between 1971 and 1973.

So far, the Fed’s asset pur­chase pro­grams — QE1, QE2 and Oper­a­tion Twist — have not resulted in infla­tion. This is because, until recently, the extra money the Fed cre­ated sat qui­etly on bank bal­ance sheets as banks con­tracted their lend­ing. With­out bank lend­ing, the money sup­ply didn’t rise very much (although the mon­e­tary base, which includes bank reserves, has shot up).

The sit­u­a­tion, how­ever, has started to change. Out­side of the mort­gage mar­ket, bank lend­ing has been ris­ing since last sum­mer. Com­mer­cial and indus­trial loans are now grow­ing at 11% year-over-year, the fastest rate since 2008. As bank lend­ing has risen, money sup­ply growth has also started to accel­er­ate; in Jan­u­ary, M2 was up over 10% from the year before.

With M2 growth just start­ing to accel­er­ate in late 2011, I’d be sur­prised to see a sharp spike in infla­tion this year. Of course, head­line infla­tion is likely to rise in the near term due to higher oil prices. How­ever, this should not be inter­preted as the start of a broad spike in over­all infla­tion, which over the long term will be about the same as core infla­tion. While higher near-term head­line infla­tion will be a drag on con­sumers, it’s unlikely to change my infla­tion out­look unless ris­ing prices spill over into core infla­tion.

Sources: Bloomberg, the Fed­eral Reserve Bank of St. Louis, The Wall Street Journal

Tags: Anxieties, Daniel Thornton, Federal Reserve, Federal Reserve Bank, Federal Reserve Bank Of St Louis, Inferno, inflation, liquidity, Mid 1970s, Money Creation, Money Printing, Money Supply, New Bond, Rapid Increases, Staff Economist, Stimulus, Theoretical Debate, Unprecedented Nature, Value Of Money, Wall Street Journal
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What the Fed is Considering Doing in Layman's Terms

Thursday, March 8th, 2012

I've spent some time this after­noon try­ing to fig­ure out the whole point of what the Fed is con­sid­er­ing.  I got this blurb from Realmoney.com, essen­tially it sounds like the hedge fund Bernanke & Part­ners is con­sid­er­ing lay­ing on a mas­sive carry trade.  And since they are the bank, and can cre­ate unlim­ited funds to do it, they have a dif­fer­ent risk para­me­ter than Joe Schmoe's hedge fund.

In a little-noticed, but incred­i­bly auda­cious announce­ment this morning,

Fed­eral Reserve offi­cials said they are con­sid­er­ing a new type of

bond-buying pro­gram. This is meant to address wor­ries about future infla­tion if

[when] the Fed decides to take new steps to stim­u­late the econ­omy in coming

months.

****************************************************************************

The math (per $ billion)

Bor­row …….$1,000,000,000 at 0.13% annual rate [today's 6-mo. T-bill

rate]

Lend ……… $1,000,000,000 at 3.08% annual rate [today's 30-yr.

T-bond rate]

Earn ………..$29,500,000 per bil­lion of carry trade EACH YEAR

If only we could do this on a grand enough scale we could wipe out the

national debt post haste. [No laugh­ter, please].

****************************************************************************

Imag­ine bor­row­ing from your spouse at 5% while record­ing only a 1% cost of

bor­row­ing in order to see the insan­ity involved here.

Your fam­ily debt rises by $1 bil­lion. Your fam­ily lia­bil­i­ties increase by

$1 bil­lion but you declare your­selves much richer at year-end and protected

against infla­tion as well.

This may well be the plot for the next Harry Pot­ter movie.

(I want roy­al­ties if this occurs.)

Tags: 1 Billion, Blurb, Bond Rate, Carry Trade, Cost Of Borrowing, Family Debt, Federal Reserve, Federal Reserve Officials, Hedge Fund, inflation, Insanity, Joe Schmoe, Layman, Liabilities, National Debt, Next Harry Potter Movie, Post Haste, Royalties, Worries, Year End
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A Tailwind for Gold? Low Rates.

Thursday, March 1st, 2012

In recent months, the Fed­eral Reserve (Fed) and the Euro­pean Cen­tral Bank (ECB) have been low­er­ing — or main­tain­ing low — inter­est rates in an effort to sup­port growth. One unin­tended ben­e­fi­ciary of the aggres­sive eas­ing by the devel­oped world’s cen­tral banks: Gold.

His­tor­i­cally, the most impor­tant dri­ver of gold returns has not been infla­tion or the dol­lar, but rather the level of real inter­est rates. In the past, envi­ron­ments with inter­est rates at or below the level of infla­tion have been very sup­port­ive of com­modi­ties, and par­tic­u­larly gold. Today’s rate envi­ron­ment fits this bill and so should that of the near future.

As the Fed and the ECB are deter­mined to main­tain their low-rate pol­icy for the remain­der of the year and prob­a­bly through 2013, real rates will likely remain neg­a­tive into next year. This should pro­vide a nice tail­wind for com­modi­ties in gen­eral and for gold.

As such, I con­tinue to advo­cate that investors main­tain a strate­gic allo­ca­tion to gold as a dis­tinct asset class. In addi­tion, com­modi­ties such as gold can help to diver­sify a port­fo­lio and pro­vide a hedge against ero­sion in pur­chas­ing power.

But what about sil­ver? For now, I pre­fer gold for two reasons.

First, gold tends to ben­e­fit more than sil­ver from neg­a­tive real rates. Sec­ond, 50% of the demand for sil­ver is dri­ven by indus­trial usage. As eco­nomic growth can still best be described as weak, global indus­trial demand isn’t likely to sup­port sil­ver prices.

So how much of a port­fo­lio should investors con­sider allo­cat­ing to gold? The exact amount of gold in a port­fo­lio will obvi­ously depend on an investors’ risk tol­er­ance and on the portfolio’s other com­po­nents. Still, accord­ing to work from the iShares’ port­fo­lio research team, an allo­ca­tion of around 1% is prob­a­bly rea­son­able for the aver­age investor. Investors should dis­cuss their own port­fo­lio allo­ca­tion with their advisors.

Source: Bloomberg

Gold and other pre­cious metal prices may be highly volatile. The pro­duc­tion and sale of pre­cious met­als by gov­ern­ments, cen­tral banks or other larger hold­ers can be affected by var­i­ous eco­nomic, finan­cial, social and polit­i­cal fac­tors, which may be unpre­dictable and may have a sig­nif­i­cant impact on the sup­ply and prices of pre­cious met­als. Diver­si­fi­ca­tion may not pro­tect against mar­ket risk.

Tags: asset class, Beneficiary, Central Banks, Commodities, ECB, Economic Growth, Erosion, Federal Reserve, inflation, Low Interest Rates, Portfolio Allocation, Portfolio Research, Precious Metal Prices, Purchasing Power, Rate Environment, Remainder, Risk Tolerance, S Central, Silver Prices, Tailwind
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Do They Or Don't They? Will They Or Won't They?

Friday, February 17th, 2012

Sub­mit­ted by Peter Tchir of TF Mar­ket Advisors

It’s hard to believe that here we are again try­ing to fig­ure out what Europe will do over the week­end.  In our case a long weekend.

In spite of the fact that the Greek story has been out there for almost 2 years now, it still dri­ves the mar­ket.  Vir­tu­ally all of the big moves this week came on the back of Greek head­lines so it is impos­si­ble to argue that it is “priced in”.  My best guess is that a res­o­lu­tion (which the mar­ket believes is most likely) sparks a 2%-4% rally.  A default (which I think is most likely) sparks a 5%-10% decline.  So at these lev­els I will be short as I think the most likely move is lower, and the move lower is likely to be big­ger.  With the mar­ket being choppy, being nim­ble remains a key.

Yes­ter­day was one of the big­ger swings we’ve had.  The S&P moved almost 2% and is start­ing to feel like it did last fall – either extremely well bid with no sell­ers, or feel­ing ugly with no buy­ers and almost no mid­dle ground.  Be care­ful about high yield.  Every­one is still talk­ing about the “flows” but although JNK has been able to attract some new money, HYG has not added a sin­gle share this week. HY may be cheap, but if the new flows dry up, it will strug­gle from here.

The CPI data is also impor­tant.  The fed has set a 2% “tar­get” and talks and acts like we are run­ning below that rate, when in real­ity, infla­tion is above their tar­get. An upside sur­prise here would be bad for the mar­kets as it would be yet another argu­ment against QE.  The eco­nomic data has been good (though I believe influ­enced by unsea­son­ably good weather), but the mar­ket is impacted by the hopes of QE, so asides from Greece, that is the other big story to watch.

The mar­ket has a ten­dency to do well after the credit guys leave on hol­i­day short­ened trad­ing days.  So with the desire to believe that Europe will not let Greece default (in spite of evi­dence to the con­trary) the mar­kets may remain in rally mode for the day because no one wants to miss the immi­nent res­o­lu­tion of the cri­sis.  I am far more con­vinced that we will get some very dis­ap­point­ing head­lines because the sit­u­a­tion really doesn’t work, and the tone of Europe has switched from “No Default” to “No Dis­or­derly Default”.

Tags: Amp, Best Guess, Cpi Data, Decline, Economic Data, Evidence To The Contrary, Good Weather, Greece, Greek Story, Hy, Hyg, inflation, New Money, Qe, Rally, Spite, Swings, Target, Tendency, Upside Surprise
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Jeremy Siegel: 66% Chance of Dow 15,000, 50% Chance of Dow 17,000 in Next Two Years

Tuesday, February 14th, 2012

This past weekend's Barron's cover story is cer­tain to leave folks think­ing that, per­haps, the lat­est round of mar­ket eupho­ria hasn't per­haps gone over the top.

The story is based on the work of Whar­ton finance pro­fes­sor and Stocks For The Long Run author Jeremy Siegel, who sees a strong like­ly­hood the Dow can reach 15,000, or per­haps even 17,000.

The argu­ment has two angles.

First, based on cycles going back to the 1800s, the mar­ket is due for an upswing.

The mar­ket his­tory draws on 141 years of equity per­for­mance, from which a fairly straight­for­ward cycli­cal pat­tern can be dis­cerned: a strong ten­dency for peri­ods of worse-than-average returns to be fol­lowed by peri­ods of better-than-average, and vice versa. Since the past five years have been squarely in the worse-than-average cat­e­gory, better-than-average returns in the two-year period just begun are now likely.

Sec­ond: In real­ity, these num­bers are based on some pretty rea­son­able assump­tions, given that the Dow closed Fri­day just over 12,800:

WHILE DOW 15,000 AND 17,000 may sound like dra­matic tar­gets, from at least two per­spec­tives — earn­ings and infla­tion — they are actu­ally rather mod­est objectives.

In 2011, earn­ings per share on the Dow grew 12%. Assume a slow­down to half that rate over the next two years, or 6% per year, which is lower than con­sen­sus esti­mates of 9% per year. Since Dow 15,000 from the Thursday's close requires an annual increase of just 8%, the price-earnings ratio on the index would only need to edge up, from the cur­rent 13.1 to a still-modest 13.6. Also, if earn­ings were to grow at con­sen­sus expec­ta­tions, Dow 15,000 could be reached with a P/E of 12.8.

On the same 6% earnings-growth assump­tions, Dow 17,000 in two years would boost the P/E on the blue-chip index to 15.4, still aver­age by most standards.

Sim­i­larly, in inflation-adjusted terms, Dow 15,000 and 17,000 are actu­ally mod­est tar­gets (see chart). Assum­ing price infla­tion of 2.5% annu­ally over the next two years (last year, it ran 3%), Dow 15,000 in 2007 dol­lars would still be below its 2007 high. Dow 17,000 would be a new high in 2007 dol­lars, but would exceed the 2007 highs by only about 7%.

Given the cli­mate, its a bold call, and for that rea­son, Siegel's con­vic­tion is a real stand­out. You can read the whole story here.

Tags: Angles, Assumptions, Barron, Blue Chip Index, Consensus Estimates, Consensus Expectations, Cyclical Pattern, Dow, Earnings Growth, Earnings Per Share, Finance Professor, inflation, Jeremy Siegel, Likelyhood, Market Euphoria, Market History, Perspectives, Price Earnings Ratio, Price Inflation, Slowdown, Upswing, Wharton
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Where to Find Value in Emerging Asia

Tuesday, February 7th, 2012

This week, I’m updat­ing my views on some of the emerg­ing mar­ket coun­tries in Asia.

While I’m upgrad­ing Chi­nese equi­ties from neu­tral to over­weight, I’m down­grad­ing South Korean and Indian stocks from neu­tral to underweight.

Start­ing with China and South Korea – the two coun­tries are both highly exposed to global growth, but China cur­rently appears to be the bet­ter posi­tioned of the two and is likely to hold up much bet­ter from a growth perspective.

First, while Chi­nese equi­ties have per­formed well year to date, they are down over the past 12 months. As a result, Chi­nese equi­ties are cheap com­pared to other Asian emerg­ing mar­ket coun­tries, trad­ing at 1.6x book value.

Recent eco­nomic data also sug­gests that growth in China is sta­bi­liz­ing and sup­ports a soft landing. The most recent pur­chas­ing man­agers index, a key mea­sure of man­u­fac­tur­ing activ­ity, came out last week at a better-than-expected 50.5, and retail sales growth is actu­ally up to 18.1% year over year. Finally, Chi­nese infla­tion, which we all know was a big prob­lem in 2011, is falling. It’s down to 4.1% from 5.5% in Novem­ber and 6.5% in August.

To be sure, South Korean equi­ties are also cheap com­pared to other emerg­ing mar­kets. This, how­ever, is nor­mal. South Korea typ­i­cally com­mands a big dis­count due to ongo­ing uncer­tainty over North Korea. The cheap­ness of South Korean stocks is also jus­ti­fied given the country’s wors­en­ing eco­nomic out­look. South Korea’s eco­nomic read­ings have par­tic­u­larly suf­fered recently.

Finally, I’m down­grad­ing India in response to the country’s recent surge in val­u­a­tions and per­sis­tently high infla­tion. Indian stocks appear expen­sive once again. They are up more than 20% year to date and are cur­rently trad­ing at 2.6x book value. This com­pares with the Asian emerg­ing mar­ket aver­age of 2.4x book value.

In addi­tion, growth in India is still strongly below trend and while the country’s prof­itabil­ity is respectable, it has been on a down­ward trend over the last cou­ple of months. Finally, Indian infla­tion, while down from a cou­ple of months ago, is still in the dan­ger ter­ri­tory at 9.3%. All in all, Indian stocks are sim­ply too expen­sive given cur­rent fun­da­men­tals (poten­tial iShares solu­tions: MCHI, ECNS).

Source: Bloomberg

Inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume. Secu­ri­ties focus­ing on a sin­gle coun­try may be sub­ject to higher volatility.

Copy­right © iShares

Tags: 6x, Countries In Asia, Downward Trend, Economic Data, Economic Outlook, Emerging Asia, Emerging Market Countries, Emerging Markets, Global Growth, Growth Perspective, Indian Stocks, inflation, North Korea, Overweight, Profitability, Purchasing Managers Index, Retail Sales Growth, South Korea, South Korean Stocks, Valuations
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Bill Gross: "QE 2.5 Today, QE 3, 4, 5, ... lie ahead"

Thursday, January 26th, 2012

PIMCO's Bill Gross commented/tweeted yes­ter­day that "Finan­cial repres­sion" and pos­si­bly three more rounds of QE lie ahead, in response to the Fed's statement.

From Bloomberg:

• The U.S. will suf­fer “finan­cial repres­sion” as the Fed­eral Reserve imple­ments addi­tional quan­ti­ta­tive eas­ing, accord­ing to Bill Gross, who runs the world’s biggest bond fund at Pacific Invest­ment Man­age­ment Co.
• A third, fourth and fifth round of eas­ing “lie ahead,” Gross wrote in a Twit­ter post.
• The Fed will prob­a­bly hold its bench­mark inter­est rate at near zero per­cent for at least the next three years, the post said. Chair­man Ben S. Bernanke said yes­ter­day the Fed is con­sid­er­ing addi­tional bond pur­chases to boost growth after extend­ing its pledge to keep inter­est rates low through at least late 2014.

• “Finan­cial repres­sion depends on neg­a­tive real yields and until infla­tion moves higher for a period of at least sev­eral years, cen­tral banks will hiber­nate at the zero bound,” Gross wrote in his monthly invest­ment out­look on Jan. 4.
• Pol­icy mak­ers are “pre­pared to pro­vide fur­ther mon­e­tary accom­mo­da­tion” and bond buy­ing is “an option that’s cer­tainly on the table,” Bernanke said after offi­cials gath­ered for a meet­ing yes­ter­day. The cen­tral bank has pur­chased $2.3 tril­lion of secu­ri­ties in two rounds of large-scale asset pur­chases known as quan­ti­ta­tive easing.
• The Fed is in the process of replac­ing $400 bil­lion of shorter-maturity Trea­suries in its hold­ings with longer-term debt to “put down­ward pres­sure on longer-term inter­est rates,” based on a state­ment announc­ing the plan in September.
• Gross increased U.S. gov­ern­ment and Trea­sury debt in the $244 bil­lion Total Return Fund to 30 per­cent of assets in Decem­ber, the high­est in 13 months, after bet­ting against the secu­ri­ties dur­ing a rally last year.

Tags: Asset Purchases, Benchmark Interest Rate, Bernanke, Bill Gross, Bond Fund, Central Banks, Downward Pressure, Federal Reserve, Financial Repression, inflation, Investment Management, Investment Outlook, Maturity, Pacific Investment Management Co, Qe 2, Term Debt, Term Interest, Treasuries, Trillion, Zero Percent
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The Bond Specialist

Friday, January 13th, 2012

A guest con­tri­bu­tion by Anna W. via The Big Picture

The fol­low­ing comes from an asset man­ager, for­merly of New York, since relo­cated to Col­orado. Because of his employer’s rules on pub­lish­ing, this is anony­mous. We shall call him  The Bond Spe­cial­ist. I know him and his col­leagues for many years, and can attest to his 35 year career on Wall Street.

~~~

2011 was a con­fus­ing year from start to fin­ish on Wall Street and the arrival of 2012 is not offer­ing much relief. Today the pop­u­lar mes­sage is that the econ­omy is get­ting bet­ter in the U.S. and prob­lems abroad can be over­come. Reces­sion has been avoided and “escape veloc­ity” will be achieved in the sec­ond half. Our econ­omy can “decou­ple” from Europe and some of the big devel­op­ing nations that have seen their economies slow such as China, India and Rus­sia, now that they have run into trou­ble. Most econ­o­mists and stock mar­ket strate­gists seem to have cut and pasted their 2011 fore­cast into their 2012 fore­cast. (How is that for the pot call­ing the ket­tle black?) But the con­cerns that clouded the out­look a year ago only seem to have got­ten deeper. The pos­i­tive mes­sag­ing is focused on the following;

–The politi­cians will kick the can down the road and there­fore avoid the kind of aus­ter­ity that could derail the recov­ery. The Fed will engage in more quan­ti­ta­tive eas­ing (a euphemism for money-printing) if the econ­omy or the stock mar­ket falters.

–Inter­est rates and infla­tion have nowhere to go but up so the least attrac­tive place to put your money is in the bond mar­ket. That is, unless you keep the matu­ri­ties short and stick with “spread prod­uct” like cor­po­rate bonds and bonds issued by for­eign governments.

–The S&P 500 will be up 10% by year end. I have been in the busi­ness for 35 years and for the last 20, the pre­dic­tion for the mar­ket has always been “up 10% or more”. The ratio­nale changes but the upside pre­dic­tion does not. This year the place to be is “div­i­dend pay­ing stocks” that pay so much more than Trea­sury notes and have a great track record of increas­ing div­i­dends. Also, the 3rd and 4th years of the Pres­i­den­tial Cycle are usu­ally pos­i­tive for stocks. Last year the empha­sis was on domes­tic small cap, inter­na­tional and emerg­ing mar­ket stocks because of their supe­rior growth potential.

–The dol­lar will be weak because our fis­cal and mon­e­tary sit­u­a­tion is worse than those other coun­tries that we have decou­pled from since they are in so much trou­ble. Gold will be higher because some Cen­tral Banks are sub­sti­tut­ing gold for dol­lars as a reserve asset and lots of women will be get­ting mar­ried in India.

–Com­mod­ity prices will be higher in gen­eral. Oil and fer­til­izer are in short sup­ply and all the rural Chi­nese are plan­ning to motor on down to Ken­tucky Fried Chicken for some pro­tein sooner or later.

–The hous­ing mar­ket and home prices are find­ing a bottom.

Based on the pop­u­lar fore­cast for 2012, you can buy prac­ti­cally any­thing but long term bonds and prob­a­bly do just fine as long as you are diversified.

That is not the way it worked in 2011 and it seems to me to be even less likely in 2012. The S&P 500 was exactly unchanged in price for the year, pro­vid­ing only a 2% div­i­dend return. It was like a video game where many aliens were destroyed and many points were scored, but it was game over on Decem­ber 30th and we will have to put another quar­ter in on Jan­u­ary 3rd. Small cap­i­tal­iza­tion stocks (Rus­sell 2000) were down 5% and the Dow Jones Indus­trial Aver­age, the home of div­i­dend pay­ing stocks, was up 6%. Euro­pean and Emerg­ing Mar­ket indexes gen­er­ally deliv­ered dou­ble digit losses. They all had big swings dur­ing 2011, but the big story was how many times that the stock indexes were up or down more than 1% (100 Dow points) or more in a day. It seemed like all of them.

Gold and sil­ver roared ear­lier in the year, but gold is down 18% from a high of $1900 just since Sep­tem­ber and sil­ver peaked in May at $50. It is now $28. Gold was up 11% in 2011 and sil­ver was down 10%. The dol­lar index was flat. Oil was up 9% but nat­ural gas was down 37% to a multi-year low. Cop­per was down 22%. Corn was flat and wheat was down 18%. For the most part, con­fu­sion reigned.

But there was no con­fu­sion in the bond mar­ket. In 2011, the most abhorred invest­ment vehi­cles; long term Trea­sury bonds and long term Munic­i­pal bonds were the two best per­form­ing major asset classes. After a swoon in Jan­u­ary, long term bonds just marched up in price (down in yield) prac­ti­cally with­out inter­rup­tion for the remain­der of the year. As is always the case when inter­est rates are declin­ing, the longest matu­rity and high­est qual­ity bonds per­form the best. The 2039 Trea­sury Strip (0% coupon bond) returned 62% in 2011 and the aver­age lever­aged Closed End Munic­i­pal Bond fund returned 21%. Closed End Build Amer­ica Bond funds, which con­tain tax­able munic­i­pals where the Fed­eral gov­ern­ment pays 35% of the inter­est, did even bet­ter with an aver­age return of 28% in 2011. The impor­tant ques­tion to ask is: in what ways will 2012 be dif­fer­ent and how will it be similar?

As pre­vi­ously men­tioned, the major­ity of pun­dits think that, even though they missed the boat in 2011, it is only a mat­ter of tim­ing and it will sail in 2012. That sen­ti­ment is under­stand­able, but the expec­ta­tion that the econ­omy is going to return to a trend of expand­ing organic growth and a return to the sec­u­lar credit expan­sion lacks cred­i­bil­ity (no pun intended). To para­phrase Bob Far­rell, in the early stages of a new sec­u­lar par­a­digm the mar­ket is adapt­ing to a new set of rules while most mar­ket par­tic­i­pants are still play­ing by the old rules. But the old par­a­digm of credit expan­sion must resume if stocks and com­modi­ties are to appre­ci­ate, hous­ing prices are to sta­bi­lize, the gov­ern­ment is to avoid rais­ing taxes and slash­ing spend­ing and inter­est rates are to rise. As dis­ap­point­ing as it is, a far less rosy out­come is more likely.

Tags: 35 Years, Asset Manager, Attractive Place, Austerity, Big Picture, Bond Market, Corporate Bonds, Developing Nations, Dividend Paying Stocks, Economists, Escape Velocity, Euphemism, inflation, Market Strategists, Maturities, Money Printing, Rationale, Recession, Stock Market, Year End
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Where Falling Inflation Means Rising Valuations (Koesterich)

Thursday, December 29th, 2011

by Russ Koes­terich, Chief Invest­ment Strate­gist, iShares

One sil­ver lin­ing of the cur­rent slow growth envi­ron­ment is that infla­tion in emerg­ing mar­kets appears to have hit an inflec­tion point.

In recent months, for instance, infla­tion in both China and Brazil has come down. In China, con­sumer prices rose 4.2% in Novem­ber from a year ear­lier, a 14-month low. Sim­i­larly, in Brazil, annual infla­tion fell to 6.64% in Novem­ber, close to the 6.5% upper limit of the Brazil­ian cen­tral bank’s tar­get range.

Emerg­ing mar­ket infla­tion should decel­er­ate fur­ther in 2012 thanks to a com­bi­na­tion of con­tin­u­ing slower global growth and the lagged impact of mon­e­tary tight­en­ing. Brazil’s cen­tral bank has said it expects infla­tion to “fall sharply” by the sec­ond quar­ter of next year.

With the out­look for emerg­ing mar­ket infla­tion improv­ing, my team recently ran an analy­sis to deter­mine which devel­op­ing coun­tries are likely to see their val­u­a­tions ben­e­fit the most from falling inflation.

Here is the list, with each coun­try ranked in order of how much they should benefit.

1.      Brazil

2.      India

3.      Egypt

4.      South Africa

5.      Rus­sia

6.      Turkey

To develop the list, we looked at the rela­tion­ship over the last five years between val­u­a­tions (as mea­sured by price-to-book val­ues) and infla­tion lev­els for var­i­ous emerg­ing mar­kets. For some coun­tries, the rela­tion­ship is pos­i­tive — mod­est infla­tion is bet­ter for growth and trans­lates into higher val­u­a­tions dur­ing peri­ods of inflation.

How­ever, for other coun­tries, the rela­tion­ship is neg­a­tive and higher infla­tion means lower val­u­a­tions. This is espe­cially true for coun­tries that have gone through hyper­in­fla­tion in the past, where investors are par­tic­u­larly sen­si­tive to infla­tion read­ings and where val­u­a­tions should ben­e­fit from decreas­ing inflation.

For our rank­ing, we focused on coun­tries with a neg­a­tive rela­tion­ship that also still have high lev­els of infla­tion. For instance, Mex­ico and Indone­sia would ben­e­fit from declin­ing infla­tion. But they didn’t make our list because their infla­tion has already come down to a good range, which has already helped their valuations.

So how much should our top six coun­tries ben­e­fit from falling infla­tion? His­tor­i­cally, every per­cent­age point increase of infla­tion in Brazil is asso­ci­ated with Brazil’s price-to-book value decreas­ing by 0.3. I would expect the oppo­site to hold if Brazil’s infla­tion decreases.

At the bot­tom of the list, every per­cent­age point increase of infla­tion in Turkey is asso­ci­ated with Turkey’s price-to-book value decreas­ing by 0.03. The other coun­tries on the list fall some­where in between.

But keep in mind that emerg­ing mar­ket infla­tion is likely to stay above the com­fort zone of many cen­tral bankers. In addi­tion, infla­tion is not nec­es­sar­ily slow­ing in all emerg­ing mar­kets on our list. In Turkey, for instance, infla­tion has accel­er­ated since Feb­ru­ary due to a com­bi­na­tion of an over­heat­ing domes­tic econ­omy and very uncon­ven­tional mon­e­tary pol­icy.

(Poten­tial iShares solu­tions: EWZ and ERUS)

Dis­clo­sure: Author is long EWZ and ERUS

Source: Bloomberg

In addi­tion to the nor­mal risks asso­ci­ated with invest­ing, inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume. Secu­ri­ties focus­ing on a sin­gle coun­try may be sub­ject to higher volatility.

Copy­right © iShares

Tags: Book Values, Brazilian Central Bank, Chief Investment Strategist, Developing Countries, Egypt, Emerging Market, Emerging Markets, Global Growth, Growth Environment, Hyperinflation, inflation, Inflection Point, Negative Relationship, Periods, Russ, S Central, Second Quarter, South Africa, Target Range, Valuations
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50 Economic Numbers from 2011 “That are Almost Too Crazy to Believe”

Tuesday, December 20th, 2011

The fol­low­ing list of 50 “crazy” U.S. eco­nomic num­bers from 2011 comes cour­tesy of The Eco­nomic Col­lapse blog:

#1 A stag­ger­ing 48 per­cent of all Amer­i­cans are either con­sid­ered to be “low income” or are liv­ing in poverty.

#2 Approx­i­mately 57 per­cent of all chil­dren in the United States are liv­ing in homes that are either con­sid­ered to be “low income” or impoverished.

#3 If the num­ber of Amer­i­cans that “wanted jobs” was the same today as it was back in 2007, the “offi­cial” unem­ploy­ment rate put out by the U.S. gov­ern­ment would be up to 11 per­cent.

#4 The aver­age amount of time that a worker stays unem­ployed in the United States is now over 40 weeks.

#5 One recent sur­vey found that 77 per­cent of all U.S. small busi­nesses do not plan to hire any more workers.

#6 There are fewer pay­roll jobs in the United States today than there were back in 2000 even though we have added 30 mil­lion extra peo­ple to the pop­u­la­tion since then.

#7 Since Decem­ber 2007, median house­hold income in the United States has declined by a total of 6.8% once you account for inflation.

#8 Accord­ing to the Bureau of Labor Sta­tis­tics, 16.6 mil­lion Amer­i­cans were self-employed back in Decem­ber 2006. Today, that num­ber has shrunk to 14.5 mil­lion.

#9 A Gallup poll from ear­lier this year found that approx­i­mately one out of every five Amer­i­cans that do have a job con­sider them­selves to be underemployed.

#10 Accord­ing to author Paul Oster­man, about 20 per­cent of all U.S. adults are cur­rently work­ing jobs that pay poverty-level wages.

#11 Back in 1980, less than 30% of all jobs in the United States were low income jobs. Today, more than 40% of all jobs in the United States are low income jobs.

#12 Back in 1969, 95 per­cent of all men between the ages of 25 and 54 had a job. In July, only 81.2 per­cent of men in that age group had a job.

#13 One recent sur­vey found that one out of every three Amer­i­cans would not be able to make a mort­gage or rent pay­ment next month if they sud­denly lost their cur­rent job.

#14 The Fed­eral Reserve recently announced that the total net worth of U.S. house­holds declined by 4.1 per­cent in the 3rd quar­ter of 2011 alone.

#15 Accord­ing to a recent study con­ducted by the Black­Rock Invest­ment Insti­tute, the ratio of house­hold debt to per­sonal income in the United States is now 154 per­cent.

#16 As the econ­omy has slowed down, so has the num­ber of mar­riages. Accord­ing to a Pew Research Cen­ter analy­sis, only 51 per­cent of all Amer­i­cans that are at least 18 years old are cur­rently mar­ried. Back in 1960, 72 per­cent of all U.S. adults were married.

#17 The U.S. Postal Ser­vice has lost more than 5 bil­lion dol­lars over the past year.

#18 In Stock­ton, Cal­i­for­nia home prices have declined 64 per­cent from where they were at when the hous­ing mar­ket peaked.

#19 Nevada has had the high­est fore­clo­sure rate in the nation for 59 months in a row.

#20 If you can believe it, the median price of a home in Detroit is now just $6000.

#21 Accord­ing to the U.S. Cen­sus Bureau, 18 per­cent of all homes in the state of Florida are sit­ting vacant.  That fig­ure is 63 per­cent larger than it was just ten years ago.

#23 As I have writ­ten about pre­vi­ously, 19 per­cent of all Amer­i­can men between the ages of 25 and 34 are now liv­ing with their parents.

#30 The retire­ment cri­sis in the United States just con­tin­ues to get worse.  Accord­ing to the Employee Ben­e­fit Research Insti­tute, 46 per­cent of all Amer­i­can work­ers have less than $10,000 saved for retire­ment, and 29 per­cent of all Amer­i­can work­ers have less than $1,000 saved for retirement.

#33 Today, the “too big to fail” banks are larger than ever.  The total assets of the six largest U.S. banks increased by 39 per­cent between Sep­tem­ber 30, 2006 and Sep­tem­ber 30, 2011.

#34 The six heirs of Wal-Mart founder Sam Wal­ton have a net worth that is roughly equal to the bot­tom 30 per­cent of all Amer­i­cans combined.

#40 Sadly, child poverty is absolutely explod­ing all over Amer­ica.  Accord­ing to the National Cen­ter for Chil­dren in Poverty, 36.4% of all chil­dren that live in Philadel­phia are liv­ing in poverty, 40.1% of all chil­dren that live in Atlanta are liv­ing in poverty, 52.6% of all chil­dren that live in Cleve­land are liv­ing in poverty and 53.6% of all chil­dren that live in Detroit are liv­ing in poverty.

#42 In 1980, gov­ern­ment trans­fer pay­ments accounted for just 11.7% of all income.  Today, gov­ern­ment trans­fer pay­ments account for more than 18 per­cent of all income.

#43 A stag­ger­ing 48.5% of all Amer­i­cans live in a house­hold that receives some form of gov­ern­ment ben­e­fits.  Back in 1983, that num­ber was below 30 percent.

Click here for the full article.

Source: The Eco­nomic Col­lapse, Decem­ber 16, 2011.

Tags: 30 Million, 5 Million, 6 Million, Adults, Age Group, Amount Of Time, Author Paul, Bureau Of Labor, Bureau Of Labor Statistics, Economic Collapse, Economic Numbers, Gallup Poll, inflation, Median Household Income, Paul Osterman, Payroll Jobs, Poverty Level Wages, Small Businesses, Survey Found That, Unemployment Rate
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Will the US be Importing Deflation? (Econompic Data)

Friday, December 16th, 2011

Bloomberg details:

The import-price index climbed 0.7 per­cent, the first increase in four months and fol­lowed a 0.5 per­cent drop in Octo­ber, Labor Depart­ment fig­ures showed today in Wash­ing­ton. Econ­o­mists pro­jected the gauge would increase 1 per­cent, accord­ing to the median fore­cast in a Bloomberg News sur­vey. Prices exclud­ing fuel decreased 0.2 per­cent for a sec­ond month, the first back-to-back drop in more than a year.

Oil prices may have reached a plateau this month, indi­cat­ing increases in the cost of imported goods may mod­er­ate as slow­ing growth from Europe to Asia and a strength­en­ing dol­lar hold down prices. Fed­eral Reserve pol­icy mak­ers yes­ter­day said they expected infla­tion to slow and reit­er­ated their pledge to hold the bench­mark rate “excep­tion­ally low” at least through mid-2013.

The below chart out­lines the longer term trend in imported infla­tion. Over the past three months, the price of imported goods (exclud­ing petro­leum) has declined for only the third time since 2005 (six month fig­ure is now flat), while the twelve month change is turn­ing lower (below 4%) after it peaked at over 5% as recently as September.

Source: BLS

Tags: Asia, Benchmark Rate, Bloomberg News, Economists, Europe, Federal Reserve, Federal Reserve Policy, Four Months, Gauge, Import Price Index, inflation, Labor Department, Oil Prices, Petroleum, Plateau, Pledge, Term Trend, Third Time, Three Months
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Richard Koo — Europe in a Balance Sheet Recession — Time for QE

Friday, November 25th, 2011

www.southofwallstreet.com

Richard Koo's lat­est note points out that Europe has entered a Bal­ance Sheet Reces­sion (ZH primer).

As he has long argued, adding liqu­dity dur­ing a bal­ance sheet reces­sion is nec­es­sary and not inflationary;

When the pri­vate sec­tor as a whole is try­ing to min­i­mize debt
despite ultra-low inter­est rates, the money mul­ti­plier for the pri­vate
sec­tor turns neg­a­tive at the mar­gin, which means the money sup­ply will
not increase no mat­ter how much quan­ti­ta­tive eas­ing the cen­tral bank engages in. And with­out growth in the money sup­ply, there can be no inflation.

He goes on to sug­gest that a form of QE is nec­es­sary in Europe:

The ECB should embark on a quan­ti­ta­tive eas­ing pro­gram sim­i­lar in
scale to those under­taken by Japan, the US, and the UK. Dou­bling the
cur­rent sup­ply of liq­uid­ity would not trig­ger infla­tion and would enable
the ECB to buy that much more euro­zone gov­ern­ment debt.
The ECB has pro­vided a total of €1.3trn in liq­uid­ity thus far. The expe­ri­ence of Japan, the US, and the UK sug­gests there is no rea­son why pur­chas­ing an addi­tional €1.3trn in euro­zone gov­ern­ment bonds would lead to inflation.

If you haven't read his book — its prob­a­bly worth your time. Bal­ance Sheet Reces­sion: Japan's Strug­gle with Uncharted Eco­nom­ics and its Global Implications

Tags: Balance Sheet, Current Supply, ECB, Economics, Global Implications, Government Bonds, Government Debt, inflation, Japan, liquidity, Low Interest Rates, Money Multiplier, Money Supply, Private Sector, Qe, Quantitative Easing, Recession, Richard Koo, Struggle, Time Balance
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