Monday, 17 September 2012

Global Easing

The big print to global reflation continues......
As money is devalued and earns no "safe" return the opportunity cost of investment in gold and hard assets falls.
If inflation takes hold and interest rates start to climb the capital value of bonds falls precipitously ending the 30 year bond bull market. This would be Sinclair's final pillar for a gold bull market.

Draghi has committed to "whatever it takes" to save the Euro, OMT - Outright Monetary Transactions, buying Euro-government bonds, possibly paving the way to Euro-bonds themselves.

China has committed to further government investment.

Switzerland the old bastion of sound money commits to print to peg the Swiss Franc against the Euro, no havens here.

Will Japan follow the same course to avoid a strong yen suffocating their exporters and seek to escape their long deflation. How else will they solve 200% debt to GDP?
Update - 19th September - Japan Ease too

UK has extended QE

Currencies race to the bottom.

Now Bernanke confirms QE to Infinity as some have called it.
In case there were any doubts about the Fed's intentions, Bernanke told reporters the FOMC has an "obligation" to continue using its various policy tools until it sees "substantial" labor market improvement. “We will be looking for the sort of broad based growth in jobs and economic activity to signal sustained improvement in labor market conditions and sustaining employment," he said, maintaining that low inflation allows the Fed to do that.
Even if inflation rises above the 2% target, the FOMC will not necessarily desist, he implied. In that event, the FOMC will "take a balanced approach," he said. "We bring inflation back to the target over time, but we do it in the way that takes into account the deviations from both of their targets."
Easing confirmed until mid 2015
Tightening will not follow immediately on any upturn.
Open Ended. In addition to twist.
Until Unemployment declines "substantially" - non-specific, and some would say unemployment will not respond to easing.
Buying Mortgage Back securities, rather than treasuries.
Some call the end of the 30 year Treasury Bull Market - Felix Zulauf is a Barron's Round Table contributor,

Bill Cara's view
The long expected Great Reflation of 2012-2014 has begun in earnest, which means that capital will flow out of bonds and into equities in a major way, like nothing we seen since the 1970’s. This process of re-building investor and consumer confidence is unlikely to stop in G-20 countries until (i) house prices lift to where the majority of mortgaged home-owners are no longer under-water, and (ii) unemployment levels have been lowered by at least one-third.
Ultimately the cost will be in higher interest rates, widespread currency devaluation against hard assets, and higher price-to-earnings multiples in the equity market. Inflation in some sectors will be offset by deflation in others. Investors today, like the 1970s, and the 1930s, will have to re-allocate assets accordingly.

The message is that dollar cash will be devalued. Inflation will be allowed. Potentially positioning for Nominal GDP targeting, as per Michael Woodford's options at the zero bound, discussed previously

Interesting considerations on QE3 at FT Alphaville

Futures magazine review - Good review

Gavyn Davies in the FT - "Why did Bernanke Change his mind
Although this does not change the Fed’s fundamental interpretation of its dual mandate, it does change its short term “reaction function” as unemployment and inflation deviate from target. That probably means that QE3 will end up being much larger than either QE1 or QE2.
This is a profound change which eventually could lead the Fed to tolerate inflation above 2 per cent, or even to flirt with a nominal GDP target. For good or ill, the markets will view Mr Bernanke in a different light from now on.
Economist Free Exchange blog - A few more QE thoughts
Again references to Woodford's Communication strategies and NGDP targeting at the zero bound.

Zerohedge worry about the lack of anticipation from FOMC going forwards damaging the "hope" in the market


Gold's Reaction to QE3

While US Long Bonds fall hard below the 200d average.

The USD falls hard below the 200d average as the Euro recovers

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