We draw your attention to what has been happening in the US as unfortunately, the degenerates determining their monetary policy have an effect on our wallets and where we should be concentrating our investments. Take it away Mr Canavan...
Markets
QE is Dead, Long Live QE - (View the original article here)
By +Greg Canavan • June 20th, 2013 via +Daily Reckoning Australia
‘If only, if only…If only me aunty had bollocks she’d be me
uncle’
David Brent, The Office.
Or to paraphrase Ben Bernanke, ‘If only the US economy would
start growing sustainably will we consider scaling down our QE program.’
If only, if only…
Nothing really changed last night with Bernanke’s speech,
except the market’s perception of what’s going on. Bernanke confirmed that the
Federal Reserve may or may not ‘taper’ — it all depends on the incoming data.
But whatever he said, the market wasn’t listening.
Try this headline from Bloomberg this morning:
‘Bernanke Says Fed on Course to End Asset Buying in 2014’
But in the meat of the article comes this quote from
Bernanke:
‘“If you draw the conclusion that I just said that our
policies — that our purchases will end in the middle of next year, you’ve drawn
the wrong conclusion, because our purchases are tied to what happens in the
economy,” he said. “If the economy does not improve along the lines that we
expect, we will provide additional support.”’
The market isn’t listening to what Bernanke says…it’s
panicking. Just about everything got hit overnight. Equities, bonds, commodities,
precious metals, all were slammed as the US dollar rallied. The Aussie collapsed
2 cents…that’s a massive move in FX land.
The speculators got it wrong. They positioned for a soothing
Bernanke statement. But they just got more of the same. That is, if the economy
moves into a sustainable expansion, we cut out the asset purchases…if it
falters, we’ll ramp them up.
That sounds pretty straightforward, but it led to a massive
unwind of leveraged bets in anticipation of the beginning of the end of easy
money.
Is it really though? The ‘end’ of quantitative easing (QE)
might just be the thing that ensures it remains a part of the financial lexicon
for years to come.
Why?
Well, bond yields are on the rise. The US 10-year bond
yield, a benchmark for the global cost of credit, traded around 1.6% at the
start of May. Following another sharp sell-off overnight, it’s now at 2.33%,
the highest level in over a year.
In general, global market interest rates follow the lead of
the US 10-year Treasury bond. So rising rates represent a tightening of
monetary conditions in financial markets. Which means the US
economy, for years heavily dependent on easy money, will come under pressure
soon as higher interest rates begin to bite.
And if the US economy comes under renewed pressure, Bernanke
won’t cut QE anytime soon. So no end to QE…long live QE!
But what if the US economy really is recovering? And
what if this recovery DOES end QE sometime next year and then interest rates
move back to normal in subsequent years?
That, dear reader, is not going to happen. It comes back to
the ‘Holden Moment’ we talked about yesterday. The whole structure of the
US economy (and much of the global economy to be honest) depends on easy
money. Car sales, home sales, government spending, consumer spending…all depend
on cheap money.
Years of zero interest rates have robbed the system of real
savings. In its place, the level of total debt has ballooned to keep up the
façade of healthy and sustainable growth. And in the meantime, the structure
(industry, incomes, employment, profits taxes etc) of the economy grows around
this ongoing provision of cheap and easy money.
If you try to take it away, the economy will fall in a heap.
That shouldn’t be a big deal but we’re talking about the world’s largest
economy, and consumer of last resort here. The US’ ongoing propensity to
consume more than it produces is made possible by easier and easier money.
As money becomes cheaper, debt levels grow to fund
consumption. The whole economic structure of the world economy grew out of this
falling US interest rate/rising debt/excess consumption model.
You think we’re going to get out of it easily? You think the Federal Reserve can all of a
sudden put an end to this multi-decade trend without major problems? Throw in
the world’s second largest economic zone, (Europe) which is in the throes of
its own painful structural adjustment…and the world’s second largest economy,
China, which is about to experience what it’s like when a credit bubble goes
bust, and…well, Houston, we have a problem.
As an aside, check out China's inverted yield curves (on the
right hand side) here.
Usually, in a non-QE monetary environment, inverted yield curves portend a
major economic slowdown...
So if QE can’t really end, where to from here?
We'll go back to our comments from a few weeks ago. That is,
confidence in the Federal Reserve and Bernanke is receding, and liquidity will
soon follow. One of the most beneficial impacts of QE is that it instils
confidence. Confidence creates liquidity which creates asset price inflation.
In the Q&A following the press conference, someone asked
about sharply rising bond yields over the past few weeks, and how that
reconciles with the Fed’s view that it’s the stock of assets it holds on its
balance sheet that determines yields.
Bernanke responded that ‘we were puzzled by that’, and then
tried to explain it away by citing other factors like potential optimism about
the outlook for the economy (optimism not shared by any other asset class, by
the way).
When you admit to being puzzled by the effects of the
largest monetary experiment in history, which you implemented, it’s a
confidence drainer. And with confidence goes liquidity.
So where do you hide in a market that has lost confidence in
its chief puppeteer? Gold? It’s falling too, right? There’s more to that
question than meets the eye.
More on that tomorrow…
Real Estate
Housing Market
Compared To Toilet Paper
Controversial economist Leigh van Onselen has published an
opinion piece comparing Australian property to the reported toilet paper
shortage in Venezuela.
Quoting an article by The Telegraph detailing the Venezuelan
government’s rationing policies and how they have caused shortages in household
items – including toilet paper – van Onselen said that parallels could be drawn
with Australian housing...continue reading
Loan Industry Giant
Predicts Major Housing Market Gains After Elections
Recently, over 3000 real estate agents attended the
Australian Real Estate Conference, which was held on the Gold Coast. One of the
speakers was the founder of Aussie Home Loans, John Symond, who was also ranked
number eight in a poll (naming the most influential economic, business and
political leaders of the last 60 years), conducted by the Australian Financial
Review.
During his speech, Symond predicted that the housing market would recover very quickly after the September election. Symond cited current ...continue reading
During his speech, Symond predicted that the housing market would recover very quickly after the September election. Symond cited current ...continue reading
Rock star pads
AUSTRALIAN rock and roll legends have been active in the
real estate industry lately, making the most of the buyer's market to cash in
and trade up. Take a peek at some of their old and new digs.
Former Icehouse frontman Iva Davies has listed his Lilyfield
home in Sydney while the former Divinyls guitarist Mark McEntee and his fashion
designer partner Melanie Greensmith are moving to ...continue reading
SME
The four big things
government can do to help small business
I know I am speaking to the converted here, and this is not
news to SMEs, but in this election year, a campaign being run by the Australian
Chamber of Commerce and Industry is trying to get government to seriously and
properly focus on the needs of small business.
What business doesn't want those things, but it's just that
SMEs are more dramatically affected by red tape and tax complications – they
have less resources to deal with those problems.
The ACCI is running a "The BIG 4 You Can't Ignore"
campaign which targets ...continue reading
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Business earnings from the Internet increased $48.4 billion
to $237.1 billion in 2011-12, according to the Australian Bureau of Statistics
(ABS).
Data from the IT Use and Innovation in Australian
Business 2011-12 report also revealed 45 per cent of Australian businesses
have an online presence, a slight increase from 43 per cent in 2010-11.
The data compares to a recent report by Deloitte Access
Economies,Connected Small Businesses, which found 59 per cent of respondents
surveyed had a low to very low level of ...continue reading
M.H. Carnegie, Vivant
Ventures announce $80 million startup fund
A new investment fund will make $80 million available for
Australian startups specialising in digital technology.
M.H. Carnegie & Co announced a partnership with startup
incubator Vivant Ventures to administer the accelerator fund, which includes
$40 million from an AusIndustry grant.
The incubator has previously worked with startups ...continue reading
We'd love to hear your thoughts on the Australian housing market... We have heard the rumors of over supply and under supply from near to far but what has been your experience? The fact remains there are still some fantastic investment opportunities in the Australian housing market if you follow a strategy and don't leave yourself exposed.
Until the next time dear readers...
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