U.S. stocks rise after Fed officials’ QE signal
…Stocks gained after New York Fed President William Dudley, who is also vice chairman of the Federal Open Market Committee, said that the Fed may adjust the pace of asset purchases up or downdepending on the economic outlook and that he was unsure which way the next change will be.
And St. Louis Fed President James Bullard said Tuesday that the central bank shouldcontinue with its present bond-buying program and adjust the rate of purchases in view of incoming data on growth and inflation. He said the program is the best policy option and has been effective.
The Fed’s $85-billion-a-month asset-purchase program aims to boost economic growth and lower the jobless rate. The program has buoyed the stock market and its end — if not properly managed — may hurt sentiment among equity investors, potentially triggering a correction in the market.
“Broadly speaking, investors are really waiting to see what Mr. Bernanke is going to say in front of Congress,” said Andrew Wilkinson, chief economic strategist for Miller Tabak. “The next 20 points in the S&P 500 are probably predicated on what he has to say.”
Two years ago, Zero Hedge first made the observation that the bulk of Fed reserves (also known simply as “cash created out of thin air” because money is first and foremost fungible no matter what textbook theoreticians may claim, and the only cash allocation preference is the capital allocation IRR analysis) had been parked not with US banks, but with foreign banks with US-based operations. We followed that with more analyses, showing explicitly how the Fed was providing a constant cash injection to foreign banks courtesy of the rate on overnight reserves which is the amount Fed pays to banks that hold reserves with it, as the bulk of reserves continued to end up with foreign banks – a situation set to become a huge political storm some time in 2014-2015 when the IOER has to rise and the Fed is “found” to have injected tens of billions of “interest” not into US banks but in foreign banks operating in the US, and which then can upstream the “profits” to insolvent offshore domiciled holding companies.
So it was our expectation that while if not slowing down its rate of money-creation (i.e., reserve-production) – something that won’t happen for a long time as it would crash the stock market – the Fed’s reserves would at least revert to being accumulated at US-based banks. No such luck. In fact as the latest H.8 report demonstrates, as of the most recently weekly data, the Fed’s policies have led to foreign banks operating in the US holding an all time high amount of reserves, surpassing $1 trillion for the first time, or $1,033 billion to be precise.
The one headline we have been waiting for for over four years has just hit:
- BOK KIM SAYS WORLD MAY FACE RATE RISK IF U.S. EXITS FROM QE
Not when, if. And there you have it: if the Fed exits, the world (and most certainly Japan) gets it. Thus, for the sake of the children (who will have inhert about $100 trillion in debt but don’t worry: debt is an asset as some “analysts” will promise) Bernanke can never exit. QE…D
And since never is a litte longer than 2016/2017, at some point in the next few years Bernanke will be the proud owner of all marketable Treasury paper. All of it.
Bank of Japan Policy Meeting Preview – Chance Of A Bond Crash?
The current Bank of Japan policy meeting is possibly the most important thing going on this week (even more so than Bernanke’s comments perhaps). If, as is distinctly possible, they don’t do anything to reinforce the immediacy of the Kuroda QQE package, we could be looking at bond markets reacting in a most “unfavorable manner”. The effect would be to reinforce the latest round of ‘fear-on’ bond selling – certainly over the short-term, and the damaged sentiment could impact stocks also.
That’s why the Bank of Japan policy meeting today/tomorrow will be so interesting. Can it nurture and sustain real growth? Devaluing yen to benefit exporters does seem to be working – look at recent Yen corporate results. However, now we’ve got the rest of Asia looking to balance Japan’s competitive devaluation. We still need to see how the other side of Abe-onomics works: rebuilding Japan. How vulnerable is the BoJ game? The Nikkei may be massively higher, but interest rates and JGB’s remain stubbornly volatile and high – a factor conflating the global bond worries… if the Fed is going to end QE and Japan’s QE squared isn’t working, then bond players will quite rightly capitulate.
There is probably not much the BoJ can say at this meeting – it’s got to give the policy (of massive QE) time to work. That leaves markets highly vulnerable to a sense of disappointment tomorrow. On the other hand, we’ve long said.. “Don’t fight Kuroda!”