economist Encima Global LLC qe2: fed's e-money not transmitting

来源: marketreflections 于 2011-05-17 11:53:08 [博客] [旧帖] [给我悄悄话] 本文已被阅读：次

Encima Global LLC | 28 W 44

St. Suite 1501 New York, NY 10036 | EncimaGlobal.com

We think QE2’s impact on the economy, markets and inflation has been exaggerated. This

creates several important market opportunities in coming months as QE2 ends and the debt

limit gets resolved. .

•

QE2 has been treated as a powerful monetary stimulus akin to money printing.

Proponents of this view cite Fed Chairman Bernanke’s 2002 observation that central

banks can stop deflation by printing money, dubbed Helicopter Ben. Financial market

moves over the last six months enhanced this interpretation of QE2 through record

dollar weakness, inflation in developing countries, equity market gains, a commodity

bubble and equity underperformance in many developing countries.

•

QE2 isn’t money printing and isn’t very powerful in its current form. To achieve its

balance sheet expansion, the Fed pays an above-market interest rate to commercial

banks for extra deposits at the Fed and discourages private sector credit through strong

regulatory scrutiny of bank balance sheets. The result has been a rise in excess

commercial bank reserves equivalent to the Fed’s balance sheet expansion.

Fed Assets and Excess Reserve (last obs. May 4, 2011, estimated to Dec 31, 2011)

0.5

1.0

1.5

2.0

2.5

3.0

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

trillions $

Total Fed Assets

Excess Reserves

Required Reserves

Source: Federal Reserve; Encima Global

David Malpass

with Wing Chow

212-876-4400

dmalpass@encimaglobal.com

May 10, 2011

Fed Not Printing;

Global Market Implications

Encima Global LLC | 28 W 44

St. Suite 1501 New York, NY 10036 | EncimaGlobal.com

•

The commodity spike and the squeeze on Treasury bonds got overdone in part due to

the view that the Fed’s QE2 was a new form of printing money that would create a nearterm

crisis. QE2 has caused substantial distortion in credit markets and artificially

depressed the dollar, but we don’t think this creates the near-term crisis that’s assumed

in high gold and commodity prices and low Treasury bond yields.

•

The market implications are: 1) the completion of QE2 shouldn’t be

contractionary; we think equities will go up, a sigh of relief, not down as some

have argued; 2) similarly, bond yields should rise as worries about post-QE

deflation subside; the threat that the debt limit might stop Treasury issuance

during the Fed’s final QE2 purchases has squeezed yields down, but we think the

10-year Treasury yield may reach 4% toward year-end on evidence of 3% U.S.

growth and over 3% CPI inflation; 3) global non-commodity-linked emerging

markets (like India and China) should do well after underperforming during the

QE2 fascination.

QE2 Isn’t Money Printing

Since banks aren’t lending against their deposits at the Fed, there’s been little transmission

from QE2 to private sector credit growth or to the economy. This explains the anomaly of a

Fed balance sheet expansion but relatively weak nominal economic growth. Usually, a bigger

Fed balance sheet means more money in the private sector economy and added growth and

inflation. Not this time.

Private Sector Credit ($ trillions, last obs. Q4 2010)

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Trillions $, SA

Source: Federal Reserve; Encima Global

Encima Global LLC | 28 W 44

St. Suite 1501 New York, NY 10036 | EncimaGlobal.com

•

The lack of private sector credit growth fundamentally distinguishes the current

monetary policy from previous inflationary monetary policies in which the Fed and bank

regulators accommodated dollar weakness and higher prices with credit growth. Private

sector credit has been contracting (in part due to mortgages) both in nominal dollar

terms…

Private Sector Credit Y/Y (last obs. Q4 2010)

-4%

-2%

10%

12%

14%

16%

Mar-55 Mar-60 Mar-65 Mar-70 Mar-75 Mar-80 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Mar-10

Private Sector Credit Y/Y % Change

Source: Federal Reserve; Encima Global

•

…and relative to GDP. This phenomenon of shrinking private sector credit is more like

the 1990s (strong dollar, falling commodities) than the 2000s (weak dollar, rising

commodities.) One characterization of inflation is too much money chasing too few

goods. We don’t think that’s happening now in part because QE2 is not adding to

private sector credit.

Encima Global LLC | 28 W 44

St. Suite 1501 New York, NY 10036 | EncimaGlobal.com

Private Sector Credit / GDP (last obs. Q4 2010)

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Mar-55 Mar-60 Mar-65 Mar-70 Mar-75 Mar-80 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Mar-10

Private Credit Market Debt / GDP

Source: Federal Reserve; Bureau of Economic Analysis; Encima Global

•

Rather than crediting QE2 itself, we attribute most of the market activity since the 2010

QE2 process to 1) confusion about QE2, which would be powerful if excess reserves

were lent; 2) trend-following behavior when liquidity is plentiful; and 3) the existence of

plentiful liquidity from factors other than QE2 – strong corporate cash flow in part due to

underinvestment; and foreign central banks keeping interest rates too low in order to

avoid currency appreciation, but generally not rationing credit as tightly as the U.S.

•

We think most of the rise in U.S. equities since the 2010 QE2 process can be attributed

to strengthening U.S. economic growth after the 2010 soft patch, strong corporate

profits, the December deal on tax cuts in which each party got its wish list and small

business hiring.

This is not an argument for QE2. We’ve been critical of QE2 on the grounds that it expands

the Fed’s mandate to include economic growth (the rationale for QE2), inserts the Fed into

equity market performance and creates an overhang of Fed bond holdings that could distort

monetary policy for years.

•

We expect inflation to rise further due to dollar weakness, high commodity prices and

regulatory costs, but we think financial markets have gone a step too far, pricing in the

idea that the Fed is printing money and that QE2 is providing powerful monetary

stimulus that will be missed when removed.

Encima Global LLC | 28 W 44

St. Suite 1501 New York, NY 10036 | EncimaGlobal.com

•

This misinterpretation of QE2 is hard to quantify. Part of dollar weakness and the rise in

gold and other commodities is due to the near-zero Fed funds rate and the Fed’s history

of devaluing the dollar. We also credit confusion about QE2, ETFs, momentum-trading

and, to an extent, valid concern about future Fed policy (like QE3 or another year of

near-zero Fed funds rate.) We note the difficulty in pricing commodities during periods

of excess of liquidity and social unrest. Because commodities don’t have earnings, an

ROI, a PE multiple or a relative asset value, their value is heavily influenced by

momentum, speculation and the value of the dollar (which is mostly speculation about

monetary policy and the Fed’s willingness to accommodate dollar weakness and

inflation.) The rise of ETFs has further widened the range of prices that might be

correct for a given commodity –fashionable commodities are worth more because

investors pay more. The price of gold fell by over 50% from September 1980 through

March 1982 as monetary policy changed and the value of the dollar doubled.

Given the shift in the banking system from price-based credit allocation to rationing-based

credit allocation, we don’t think money supply has much connection to the economic and

inflation outlook.

•

Monetary base (the M0 money supply) includes the Fed’s excess reserves and has

been rising rapidly in line with the Fed’s balance sheet. It’s not inflationary because it’s

not being transmitted into the private sector.

M0 (last obs. April 25, 2011)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

trillions $, SA

Source: Federal Reserve; Encima Global

Encima Global LLC | 28 W 44

St. Suite 1501 New York, NY 10036 | EncimaGlobal.com

•

M2 money supply surged after the Lehman bankruptcy as the Fed allowed money

creation, but reverted to a normal trend.

M2 (last obs. April 25, 2011)

Jan-

trillions $, SA

Lehman

Bankruptcy

Source: Federal Reserve; Encima Global

•

M2 money supply growth is running at roughly a 6% annual rate, versus 3.7% nominal

GDP growth rate for the first quarter.

M2 13 week % change annualized (last obs. April 25, 2011)

-5%

10%

15%

20%

25%

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

13 week % change

Source: Federal Reserve; Encima Global

•

On a year-over-year basis, M2 money supply growth is running at 5%, versus 3.9%

nominal GDP growth yoy.

Encima Global LLC | 28 W 44

St. Suite 1501 New York, NY 10036 | EncimaGlobal.com

M2 Y/Y (last obs. April 25, 2011)

10%

12%

14%

Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

52 week % change

Source: Federal Reserve; Encima Global

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