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The Stock Is Dead, Long-Live The Flow: Perpetual QE Has Arrived


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#1 TakeAStepBack

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Posted 14 June 2012 - 02:58 PM

http://www.zerohedge...qe-has-arrived

Two months ago, as we were carefully reading the latest Goldman explanation of how the firm had completely missed something Zero Hedge predicted back in January, namely the record warm winter's impact on skewing seasonal adjustments for payroll data (which has since validated our day 1 of 2012 predication that 2012 will be a carbon-copy replica of 2011, and which has made the comedy value of another Goldman masterpiece, that of Jim O'Neill's idiotic "2012: Not a Repeat of 2010 or 2011" soar through the roof) we stumbled upon something we knew was about to get much, much more airplay: Goldman's quiet and out of place admission that what matters for a country's central bank is the flow of its purchases, not the stock (another massive economic misconception we have been trying to debunk since the beginning). Recall these words: "...we have found some evidence that at the very long end of the yield curve, where Operation Twist is concentrated, it may be not just the stock of securities held by the Fed but also the ongoing flow of purchases that matters for yields..." This is how we summarized this observation two months ago (pardon the all caps): "UNLESS THE FED IS ACTIVELY ENGAGING IN MONETIZATION AT EVERY GIVEN MOMENT, THE IMPACT FROM EASING DIMINISHES PROGRESSIVELY, ULTIMATELY APPROACHING ZERO AND SUBSEQUENTLY BECOMING NEGATIVE!"
All caps aside, what this means is simple: if it is indeed flow that matters (and it is), then Fed intervention can never stop, period. If the stock of a central banks' assets is irrelevant, the Fed can have $1 on the left side of the balance sheet or $1 quadrillion: it does not matter - if the market expects the Fed to stop buying assets tomorrow, then the crash is as good as here. That has precisely been the biggest flaw with the Fed-accepted stock model, per which Bernanke can buy up a few trillion in MBS and the stock market will be flat as a frozen lake. Alas, this is increasingly becoming obvious is not the case. Hence flow.
Which is why today, two months later, and a week before Bernanke will almost certainly announce the NEW QE, we were not surprised at all to see that Goldman has actually made the case for flow in the form a of a white paper titled "Flow Effects at the Ultra-Long end of the Curve."
For monetary theory purists this is equivalent to Martin Luther walking up to the front door of the Marriner Eccles building and nailing his 95 theses: we have now entered the era of the monetary reformation, which incidentally as more and more classical economists follow suit, will throw all of Keynesian and neo-classical economics into a tailspin where virtually every core assumption will have to be reevaluated.
Congratulations economists: in their pursuit of another record year of bonuses at any cost, Goldman just sacrificed your precious voodoo. Because where Goldman goes, everyone else promptly follows.
From Goldman Sachs:
Flow Effects at the Ultra-Long End of the Curve (Shan/Stehn)
  • With the scheduled end of the Fed's twist approaching, market participants are debating the extent to which the end of the Fed's purchases will affect the yield curve. The "stock view" – which Fed officials and we have generally subscribed to – suggests that markets tend to price in the Fed's purchases at announcement and then show little responsiveness to the subsequent flow (and end) of purchases. The "flow view," however, would suggest that yields increase when the twist concludes.
  • Using a simple model of the Treasury yield curve, we revisit this issue in today's daily. Our estimates suggest that the flow effect is negligible for short and intermediate maturities (of less than 20 years) but statistically significant at the ultra-long end of the curve (with maturities of 20+ years). Although the uncertainty is significant, these estimates suggest that – all else equal – the end of the twist will have negligible effects on the short and intermediate part of the curve, but might push up yields at the ultra-long end of the curve by around 5 basis points.
With the scheduled end of the Fed's twist approaching, market participants are debating the extent to which the end of the Fed's purchases will affect the yield curve. Economic theory suggests that we need to distinguish between the effects of the announced stock of Fed purchases and the flow of actual purchases. In forward-looking and liquid markets, bond yields should primarily depend on the announced stock of purchases. Therefore, markets should price in the size of the purchase program at announcement and show little response to the subsequent flow of purchases. This means that when the flow of Fed purchases is discontinued—but the size and duration of the Fed's balance sheet is unchanged—there should be little effect on yields. Empirical evidence has generally reinforced this prediction. Our own work, for example, has confirmed that stock effects dominate flow effects. (See Sven Jari Stehn, "Stocks vs. Flows Revisited: End of QE2 Unlikely To Have Significant Effect on Bond Yields," US Daily, April 13, 2011.)
Although the "stock view" appears to be a good description of the effects of Fed purchases at the short and intermediate maturities, flows might be more important at the ultra-long end of the Treasury curve. Intuitively, this would fit with the observation of investment habitat – how purchases of 20-30 year bonds are mostly conducted by more heterogeneous investors that are less sensitive to changes in demand and supply in the Treasury market.



More at the link.

#2 Julius

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Posted 14 June 2012 - 03:13 PM

short summary please, my greek is a little rusty.

#3 TakeAStepBack

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Posted 14 June 2012 - 03:25 PM

The short summary: We're moving passed the point where the fed can stop purchasing assets and pumping money into the markets. The stock is not th eonly indicator of yeilds, it has come to the point of manipulation that the flow of fed purchases will inevitably effect yields. Negatively. The fed is now in a position that it must continue to be an "actor" in buying assets and pumping cash into markets. Whetehr it be QE3 or QE103. if the market survives that long.

#4 PeaceFrog

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Posted 16 June 2012 - 04:48 AM

well that cleared it right up :loopeye:

"If you can't dazzle them with brilliance, baffle them with bullshit." -- WC Fields

let me try to translate that for TASB:

"Ify ou cna't dazzle them with brilliants, baffle them with bullshit"

#5 TakeAStepBack

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Posted 16 June 2012 - 12:23 PM

its all in the article. If you can comprehend it. Which for you is highly unlikely. Highly.

#6 PeaceFrog

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Posted 17 June 2012 - 04:56 PM

I'm glad you posted this. It's a perfectly typical example of your contributions here.

You cut and paste some bullshit that makes no sense, then when someone asks you to explain it in layman's terms, you're unable to.

Then, you act like it's the reader's problem for not understanding.

My self-esteem isn't that low. When I don't understand something, I admit it quite openly.

You'd rather do your "Emperor's New Clothes" technique and hope that nobody is willing to say anything.

Obviously I'm not the only one here that sees you're able to string a long line of multisyllabic words together, but the end product doesn't really make any sense.

#7 TakeAStepBack

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Posted 18 June 2012 - 12:43 PM

Translation: I do not understand, therefore it makes no sense. :lmao:

#8 Julius

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Posted 18 June 2012 - 01:26 PM

Play nice boys!

#9 Tim the Beek

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Posted 18 June 2012 - 01:37 PM

Play nice boys!


Oh hey, you must be new here. Welcome!

:funny1:

#10 PeaceFrog

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Posted 18 June 2012 - 09:03 PM

wow that's convenient

so anyone can just spout off some technical sounding bullshit that really has no meaning, and if it isn't understood, then it's the listeners problem.

I could see if that happened once or twice, but this is a daily occurrence with you.

How about telling us what the article means to you in your own words like you had to do back in 5th grade.

Because in the first couple or few sentences there are 2 other articles referenced that I haven't "carefully read" and I'm not going to carefully read.

Effective communication entails knowing your audience and speaking to them in a way that they can understand.

#11 TakeAStepBack

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Posted 19 June 2012 - 11:14 AM

You're not in my audience pool, derp. If you dont understand, that is your problem. Especially if you're not going to take the time to read the info.

#12 TakeAStepBack

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Posted 19 June 2012 - 11:23 AM

http://www.zerohedge...on-flow-program



As Part Of Its NEW QE Q&A, Goldman Warns Of Possibility For $50-$75 Billion "Flow" Program



Not like it should come as any surprise that the bank that first among peers "discovered" that flow, not stock matters, implying the Fed may literally never be able to stop monetizing, is expecting the FOMC to "ease monetary policy on June 20", but nonetheless here is the full just released Q&A from Goldman's Jan Hatzius, who just happens to be a Pound and Pence drinking buddy of former Goldmanite Bill Dudley, who just happens to run the New York Fed. Connects the dots. Implicit is that a big dollop of Large Scale Asset Purchases is imminent. That said, if the Fed does disappoint on June 20, and merely extends the maturity of bonds that it will sell as part of a Twist extension from 3 to 4 years, as the bond market appears to be implying (as first warned by Zero Hedge), then all bets are truly off. On the other hand, note where Goldman says: "However, it is also possible that the program would be specified as a "flow" of purchases of perhaps $50bn-$75bn per month." If that happens, gold is going to $2000, $3000, hell, $10,000 very soon, as it means the Fed will not stop printing ever again. Period.

From Goldman:

FOMC Preview: QE or Not QE (Hatzius)

We expect the Federal Open Market Committee (FOMC) to ease monetary policy on June 20, in response to the weaker economic data and increased downside risks from the intensifying crisis in Europe.

The form of the easing is a closer call. Our baseline is a new asset purchase program that involves an expansion of the balance sheet, but an extension of Operation Twist and/or a further lengthening of the short-term interest rate guidance in the FOMC statement beyond the current “late 2014” formulation are also possible.

Q: Will the FOMC ease monetary policy?

A: Probably. Although renewed Fed easing by mid-2012 has been our forecast all year, we felt more uncertain about this view a few months ago given the temporarily better data and the apparent shift of the Fed's reaction function in a more hawkish direction. But at this point, we would be quite surprised if we saw no easing this week.

Q: Why?

A: In her June 6 speech, Vice Chair Yellen listed three alternative criteria for further easing:

…[i]f the Committee were to judge that the recovery is unlikely to proceed at a satisfactory pace (for example, that the forecast entails little or no improvement in the labor market over the next few years), or that the downside risks to the outlook had become sufficiently great, or that inflation appeared to be in danger of declining notably below its 2 percent objective... (emphasis ours).

We believe criterion 1 has been met. As shown in Exhibit 1, we expect the committee to lower its forecast for real GDP growth and raise its forecast for the unemployment rate significantly in the Summary of Economic Projections to be collected at the meeting. If we are right in thinking that the "central tendency" forecast still shows the unemployment rate at 6.9%-7.6% at the end of 2014, many committee members may view this pace of improvement as insufficient, and be inclined to ease accordingly.


The rest at the link.



I think the fed knows that it can not end its asset purchases without dire effects. Therefore, it will act to keep the system running.


#13 PeaceFrog

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Posted 20 June 2012 - 01:50 AM

here's your audience:

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#14 TakeAStepBack

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Posted 20 June 2012 - 10:35 AM

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#15 PeaceFrog

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Posted 20 June 2012 - 08:26 PM

I'd like you to tell me that in person.