Forget QE3, No Amount of Fed Stimulus Will Help Economy: Hedge Fund Manager - TheNewTopical.com - current events, politics, culture, ethics, economics discussion forum

FredFredson · #1 (**permalink**) 15-07-11, 03:53 PM

Forget QE3, No Amount of Fed Stimulus Will Help Economy: Hedge Fund Manager
By Matt Nesto | Breakout – 21 hours ago

Forget QE3, No Amount of Fed Stimulus Will Help Economy: Hedge Fund Manager | Fin - Breakout - US - Yahoo! Finance

What's worse than when you go see your doctor about some ache or pain and being told to ride it out for a week or two to see if it gets better? Nothing...even though it frequently works. When we're hurting, we want action. Do something, don't just sit there.

And the same thing holds true for the economy right now. Nearly four-years into an economic slump and people don't just want solutions, they want action now.

So when economist-turned-hedge-fund-manager Mark Dow of Pharo Management tells me "no amount of monetary easing is going to get things going," it gets my attention. Especially since the mere inference that there even could be a QE3 sparked a big rally in stocks.

"I think the bar (for QE3) is pretty high. The efficacy, from an economic standpoint, of the last round was minimal," Dow says. He then qualifies that "at a certain point if things were to get really, really ugly the Fed would do it again, but I think things would have to get really ugly because they understand their diminishing marginal returns to the psychology of monetary accommodation."

You might have to read that quote twice and take note of the fact that before he was a portfolio manager, Dow worked as an economist at the IMF and US Treasury.

So with credible insight, Dow says "the government and their intervention pulled us back from the precipice but after doing that there's really not a lot they can do. They just can't go in and fix the balance sheet for individual households...they just can't do it."

Quite simply, he says household balance sheets are the crux of the problem. "The story is very simple. Households have too much debt and until they get out from under that debt, demand is not going to come back. And only when demand comes back will companies start to invest again. The reality is, the demand is not there," according to Dow.

And this is where it gets tricky. If you follow his logic that further Fed easing won't help, that puts even greater importance on the current budget/debt/deficit negotiations and what he refers to as "the fantasy of expansionary austerity."

Dow says people "still subscribe to the notion that if you just free-up resources for the private sector, the private sector will figure out how to grow. That's normally the case 95% of the time," EXCEPT when "households are deleveraging."

"The only one spending right now is the government. If they cut too dramatically than aggregate demand will decline precipitously and then everyone gets in trouble again." What that means is that Dow thinks President Obama now "has the upper hand in the game of chicken" because he can say he is willing to make deeper cuts than the Republicans would if they would only agree to small tax hikes on the wealthy.

As politically unlikely as it is until after the 2012 election, he says there is significant room longer term to make structural changes to the under-funded entitlement programs that are at the core of the Federal budget imbalance. "We are in a place we have never been before," he says but doesn't think another recession is likely.

"Anything could happen but my base case is we slowly but surely work our way out from under this thing with an anemic rate of recovery and at some point have to face up to the structural issues which are much more challenging."

Furthermore, according to Dow "the price of money is not holding things back. Corporations have tons of cash on the balance sheet but they don't see top line growth, they don't see demand. I guarantee you, if these companies saw demand on the front door they would be expanding but they're not seeing it."

So again, the doctor has asked us to be patient, to ride it out. And while we wait, he also says the stock market will be a ''trading environment" where you would "buy the S&P toward 1250 and sell it towards 1350... It's really hard to put on a position and say I'm gonna stick with this for 18 months because it's not that kind of world."

I don't know about you, but I miss that world. And am tired of waiting.

FredFredson · #2 (**permalink**) 15-07-11, 04:49 PM

Global Research, July 13, 2011Europe and America: "Financially Burning"

by Bob Chapman

International Forecaster

Markets are what they are today because that is the way government wants them. The stock market has stayed up for quite some time, but the best earnings are fading. The Street is well aware of what has been happening for a number of years. They just do not say anything and go along with the program. They have come to overlook situations worldwide as well as in America, because they believe that, “The President’s Working Group on Financial Markets” won’t let the market fall.

There are not many professionals that believe there will be no extension of the short-term debt limit to $16.7 trillion. They do not believe default is possible. That tells us that extension has already, at least 80%, been discounted in the market. If approved, the event should not cause much of a future rally. Extension of hostilities in the Middle East could put further pressure on the market. There certainly will be much less debt created and that will change fiscal policy. It will tend to further slowdown an economy that cannot stand on its own. In fact, without an $850 billion stimulus it will not most certainly fall into minus GDP growth. If the economy is to stay in growth the Fed will have to create the funds for both the funding of Treasury and Agency debt and perhaps purchase more toxic waste. They own almost $1 trillion now whose value we cannot determine, and simultaneously fund the economy. If all of this does not take place then the economy will fall as will earnings and the market will as well. As you are well aware governmental, personal and corporate debt are overwhelming, which means it is going to take many years to try to pay this debt off. We do not see it ever being paid off. We expect a series of wars or a Third World War, which could cause a debt settlement by many nations, or in absence of a war there could be currency devaluations, revaluations and multilateral partial or full default.

The QE2 program was in effect for a year and unemployment did not improve in spite of stimulus 2, or the injection of $862 billion. Housing isn’t going to improve anytime soon, nor is commercial real estate, both of which could remain moribund for many years. By the end of the year home inventories could be 3 to 3.5 million residences. Government has done almost nothing to create substantial numbers of jobs, as our Congress allows transnational conglomerates to keep foreign profits tax free offshore and under free trade, globalization, offshoring and outsourcing gut our job market. No effort is made to stop it. We have lost 11.7 million jobs in 11 years and 440,000 corporations that have moved offshore. We ask, why doesn’t the President and Congress start here and as well clear the 30 million illegal aliens out of the country? The administration is more interested in selling 30,000 weapons to criminals who operate drug cartels. Unemployment is 22.6% and government has to stop lying about the numbers. Government now wants to change the CPI, so ever more bogus figures can be produced. Do not worry we will always have the true figures.

Under such circumstances how can consumers increase debt and spend more? They simply cannot and that will soon show up in consumption as a percentage of GDP, when it again hits 69% on its way to the long-term average of 64%. Yes, the ratio of household debt to disposable personal income has fallen from 130% to 150%, but with major unemployment will it return to 75% that existed during the last 25 years of the 20th century? Momentum is only headed in one direction and that is down.

We are not the only country with these problems, just look at England and Europe - they are in the same boat. In addition, their financial conditions are continuing to deteriorate. In Asia, Japan is trying to recover from its terrible destruction and China and others are raising interest rates and mandatory bank reserves to combat inflation.

The agreement on short-term debt extension will not include any meaningful budget cuts. They will just pile on more debt until the system collapses. For the paid-off politicians and those behind the curtain pulling all the strings it is just another game to control the populace and enslave them. The public is so entrapped they want debt extension and QE3. They do not care what the cost is they just do not want the game to stop and the music to end. Like in Greece if they can they want both parties out of government, but that is not going to happen unless there is a revolution. We will have a 10-year deficit reduction to bamboozle the people and it will mean little. Some higher taxes for the rich and more bread and circuses for the people. Future congresses are not gong to be bound by legislation they’ll just bypass it or pass offsetting legislation. This is really all a game of political posturing and theatre.

Low interest on mortgage loans still is not luring or qualifying many people to buy homes. Most buyers are speculators – many of which pay cash and rent the dwellings. Those millions of homes in lender inventory are not being sold or depleted. That inventory somehow is never mentioned in the mainline media coverage. It tells a good part of the whole story, America was overbuilt and it will take years to clear the inventory, as builders, build 550,000 new homes a year. That means lower prices and years of illiquidity.

The housing bubble is still being liquidated and as long as that is in progress there will be no American recovery. Manufacturing has in large part been shipped overseas, so what will create jobs and prosperity if housing and manufacturing are moribund? It certainly won’t be services that provide $10.00 per hour wages. The lost jobs paid $30.00 an hour. The tacks the US Congress and transnational conglomerates have taken are sure to destroy America as a first world nation. All they have done is enrich themselves and betrayed fellow Americans. Most banks are certainly insolvent and the government made the conscience decision to effectively nationalize housing. We believe that decision was made ten or more years ago, when we predicted this would be the outcome. If government owns all the houses the only people who can rent them are those that do what government tells them to do, such as where you will work and where you will live. This fits in perfect with fascist political and economic philosophy.

We are making major inroads into informing the US and world public about what is really going on, yet, at least 50% have no clue as to what is really going on. They are deeply in debt and psychologically they have been wiped out by real estate losses. They have no food storage; water filters or means to defend their families. They have no gold or silver to carry them through hard times. For years Wall Street and government anti-gold and silver propaganda has left them at best confused. They are totally unprotected and are very liable to end up in dire straights.

We again have been fortunate in predicting this past week’s moves in gold and silver. Gold rose almost $60.00, up some 6% versus euros and almost 4% in dollars. In many countries the yields are rising on government bonds and as we have said since 1967, that has been a harbinger of higher gold prices. Worldwide yields are at record lows, which means that yields have nowhere to go except up. Worse yet, debt is increasing everywhere if for no other reason than it is cheap to borrow. Add to the debts mix in a lack of confidence because of fiat currencies and you have major problems now and looking down the road. As time passes more investors will want gold and that means as currencies are dumped gold and silver will be the beneficiaries.

Investors are concerned because everything government does turns out poorly. Debt based money has always been a ticket for disaster. There is only the euro, which has about 5% gold backing, down from 15% ten years ago. As a result all currencies have lost an average of more than 20% annually versus silver and gold. That means there are some who just do not want paper if they can avoid it. In just the past ten years 60% of US debt has been added of the 97% loss since 8/15/71. Recently we have seen many sovereign-debt down grades, which should have taken place years ago. Why did they now all come at once? It is because those on Wall Street and at the Fed want investors looking at other nation’s problems, not America’s problems, which are 100 times worse than those of Greece and the other five European sovereigns.

Don’t forget the rating agencies are controlled by Wall Street; just look at their deliberate mis-rating of CDOs and MBSs. That should be proof enough. Just recently Germany refused to accept their ratings. They said they were bogus and politically charged. We realize the debt situation with these six countries is dire, and will worsen and more and more funds will be needed to pay interest to the bankers. Their market interest rates have risen and will continue to do so, at rates that will destroy these nations and perhaps the lending nations and the IMF as well. Delaying the inevitable is a very dangerous policy that will end up being terminal for all. If these nations that are in trouble cannot borrow they cannot recover. Austerity eliminates jobs and reduces government income in the form of taxes. Then the victims need more loans, which eventually cause collapse, as we saw in Argentina in the late 1990s. These countries cannot devalue their debts because they are trapped within the euro and the only way to recover is to default and leave the euro and go back to their original currencies. The elitist powers in Washington want the euro to collapse so that the US dollar remains the world reserve currency. This is currency war aided and abetted by the rating agencies captive subsidiaries of Wall Street.

How can a nation such as Greece with 11 million people pay off $675 billion? Obviously they cannot, so we see the exercise of one of destroying Greece, the other five nations, and eventually the euro. The key to the collapse of the weak euro zone members is that they cannot devalue and that is why they have to exit the euro, or remain in bondage for the next 50 or more years. The US on the other hand can raise the debt limit; euro zone members cannot do that. This is what the US has been doing since 2000 via the creation of money and credit and as a reflection of that in dollar terms is the rise of gold from $260 to $1,577 and silver from $3.50 to $50.00. That tells the whole story. Today it is worse as the US borrows about half the money it spends. Over the past three years that debt tripled at the rate of $1.5 trillion annually. Under present circumstances this scenario has to worsen, because just to maintain more and more money and credit has to be shoved into the system. We have just seen in Stimulus 1 and 2 and QE 1 and 2 that the results of almost $5 trillion in spending has brought two, six to nine months periods of growth that fizzled once the infusions ended. QE 3 is now upon us and the Fed will do the same thing again getting the same poor results. In the US economy the minute the money and credit stops the bottom falls out.

As we have said many times before the only way to end this crisis is to have a meeting of all nations. Revalue, devalue ad multilaterally complete debt default. That is what has been done in the past and that is what has to be done now. We know problems are far greater today than the past and the depression to follow will last for five or more years. That is far better than letting the system collapse, trying to rebuild and suffering 20 or more years of worldwide depression. Due to this indecision the crisis worsens with each passing day.

The world financial system has been built on sovereign debt once that system goes into crisis, which it is in the process of doing, and then the entire system will collapse. Europe is the beginning and we believe the interconnectivity will first take down Europe, then England, then the US, and in varying degrees the rest of the world, unless soon the meeting we mentioned begins.

The US needs to act and act quickly to bring about such a meeting - at least within the next few years. At the present pace the dollar problem could be stretched out for a number of years, but the longer it is stretched out the worst will be the final result. During the immediate timeframe the dollar’s world reserve status could be maintained, if the meeting’s held and the dollar returns to a gold standard.

Europe is figuratively financially burning. In Greece everyday there are demonstrations ranging from 200,000 to two million at any given time. The price of gold in euros hits a new high almost every day. The bankers and leadership in Europe are delusional. They simply refuse to face the reality they have created. The end of QE 2 is a joke. The Fed has not refrained from monetizing Treasury debt, as its balance sheet hit another high on July 6,2011. That was a total of $2.854 trillion, consisting of $1.625 trillion in Treasuries. The total was $600 billion plus $250 billion from reinvested funds. We had estimated more than a year ago participation of $900 billion net. This $850 billion will continue to be invested on a rolling basis. The maturities will dictate participation and how much more funds would have to be added to absorb 80% of Treasury issues and to stimulate the economy. As you can see the Fed has lied again and the crossover to QE 3 has been silent and seamless. There is no limit and as we pointed out long ago, there will be no limit. There cannot be because in the absence of perpetual funding comes collapses.

Bob Chapman is a frequent contributor to Global Research. Global Research Articles by Bob Chapman

FredFredson · #3 (**permalink**) 16-07-11, 04:47 PM

18,000 New Nails in the Coffin

-- Posted Monday, 11 July 2011 | | Source: GoldSeek.com

By Toby Connor, GoldScents
As many of you know I believe that we have begun the topping process of this cyclical bull market. In a healthy market an intermediate decline is a profit-taking event after a significant leg up. It should hold well above the prior intermediate bottom. The decline into the June low was not a profit-taking event. The market had not rallied long enough or far enough to warrant an intermediate correction and certainly not one that would test the March lows. The decline in May and June was the first shot over the bow that something is wrong with the fundamentals driving this market.

Now let me be clear because I think many people got the wrong idea from my last article. I don't recommend anyone sell short the market. All I'm saying is it is too late to have retirement funds positioned long at this time.
Asset appreciation is the FED’s stated third mandate. Bernanke is going to fight the bear tooth and nail. There will be continued interventions into the markets. The rules will be changed as we go. Anything and everything will be tried to keep stock and bond markets levitated. That is not the kind of environment conducive to making consistent gains on the short side. That is the kind of environment that can and will whipsaw traders to death.

Even in a market free of intervention the topping process is always volatile and dangerous. But in a market that is being actively managed it is especially dangerous on the short side. Case in point - the June bottom was way too early for a final intermediate bottom.
As I said in my previous articles we should have seen a counter trend bounce to relieve sentiment extremes followed by another leg down into a more lasting bottom. Unfortunately that was not allowed to happen. The powers that be manufactured an explosive rally on the low volume preholiday week in an attempt to create a massive momentum move ahead of the end of QE2 that would be hard to turn around. Needless to say Bernanke didn't want a repeat of last year when QE1 ended.

The Fed can temporarily turn the markets higher but what they cannot do is reverse the economy. I said when QE1 began that no amount of printing or stimulus would stop the underlying cancer in the economy. All it would do is create a brief reprieve which would be followed by an even deeper and more severe recession once the sugar high wore off.

The simple fact is that we cannot cure a problem of too much borrowing and too much spending with more borrowing and more spending. We tried this in the `30's and it caused a 15 year depression. Japan tried it and it led to two lost decades.

The cure is to bite the bullet and allow the deleveraging process to run its course. Yes it will be painful. We've put this off for so long that it isn't just going to be painful it's going to be catastrophic. But the longer we kick the can down the road the worse the endgame becomes. The only ray of sunshine I can offer is that if we let the markets work they will complete the deleveraging process fairly quickly. Within 2 to 3 years the world can be back on a sustainable path of growth. Continue to fight this and we could be stuck in an on-again off-again recession for another 20 years with the final end game collapse so devastating that it will make the Great Depression look like a picnic.

The last two employment reports are clearly showing that the economy is slipping back into recession. I suspect by August the employment report could, and probably will, turn negative. All the manufactured rallies in the world cannot prop up the stock market if the economy is rolling over into another recession. They can postpone the inevitable only so long and ultimately will just make the bear that much more severe.

The Fed's efforts have only extended the topping process, they haven't stopped it.

FredFredson · #4 (**permalink**) 16-07-11, 04:57 PM

It Ain't Money If I Can't Print It!

By: Peter Schiff, CEO of Euro Pacific Capital
It Ain't Money If I Can't Print It!

-- Posted Friday, 15 July 2011 | | Source: GoldSeek.com

I have been forecasting with near certainty that QE2 would not be the end of the Fed's money-printing program. My suspicions were confirmed in both the Fed minutes on Tuesday and Fed Chairman Ben Bernanke's semi-annual testimony to Congress yesterday. The former laid out the conditions upon which a new round of inflation would be launched, and the latter re-emphasized - in case anyone still doubted - that Mr. Bernanke has no regard for the principles of a sound currency.

Tuesday's release of the Fed minutes contained the first indication that a third round of quantitative easing (QE3) is being considered. The notes described unanimous agreement that QE2 should be completed, along with the following comment: "depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run." Since the unemployment situation is deteriorating, and by all accounts will continue to do so, the Fed is essentially pledging to keep the spigot turned on. The committee also decided to look only at current "overall inflation" in making their judgments, as opposed to "inflation trends." Since new dollars take awhile to circulate around the economy and raise prices, this means the Fed is sure to be too late in tightening once inflation starts to run away, causing more dislocations in the American economy.

If anyone had lingering faith that Mr. Bernanke actually has a plan to end the US government's addiction to cheap money, the Chairman's semi-annual testimony to Congress should have washed it away. In addition to claiming that his money-printing has helped the US economy, Bernanke told Congress that gold is not money, people buying gold are not concerned about inflation, and the external value of the dollar has no influence on its domestic purchasing power. He even took a moment to stump for President Obama's plan to raise the debt ceiling.

By claiming that gold is not money, the Chairman demonstrates his ignorance of much of monetary history. He told Congressman Ron Paul that he had no idea why central banks hold gold, before speculating that it might have something to do with tradition. Yes, traditionally gold is money, which is precisely why central banks hold it. And gold is money because central bankers like Mr. Bernanke cannot be trusted with a paper substitute.

Bernanke further disputes the facts by claiming that the only reason people are buying gold is to hedge against uncertainty, or "tail risks" as he calls them. My advice to the Chairman is to ask the people who are actually buying it. As someone who has been buying gold myself for a decade, I can assure him that my gold buying has nothing to do with "uncertainty." In fact, it's just the opposite. I am buying gold because of what is certain, not what is uncertain. I am certain that Mr. Bernanke's incompetence will destroy the value of the dollar and unleash runaway inflation.

If it were true that people bought gold to protect themselves from market uncertainty, as the Chairman claims, then the metal should have spiked in the midst of the '08 credit crunch. Instead, it fell along with most other assets. People instinctively fled into US dollars and Treasuries because of their long record of stability. What Bernanke doesn't understand is that his irresponsible monetary policy is undermining that faith in US assets, built up over generations. That is what's driving gold: easy money, negative interest rates, and quantitative easing.

Finally, by claiming that the dollar's exchange rate has no effect on domestic prices, Mr. Bernanke demonstrates that he probably lacks the competence to be a bank teller, let alone Chairman of the Federal Reserve. A weaker dollar means Americans have to pay more for imported goods. But it also means domestic producers have to pay more for raw materials and imported components, which raises domestic production costs as well. It also means that more domestically produced goods are exported, reducing the supply and raising the price of what is left for Americans to consume. This is Econ 101.

Given the Chairman's confusion on the basics of economics, perhaps it's no surprise that he's put quantitative easing right back on the table, where, despite prior rhetoric, it has been all along. The Fed has always known that QE3 is coming; it's just looking for an excuse to launch it.

The problem is that fighting a recession with QE is like fighting a fire with gasoline. As the flames of recession reignite, more QE, while dousing it momentarily, will only produce an even larger economic inferno.

At one point, Bernanke said, "The right analogy for not raising the debt ceiling is going out and having a spending spree on your credit card and then refusing to pay the bill." He's got the analogy right, but his conclusions are completely wrong. Yes, Congress has gone on a spending spree and it's time to pay up. But raising the debt ceiling is like taking out a Mastercard to pay the Visa... it just makes the problem worse. If you or I go out one night, get drunk, and run up a huge credit card bill, we know that the way to fix it is to buckle down and pay it back. We might postpone vacation plans or put off buying a new car, we might cancel our cable TV subscription or gym membership. The point is that we would have to reduce current consumption to make up for the overspending in the past.

Obama claims that raising the debt ceiling is about getting a hold of the federal debt. Have you ever heard of anyone getting out of debt by taking on more debt? Has anyone ever reduced their debt without reducing current consumption? How can the Fed Chairman endorse such a preposterous idea?

Bernanke actually went a step further and warned against reducing current federal spending too sharply, claiming that such a move might impede the "recovery." He apparently believes that it is the role of the Congress to go on spending sprees, and his role to pay the mounting bills with freshly printed dollars. The fact that this formula has produced larger and larger economic crises does not seem to bother him. I guess ignorance is bliss.

AnonymousIdiotSavant · #5 (**permalink**) 16-07-11, 07:58 PM

The QE stuff would be fine, if they were also focusing on a jobs recovery, and not just a financial (not the real US economy) recovery.

To paraphrase Bill Clinton: Its about demand, stupid.