Most people would have noticed how ZeroHedge, perhaps the most popular financial blog, has done a 180 degree reversal on the prospects for imminent quantitative easing by the Fed, as well as other important central banks. And if you hadn’t noticed the reversal, then you will after reading this. Most of last year and the first few months of this year, the writers/editors there had been heavily biased towards the Fed announcing a bold new QE program at almost every significant meeting. Now, not so much. So what happened?
Well, basically, their analysis was wrong before, and now it is more in tune with reality. That is a commendable flexibility of analysis rather than something to be critical of. The financial and political constraints on monetary easing throughout the world have become much too clear to ignore any longer. The toolbox of CBs is too limited, the markets are valued too high, the data is not bad enough and the political climate is too bitter. Here is a sampling of recent statements from the ‘Hedge’ that clearly show its reversal in thinking about QE:
“It appears that The Bernank has followed his central banking peers around the world and passed the torch on to someone else (since perhaps he has realized his own lack of omnipotence – or more simply he knows the market has become self-aware of QE and needs to reset expectations to have any hope of a QE impact).”
“It seems to us that Santelli’s perspective that Bernanke knows he is at his limit with regard to efficacy of measures seems much more realistic than Liesman’s re-iteration of the Fed-Watcher’s desires and his own incredible cognitive dissonance – just what happens if the Fed is not omnipotent?”
“We discuss each below but note, just as Goldman believes, that while we think that a modest easing step is a strong possibility at the August or September meeting, we suspect that a large move is more likely to come after the election or in early 2013 (and not before), barring a very rapid further deterioration in the already-cautious near term Fed economic outlook (which we assume implicitly brings the threat of deflation).”
“[Bernanke says] ‘I assume there is a theoretical limit on QE as the Fed can only buy TSYs and Agencies’ and ‘If the Fed owned too much TSYs and Agencies it would hurt the market’. Perhaps the market was expecting that the Fed would admit it can buy ETFs and REITs like the BOJ, or that it can sell vol into the single digits, as its New York Fed trading desk is rumored to be doing, but this is hardly the stamp of endorsement to buy any stock come hell or high water that the algos now expect out of the Fed.”
“The Fed’s Beige Book was just released and for those looking for cliff-dropping and panic-driven views of the plunge in the economy, we are sorry. The Beige Book was, well, beige… Maybe we will just muddle through with our lower earnings and weaker outlooks but never quite bad enough to get Ben off the bench.”
“Finally, people for whom extended claims expired soared by 84K in one week, as those on EUC 2008 benefit is imploding with each week. Overall, a very ugly number, but not horrible enough yet to send the S&P up 100 on imminent NEW QE.”
“Sadly, which the economic contraction accelerates and print after print is horrible, once again they are not nearly bad enough to usher in New QE any second, even as the market has priced in not only QE 4, but 5, 6, and so on.”
“If, indeed, adverse US climatic conditions spread, and it appears they already have as “the monsoon season, which is critical for that country’s agricultural production, is 22% below normal conditions for the year” it means that Asian food prices will broadly be the next commodity sector to go sky high, and with that kill any hope of either an RRR cut, or an outright reduction in the PBOC’s Interest Rate.” [see also China is Missing It’s Own Targets]
“Then again, praying for rain is oddly more appropriate and realistic than hoping that the central bankers will ease more with the US stock market at its 2012 highs.”
That is obviously not an exhaustive list of such statements, and I’m sure we’ll get many more in the near future. As our readers know, TAE has been making very similar points about the prospects and effectiveness of monetary easing for quite some time. We never rule out that a large QE3 effort will be undertaken, but we are always careful to examine the factors which inform such a decision and to recognize the limits on the power of central banks within the current system. With the Fed, ECB and PBoC by and large sitting on the sidelines in terms of full-fledged monetization, it stands to reason that the financial/equity markets will be suffering from even more painful withdrawal before the year is up.