How's the 600 billion going to affect the market and inflation?

[haha]

I'm here to eat my humble pie. Last September of 2009 when the DOW was at 9800 I became real uneasy about things and went nearly 100% cash.

While I'm still uneasy about things, I'm concerned about inflation and have concluded that since no one can really predict where all of this is going to end up, the wisest thing for me to do is to hold a very diversified portfolio and just let it ride. So today I went back in with a broad mix at a 65%/35% ratio of stocks to bonds.

I'll consider this a very expensive lesson learned as it has cost me several hundred thousand dollars

Yes, and the lesson may not be over yet.

Ha

 

[LARS]

I am not exactly sure what you are saying. Precisely because the Euro trades freely, its movements against the dollar are meaningful. Up another cent this morning, to $1.44

What I'm saying is that if the Yuan, Yen, etc. were allowed to appreciate the way the Euro, Pound, Aus $, etc have, the impact on the US consumer, and thus the economy, would be very negative (and more than offset any improvement by way of exports).

 

[Gone4Good]

What I'm saying is that if the Yuan, Yen, etc. were allowed to appreciate the way the Euro, Pound, Aus $, etc have, the impact on the US consumer, and thus the economy, would be very negative (and more than offset any improvement by way of exports).

So Yuan appreciation is bad for the U.S? That's news.

The idea that Yuan appreciation would create U.S. inflation assumes the Chinese would have the ability to raise prices. Producer pricing power is not something in evidence in the U.S. economy today.

 

[DallasGuy]

I'm curious. If the economy all of a sudden appeared to take off stronger than anticipated, would the Fed stop or slow the planned $75 billion per month purchases of Treasury debt? I know this is probably not going to happen given the current poor state of the economy, but has anyone read anything that indicates that the purchases could be slowed or stopped depending on how well the economy responds.

 

[LARS]

And as to oil, the other potential shock from a falling dollar (the first being rising import costs if Yuan, etc. freely floats), it (oil) hits six month peak on Fed moves.

Oil hits six-month peaks on falling dollar, Fed move

 

[Gone4Good]

I'm curious. If the economy all of a sudden appeared to take off stronger than anticipated, would the Fed stop or slow the planned $75 billion per month purchases of Treasury debt? I know this is probably not going to happen given the current poor state of the economy, but has anyone read anything that indicates that the purchases could be slowed or stopped depending on how well the economy responds.

According to the FOMC Statement:

The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

 

[keegs]

Given the political realities and the GDP gap forecasts without further stimulus, are there other options?

Is having exports equal to 5 or 8 or even 15 % of GDP acceptable? Do we want jobs or cheaper consumer goods?

Oil is likely a tougher one. Lots of folks in rural areas will be hit hardest by higher prices.

 

[LARS]

I'm curious. If the economy all of a sudden appeared to take off stronger than anticipated, would the Fed stop or slow the planned $75 billion per month purchases of Treasury debt? I know this is probably not going to happen given the current poor state of the economy, but has anyone read anything that indicates that the purchases could be slowed or stopped depending on how well the economy responds.

The FED has placed themselves squarely between a very large rock and a very large hardplace. It will take very significant, mulitple quarters of positive results before the FED will even consider tapping lightly on the monetary brakes for fear they will snub out any "green shoots".

I continue to be skeptical of the FEDs policy responses of dealing with a solvency problem with ever more liquidity. We are IMHO in a classic liquidity trap and so the FED current policies are only adding to distortion of markets/asset prices and delaying the necessary rebalancing the economy needs for future sustainable growth.

But time will eventually tell if Bernanke is correct...

 

[MichaelB]

US$ devaluation is without question positive for the economy, as long as it is orderly.

It improves both the trade and current account balances. Our net public debt is US$ positive, so it declines in value along with the $$, and private (business and individuals) ownership of foreign asset exceeds foreign liabilities, so they gain. It also reduces the cost of US labor, making new investments more attractive vs other countries.

Consumers pay higher prices for both imported goods and domestic goods with export markets. Excess capacity in labor and factories should limit increases and, over time, domestic GDP growth should more than compensate.

The biggest losers are holders of debt, especially public debt. This would currently be China and Japan, followed by resource producing countries, mainly petroleum.

Everyone in the world sees and knows this, and expects it as well. If it is orderly, most will not be particularly happy but will suck it up and learn to live with it.

 

[Gone4Good]

US$ devaluation is without question positive for the economy, as long as it is orderly. .

+1

 

[LARS]

US$ devaluation is without question positive for the economy, as long as it is orderly.

It improves both the trade and current account balances. Our net public debt is US$ positive, so it declines in value along with the $$, and private (business and individuals) ownership of foreign asset exceeds foreign liabilities, so they gain. It also reduces the cost of US labor, making new investments more attractive vs other countries.

Consumers pay higher prices for both imported goods and domestic goods with export markets. Excess capacity in labor and factories should limit increases and, over time, domestic GDP growth should more than compensate.

The biggest losers are holders of debt, especially public debt. This would currently be China and Japan, followed by resource producing countries, mainly petroleum.

Everyone in the world sees and knows this, and expects it as well. If it is orderly, most will not be particularly happy but will suck it up and learn to live with it.

What you say is conventional wisdom.

I am suggesting that the due to globalization, and the exporting of our manufacturing base over the last thirty years, and our continued reliance on imported oil, that conventional wisdom is no longer correct as a short term solution to kick start the US economy. And if the Chinese suddenly allowed the Yuan to float the repercussion of imported inflation would be devastating to the US economy.


Finally, there is no winner when it comes to a "beggar-thy-neighbor" currency war, which the FED is quasi-pursuing.

 

[Gone4Good]

And if the Chinese suddenly allowed the Yuan to float the repercussion of imported inflation would be devastating to the US economy.

Chinese policies are exporting deflation, which is of more proximate concern. Maybe if the Chinese stopped buying Treasuries, the Fed could stop buying them too.

The Chinese currency peg is maintained by them buying USD. When the Fed buys Treasuries it injects USD into the system. Maybe the two sides could call a truce with the Fed backing off QE2 and the Chinese backing off their currency peg. I suspect the world financial system would be more stable without this tug of war.

 

[MichaelB]

What you say is conventional wisdom.

What?

Please, explain what US$ devaluation does to 1) our current account balance, 2) our trade balance, 3) the global value of US obligations held outside the US, 4) The value in US$ of foreign assets and liabilities held in the US.

I am suggesting that the due to globalization, and the exporting of our manufacturing base over the last thirty years, and our continued reliance on imported oil, that conventional wisdom is no longer correct as a short term solution to kick start the US economy. And if the Chinese suddenly allowed the Yuan to float the repercussion of imported inflation would be devastating to the US economy.

Nobody is talking about a short term solution. We have not “exported our manufacturing base”. We have exported our “low added value” manufacturing and the “high added value” is still quite strong. China is in as much of a bind as we are and they can’t let the Yuan float. Oil is a problem. Higher prices hurt but they also help (by adding cost to imported goods). The US needs an energy policy, but that is not a function of either the Fed or currency.

Finally, there is no winner when it comes to a "beggar-thy-neighbor" currency war, which the FED is quasi-pursuing.

I’ve read and heard this in the media, but it doesn’t really make sense to me. What exactly are you saying?

Lars, it's clear you are unhappy with something but I'm having trouble understanding your arguments.

 

[Gone4Good]

Finally, there is no winner when it comes to a "beggar-thy-neighbor" currency war, which the FED is quasi-pursuing.

Let's look at the facts of the situation to see who is engaging in "beggar-thy-neighbor" policies . . .

1) The Fed is faced with disinflation and is engaging in a loose monetary policy which could also lead to a weaker USD. Both are inflationary, so the policy action is aligned with solving the problem of disinflation / deflation.

2) China is faced with inflation and is engaging in direct foreign currency intervention and capital controls to prevent its currency from appreciating. Weakening the Yuan is an inflationary policy choice and is at odds with solving China's inflation problem.

It's pretty clear here which Central Bank is manipulating its currency for reasons other than achieving price stability.

 

[Bestwifeever]

I'm here to eat my humble pie. Last September of 2009 when the DOW was at 9800 I became real uneasy about things and went nearly 100% cash.

While I'm still uneasy about things, I'm concerned about inflation and have concluded that since no one can really predict where all of this is going to end up, the wisest thing for me to do is to hold a very diversified portfolio and just let it ride. So today I went back in with a broad mix at a 65%/35% ratio of stocks to bonds.

I'll consider this a very expensive lesson learned as it has cost me several hundred thousand dollars

It could have gone the other way--who knew? Hang tight in your new allocation.

I remember back then some people said they would pull out of the markets when the Dow hit 10,000 or somesuch recovery point. I wonder if they did.

 

[BigNick]

In answer to the OP: I don't know, but the Dow is up 178 points and it's only lunchtime.

 

[dex]

I'm here to eat my humble pie. Last September of 2009 when the DOW was at 9800 I became real uneasy about things and went nearly 100% cash.

While I'm still uneasy about things, I'm concerned about inflation and have concluded that since no one can really predict where all of this is going to end up, the wisest thing for me to do is to hold a very diversified portfolio and just let it ride. So today I went back in with a broad mix at a 65%/35% ratio of stocks to bonds.

I'll consider this a very expensive lesson learned as it has cost me several hundred thousand dollars

Did you go from cash to stocks/bonds in one day?

 

[73ss454]

As the market was heading down I said I would do 2 things if the market hit 7K. I would look for a PT or full time job and pull out of the market. On the day it did the market went down from just over 7K to 6600 and I missed my 7K exit point. I continued to sit and still haven't touched anything. As for the job, I got a PT job which is just about to end.

All is well that ends well, but I'm sure we aren't out of the wood yet.

So yes Nova, no one knows anything.

 

[Purron]

Check out Bernake's op-ed piece in today's Washington Post:

Ben S. Bernanke - What the Fed did and why: supporting the recovery and sustaining price stability

Lots of interesting comments too.

 

[keegs]

In answer to the OP: I don't know, but the Dow is up 178 points and it's only lunchtime.

Yeah.. ..but does it have legs?

This has been a very good exchange boys... all very good points...wish I had some more cycles to take it in better. .. I'm going to have to go over it again when I've got some down time...keep on going!

 

[dex]

I don't fully understand the Fed's actions but here are some of my thoughts about it: 1. put liquidity into the economy 2. try to keep or lower interest rates - keeps borrowing costs low; government debt interest low and CPI related increases low 3. devalues the US$ - higher cost for imported goods; people will buy less costly American item. Increases exports. Reduces the balance of trade deficit. Here are some of the headwinds for the Fed's actions A. Oil $87 - a major import is increasing in price during the US winter taking money out of consumer's pocket and the economy in general. B. Consumer sentiment low and fragile I think one of the reasons for the current market advance is not so much the Fed's actions but a reaction to the election. People see it as the Fed Gov't will be gridlocked so not much will change in the next 2+ years. This provides a certainty the business community has bee looking for. The future; when inflation starts up and the Fed needs to take the money out of the market it has been putting in is the real critical point.

 

[MichaelB]

Back to the original post. It's probably especially important to stay well diversified and not bet on a specific outcome. Some folks may see this as a good time to rebalance. My allocation has not changed - equities and munis with a fair amount of cash.

Both the world economy and population continue to grow and the developing world continues to industrialize, and that looks to continue for a while.

 

[LARS]

Yves at Naked Capitalism has a pretty good summary of the discussion of QE II. Worth a read for those that are trying to understand likely impact.

Bernanke Versus Pimco’s Mohamed El-Erian on QE2 « naked capitalism

 

[haha]

The biggest losers are holders of debt, especially public debt. This would currently be China and Japan, followed by resource producing countries, mainly petroleum.

Michael, this seems to be a forecast, presented as a fact. Obviously debt-holders will lose, but let us not forget that the price of oil freely floats, and it now floating pertty high, even in the midst of a large slowdown in the Western economies.

It is also far from a foregone conclusion that debt-holders will "suck it up" and continue as before.

Ha

 

[Gone4Good]

Michael, this seems to be a forecast, presented as a fact.

I read it as saying that foreign holders of US Dollar denominated debt would be hurt by a devaluation.