Monday, May 24, 2010
Credit destruction outpacing QE
Zero Hedge: Bob Janjuah
The calls for a serious correction are gathering, of the people I follow only Doug Kass and Nadeem Walayat seem bullish although both have reasonable records during the crisis. Richard Russell of Dow Theory has advised his clients to get out of stocks in no uncertain terms, as as Pretcher, with similar type messages from Klarman, Roubini (as usual) and Albert Edwards. Let's see what happens now. Every time since March 2009 we have rallied to new highs.
Also Janjuah makes the interesting point that eventually the fed will be forced into QE 2 (which I have alwways thought a near certainty.
It will be then that we might have to worry about inflation.
Posted by bellwether @ 02:05 PM (1032 views) Add Comment
12 Comments
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1. mark wadsworth said...
Is the Fed going on a cruise on the QE2?
2. jack c said...
I think he meant quantative theiving part 2
3. Wageslavex14 said...
I thought this was already pretty much the prevailing view, i.e. the prevailing market forces are deflationary, but that it is the massive government stimulus packages, in particular QE, that are preventing further collapse in asset prices - govt. versus the markets.
Faber has been saying for a while that you might as well buy US stocks, as if the market dips below current prices by any substantial margin, then the US will simply start printing money again. I didn't think this was a controversial viewpoint. The recent increase in the strength of the dollar will make it especially easy for them to do this. The flip-side of this is, hopefully, that the recent softening of the pound and the terrible inflation data will make it v. difficult for the BoE to restart QE, but you can never be sure what politicians like Big Merv will do (he is a politician and not an economist, in my view).
4. bellwether said...
Cheers Mark, the pun was sort of deliberate
5. bellwether said...
@3 not sure what the prevailing view is, amongst the most mainstream commentators it is that the world has been saved and we are already partaking in a self sustaining recovery, for many on this site we are already in the grip of an inflationary spiral and the end of fiat currency/civilistation is nigh.
I often wonder if everyone tries to devalue at once (which is sort of what is happening) how can we ever get inflation. Anyone any thoughts on this?
6. flashman said...
I honestly have no idea if the equity markets will rise or fall. I suspect that no one really does. My intuition says that they HAVE to fall but I have learned to always ignore my intuition. I am also a bit dubious about the expression "destruction of credit" I know what it means but I have never seen it properly defined or quantified. I found the quote (below) from a 2008 Telegraph article. I am not making any particular point but it is quite amusing in light of what actually transpired. It shows you how a perfectly reasonable prediction, can not pan out in the slightest.
"The price of white truffles has fallen 84pc. Fines wines have dropped 65pc. Lobsters are off 52pc. Deflation has reached the City. It has engulfed housing and now threatens to spread through the broader economy, lodging like a virus in the British and global monetary systems. Mervyn King, the Governor of the Bank of England, says it is now "very likely" that the UK retail price index will turn negative next year. This is a drastic reversal of the oil and food spike that played such havoc with monetary policy over the summer. The curse of deflation is that it increases the burden of debts. Incomes fall: debts stay the same. This way lies suffocation"
7. bellwether said...
Flash I guess noone knows whether markets rise and fall. I think credit destruction is simply anticpated payments on loans not being made, and also I suppose the contraction of credit creation, as has happened in the US with consumer credit throughout the year + recovery of stock prices.
Any thoughts on my question at 5
8. paranoia blue said...
Well the PB will state categorically, that over the next few years the Bourses will drop massively, in intrinsic value, and may continue to bleed to death for years. ATB
Latest "print what you see," was “exorcise minister!” "Honest guv" :) ATB
9. flashman said...
Bellwether: Re your question: If everyone tries to devalue at once then all you get is the status quo (maybe down down deeper and down was about credit destruction). Occasionally someone will get their nose ahead but then another mob that is trying to be the biggest devaluer will catch up. I don't think that this competitive devaluation scenario will or can cause inflation or deflation. I think that inflation will only occur if they underestimate the potential for worldwide economic growth and apply too much QE or stimulus at the wrong point of the curve. I can only see deflation happening if they get overly spooked by inflation and therefore fail to apply stimulus before downward momentum occurs. The decision to nip inflation or deflation in the bud involves crystal ball gazing because it can only be done by gambling on an unknowable future direction. It therefore follows that we might be better off if the central banks stopped interfering. I still don’t swallow the story that QE stopped the world from going back 200 years. A few major banks would have clung on and the dust would have settled by now ( in my opinion).
10. paranoia blue said...
My noted position - for over the last few years, re: UK economy, is stagflation!
It is unfortunate, but very obvious, and it will be awful.
PS Still time to make a few sensible counteractions! ATB
PPS Action is necessary, very soon. Hint: ‘goggle’ “1930 depression” or similar. NB All the bullish comments, until the abyss sucked in poor souls for almost 20 years.
Take care! This time, it will be much worse! - most folks can’t even spell “austerity,” even after laying down both bulging bags of “cut-cost-clothing-crap”
11. flashman said...
paranoia blue @10: You appear to be suggesting that there will be stagflation and a worse version of the great depression at the same time? I can't see how those conditions could coexist
12. Fra Paolo said...
Mass competitive devaluation is liable to have the same effect as high tariffs, with a return to ideas of economic autarky.
The real issue remains all that duff paper governments bought with quantitative easing. Either that goes back to the private sector, as part of a managed decline in asset values, or it needs to be inflated, in a managed way again, into nothing. The problem remains how to manage this change in such a way that nobody gets hurt too much.
Sooner or later someone is going to figure out we need exchange controls and managed currencies to get out of this mess with the least pain. The Chinese and Russians are ahead of the West on that one. Given Wynne Godley's recent passing, maybe we need to reinvent his ideas for the 21st century.