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You'll know what I mean when I say there's the risk of replacing slow money with fast money. Liquidity may increase, but will it be at the expense of volatility over the longer-term? (seemingly contradictory).

Yes, this is exactly what I'm talking about - and why I parenthesised that the primary market must be wildly mispriced at present (in one direction or the other). Conceptually, the "fast money" you refer to is looking for windows where buy-side is able to pay more or sell-side will sell for less - in either case, spreads are in all probability currently too wide and prices (again in all probability) simply at entirely the wrong levels.

On the volatility front - it's a potAYto/ potAHto thing. I'd go as far as to suggest that status quo is actually more fragile than the alternative(s) if you really think this through - more harm will be caused as the present primary market attempts to follow broad price signals from the wider economy precisely because the structure of the market lends itself to bouts of illiquidity it turns, herd-like (or perhaps lead by the nose-ring might be more accurate in this case), to follow the latest season's fashions.

The BOE may prefer the (in my view - far too cozy) relationship it has with the GEMM's, but in the long run this benefits no-one - not the DMO, not the taxpayer, and certainly not the long term investor. They also (again in my view) have a window here to address the problem and effectively broaden the primary market (ie, by invoking the "needs must" clause) - it'll be disappointing if they fail to see its true nature and could well lock this market into long term decline.

In fact from "fast money"'s perspective there's simply no need at all to bid for the BOE's paper - at this stage they're seriously behind the curve (in a marketing sense), in addition to their other (ie operational) woes.

Edited by ParticleMan
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King to End Bond Purchases as Economy Revives, Gilt Dealers Say

Aug. 5 (Bloomberg) -- The Bank of England will end a five- month program of bond purchases as Europe’s second-largest economy shows signs of emerging from a recession, said a majority of the firms that bid at government debt auctions.

Eight of 12 primary dealers surveyed by Bloomberg said the central bank will stop the program after announcing a pause at its monthly meeting tomorrow. Four -- BNP Paribas SA, RBC Capital Markets, Merrill Lynch & Co. and UBS AG -- predict policy makers will increase purchases.

i know it's only a survey, but worthy of a thread bump. is this the PDs' way of yelling 'please stop'?

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http://www.sharecast.com/cgi-bin/sharecast...tory_id=2930824

LONDON (SHARECAST) - The Bank of England could decide to boost its programme of quantitative easing (QE) by another £25bn following the weakest money supply growth data in ten years.

Today’s M4 money supply, which gauges the effectiveness of QE as it excludes potentially major distorting elements, rose 3.1% year-on-year in the second quarter.

That’s less than the 3.8% during the first three months of 2009 and way below the 6.7% in the second quarter of 2008.

On an annualized basis, the rate improved to 3.7% from 3.35% in the first quarter, although that was still less than the 6.4% reported a year ago.

Howard Archer, chief UK economist at IHS Global Insight, suspects this latest data “will not go down that wellâ€.

“It hardly boosts confidence that QE is significantly lifting underlying money supply growth even allowing for the limited rise in the annualized growth rate in the second quarter compared to the first,†he says.

Archer believes there has been little hard evidence that QE and other policy measures have fully feed through to boost money supply growth and support bank lending.

As a result, the central bank could decide to extend its QE programme on Thursday to the maximum £150bn authorised by Chancellor Alistair Darling.

http://www.bankofengland.co.uk/statistics/...Jun/tablea1.pdf

;)

Not much evidence there

Edited by Ash4781
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The MPC today voted to increase the purchases of assets under the QE programme to a total of £175bn.

They said that they expect this extended programme to take another three months to complete, suggesting a buy rate of roughly £4bn per week (for most of the previous QE programme they were buying at £6.5bn per week).

Gilt prices have spiked up, with the yield on the 10-year dropping by 20 basis points, from 3.85% to 3.65% (yields move inversely to price).

The Bank is extending its range of gilts eligible for purchase to any conventional gilt with a minimum residual maturity of greater than three years. This therefore includes long-dated gilts.

Reverse auctions will now take place on Mondays (10-25 years), Tuesdays (>25 years) and Wednesdays (3-10 years).

The Bank is also setting up an arrangement with the DMO where a "significant amount of the gilts acquired by the Bank via the APF to be made available for on-lending to the market by the DMO through the DMO’s

normal repo market activity".

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The MPC today voted to increase the purchases of assets under the QE programme to a total of £175bn.

They said that they expect this extended programme to take another three months to complete, suggesting a buy rate of roughly £4bn per week (for most of the previous QE programme they were buying at £6.5bn per week).

Gilt prices have spiked up, with the yield on the 10-year dropping by 20 basis points, from 3.85% to 3.65% (yields move inversely to price).

The Bank is extending its range of gilts eligible for purchase to any conventional gilt with a minimum residual maturity of greater than three years. This therefore includes long-dated gilts.

Reverse auctions will now take place on Mondays (10-25 years), Tuesdays (>25 years) and Wednesdays (3-10 years).

The Bank is also setting up an arrangement with the DMO where a "significant amount of the gilts acquired by the Bank via the APF to be made available for on-lending to the market by the DMO through the DMO’s

normal repo market activity".

I was wrong, i thought they would stop at 125bn, where will the madness end? Is it really re-electioneering, re-bailing the banks, or just pure and utter currency debasement? Do they really know what they are doing?

I am at a loss? :(

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I was wrong, i thought they would stop at 125bn, where will the madness end? Is it really re-electioneering, re-bailing the banks, or just pure and utter currency debasement? Do they really know what they are doing?

I am at a loss? :(

You can't really blame them. As of this moment the yield on the 10-year gilt isn't much higher than it was when QE started in March.

Since QE started GBP/EUR has risen from 1.12 to 1.17, and GBP/USD is up from 1.41 to 1.68.

So far there doesn't seem to have been a great deal of market resistance to the QE programme.

It also suggests that they don't see a big pick up in CPI next year despite technical factors (e.g. the rise in VAT) creating a possible short-term spike.

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I was wrong, i thought they would stop at 125bn, where will the madness end? Is it really re-electioneering, re-bailing the banks, or just pure and utter currency debasement? Do they really know what they are doing?

I am at a loss? :(

Panda, that's very big of you to say imo. You are a very intelligent poster.

They have been pretending it's deflation, whilst preparing to unleash inflation (leading to a hyper-inflation of the currency further down the road) on everyone. ECB calls it by one name, the UK calls it QE to confuse the majority (although this comment is not aimed at you obviously).

I just hope now that everyone on here can see what they are doing & going to do.

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You can't really blame them. As of this moment the yield on the 10-year gilt isn't much higher than it was when QE started in March.

Since QE started GBP/EUR has risen from 1.12 to 1.17, and GBP/USD is up from 1.41 to 1.68.

So far there doesn't seem to have been a great deal of market resistance to the QE programme.

It also suggests that they don't see a big pick up in CPI next year despite technical factors (e.g. the rise in VAT) creating a possible short-term spike.

So I don't have to worry about a hyperinflationary holocaust then?

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You can't really blame them. As of this moment the yield on the 10-year gilt isn't much higher than it was when QE started in March.

Since QE started GBP/EUR has risen from 1.12 to 1.17, and GBP/USD is up from 1.41 to 1.68.

So far there doesn't seem to have been a great deal of market resistance to the QE programme.

It also suggests that they don't see a big pick up in CPI next year despite technical factors (e.g. the rise in VAT) creating a possible short-term spike.

This is where the Boe's Q/E deflation fighting remit starts to wear a bit thin.

If CPI ain't 3% + in early 2010 then I'm a Dutchman ... and Sterling must subsequently die .... Die you motherfecker.

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So I don't have to worry about a hyperinflationary holocaust then?

I don't see a hyperinflationary outcome from the current QE programme unless the BoE operates a permanent policy of monetising government debt. The banks can't leverage all the new reserves the BoE has injected too far because they're still too capital constrained.

When the extended QE purchases are complete in three months time, the BoE will have expanded the monetary base by a factor of roughly 3.5 in the past two years. That certainly has the potential to create high inflation, but bear in mind that to get hyperinflation the monetary base will have to continually expand, otherwise prices will level out at some equilibrium point.

(I'm not aware of any historical hyperinflation which hasn't had this dynamic, but I'm willing to be educated).

If you look at the graph below which charts the expansion of the Weimar monetary base as a multiple of its level at the start of 1914, you'll see that the BoE hasn't taken us very far along this road. Of course, it may do so, but that requires the BoE to continually monetise government debt just as the Reichsbank did in the Weimar Republic.

weimarbasemoney.gif

Now look at the following charts relating to Japan. The first comes from Richard Koo of Nomura Research and it shows relative changes in the monetary aggregates. Note how the QE expansion had very little effect on the amount of lending to the private sector (the same happened in the 1930's when the Fed expanded the monetary base, although not to the same extent).

Japan1.gif

Next up is a long-term chart from the Bank of Japan which shows CPI against growth of the monetary base. You can see the lagged effect on inflation due to money printing in the 1970's, but the same hasn't happened in the past two decades despite the expansionary efforts of the BoJ.

Japan2.gif

And finally this chart (also from the BoJ) shows the more recent performance of CPI vs the monetary base:

Japan3.gif

I can't be sure what's going to happen over the next few years, but I don't see hyperinflation as a realistic proposition unless the BoE shows signs of remorseless monetisation. I can see QE leading to high inflation at some point if the BoE doesn't respond quickly enough, but that will just send IRs shooting up and it will cripple indebted households (and the government too) if debt levels haven't already come down.

Sure, the system's rigged and they're going to try every trick in the book to bail out both the Government and borrowers. Question is, can they succeed?

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I don't see a hyperinflationary outcome from the current QE programme unless the BoE operates a permanent policy of monetising government debt. The banks can't leverage all the new reserves the BoE has injected too far because they're still too capital constrained.

When the extended QE purchases are complete in three months time, the BoE will have expanded the monetary base by a factor of roughly 3.5 in the past two years. That certainly has the potential to create high inflation, but bear in mind that to get hyperinflation the monetary base will have to continually expand, otherwise prices will level out at some equilibrium point.

(I'm not aware of any historical hyperinflation which hasn't had this dynamic, but I'm willing to be educated).

If you look at the graph below which charts the expansion of the Weimar monetary base as a multiple of its level at the start of 1914, you'll see that the BoE hasn't taken us very far along this road. Of course, it may do so, but that requires the BoE to continually monetise government debt just as the Reichsbank did in the Weimar Republic.

weimarbasemoney.gif

Now look at the following charts relating to Japan. The first comes from Richard Koo of Nomura Research and it shows relative changes in the monetary aggregates. Note how the QE expansion had very little effect on the amount of lending to the private sector (the same happened in the 1930's when the Fed expanded the monetary base, although not to the same extent).

Japan1.gif

Next up is a long-term chart from the Bank of Japan which shows CPI against growth of the monetary base. You can see the lagged effect on inflation due to money printing in the 1970's, but the same hasn't happened in the past two decades despite the expansionary efforts of the BoJ.

Japan2.gif

And finally this chart (also from the BoJ) shows the more recent performance of CPI vs the monetary base:

Japan3.gif

I can't be sure what's going to happen over the next few years, but I don't see hyperinflation as a realistic proposition unless the BoE shows signs of remorseless monetisation. I can see QE leading to high inflation at some point if the BoE doesn't respond quickly enough, but that will just send IRs shooting up and it will cripple indebted households (and the government too) if debt levels haven't already come down.

Sure, the system's rigged and they're going to try every trick in the book to bail out both the Government and borrowers. Question is, can they succeed?

Great post FT and my thoughts as well on hyperinflation; I just can't see it. The one quibble I have is that I don't see higher IRs crippling the government; quite the opposite IF they have spending under control and are net reducing government debt, which is what I expect any future government will be doing, irrespective of whether they are Tory or Labour.

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thanks Freetrader. you and the likes of VerdantaTrader amongst many others are why I log in in the morning

(and put up with daddy bear injin and IRS) lol only joking folks

what about inflation pressure due to a run on currency though - any thoughts??

Edited by getdoon_weebobby
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what about inflation pressure due to a run on currency though - any thoughts??

A currency run is a definite possibility at some point, and the most likely catalyst in my view would be the perception that the UK government has debt commitments and has made guarantees that exceed its ability to honour. If the markets believe that the UK has no choice but to print its way out of the mess to avoid a banking system collapse or spiralling interest costs, then we could see capital flight.

Tim Congdon outlined the dangers of this scenario in an FT piece the other day, and he's essentially restating the argument that ?...! (monkey-with-a-baseball-bat) made on HPC a long time ago.

Britain has reason to fear runaway debt

In the end it comes down to perceptions – first, that the Government will meaningfully address the budget deficit after the election, and second, that the BoE's inflation-fighting posture isn't just empty rhetoric.

All we can do at present IMO is to keep watching the situation and constantly reassess the odds of various outcomes. The problem with taking a polarised view and positioning yourself 100% against very high inflation is that you'll likely lock yourself into relatively illiquid hard assets and miss out on the opportunities that holding cash or near-cash often present in times of financial stress. So to my mind there's a good argument for holding a fair proportion of liquid funds unless we get to the state where cash is likely to suffer significant long-term negative real yield.

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All we can do at present IMO is to keep watching the situation and constantly reassess the odds of various outcomes. The problem with taking a polarised view and positioning yourself 100% against very high inflation is that you'll likely lock yourself into relatively illiquid hard assets and miss out on the opportunities that holding cash or near-cash often present in times of financial stress. So to my mind there's a good argument for holding a fair proportion of liquid funds unless we get to the state where cash is likely to suffer significant long-term negative real yield.

exactly how i see it. im pretty much all cash/gold. the QE decision yesterday put me momentarily on edge but like you say you just have to keep reassessing whats happening.

i still see deflation short/medium term but the threat of inflation long term

what election outcome do you think would upset gilt market most? labour/tory/hung paliament ?

Edited by getdoon_weebobby
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A currency run is a definite possibility at some point, and the most likely catalyst in my view would be the perception that the UK government has debt commitments and has made guarantees that exceed its ability to honour. If the markets believe that the UK has no choice but to print its way out of the mess to avoid a banking system collapse or spiralling interest costs, then we could see capital flight.

Tim Congdon outlined the dangers of this scenario in an FT piece the other day, and he's essentially restating the argument that ?...! (monkey-with-a-baseball-bat) made on HPC a long time ago.

Britain has reason to fear runaway debt

In the end it comes down to perceptions – first, that the Government will meaningfully address the budget deficit after the election, and second, that the BoE's inflation-fighting posture isn't just empty rhetoric.

All we can do at present IMO is to keep watching the situation and constantly reassess the odds of various outcomes. The problem with taking a polarised view and positioning yourself 100% against very high inflation is that you'll likely lock yourself into relatively illiquid hard assets and miss out on the opportunities that holding cash or near-cash often present in times of financial stress. So to my mind there's a good argument for holding a fair proportion of liquid funds unless we get to the state where cash is likely to suffer significant long-term negative real yield.

Top post again FT; you are on a roll today! Strange thing is re perceptions that you would think that what is sauce for the goose......yet Italy get away with fiscal murder year after year, seemingly with no ill effects. Why is that, I wonder?

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Top post again FT; you are on a roll today! Strange thing is re perceptions that you would think that what is sauce for the goose......yet Italy get away with fiscal murder year after year, seemingly with no ill effects. Why is that, I wonder?

thats another point we always look at our own country very negatively (rightly so). but as you say greece and italy get away with borrowing like madmen. japans borrowing is at 200% of gdp? i think we started off at 40% and rapidly rising? not something im comfortable with . but it is ot zimbabwe as many would like you to think

Edited by getdoon_weebobby
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exactly how i see it. im pretty much all cash/gold. the QE decision yesterday put me momentarily on edge but like you say you just have to keep reassessing whats happening.

i still see deflation short/medium term but the threat of inflation long term

what election outcome do you think would upset gilt market most? labour/tory/hung paliament ?

I think it goes without saying that the gilts market is currently pricing in a Tory victory and several years of fiscal austerity. If Labour were re-elected then gilts and sterling would likely take a hit, but that could be dampened if Darling kept his position and was able to quickly show some independence from No 10.

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thanks Freetrader. you and the likes of VerdantaTrader amongst many others are why I log in in the morning

(and put up with daddy bear injin and IRS) lol only joking folks

what about inflation pressure due to a run on currency though - any thoughts??

Two points:

- for a currency decline to affect inflation, firms have to have the ability to raise prices (which they do not appear to have at present in general)

- we are a big enough country to have a big internal economy, so we arent effected as much by the exchange rate as small countries (although oil prices etc of course do matter)

Sterling just fell 20-30% against a basket of currencies in late 2008 to the early part of this year and what happened?

Inflation fell... ;)

(albeit during the period the oil price fell by 2/3....)

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I think it goes without saying that the gilts market is currently pricing in a Tory victory and several years of fiscal austerity. If Labour were re-elected then gilts and sterling would likely take a hit, but that could be dampened if Darling kept his position and was able to quickly show some independence from No 10.

yeah im firmly hoping for a good tory victory (no abuse please!!)

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I think it goes without saying that the gilts market is currently pricing in a Tory victory and several years of fiscal austerity. If Labour were re-elected then gilts and sterling would likely take a hit, but that could be dampened if Darling kept his position and was able to quickly show some independence from No 10.

Darling is unassailable and can do what he likes IMO, even if Brown pulls off an election victory. If Brown replaces him with Blinky he looks weak and spiteful; if he keeps him in place he just looks weak. What's it to be Gordon?

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Strange thing is re perceptions that you would think that what is sauce for the goose......yet Italy get away with fiscal murder year after year, seemingly with no ill effects. Why is that, I wonder?

The screw's gradually being turned on Italy though. They're paying a very big premium over bunds on government debt.

Note also that the Italian government is now trying to raid the piggy bank with its proposal to tax the unrealised gains on the Bank of Italy's gold holdings. The ECB is trying to block this. When you start seeing desperate tactics like this from governments you know what's coming. That's the sort of proposal that would prompt me to move all my assets out of sterling if we ever saw similar measures here.

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The screw's gradually being turned on Italy though. They're paying a very big premium over bunds on government debt.

Note also that the Italian government is now trying to raid the piggy bank with its proposal to tax the unrealised gains on the Bank of Italy's gold holdings. The ECB is trying to block this. When you start seeing desperate tactics like this from governments you know what's coming. That's the sort of proposal that would prompt me to move all my assets out of sterling if we ever saw similar measures here.

weve no gold to tax! lol

good points

oh and bagsos can we stop talking about brown election victory please!!

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The screw's gradually being turned on Italy though. They're paying a very big premium over bunds on government debt.

Note also that the Italian government is now trying to raid the piggy bank with its proposal to tax the unrealised gains on the Bank of Italy's gold holdings. The ECB is trying to block this. When you start seeing desperate tactics like this from governments you know what's coming. That's the sort of proposal that would prompt me to move all my assets out of sterling if we ever saw similar measures here.

That's one of the most bonkers things I have heard this week. And it has been quite a bonkers week.

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