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Weekend reading: More of the same from the US Federal Reserve

Weekend reading

Some good reads from around the Web.

A few of my investing friends are quietly furious at US Federal Reserve chairman Ben Bernanke’s announcement this week that he was going to pump $40 billion a month into the US economy indefinitely.

As well as buying mortgage-backed securities, he vowed to keep interest rates low for even longer than he’d previously suggested.

These are unprecedented moves, to some extent – an argument that it really is ‘different this time’.

And that’s what annoys my chums. Bearish about the global economy and stock prices (they are skilled but healthily stingy investors) they believe Bernanke is pulling the rug from under their feet.

I sympathize, to some extent. As I never tire of boring you with, I avoided buying a home in the UK because prices were clearly very elevated compared to both earnings and rents. Yet prices, especially in London, haven’t fallen half as far as I expected, mainly because the Bank of England cut rates to a 300-year low and held them there. It was unprecedented, and it seemed to me unfair.

So think my friends about Bernanke’s move. “He’s twisting my arm and forcing me to buy stocks,” one told me.

However I think my friends protest too much.

They are bearish about stock markets and the economy, because they believe the US has suffered a once-in-100 year debt bubble burst that cannot be wished away in just a few years. They think US consumers – the engine of global demand – will be on the racks for years.

Most of them also think that Europe is no further out of the woods than a bear who just headed a bit deeper in to ‘do his business’ in it.

I disagree with the depth of their gloom, but that’s not the point.

What is? That they can’t have it both ways.

If it’s a once a century collapse, I’m not surprised the Fed chairman is doing extraordinary things to combat it.

Furthermore, you could argue his buying $40 billion in mortgage securities is an attempt to replicate normality. It’s not unusual that there will be this much activity in the US mortgage debt market over the next few years – but that for the past few years that there hasn’t.

Will markets continue to rally on the news? As ever, who knows.

The FTSE 100 is actually only up 2% on the week, so much of the talk of euphoria is overdone, anyway.

p.s. I have added a Facebook “Fan Box” in the sidebar to the right of here, and overhauled our Facebook page. If you’re a happy reader of Monevator, then please do give it a click.

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From the money and investing blogs

Product of the week: Close Brothers Savings has just launched Premium Gold – a two-year fixed rate savings account paying 3.75%. I doubt it will hang about for long.

Mainstream media money

  • Jack Bogle on the secret of long-term returns – The Economist
  • Why is this popular investment strategy so awful? – Motley Fool
  • Big overview of upcoming pension auto-enrollment – FT
  • (The big) Apple creates a tech fund headache – FT
  • Keep ‘dim sum’ bonds off the menu – FT
  • Commercial property can pay – FT
  • Merryn: Extrapolate away, but nothing lasts forever – FT
  • Bank of England selling this £50 for £150 – Spink (and Telegraph)
  • 10 tips for getting the best mortgage [Images]Telegraph
  • An emerging market dividend fund – Independent

Book of the week: Thinking, Fast and Slow, which is reviewed above, is available for just £5.39 in paperback from Amazon, saving you £3.60.

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{ 12 comments… add one }
  • 1 Willem de Leeuw September 15, 2012, 1:13 pm

    Yes, some of the apparently experienced investors and commentors on FT Alphaville’s Markets Live were squealing about QE3 too. I suspect they were burned shorts but they really should know better by now.

    Years ago Ambrose Evans-Pritchard of The Telegraph wrote about the typical anatomy of crises and defaults and it’s been very typical so far. Essentially even if default or collapse appears inevitable authorities (and, for that matter, individuals) will do everything they can to avoid it, including measures which in good times are unthinkable and go against orthodoxy e.g., central bankers worry a lot less now about moral hazard than they used to and the ECB weren’t thought able to buy eurozone government bonds.

  • 2 Neverland September 15, 2012, 7:01 pm

    I’m reminded of the bit in Jaws when Roy Schneider sees the shark and says “You’re gonna need a bigger boat”

    This is a big boat

    I think it really is a different sort of intervention, lets be clear what the Federal Reserve (the central bank of the world’s reserve currency) promised to do:

    buy $40bn of mortgage bonds, each month, on an UNLIMITED basis, until US unemployment improves SUBSTANTIALLY at least until 2015

    That level of intervention to my mind exceeds 2009, especially taken in tandem with the ECBs promise last week to buy unlimited quantities of short maturing bonds of a country in an EU approved austerity program

    These measures are both unlimited (admittedly the ECB is going to withdraw liquidity elsewhere in the Eurozone, probably Germany)

    It might provide quite a bit of a sugar rush to risk assets

  • 3 SemiPassive September 16, 2012, 3:17 pm

    I have a foot in both camps as currently 50% in equity trackers and 25% in cash waiting for either the Euro crisis to blow up or the US “fiscal cliff” event in January to precipitate a big sell off in the markets.
    This is the dilemma when you attempt market timing. What if the markets keep climbing and equities are even more expensive early next year? Do you plough in then regardless or will war in Iran be the next bad event just around the corner?

  • 4 Lemondy September 16, 2012, 8:23 pm

    Your friends express the view described as “liquidationism”. They think we “need” a deeper slump to liquidate the “inherently bad” debts, or “misallocated” capital, or whatever; and central banks are somehow repressing that “necessary” slump.

    That view was wrong in the 1930s, and it’s wrong now. Bernanke finally took a stand against the liquidationists this week, and we must salute him for that. The neverending recession, and the widespread human suffering caused by elevated unemployment – these are not “natural” phenomenon. They are caused simply by a shortage of money circulating in exchange for goods and services; and when our central bankers can put into circulation unlimited amounts of money at no cost, this is a “self-induced paralysis” of the highest order.

    The ECB and the BOE must now follow!

    Rant over, Lemondy out.

  • 5 Jacob September 16, 2012, 10:47 pm

    Central bankers cannot put unlimited money ‘at no cost.’ Of course there is a cost, money already in existence loses value via inflation. Why should a central bank dictate that mass borrows should benefit at the expense of savers?

  • 6 david stuart September 17, 2012, 2:34 am

    Neverland September 15, 2012 at 7:01 pm

    I’m reminded of the bit in Jaws when Roy Schneider sees the shark and says “You’re gonna need a bigger boat”

    brilliant–great summary

  • 7 Lemondy September 17, 2012, 4:09 pm

    “money already in existence loses value via inflation”

    Yes, that’s the point. Those who hoard money will lose out. Again, you are precisely aping the hard money liquidationists of the 1930s, who feared inflation above all and refused to devalue from the gold standard. And guess what? Countries who devalued in the 1930s recovered first and regained prosperity first. Those who refuse to learn from history are doomed to repeat it.

    “mass borrows should benefit at the expense of savers”

    This is utterly false. Real saving is investment in capital – be that human (training your employees) or physical (factories, machinery). Real saving is rewarded in a growing economy, punished in a depressed one. How well did savers fare in 2008?

    Central banks exist to appropriately balance the reward for holding money against the necessity to keep money in circulation, in spending on new goods and services. If spending rises too fast, and there is too little reward for holding money, we get the “Great Inflation” of the 1970s. Holders of capital – real savers – are also punished then, since the return on capital becomes unpredictable and quickly devalued. High and unstable rates of inflation are the only possible cost of printing money. In the UK we have suffer only inflation at historic lows, 1-3%, ignoring irrelevant tax changes.

    Currently, there is too great a reward for holding money, and we do not have enough spending to maintain the demand for new goods and services, and the jobs which result from that demand. There is no cost to printing money in such an economy.

  • 8 The Investor September 17, 2012, 5:25 pm

    Another way of putting it might be to say that currently the demand for cash is too high, and the demand for stuff (houses, shares, bread, credit) is too low. In such an environment, a central bank can provide more cash like a farmer bringing more crops to market.

    Usually demand for cash is pretty low, so savers have to be enticed to hold it with high interest rates. At such times, demand for credit is pretty high.

    The key to avoid the inflationary spiral that many fear (including me once, though I’ve massively calmed down in the past 18 months as the scale of the deflationary counter-forces has become evident) will be that central banks ease up on supplying cash once ‘we’ don’t want it so much either. (i.e. ‘We’ start to spend, borrow, and so on).

    That probably doesn’t fit exactly with how Lemondy is explaining it, but I find it a helpful model. (Hi by the way Lemondy! 🙂 )

  • 9 Jacob September 18, 2012, 8:03 am

    Thanks for the reply guys, I can see what your saying!

    When the BOE and fed first launched QE1 there was a real case for it, collapsing money supply that needed to be propped up. Also like you have pointed out in punished those with cash- hoping to push them into assets like housing- shares and the like.

    The problem is that since then the central banks have used QE as a quick fix to rally equities and patch over deeper economic problems. Rather than inflate away cash to push up equities, tax rates could be lowered to stimulate demand and keep sterlings value steady again forex. Price signals would be more constant rather than under an inflationary scenario.

    What do you think? Are there problems with this scenario? Genuinely interested to know!

  • 10 john September 18, 2012, 5:08 pm

    So should I borrow to buy a small holding now or hang fire?
    It would seem that too many people of power have a vested interest in keeping interest rates low. If interest rates are going to be kept low by all this QE maybe a 20 year buy to let mortgage is the answer to supplement my retirement?

  • 11 The Investor September 18, 2012, 6:25 pm

    @John — Who knows? I’d love to lock in what appear to be once in several lifetimes low rates — at least in the UK — but I’d want to do so on at least fair value property, which isn’t in my judgement what’s for sale in London. Smallholdings in the provinces may be different! 🙂

  • 12 Lemondy September 18, 2012, 10:18 pm

    “the demand for cash is too high, and the demand for stuff (houses, shares, bread, credit) is too low”

    Zigzactly, sir!

    The “inflationary spiral” thing is just is not a problem. Central Banks can kill off inflation whenever they want, in the flick of an interest-rate-switch. We solved that problem. Unemployment, and long-term unemployment, those are the problems we should fear. 3, 4, 5% inflation – that’s a total wash. The mid-1980s saw fantastic GDP growth with circa 4-5% inflation.

    And hi to you too!

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