Alex Schiff on QE3

Operation Screw: The Fed goes all-in on QE

The geniuses at the Federal Reserve have concocted a bold new plan to revive the U.S. economy -- print a bunch of money, loan it to Americans at super low interest rates so they can speculate on rising real estate prices, extract the appreciated equity and spend it on consumer goods. In other words, build an economy of real estate, by real estate, and for real estate. The only problem is we've been there and done that. The last time it almost destroyed the U.S.economy. I guess almost isn't quite good enough for the Fed, so now it's determined to finish the job.

Capital Account

"QE to Infinity and Beyond," says Mike Shedlock!

QE3

Hong Kong Adds Curbs to Cool Home Prices as Fed Starts QE3

Hong Kong has widened efforts to cool home prices that have gained almost 90 percent since early 2009, as the U.S. Federal Reserve’s third round of quantitative easing risks fueling asset bubbles in the city.

Businessweek,

16 September, 2012

The Hong Kong Monetary Authority will limit the maximum term on all new mortgages to 30 years, Norman Chan, the de-facto central bank’s chief executive, told reporters on Sept. 14. Mortgage payments for investment properties can’t be more than 40 percent of buyers’ monthly incomes, from the current 50 percent, he said.

The curbs came after the Hang Seng Property Index completed a six-day, 11 percent rally on optimism the Fed’s QE3 program would fuel inflows to the city, which tracks U.S. monetary policy because of a currency peg to the dollar. Record low mortgage rates, an influx of buyers from other parts of China and a lack of new supply have underpinned the housing market, prompting Hong Kong Chief Executive Leung Chun-ying to announce plans in the past month to accelerate land sales and give preference to local buyers in some projects.

“Recent renewed signs of heating in the property market have been acknowledged by the HKMA,” Kelvin Lau, an economist of Standard Chartered Plc in Hong Kong, said. “It remains to be seen whether this will be enough to defuse medium-term upside price pressures, especially in view of the perceived supply shortage, still-ample liquidity, and strong domestic and cross- border fundamentals.”

Shares Rise

The nine-member Hang Seng Property Index extended last week’s gains, rising 0.2 percent as of 9:49 a.m. to the highest since August 2011. That takes its advance this year to 28 percent, more than double the 12 percent advance in the benchmark Hang Seng Index over the period.

Cheung Kong (Holdings) Ltd., the city’s second-biggest developer by market value, rose 1.1 percent to HK$115.20, the highest in 13 months. Sun Hung Kai Properties Ltd., the biggest, advanced 0.8 percent to HK$112.70.

The introduction of QE3 “will create the potential for renewed influx of capital into Hong Kong,” Chan said. “We have to stand ready for it.”

The central bank also raised the minimum down payment on investment properties for buyers who derive their income from outside Hong Kong. Investors using their assets -- not income -- to borrow can now only take out loans for as much as 30 percent of a property’s value, Chan said. The restrictions are effective immediately.

“The new measure will deter speculative and investment demand and the yield for property investors will be lower,” said Raymond Yeung, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd.

Weekend Sales

The city’s Financial Secretary John Tsang also said on Sept. 14 that QE3 may push up Hong Kong home prices and the government won’t hesitate to introduce more property curbs if needed.

The 15 largest estates in the city recorded 44 second-hand sale transactions over the weekend, compared with 30 the prior weekend, Midland Holdings Ltd. (1200), Hong Kong’s biggest publicly traded real estate company, said in an e-mailed statement yesterday. The low-interest environment, extended by the introduction of QE3, is encouraging renters to buy, executive director Vincent Chan said in the statement.

Restricting Homebuyers

Buyers from other parts of China made up 36.8 percent of all new sales by value in the first quarter, down from 37.9 percent in the previous three months, according to Midland. The proportion reached 53.9 percent in the third quarter last year, the realtor said.

Leung said on Sept. 6 he will restrict homebuyers of two building sites the government plans to sell to local residents, a week after announcing a 10-point package to rein in prices including making more land available to developers and speeding up the building of public housing.

“Without policy intervention, QE3 will further heat up the Hong Kong property market,” David Ng, a Hong Kong-based analyst at Macquarie Securities Ltd., wrote in a note after the HKMA’s announcement. “Excessive price growth not only hurts affordability, but will further weaken the political clout of the government.”

The city’s chief executive, who was elected in March by a committee of mostly businessmen, professionals and lawmakers, has pledged during his campaign to address a widening wealth gap and concerns that housing is becoming unaffordable for the general public.

1997 Peak

The government has had to tweak demand and supply through additional property transaction taxes, higher mortgage down payments and by releasing more land to developers as Hong Kong’s currency peg to the U.S. dollar pushed borrowing costs to a record low and prevents the de-facto central bank from using monetary policy.

The number of home transactions rose 42 percent in August from a month earlier, the biggest increase since March.

The central bank raised the minimum down payment for some mortgages in June last year, the third time since August 2010, with borrowers now having to put down 40 percent for homes costing more than HK$7 million ($902,000). In 2010, the government introduced an additional stamp duty on residential units sold within two years of purchase.

Hong Kong home prices have risen 14 percent this year, according to a Centaline Property Agency Ltd. index. They fell 4 percent in the last three months of 2011, the biggest quarterly drop since the global credit crisis, after the government’s mortgage restrictions and as China’s economy began to slow.

Hong Kong’s home prices have now surpassed their peak in October 1997, which marked the start of a 70 percent decline to August 2003, according to the Centaline index. They have soared 240 percent since that trough nine years ago.

Peter Schiff on QE3

PETER SCHIFF: The Fed Just Unleashed 'Operation Screw'

Peter Schiff, Euro Pacific Capital

Business Insider,

14 September, 2012

With yesterday's Fed decision and press conference, Chairman Ben Bernanke finally and decisively laid his cards on the table. And confirming what I have been saying for many years, all he was holding was more of the same snake oil and bluster. Going further than he has ever gone before, he made it clear that he will be permanently binding the American economy to a losing strategy. As a result, September 13, 2012 may one day be regarded as the day America finally threw in the economic towel.

Here is the outline of the Fed's plan: buy hundreds of billions of home mortgages annually in order to push down mortgage rates and push up home prices, thereby encouraging people to build and buy homes and spend the extracted equity on consumer goods. Furthermore, the Fed hopes that ultra-cheap money will push up stock prices so that Wall Street and stock investors feel wealthier and begin to spend more freely. He won't admit this directly, but rather than building an economy on increased productivity, production, and wealth accumulation, he is trying to build one on confidence, increased leverage, and rising asset prices. In other words, the Fed prefers the illusion of growth to the restructuring needed to allow for real growth.

The problem that went unnoticed by the reporters at the Fed's press conference (and those who have written about it subsequently) is that we already tried this strategy and it ended in disaster. Loose monetary policy created the housing and stock bubbles of the last decade, the bursting of which almost blew up the economy. Apparently for Bernanke and his cohorts, almost isn't good enough. They are coming back to finish the job. But this time, they are packing weaponry of a much higher caliber. Not only are they pushing mortgage rates down to historical lows but now they are buying all the loans!

Last year, the Fed launched the so-called "Operation Twist," which was designed to lower long-term interest rates and flatten the yield curve. Without creating any real benefits for the economy, the move exposed US taxpayers and holders of dollar-based assets to the dangers of shortening the maturity on $16 trillion of outstanding government debt. Such a repositioning exposes the Treasury to much faster and more painful consequences if interest rates rise. Still, the set of policies announced yesterday will do so much more damage than "Operation Twist," they should be dubbed "Operation Screw." Because make no mistake, anyone holding US dollars, Treasury bonds, or living on a fixed income will have their purchasing power stolen by these actions.

Prior injections of quantitative easing have done little to revive our economy or set us on a path for real recovery. We are now in more debt, have more people out of work, and have deeper fiscal problems than we had before the Fed began down this path. All the supporters can say is things would have been worse absent the stimulus. While counterfactual arguments are hard to prove, I do not doubt that things would have been worse in the short-term if we had simply allowed the imbalances of the old economy to work themselves out. But in exchange for that pain, I believe that we would be on the road to a real recovery. Instead, we have artificially sustained a borrow-and-spend model that puts us farther away from solid ground.

Because the initials of quantitative easing - QE - have brought to mind the famous Queen Elizabeth cruise ships, many have likened these Fed moves as giant vessels that are loaded up and sent out to sea. But based on their newly announced plans, the analogy no longer applies. As the new commitments are open-ended, quantitative easing will now be delivered via a non-stop conveyor belt that dumps cheap money on the economy. The only variable is how fast the belt moves.

Fortunately, the crude limitations of the Fed's only policy tool have become more apparent to the markets. If you must stick with the nautical metaphors, QE3 has sunk before it has even left port. The move was explicitly designed to push down long-term interest rates, but interest rates spiked significantly in the immediate aftermath of the announcement. Traders realize that an open-ended commitment to buying bonds means that inflation and dollar weakness will likely destroy any nominal gains in the bonds themselves. To underscore this point, the Fed announcement also caused a sharp selloff in Treasuries and the dollar and a strong rally in commodities, especially precious metals.

Given that 30-year fixed mortgages are already at historic lows, there can be little confidence that the new plan will succeed in pushing them much lower, especially given the upward spike that occurred in the immediate aftermath of the announcement. Instead, Bernanke is likely trying to provide the confidence home owners need to exchange fixed-rate mortgages for lower adjustable rate loans - which would free up more cash for current consumer spending. He is looking for homeowners to do their own twist. If he succeeds, more homeowners will be vulnerable to increasing rates, which will further limit the Fed's future ability to increase rates to fight rising prices.

The goal of the plan is to create consumer purchasing power by raising home and stock prices. No one seems to be considering the likelihood that unending QE will fail to lift bond, stock, or home prices, but will instead bleed straight through to higher prices for food, energy, and other consumer staples. If that occurs, consumers will have less purchasing power as a result of Bernanke's efforts, not more.

The Fed decision comes at the same time as the situation in Europe is finally moving out of urgent crisis mode. While I do not think the ECB's decision to underwrite more sovereign debt from troubled EU members will work out well in the long term, at least those moves have come with some German strings attached [For more on this, see John Browne's article from earlier this week]. As a result, I feel that the attention of currency traders may now shift to the poor fundamentals of the US dollar, rather than the potential for a breakup of the euro.

In the meantime, the implications for American investors should be clear. The Fed will try to conjure a recovery on the backs of currency debasement. It will not stop or alter from this course. If the economy fails to respond to the drugs, Bernanke will simply up the dosage. In fact, he is so convinced we will remain dependent on quantitative easing that he explicitly said he won't turn off the spigots even if things noticeably improve. In other words, the dollar is screwed.

Marc Faber on QE3

Marc Faber: Fed QE3 Policy Will 'Destroy the World'

the Market Oracle,

14 September, 2012

Marc Faber, publisher of the Gloom Boom & Doom Report, told Bloomberg Television's Betty Liu on "In the Loop" today that "the fallacy of monetary policy in the U.S. is to believe this money will go to the man on the street. It won't. It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols.

Faber said that he is "very happy. Very good for the Fed. Congratulations, Mr. Bernanke. I'm happy. My asset values go up but as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world."

Faber on more Federal Reserve stimulus:

"It is difficult to tell what will happen. I happen to believe that eventually we will have a systemic crisis and everything will collapse. But the question is really between here and then. Will everything collapse with Dow Jones 20,000 or 50,000 or 10 million? Mr. Bernanke is a money printer and, believe me, if Mr. Romney wins the election the next Fed chairman will also be a money printer. And so it will go on. The Europeans will print money. The Chinese will print money. Everybody will print money and the purchasing power of paper money will go down. And I don't like bonds. I don't particularly like equities, but I think equities are a better space to be in than bonds."

On what he will do with his portfolio in reaction to yesterday's move:

"I own corporate bonds and I recently, as I wrote, I pulled some bonds from Kazakhstan because Kazakhstan economically is a much sounder country than the United States or any European country. But it is in small doses. I wouldn't put all of my money in corporate bonds. They have an equity character. I also own equities still in Asia and as I pointed out already four months ago for the first time in my life I bought equities in Portugal, Spain, Italy and France because they were unbelievably distressed. I think what people overlook today is they look at markets but they don't look at what happens within the market. In the last 12 to 18 months the U.S. has massively outperformed European markets, Asian markets with a few exceptions and now some markets are relatively depressed. I could argue the Chinese stock market is now relatively depressed. So the asset allocators may move some money in Chinese stocks and then they can rally 10% to 20%."

"The fallacy of monetary policy in the U.S. is to believe this money will go to the man on the street. It won't. It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols...Very happy. Very good for the Fed. Congratulations, Mr. Bernanke. I'm happy. My asset values go up but as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world."

On whether there's any credibility in the Federal Reserve trying to bring down the unemployment rate and improve the housing market:

"I think there is a huge misconception and fallacy that money printing can actually improve the rate of employment because the money flows down into the system. It goes first into the banking system and into financial institutions, into the pockets of well-to-do people. If you drop money into my pockets and you have at the same time increased government involvement in the economy and we have the government growing with its regulation and legislation that stifles economic development. I don't want to build a new business. But what I may do is look around the world, where are the distressed assets. So I will go and buy existing assets, takeovers. But takeovers don't add to employment. They destroy employment. Secondly, I would just like to mention one thing. This money printing business, they have been saying that for the last 15 years that bailing out LTCM were necessary. Then they say the NASDAQ collapsed after March of 2000. We need to create another bubble, print money. They created a gigantic credit bubble and the misery that we have today."

On where gold prices are headed:

"I think that the trend for gold prices will be steady, but the trend for the dollar and other currencies will be down. In other words, in dollar terms the price of gold will trend higher. How high it will go, you have to call Mr. Bernanke and at the Fed, there are other people actually that make Mr. Bernanke look like a hawk. So they are going to print money. And they have done it for ages already and where has it led? To record high unemployment essentially since the Great Depression and structural unemployment. Unemployment goes among low paying jobs, not high paying jobs. So, you ought to own some gold, but don't store it in the U.S. because the Fed will take it away from you one day."

On whether he would buy property in the United States:

"Yes. Property prices in the south of the U.S. are very inexpensive compared to property prices around the world. The tragedy is that the people that were evicted from these homes have no access to credit. They have no money. They can't buy them. So, with easy money by the Fed well-to-do people can buy these properties and then rent them out to the people that were kicked out of these homes. What a great achievement of the Fed. First they create the property bubble and destroy the wealth of poor people, then the poor people have to rent and the rents have been up over the last 12 months. What a great achievement. Thank you, Mr. Bernanke."

Marc Faber on QE3

Capital Account on QE3

Marc Faber on Hedging the Bernanke Put and QE3 with Gold, Land and Equities!

QE3 - here we come!

Here comes QE3

Sam Ro

BusinessInsider,

2 June, 2012

Most people agree that yesterday's jobs report was a disaster.

To many, this just meant the chances of more quantitative easing had increased. Surely, this is why gold prices spiked yesterday.

Vincent Reinhart, Morgan Stanley's chief U.S. economist, thinks there's an 80 percent chance that a new quantitative easing program is announced at the June 19-20 FOMC meeting.

"Slower employment growth, worsening strains in European markets, and a gloomier assessment of US politicians’ ability to steer clear of the impending fiscal cliff makes it likely that the Fed will mark down its already tepid forecast," he wrote in a note to clients yesterday.

Here's what he thinks it'll look like:

As our base case, we assume the Fed would purchase $525 billion in 10-year duration equivalents, $475 billion in par amount. We expect the program to last nine months and remove $53 billion par amount of securities from the market each month – in line with previous programs.