Wednesday, October 20, 2010

Nothing Straightforward About Ben Bernanke (Despite what WSJ says)

WSJ's Kelly Evans is out with a piece today where she writes:
In the past, the Federal Reserve's efforts to stimulate the U.S. economy have been fairly straightforward.
This is the kind of misleading thinking that will confuse a lot of investors. Bernanke is as far from straightforward as you can get. As I have pointed out ad nauseum, he institutes new "tools" that get out of control and then he is forced to create new "tools" to deal with the situation. He now has created the "tool" of draining funds by allowing money markets to buy securities from the Fed, as a patch job for the excess reserves which exist because of an earlier new Bernanke "tool."

Keep in mind that there is over a trillion dollars sitting in excess reserves. No one knows, when, how fast or what will cause these reserves to come flying into the system. Straightforward? Hardly. You should never talk about striaghtforward when a trillion emerges out of nowhere and the Fed desperately creates even more tools to deal with this out of control tool.

Remarkably, Evans then goes on to analyze current money flows as though the current pre-QE2 flows will have anything to do with money flows when QE2 is launched:

The [Fed stimulation]process becomes much more fraught, however, when investors have other, more attractive assets—and other countries—to choose from.

Already, the protection against dollar debasement and inflation offered by commodities and precious metals is luring investors. So are the greater growth prospects of emerging markets. Emerging-market equity funds, including ETFs, have taken in nearly $60 billion year-to-date, according to EPFR Global. Global precious metals and commodity funds have added about $19 billion. U.S. equity funds, meanwhile, have seen $50 billion of outflows.
True there have been flows into emerging markets and precious metals. But this is BEFORE QE2. Does she really think QE2 is not going to reverse the outflow from the U.S. stock market?

What we are seeing now is crossflows--since there is no significant money printing. When QE2 comes, the game changes. Precious metals and emerging market strength will continue, but there won't be a this asset versus that asset situation, like we have now. There will be plenty of money to flow into all assets.

The real danger is not as Evans writes that:
Policy makers may find it tougher than expected to inflate this leaky balloon.
The real danger is the exact opposite that inflation will get entirely out of control.

1 comment:

  1. My thoughts exactly: