David Tepper and The Coming “Cash on the Sidelines”

David Tepper of Appaloosa Asset Management was on CNBC this morning reiterating his bullish call for stocks based on the Fed’s easing programs.  Tepper, in case you don’t know, has been one of the biggest champions of the “don’t fight the Fed” stock market position.  And he’s been very right.  But I am not so sure he’s connecting all the dots here.  For instance, here’s what he said this morning on CNBC:

“I’m definitely bullish. Look, ever see the movie cousin Vinnie? So there’s this moment at the end of the move where where he is making the case, summing it up. He sums up so many different things that the prosecution says, case dismissed. Because the evidence is so overwhelming. Kind of like that right now. It’s so overwhelming. Autos are better, housing is better. The fed, well, before we get to the fed, Australia just eased, Japan, Korea. These United States of America, we just are just amazed at the way these numbers work.

So really on the tv, on your show and others, there’s been talk about tapering. Tapering back to fed. So the market is worried about tapering. The numbers are quite amazing. Just truly amazing. The fed is going to purchase $85 billion of treasuries and mortgages a month.  So over 500 billion in six months. What’s happened and what’s really amazing is that if you look at the incomes the next six months because of tax increases, budget cuts, growth in the economy and Fannie mae and Freddie mac paying back, the deficit is shrinking. This is something we can hopefully at least work on now. And i have the numbers. The next six months deficit will be well under 100 billion. Probably closer to 85. Which means — this is an important thing. For those people who say we have been financing the deficit, we really have — the fed will never say that. this is a pretty big issue. we have over $500 billion we’re going to buy over the next six months. now we only have a deficit less than 100 the next six months. the net issuance versus refunding is a little over 100. That means we have 400 billion, 400 billion that has to be made up.

So basically think about this. that’s being taken out of the market, out of the bond market. 400 billion is now in your hands, my hands and other folks’s hands. And there’s a few choices. It either has to go in the economy, which, you know, it probably will go somewhat in the economy. It has to go to the short end of the curve. The long end of the curve trade because we have this excess. Or it has to make stocks trade higher. The problem is you might be worried some of that might go into the economy and, you know, it might stimulate with a little bit of surge. Basically, afterwards, we also have to cut back because the deficits in the future will be less than this trillion dollars. so if we don’t taper back we will get into this hyper drive market. It’s backwards. the fed has to taper back. Because if you look at the numbers, it’s so tremendous, these numbers are so tremendous that you can have the market in hyper drive.”

That’s a lot to chew on.  But the part that really jumps out at me is how money managers are just assuming that this money has to “move into” stocks which implies higher prices.  But this confuses market dynamics.  First of all, stock prices are a reflection of expectations for the underlying corporations.  So, let’s say you have $100 in cash and someone is holding $100 in 1 share of GM stock and you guys exchange cash for stock.  Then GM announces that its revenues fell 50% the following year. Let’s also say the Fed announces $100 in QE.  Would you expect that $100 of Fed QE means that GM’s stock price will trade at the $100 level?   It certainly might!  But only if some bonehead is willing to purchase your 1 share at $100 even though the underlying cash flows of the corporation have deteriorated since you purchased it.  More likely, the majority of investors will look at GM’s deteriorating income statement and wait for the stock to trade much lower than where you purchased it.

But the more interesting thing to think about is the sellers $100 in cash.  Let’s assume he wants to replace his GM stock with something else that will earn a return.  Does that seller automatically turn around and bid up stock prices just because he has cash?  Well, he might, but that makes him equally boneheaded as the person who buys deteriorating GM stock at $100.  The thing is, money doesn’t move into markets.  It moves through markets.   One person sells, another person buys, that’s why it’s called a “stock exchange”.

Now, what about when supply changes?  As Tepper noted, we’ve got $400B in t-bonds and MBS coming out of the markets in the coming 6 months.  And yes, the recipients of that cash will almost certainly be people looking to replace their lost return.  So they’ll likely turn around and look at the available options.  Could they buy stocks, bonds and other assets?  Of course.  But the price they’re willing to purchase those assets at should be contingent upon the underlying fundamentals of the entity that issued those securities.

Now, I am not bearish on the economy at present.  In fact, I think Tepper’s right.  The economy is improving.  But what if that’s not the case in 12-18 months?  What if the budget deficit shrinks so fast that it substantially weakens the economy?  What if private investment slows?  We’re still in a rather fragile state here.  And if that happens the air pumped into the markets by this sort of positive irrational thinking (that you need to buy stocks regardless of their fundamentals and just because there’s nowhere else to go) will quickly turn into negative irrational thinking.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:
TwitterLinkedIn

Comments

  1. I wonder when Tepper will come on CNBC and tell everyone he’s selling before he actually does. These guys are just looking for greater fools. He’s another hedge fund fraud who makes way more than he should and contributes very little to society through his actual life’s work. Most of these money managers are just leaches who syphon money out and give a little back through charity, but aside from that actually provide nothing useful at all. Shame that a smart guy like Tepper ends up flipping stocks for his whole life.

      • Is it? What does David Tepper do for the world? I know he’s a charitable person, but so what. The world doesn’t need a bunch of rich hedge fund guys collecting money and then giving small portions of it away. I’d rather see people actually producing goods and services that make the world a better place who collect the money and give it away. Guys like Bill Gates come to mind. Tepper is nothing. He’s useless. The only people he’s making better off are the people who are clients of his. And when his dart throwing skills hit a dry run he’ll be exposed as a fraud just like the rest of the guys doing what he does.

        • Money managers are supposed to allocate capital so that others may produce. Their the ‘oil’ in the economy. I understand you’re weary that too much oil may hydrolock the economy, but these money managers (though arguably overpaid) are managing the assets of thousands and thousands of people — often through pensions.

      • You know the math on active management Cullen. Don’t tell me you think Tepper is anything more than a blindfolded monkey throwing darts who happened to hit a few bulls eyes so now all the other monkeys think he’s a great dart thrower.

          • I’m not very familiar with his approach either, but based on what he has been saying I’m sure you’d agree that the strategy is broadly based around taking bets based on his views of his economic and market views. To explain what I mean, look at right now – as you’ve just discussed, he’s wildly bullish based mostly on his view that the market could go into hyperdrive due to an improving economy and wads of money “coming into the market”.

            Tepper’s enjoying his time in the sun – just like every money manager gets to do at times. He’s been very right. Its for everyone to decide for themselves whether they feel he’s been right for the right reasons and whether he’s smart enough to continue being right.

          • From their Form ADV, it appears that they manage a couple strategies — one being distressed debt, another being investment-grade debt and equities. The thing about a self-made billionaire is that he’s been right quite often. Bill Gross may argue that he played in the sun and it’s about to start raining, but no one knows for sure…

    • Tepper is pretty much a perma bull, and that has served him well when markets have been going up. But he lost 20% in 1998 (Russia), 20% n 2002 and 20% in 2008. So he does not understand bad markets or see them coming (to his credit, he wanted to short techs in 2000, but his clients refused, but he still messed up later anyway).

      • Tepper is not especially intelligent, but he is very “street smart”. He is a perma bull. His returns smack of aggressive beta. But he manages to lose less in downturns (although he loses a lot) than he aggressively makes in upturns. His Sharpe ratio is nothing special, but his absolute (volatile) returns are high. So I would not be surprised to see him blow up at some point, although he plays plain vanilla, liquid, so he must really be caught wrong-footed to do so. He seems arrogant though, so this can serve him a bad trick.

    • Will, i think that along with corporate buybacks is playing a huge roll in the rally. You have massive amounts of demand for equities as supply of equities is contracting with all the buybacks. Fundamentals matter less, when there is diminishing supply and increasing demand.

  2. This Tepper appearance has epic potential for marking a significant turning point in the market. The village children will sing songs mocking him as they play their jump rope games. This is really rediculous stuff. Kudos for calling him out Cullen.

  3. All that money that just has to move into the markets and force prices higher! Ha. And to think that all the CNBC lemmings probably worship this Tepper fellow like he understands what he’s talking about.

  4. Hey Cullen, isn’t Tepper ignoring MBSes?

    I’d like to see as long a time series as possible:

    Net MBS issuance (Issuance – retirement)

    Plus:

    Net Treasury issuance (new issues – retirement) +/- Net Fed “Issuance”/”Retirement”

    Yes, the fed isn’t issuing and retiring bonds, but in the short term that’s effectively what it’s doing. (And maybe in the long term? Brave new world…) Flowing new bonds in or sucking them out. (Some of those bonds naturally retire while in Fed hands, but that’s already accounted for in the Treasury and MBS issuance/retirement.)

    Also have to include Fed repos, I think? But maybe trivial over the long term.

    What I’d like to see: net Net NET consolidated flow of new bond issuance to the private sector by Treasury, Fed, and the GSE gods.

    Then: that measure as a percent of GDP? TCMDO? Other measures to compare it to?

  5. Seeing everyone hanging on every word from Tepper can’t help but bring back memories of a simular belief in Joe Granville in the late 70′s early 80′s, Bob Prechter in the later 80′s or Ralph Acompora in the late 99 early 2000. For those not around back then, things didn’t work out to well for them or their followers. It’ll be interesting to see how this episode ultimately ends up playing out.

  6. Question on the Fed’s impacts on stocks… the narrative I keep hearing is that the Fed’s bond buying is giving free cash to the banks and they have to put it into stocks if they want any kind of yield… but is that really true? Banks currently have $1.7T in excess reserves at the Fed so I would assume they could do whatever they wished with that money (within the regulations) including put more into stocks sending the S&P to the moon if they really thought it was such a great investment… what that says to me is that the banks have decided that the risk adjusted returns of cash is the best place for all that money… my feel is that whatever money the banks are putting into the market is an amount they are comfortable with the risk of a 50% draw-down at some point over the next few of years, but were the flow is actually coming from is pension funds and retirees that can’t live on 1% return so they have to go into stocks (reach for yield)… Since the economy is de-leveraging, and seems to be intent on continuing to do so for a while (which makes sense given our demographics AND adding onto that massive credit over-expansion of the previous couple of decades), is there a point when the Fed has to acknowledge that its easy money policy may never create the loans, and thus the economic activity, that it should have in theory, and it is actually adding fragility and risk to the system? Or do will they always wait for the system to tell them (usually in an unpleasant way) when they’ve gone too far?

    • When you write “giving free cash to the banks” that’s not what is actually happening. The Fed is buying bonds from the private sector, including the banks, but a good deal of it from non-banks. When the Fed buys bonds from the banks, it’s an asset swap for the banks. When they buy from non-banks, it expands their balance sheet: reserve assets matched with customer (bond seller) deposit liabilities. Here’s a simplified balance sheet example of what the latter (non-bank bond seller) scenario looks like:

      http://brown-blog-5.blogspot.com/2013/03/banking-example-4-quantitative-easing.html

      So QE doesn’t change anybody’s equity position. Regarding the bank balance sheet expansion due to non-bank bond sales to the Fed, keep in mind that the banks are not free to do whatever they like with those reserves (which are expanding the asset side of their balance sheets). Sure, in theory they can use those reserves to buy whatever they like:

      http://brown-blog-5.blogspot.com/2013/03/banking-example-5-bank-spends-excess.html

      office supplies, pay their electric bill, pay their employees, pay dividends, make investments in stocks and corporate bonds, etc. But whatever they do with those reserves they must maintain acceptable CAMELS scores in the eyes of the regulators. For example, they must continue to meet their reserve and capital regulatory requirements. For capital requirements, they must maintain an acceptable capital adequacy ratio (CAR):

      CAR = (Tier 1 + Tier 2 capital) / (sum of risk weighted assets) > 10%

      Reserve (and Treasury bond) assets have a risk weight of 0 in the denominator of the CAR. If they were to trade their reserves for another riskier asset (one having a weight greater than 0), the denominator of the CAR would increase thus making it more difficult to meat their capital requirements.

      Here’s more information:

      http://brown-blog-5.blogspot.com/2013/03/example-32-capital-requirements-stock.html

      http://brown-blog-5.blogspot.com/2013/03/banking-example-7-calculating-capital.html

    • First paragraph: I wrote:

      “When they buy from non-banks, it expands their balance sheet”

      to be more clear I should have written:

      “When the Fed buys from non-banks, it expands the banks’ balance sheets”

      • Nice description Tom (as a long-time follower of all this I agree 100%).

        I think the problem you have trying to have people understand the real facts is that it all gets a bit too hard for them – they have this simplistic pre-conceived view of “money printing” pushing the markets and their eyes just glaze over when someone tries to tell them otherwise.

        • Thanks! I think you might be right: my eyes would glaze over too. That’s why I find it’s very helpful to see it all sketched out on simple balance sheets when possible. I don’t have any background in accounting… so I like to keep it simple, but once you see the idea of double entry book keeping, you can use it think through a lot of what’s going on… at least to some basic level of understanding. Of course sites like this and the smart and knowledgeable people that show up here are an invaluable resource too!

          • Well, the Fed is not printing money for the non-banks, but it is printing money and buying assets with it for the banks. So ok the non-bank economy sees no new money, but the banks do. So why not have the banks then:
            - chase other yielding assets / buy stocks
            - give speculative credits for others to buy stocks / yielding assets

  7. You nailed it again, Cullen. “Positive irrational thinking will turn to negative irrational thinking”. I’ve never heard it put so succinctly. FWIW I don’t think we’re even at the irrational part yet. Well, maybe the beginning. At some point I will put on my beartard hat and act like a beartard. I trade the trend, you know.

  8. Here’s what people don’t seem to get:

    “Banks currently have $1.7T in excess reserves at the Fed so I would assume they could do whatever they wished with that money”

    This is true of individual banks, not of the banking system as a whole.

    The only way those reserves decline is if banks trade them *with the Fed.* Otherwise they just circulate among banks. The banking system can’t “spend down” its reserves except by spending them on bonds sold by the Fed.

    And if the Fed is buying, not selling…

    • Yes, that’s a good point, but even for an individual bank, they are not necessarily free to trade risk free assets for riskier assets. The risk weighting of assets factors into their CAR for example, which they must keep above 10%. Trading risk free assets for risky assets makes this more difficult. And since they’re being paid IOR, what is the upside? It’s as if the Fed came along and handed the banks a bunch of new risk free assets paying IOR and an offsetting bunch of new deposit-liabilities.

      http://pragcap.com/david-tepper-and-the-coming-cash-on-the-sidelines/comment-page-1#comment-144785

      And even though the banks’ balance sheets have expanded with QE (due to QE purchases of assets from non-banks), their equity positions don’t necessarily change since all those excess reserve assets are offset by new deposit liabilities.

      Here’s a list of the only three places Fed deposits can go (reserves are a kind of Fed deposit):

      http://brown-blog-5.blogspot.com/2013/04/the-three-places-reserves-can-go.html

    • So here’s my understanding… banks have a statutory reserve requirement and anything above that would be an excess reserve… for the excess portion they can either make a loan (and increase their reserve requirement) or buy a security (so it is no longer a reserve)… so the total money isn’t getting “spent down” (it is actually increasing as loans create deposits), either the requirement is increasing or the money is no longer eligible to be counted as a reserves, but either way the excess reserves in the system are being reduced… based on that understanding my point was that there is $1.7T in cash between vaults and the Fed that is not required to be there so the banks could either make loans (the Fed’s preference) or invest the money, but neither of which seem to be as attractive as cash to the banks when adjusted for risk… corporations are in the same position today, except they have a responsibility to return “excess reserves” to shareholders when there are not other more attractive options… which makes me wonder what exactly are the attractive investments that will drive growth in the near term?

      • If the banks make loans it will expand their balance sheets, even if QE were to come to a complete halt. The effect of making loans on bank reserves is to convert a small percentage of the loan amounts in excess reserves into required reserves. Practically this will be less than 10% (it would be 10% if all those loans ended up as command deposits). It does not change the total amount of reserves, and since both ER and RR pay IOR, there’s really no difference.

        • For example, if the banks have $1.7T in ER and they make $1T in new loans, then less than $100B in ER would be converted to RR. Overall reserve levels wouldn’t change.

          • I guess my point is that if banks are not required to hold that much cash why are they? (my guess is that they can’t find anything that justifies the risk/reward). And if they are already sitting on a ton of cash is QE induced liquidity really driving this market as so many people seem to be saying? Or has the Fed’s academic theory of “low interest rates will stimulate demand” collided with a dual storm of BSR and aging Baby Boomers, so instead of hitting their intended target of loan generation they are instead forcing people into riskier assets just so they can make ends meet in retirement (either currently or in the future) driving a massive wedge between fundamentals and asset prices?

            • Reserves are ‘excess’ deposits, right? You or me or GM have deposits at the bank, and some of that is held in the reserve system?

              • Excess reserves (ER) are excess deposits in that they are at a level above that required by regulation (the so called “required reserves.”).

                I don’t think of bank deposits as being the same thing at all. Bank deposits that you or I or GM holds have a relationship to reserves, but you bank deposit is not necessarily represented anywhere by excess reserves.

                • Do reserves ultimately below to the depositer? The bank is free it invest them as it sees fit, but when I demand my deposit back, some of my deposit is taken out of reserves?
                  Looking at it this way, isn’t the problem that so much money is being created and provided to the 1 percent who don’t really circulate the money in textbook fashion. They’re not even investing it anymore.

                  • Actually it’s quite impossible for you or I to own reserves. The reason is we are not qualified to be Fed deposit holders. We’re not a foreign government, or the IMF, nor do we possess banking charters. We can withdraw our BANK deposit as physical cash, but that cash loses its reserve status as soon as it leaves the bank. That’s kind of a technicality I realize, so you could say that you or I could get our hands on “outside money” in the form of physical cash… but usually that’s merely a convenience. We, as non-banks, mostly live in the world of inside money, with cash (outside money) only there for our convenience.

                    Imagine reserve requirements were lowered to 0% and that all the commercial banks were consolidated into a single bank… and we got rid of physical cash. Then there would really be no need for reserves in almost any circumstance. We (and all other individuals and businesses) would live in a pure bank deposit world, and what’s more that single commercial bank would never need to borrow reserves to clear payments between its customers.

                    When you think of the banks in aggregate, that’s similar to how the system works now.

            • All good questions! Only the 1st one I can try to answer: “if banks are not required to hold that much cash why are they?”

              I think there’s a clear answer here. There’s literally only a few options about where reserves can go (in aggregate):

              http://brown-blog-5.blogspot.com/2013/04/the-three-places-reserves-can-go.html

              The most likely place being back to the Fed once it starts selling assets instead of buying them.

              Also in an earlier post you mentioned “corporations” and their “excess reserves” which you put in quotes. I think you already know this since you put that in quotes, but of course those are bank deposits, not reserves. The have a different set of “escape channels.”

    • Right, but most of QE is with the non-bank public so grandma sells her t-bond, obtains a deposit and the bank on-sells the t-bond to the Fed. The net financial asset position of the pvt sector is the same, but grandma could go buy whatever she wants to with her deposit. She might even be dumb enough to buy the S&P 500 at 2X today’s price regardless of its underlying fundamental changes. Or she might go buy an apple for 2X yesterday’s price. But that has nothing to do with QE really. It just has to do with grandma’s level of intelligence.

      • I thought I had this whole thing clear in as much as QE was simply an asset swap WITH the banks into their RESERVES with which they have limited ways to deploy those reserves. This being the reason that the bank’s reserves balances has been roughly increasing at the rate of 80 billion a month or so. Cullen, are you joking around here?

        • No, I don’t think he’s joking around. If the bank holds bonds and the Fed buys them, it’s a straight asset swap: one safe asset (reserves) for another (T-bonds). If the Fed instead is buying T-bonds from the non-banks (like grandma), then for the non-banks it’s an asset swap, but for the banks it’s an expansion of their balance sheet. They add reserves (assets to the bank) and new deposits (liabilities for the bank and held for the non-bank bond sellers) in equal measure, so their equity doesn’t change. Cullen is saying that mostly it’s the non-banks which are selling to the Fed. That’s what I have illustrated here with simplified balance sheets:

          http://brown-blog-5.blogspot.com/2013/03/banking-example-4-quantitative-easing.html

          So you can see how it expands the bank’s balance sheet w/o changing the bank’s equity position.

        • QE is a swap with the pvt sector. It either occurs with the banks as a direct swap of reserves for t-bonds OR it occurs in the non-bank public where deposits increase and t-bonds are swapped out. In the latter case the bank just acts as a middleman buying the bond and selling on to the Fed. But there’s no increase in pvt net financial assets here no matter what. And whether it’s a bank selling or a household selling the result is the same. Someone ends up with cash balances that don’t generate a lot of income and they’ll feel pressured to chase other assets to replace lost income. That’s the thinking behind the portfolio rebalancing effect at least….

          • How is there not an increase in net financial assets?
            Let’s say the Fed bought my car. I would then go out and buy a new car. My position would be the same, but somebody else would have the money that came from the Fed?
            Doesn’t the same thing happen with QE? The bond seller has the same position, but somebody else has a new asset.
            Note: In both examples, my assumption is that the Fed takes the car (bond) to the impound lot and it’s never seen again.

            • The Fed doesn’t buy your car. They buy a t-bond, remove it from the pvt sector and give you cash. Someone is always building new cars somewhere. If you owned a t-bond you could sell it and go buy a car. After QE is done and you have cash you don’t have to sell the bond because you already sold it. But you can still go buy your car if you want to. But you aren’t wealthier or better off after QE is done. The net financial position is exactly the same….

            • There’s not a NET new financial asset:

              You effectively traded one car for another (no change in your assets or liabilities). The other person traded their car for cash (no change in their assets or liabilities). Assuming a fair price was paid in both cases then equity = assets – liabilities didn’t change for anybody…. including the banks or the Fed (The Fed’s balance sheet expanded with a car-asset offset by new reserve-liabilities, and the banks’ assets grew by new reserve-assets offset by the now car-less other guy’s new bank deposit).

              However, Treasury deficit spending is different! In that case net new financial assets are added to the private sector (I’m defining Treasury deficit spending as the results of the whole process: Treasury auctions bonds and then spends the proceeds back into the private economy).

              • Tell the car companies their situation doesn’t improve when they sell a car.
                In my example, the car company is better off, the workforce is better off, the dealer is better off.
                You’re stimulating economic activity.
                Now, my example would be a good way to do QE. Present QE merely stimulates the markets.

                • You’re missing the point. Spending is a function of income relative to desired saving. You have to move the needle on one of those variables to increase overall spending. QE doesn’t increase incomes. And it doesn’t increase net saving. When you own a t-bond you are just as capable of buying a car as you are if you have cash. You just have to sell the t-bond first. So the t-bonds “moneyness” is lower than that of a deposit, but it doesn’t imply that there will be more spending or inflatino just because you swap a t-bond for cash.

                  Car companies don’t sell more cars when QE occurs because the net financial position of the pvt sector hasn’t changed. Grandma had a savings account before QE and a checking account after. Her net worth is the same so why should she feel more inclined to go buy a car after QE is done?

                  • I think you are missing the point of my car analogyy.
                    If — If — the Fed was buying cars, then the car companies would benefit because more cars would be sold.
                    The fact that the Fed is buying T-bonds means that the financial sector is selling more securities.

                    • No, no no. That’s totally different. If the Fed was buying cars I’d start making cars and selling them to the Fed. That would be highly inflationary. But that’s not what they’re doing. The Fed is buying govt guaranteed assets like MBS and T-bonds issued by GSEs or the US Tsy. That’s totally different than buying cars. It’s night and day.

                    • Cullen is right to point out that buying cars is a very different thing than buying financial assets… especially safe financial assets (i.e. swapping reserves for T-bonds). In swapping safe financial assets the total amount of safe financial assets didn’t change.

                      Buying cars is different. Since the Fed has a bottomless pocket… if it were to start buying anything at all, then it could essentially raise the price of those things to whatever new level it desired.

                      I don’t think it’s as clear cut in regard to securities… Someone who sells their T-bond was probably not influenced to sell it because the Fed is buying $85B a month. They probably already had plans. Could the price have been effected marginally and thus in some marginal way influenced their decision? Sure… but again, it’s not that clear.

                      Now if the Fed were to instead buy as many … say T-bonds maturing in 10 years as was necessary to move the yield on these securities to a new lower value (or raise the price to a target level)… then that’s a little different story. The Fed has a bottomless pocket, so you’d be a fool to bet against their ability to do this.

                      That’s why I think it’s less clear exactly what QE accomplishes… it’s a fixed $ amount they are buying… they are not targeting price/yield levels.

                    • Also, Tom and Cullen, the government is the monopoly issuer of Treasuries. The private sector cannot simply amp up production of them and sell them to the Fed!

                      GSE MBS are a little different story since the private sector can technically produce them, but current market conditions are such that we are not at risk of reinflating the real estate bubble (just yet) by having the Fed commit to buying $X a month.

                    • As Johnny said, it makes sense to me that the Fed’s machinations should – to a first order effect – increase the price of T-bonds, MBS, etc. This should result in more of these being issued.

                      But that’s the first order effect; I don’t think the actual response in the economy is linear. Or, to say it differently, if you were to graph the function of Extra Bond Issuances vs Fed Stimulus, the function will be wildly non-linear, and maybe even negative for low values of QE, if banks get more conservative when the Fed puts money into the economy because of expected future inflation.

                      Anyways – there’s a point where Fed stimulus would be solidly inflationary… but obviously, we’re not there right now. It’s unclear to me if the Fed’s stimulus is even *marginally* inflationary right now.

                    • My examples really address the 0th order effects. In other words, if the Fed decides to purchase a single car and pay market price for it… nobody’s going to be any better off (except marginally) and inflation won’t be affected. Now even given this single purchase the 1st order effects (the depreciation of the car vs the depreciation of the bank deposit and the reserves, etc) come into play over time.

                      Then there’s the issue of the Fed buying a lot of cars, or a large fixed dollar amount each month. And then there’s the issue of inflation targeting.

                      And then there are parallel issues involved with Fed Treasury debt and MBS purchases, but I think Cullen is correct to say these issues will be on a different scale than with something like cars… especially when the Treasury continues to deficit spend (and thus issue new bonds).

              • Before QE: Public has a bond.
                After QE: Public has a deposit, Fed has a bond.
                That’s an increase in net financial assets. The only way it’s not is if a) you believe that once an asset goes to the Fed it becomes invisible, or b) you believe that QE is the monetization of the bond.

                • Before Treasury Deficit Spends: Public has a bank deposit, Treasury has a bill with no funds.

                  Treasury Issues Bonds to Procure Funds: Public has a bond, Treasury has a bank deposit

                  After Treasury Deficit Spends: Public has a bond AND a bank deposit, Treasury has its goods and services.

                  That is an actual increase in net financial assets.

                • Johnny, if you include what the Fed and Treasury hold, then you should include the liabilities side of their balance sheets too… in which case it all adds to 0. Take the Fed for example… it buys a bond during QE and that’s its asset. However, the reserves it used to buy that bond are its liability! That’s why if you’re counting a net change in financial assets, you really have to draw a line somewhere, and one logical place is between public and private. When you do that, what Joe writes is absolutely correct. Treasury deficit spending as he described it increases net financial assets in the hands of the private sector. QE doesn’t.

                  • I can see that makes sense if you accept that a T-bond is a Net Financial Asset without a corresponding liability. Then, yes, deficit spending moves the deposit from Peter to Paul and give Peter a bond, an money-like asset.
                    I guess then what QE does is it just gives Peter back his deposit. In other words, it lays bare that deficit spending is really monetization. That’s OK, I accept that, but it does change the narrative.

                    By the way, do you think the Fed really has liabilities in a traditional sense? The Fed doesn’t really have to pay anything back, does it.

                    • Johnny, you write:

                      “I can see that makes sense if you accept that a T-bond is a Net Financial Asset without a corresponding liability.”

                      You don’t have to accept that actually. The T-bond is a liability for the Treasury. So again, if we include public and private together, then even deficit spending produces no NFAs. But because we draw a line and say that deficit spending adds NFAs to the private sector… that’s actually true! Left unsaid is it subtracts NFAs from the public sector.

                      Does the Fed have liabilities? Sure. I’m not sure what you mean by “traditional sense” but it does have liabilities… notably reserves and physical cash. Those are the big ones (I think!). It is true that the Fed is somewhat unique in that it can expand it’s own balance sheet to purchase unlimited quantities of whatever it wants. Banks can expand their balance sheets too by “buying” loans by creating deposits for the borrowers. But they are restricted by solvency and regulatory constraints when they do this. Banks (actually PDs) can also buy bonds from Treasury in this manner, creating a special deposit (TT&L deposit) for Treasury (out of thin air) to “buy” bonds at auction. The hitch is that the banks are then on the hook to honor those deposits with reserves once the Treasury transfers the funds to their TGA Fed account (which they must do prior to spending). But I don’t think banks can go around creating deposits for the car dealership (for example) to buy all their cars. Perhaps they can!… but again, they’d have to abide by regulations … and they’d have to stay solvent. Otherwise they either get shut down or they go out of business.

                      The Fed probably has to worry about making sure that they don’t start accumulating negative equity, but other than that, they are free to expand their balance sheet without bound. For example, eyebrows would be raised if the Fed bought a bunch of overpriced junk that turned out to be worthless and thus accumulated negative equity. As it turns out, negative equity (I don’t think!) hasn’t been a problem… they actually make quite a bit of money that they then remit to Treasury. I think you can see that if you stick with safe assets, it would be hard to get in trouble. However… say they start selling bonds after interest rates go back up…. well then they’re going to take a loss on those. So that might be an interesting thing to watch for in the coming years… will we have a case where the Fed accumulates negative equity… and then what are the consequences of that. I don’t know!

                    • Johnny, take a look at this example:

                      http://brown-blog-5.blogspot.com/2013/03/banking-example-6-cb-holds-gov-debt-to.html

                      It’s an oversimplified example in many ways, but it does fold in Treasury, the Fed (central bank, or CB), a bank, and a person, and it demonstrates what happens when Treasury deficit spends and the CB buys the T-bonds from the public. The good thing about the example is I keep track of the asset and liability status of each player through all the steps. Taken all together, the net equity position of all the players together always adds to zero!

                    • Appreciate the examples, I’ll look at them.
                      I mean the Fed doesn’t have liabilities in the sense it can buy whatever it wants, we’ve seen that recently. It can’t go out of business, it doesn’t answer to anybody.
                      When you have a printing press, your only liability is that the economy can’t swallow that money, right?
                      Your supposition that the Fed might get into trouble if it bought ‘overpriced junk’ made me chuckle.

                    • Well, again, I think negative equity on the Fed’s balance sheet **could** be a problem for them. I think Cullen had some thoughts on that somewhere… I think he mentioned that the Treasury might have to act in some way to “fix” a broken Fed with negative equity on its books. But then, I’m not sure it’s ever happened, so we might get a chance to see first hand if they don’t manage their “unwind” appropriately. Chances are though, they’ll be able to manage it just fine.

                • The Fed’s assets are not held in the private sector. You’re including the Fed’s balance sheet in the pvt sector as though they’re out there shopping at Wal-Mart with their bottomless pit of bank reserves. They’re not!

  9. He says the Fed is going to pump $500 billion into the economy in the next 6 months — I thought we’d be reading in here that QE had a minimal impact and that it was really just an asset swap, that new money wasn’t coming into play.
    I think he’s describing the current market accurately. You buy stock from me and it goes up. I buy it back from you and it goes up. You buy it back …. etc., etc.

    • I think “pump $500 billion into the economy” is a little bit misleading in this article. I would expect a lot of that to just sit on bank balance sheets paying IOR…. or more accurately paying the spread between IOR and what the banks pay their deposit holders (which is just a hair above zero).

      What may be the more important part of this story is what’s been pumped OUT of the economy: a (perhaps) not insignificant percentage of the safe, yet interest bearing, Treasury debt.

      That $500 billion in excess reserves can only go three places:

      http://brown-blog-5.blogspot.com/2013/04/the-three-places-reserves-can-go.html

      1. It could go into the TGA if Treasury decides to start running a surplus instead of a deficit. What do you suppose the likelihood of that is? I think it’s very low.

      2. It could be withdrawn as cash. But do you suppose that the existence of $500 billion more in excess reserves is really going to cause significant new outflows of deposits in the form of cash withdrawals? Some MMers think so (at least if the Fed stops paying IOR), but I don’t see it.

      3. The most likely place (in my opinion) is it goes right back to the Fed (where it ceases to exist) once the Fed starts selling instead of buying. Otherwise it just sits there earning the banks IOR.

      I’m not saying that the $500 B doesn’t make a difference… but I’m saying to picture it being “pumped into the economy” gives the wrong impression.

      • You’re saying the Fed’s purchases are going into reserves — but are the bonds being held in reserves now? I don’t think that is so.
        If the Fed buys a bond from you and me, that money doesn’t go to reserves, does it? You and me either spend it or buy another asset. We’re probably not buying another Treasury (why would we sell a Treasury and then buy one back.)

        • So what is the QE bank vs non-bank bond purchase split look like right now? I thought it was 100% bank and you can trace it by watching the reseve balances as a sum of all the banks swell by 80+ billion a month?

          I feel like this discussion has just confused what had become more settled concepts with regard to QE.

          Sorry.

        • If the Fed buys a bond from a non-bank (you or me), then you get a bank deposit, the bank gets reserve assets (in the amount of your deposit) and they also “get” your new deposit as a liability. The bank’s balance sheet grew by the amount of your deposit, but their assets and liabilities grew equally. It’s illustrated right here on these few simplified balance sheets:

          http://brown-blog-5.blogspot.com/2013/03/banking-example-4-quantitative-easing.html

          Notice that the bank didn’t sell anything… it simply held person x’s deposit (person x sells the bond to the Fed), yet the bank’s excess reserves increased. Nobody’s equity changed (i.e. nobody’s any richer).

  10. Ever see the movie “As Good As It Gets”? I don’t know many boomers who can maintain their spending habits well into retirement and they say people are living longer now. They also say Americans are getting out of debt. Well I would like to see the demographics on that. Certainly college grads are in debt. The average is 27k. What impact will the boomers have if they continue to save because they have finally awakened to the fact that they are OLD?? I’m spending very little right now and I don’t see that this will change for me for a long time if ever.

    • What’s the point of saving if you never spend it?

      Most people end up spending down most of their savings, if not in retirement expenses, then in end-of-life treatment (grim, sorry).

      What they don’t spend becomes taxes or inheritance, and I’d wager that a fair portion of that gets spent, too.

      So, obviously, boomers’ saving accounts are going to decline. I’ve no idea, though, if their kids’ savings accounts are expected to increase enough to negate that decline.

      The real elephant in the living room is SS and Medicare, though.

  11. Some economists say that the top 10% in income in the US are doing so well that they are the ones supporting US GDP growth, while the bottom 90% are probably not increasing what they spend, leading toward a flat GDP. Will the increase in spending and private investment by the top 10% be enough to truly get the US economy growing faster than 2.5%? Not sure if that top group an pull it off.

    • I take your point, however, even “if that top group can pull it off” it will hardly matter to the other 90% will it? It’s not like we’re all on a national team w/ the goal being to raise GDP by more than 2.5% per year…. so the 90% gets poorer, but cheers on the 10% (like a bad football team cheering their star running back as he carries them to yet another victory). Personally I’d be OK if GDP decreased by 1% a year… as long as the 90% group (the one I’m in!) experienced a nice 3% gain. I guess an even more selfish view is I don’t care about anybody except myself… which is kind of true!… but not completely. I’d rather live in a nice stable, sufficiently affluent, educated Democracy… and I think that has more to do with the well being of the 90% than it does with the 10%.

      • In an age where people have lost faith in nearly every institution, we now have a corrupted? Highjacked? Dysfunctional? capitalist system which has dealt out people from the economy by the hundreds of millions. An increasingly dangerous situation IMO.

        • I believe the situation may well be getting “increasingly dangerous” as you state, however, I don’t think I’d say that “people have lost faith in nearly every institution.” We are a long ways from that IMO. That sound like Somalia!

          • People ARE losing faith in most of the institutions though. Thing is the institutions dont need our faith as much as they simply need credible force to back them up.

            Lets look at our various institutions and try to assess where the average person views it.

            Congress- probably the lowest its ever been less than a third have a positive view of it and believe they cant get anything positive done for US.

            President- 10- 15points above Congress, which isnt saying much

            Fed- Most people have no idea how fed operations really work but still the majority of people do NOT trust the fed to do anything that can help them. Maybe lower than Congress. Even those of us with some clue about how it works have little faith they can help us.

            Supreme Court – Probably above Congress and the Fed but its my feeling that most people feel it is not a neutral body anymore AND think life terms are bad

            IRS- Do I even need to comment?

            Dept of Educ- see above

            EPA- ditto

            SEC- ditto

            US media/news complex- Maybe lower than the IRS

            Its less about our faith in them but more about what they can do if we try to ignore them

            • Not a bad list. I’d originally written out a longer response to Michael listing things I had more and less faith in. Congress was at the bottom of my list. Fox news says 17% approve of congress and 74% disapprove. Obama is actually up at 47%… and Bush not far behind that! I actually rank bureaucracy (whether Fed, State, or local gov) and state and local gov to be HIGHER than congress. And the courts. Even the DMV… cops, fire, … etc. I still have faith that calling 9-11 isn’t useless. I also pretty much trust the integrity of aircraft I fly on and the FAA, FDA, FCC, nuclear regulators, etc… and the roads/bridges/etc. I also don’t think I have to bribe gov officials to get things done. That’s standard operating procedure in much of the world. Congress, again, is in it’s own league there. They pretty much run on “bribes” … at least after a fashion.

              My favorite news story over the past few weeks pitted a huge Federal bureaucracy (the irony here is we’ve been told repeatedly by the politicians that we shouldn’t have ANY faith in these kinds of bureaucracies… the epitome of “waste, fraud, and abuse”) against congress: Recall the story of the US Army telling congress “No! Stop! … no more M1 Tanks! We really don’t need any more!” … and here’s congress… supposedly full of “deficit hawks” telling the Army “Too bad! You’re gonna get the tanks whether you want them or NOT!” … so the Army got all the tanks they never wanted. Hahaha! No wonder congress is running at 17% (which is actually a bit of high for them… they’ve been hovering around 12% for a years now!). They’ve been one of the most hated institutions in our country and they’ve earned that hatred.

              http://www.foxnews.com/official-polls/index.html

              I also don’t have much faith in our financial regulatory institutions or our campaign finance rules or watch dogs. Nor do I have faith in a large chunk of the public! With their rabid anti-science and innumerate thinking. And even though I in general hold bureaucracies of all types in much MUCH higher esteem than congress, I think there’s a lot of self perpetuating stuff that goes on there too: farm subsidies, war on drugs, our prison system, etc.

              I do have faith that most of our rights as citizens are still being protected. The 1st amendment being the most important in my book. I don’t live in fear of family and friends disappearing in the middle of the night… or even losing their jobs, over something they said or wrote on the internet. Private property is still being protected for the most part. Crime is at manageable levels (at least street crime) over most of the country. People’s bank accounts don’t generally disappear on them due to corrupt banks or gov officials. Nor the deeds to their property (most of the time… yes there is that huge foreclosure scandal!).

              As far as the Fed goes, I think a there’s a vocal minority that’s absolutely dead set against them… but most people are just clueless… which means that the Fed will continue to operate and continue to serve the purposes of our banks… which perhaps isn’t ideal, but better than the anarchy of what might happen if ignorant economic populists took over. If they screw up bad (again!) though all bets are off!

              I agree the media has taken a lot of hits. It’s in a state of economic transition. I hope some fair investigative journalists survive this period!

              So it’s a mix, by any measure. But I still say that overall, things aren’t that bad! Most of us can read and do simple math. We don’t have religious extremists blowing themselves up in girl’s schools on a regular basis. People still feel they can raise their family here and make a reasonable plan for the future.

                • Right you are Michael. I should have put them on my list except that in some circles they are even more popular. Those churches with the more conservative bent are experiencing some growth in many areas.

                  Catholicism is pretty putrid on the list of “Institutions to take your advice on ethics from” due to the predeliction of their priests for young boys.

                • That one doesn’t bother me as much… I’m in the “skepticism is good” camp. If we’re going to have religion though… I’d like to see the moderate voices dominate rather than the purists. Purists of whatever stripe can easily turn into dangerous problems! Purists scare me!

              • Very thoughtful response Tom. You bring up some excellent points

                Feel I need to point out that I am NOT saying we are on the verge of massive institutional breakdown and revolt, much of the reason is cultural, but I do think there are necessary institutions which are deteriorating simply because we have a small powerful minority who finds them “in the way” of their profiteering. Education is one for sure. Companies are finding a way to use our childrens education as their income stream and a way to enrich investors. This has been a slow and insidious process.

                I think neo liberalism is waning but it will take a few more things down with it which we will have to rebuild. I think our system of public parks and what we refer to as federal lands are in the crosshairs of some powerful people. A “debt crisis” might just force the govt to sell off some their valuable assets.

                You said;

                “I do have faith that most of our rights as citizens are still being protected. The 1st amendment being the most important in my book. I don’t live in fear of family and friends disappearing in the middle of the night… or even losing their jobs, over something they said or wrote on the internet.”

                As much as you did 15-20 years ago? This is another area under assault thanks to our war on terror. Federal workers may not lose their jobs over what they say or write but there are private employers who flaunt those labor laws. I dont live in fear of my son being “disappeared”, (what % of the world truly does?) but I do feel there has been a palpable shift in how police forces respond to situations. If the 1% are nervous about OWS guys the police are called in to rough them up yet Tea Party guys rally with weapons in plain view, just daring a response and…………….nothing. As police forces are put in more budget binds they will become more and more private security paid for with our taxes.

                ” Private property is still being protected for the most part. Crime is at manageable levels (at least street crime) over most of the country. People’s bank accounts don’t generally disappear on them due to corrupt banks or gov officials. Nor the deeds to their property (most of the time… yes there is that huge foreclosure scandal!).”

                Again, I think there has been a palpable shift away from where it was when I was 30-35 but as long as the institutions are working FOR the powerful we likley would need to reach 75-80% completely disgusted/ready to revolt before we could overwhelm their response.

                If the equivalent of the OWS crowd, along with some of us who are sympathetic to much of their calls, were to reach the revolt stage, even if it were just a revolt without weapons, (something like a mass refusal to pay back any loans to banks for a month) the response would be swift and violent I think. We would need upwards of 65-75% of us to take this kind of action before they would realize that any imprisonment or killing would be possible. They cant imprison ALL of us (who would do their work for one!!) but they could and would respond that way to a movement that just involved a few million.

                Back in 60s 70s our govt responded to million person marches, now thats the number of people who might get together in Alabama to watch a NASCAR race.

                I think our govt is quite capable and willing to inflict (previously) unspeakable violence on its own people to protect corporate profits.

                I hope I never have to see if my theory is correct but if we continue down the road our Tea Party Patriots are driving us down we might find out.

                • I sympathize with a lot of what you say there Greg. No institution is a sure thing. The history of the Roman Republic teaches us that!

                • The big problem is that middle class Americans don’t see how simple the problem really is. Start by taxing wealth, not income. If you own 50% of the wealth you pay 50% of the taxes. Then you redistribute down instead of redistributing up, which was done in large part by government policy. (Of course some will scream socialism, it’s only OK for the government to give the rich money). 650b is 1% of US net worth of 65t, and 650b is enough to give 130m families an extra 10% of income at the median ($100/wk). Throw in a realistic health care plan and problem solved, no major burden on a 65t country. I’m not saying these are the only ways to do it, just examples to prove the problem isn’t that big. Getting people to see will be the hard part.

                  • I agree Michael, wholeheartedly. The average American is clueless about the problem, partly from their own laziness (dont want to take time to critically examine) but mostly because they are fed bullshit by media and business. It took me 48years to start asking some of the critical questions. I didnt buy most of the common wisdom hook line and sinker but I had no place to start and debunk it. It took places like here, and Moslers site and a few more to “remove the scales from my eyes”

                    Ive been quick to refer to many Americans as stupid but I would have to include myself for much of my life. Not because of lack mental capacity but lack of interest to search for alternatives, since I was doing OK. The advent of the internet combined with the number of people who have gone from relatively comfortable life to on the edge of massive debt if one thing goes wrong has been a formula for potentially very rapid changes in group sentiment and group knowledge.

    • Speculation– The ever increasing income share going to the top 10% will not bring back the good old days of decent GDP growth for this reason, that these folks want to spend a high fraction of income on financial investment rather than consumption . If a poor person gets $100, he will likely soon spend say $95 on something that gives income to the next guy. But when a rich person gets yet another $100, he may well want to use $50 towards buying some existing financial asset, leaving only $50 to spend out into the economy. What do you guys think?

      • Isn’t that a form of the cash on the sidelines argument? If I save $100 and I am super rich and decide to buy a stock then someone has to sell me their stock. They get the cash and I get the stock. Someone ends up holding the cash in the end. And the unrealized gains from secondary markets can actually make everyone feel wealthier which should boost spending. Am I wrong?

        • I don’t know, but the idea that rich people might end up using much of their funds trading financial assets back and forth with each other whereas poor to middle class people tend to use their money to buy real stuff like food and clothes (which other people then need to be employed making and delivering) at least seems plausible. Of course rich people spend on those real things things too, but there’s much fewer of them…. so even if they buy the best quality and in large quantities it’s hard to imagine they’d compensate for a lack in spending amongst the lower 99%. But like I say, I have no idea really!

        • Yes, you’re right Frederick. What it really comes down to is the fact that all securities issued are always held by someone. Apple can’t issue more shares than the public is willing to purchase. And the amount of shares held by the public is based on the public’s desire to allocate their savings in a particular way (there’s that savings portfolio concept again!).

          There are a bunch of nasty misconceptions in this thinking. The first is that people are more likely to spend cash if securities aren’t issued. That’s wrong. People who buy stocks and bonds are going to save no matter what. They just realize that it’s smarter to save in stocks and bonds than in cash so they allocate their cash to those securities. Again, all securities issued must be held. Also, the idea that rich people are evil because they save is silly. It implies that saving is less prudent than spending and it also implies that the saver was going to spend his cash were it not for those darned securities. Wrong. He/she was going to save no matter what. In short, the amount of securities issued at any given time represent the demand for saving at any given time. But this doesn’t pull money out of the economy. That money was already pulled out of the economy and was going to be saved no matter what. And the people who imply that this is always a bad thing are almost certainly talking out of both sides of their mouths….

          • This is why I always hated when people phrase market moves in terms of “more buyers” and “more sellers”. It shows a fundamental misunderstanding on how that market works.

            Of course there is the case of short sales where two parties hold a claim to the shares (or rather one holds a derivative thereof).

            • “This is why I always hated when people phrase market moves in terms of “more buyers” and “more sellers”. It shows a fundamental misunderstanding on how that market works.”

              Except Nils, at a given time there may be more sellers or buyers AT A GIVEN PRICE. When markets have more people making sell bids then buy bids the market moves down relative to the price it is at to try and find the place where every seller finds a buyer. Think of it like a Vegas line on a football game. If it opens at Alabama -14 and almost everyone is taking Alabama then the line (price?) will move up til there are enough people taking the points to make the money balance on each side of the bet. The desires of the bettors moves the line til the money balances.

              • I don’t get your Vegas analogy, but I know how a stock exchange works, I’ve been staring at Level2 screens for countless hours.

                But when I hear after the close someone say “there were more buyers than sellers” I gotta scratch my head.

                • The Vegas analogy is simply trying to demonstrate that the price of a stock(point spread) is determined by the relative buyers and sellers. When the exchange opens and you want to buy at the price it closed at yesterday say, in most normal markets there will be a seller at that price, but if all sellers want a higher price they will hold out for a higher bid. If no such bids come they will either hold or lower their price to sell.

                  In 2007 when the market tanked, there were more people wanting to sell than people wanting to buy. Yes every transaction had a buyer and seller of course but there was a preponderance of sell bids to buy bids. Many sell bids didn’t get filled til they lowered their bid and some didn’t sell they just held a falling value stock, refusing to sell that low.

          • “People who buy stocks and bonds are going to save no matter what.
            …, the amount of securities issued at any given time represent the demand for saving at any given time. But this doesn’t pull money out of the economy. That money was already pulled out of the economy and was going to be saved no matter what.” This helps answer the issue I posed above. My takeaway from these comments is that, yes, to the extent that a higher fraction of the national income goes to folks who want to squirrel most of it away ( but whether in cash or in higher yielding assets like equities , it doesn’t much matter) GDP growth will suffer. The exception might be if the saved / invested funds are used to build additional productive assets.

            • “The exception might be if the saved / invested funds are used to build additional productive assets.”

              Right. But as long as the savings are just put aside, not invested, they’re deflationary for the overall economy.

              This plays into something I’ve been thinking about lately, the ongoing scare about automation and “robots are coming to take your jobs”.

              When enough companies replace their workers via automation or outsourcing, and those people don’t find new jobs quickly, they lose their income. With less income, you might subsist on savings or credit for a while, but ultimately, you have to cut your spending, which means less revenues for the companies.

              Basically, in such an economy, automation or outsourcing cannibalizes its own customer base. When no one can afford your product, no one will buy it. (Or, more accurately, when few enough people can afford your product, you’re losing money).

              This is “fixed” when:
              1) Consumers find jobs, or better-paying jobs.
              2) Producers lower prices to the point where consumers can afford them.
              3) Government changes policy to increase consumer’s disposable income (whether by more food stamps, lower taxes, whatever).

              Notably, if savers (including companies) start spending or investing their savings, this provides new demand, and stimulates job creation (#1).

              The “robots are coming to take our jobs” is just a scare. If enough people are put out of a job, companies will make less profit, and if you can’t afford their products, they certainly won’t build new factories. Automation is self-limiting.

              It’s also why I think that corporate profit margins are going to have to come back down. To the extent to which this represents a transfer of money from consumers to savers, it’s deflationary, and ultimately self-defeating.

              • … interesting thinking. However, to take a darker (not completely serious) view, there are some other possible outcomes: 13th amendment repealed so that the out-of-work can sell off their internal organs for spare parts (to the rich… who’ve devised a way to cheat death given a steady supply of replacement parts) and produce some income that way. Kind of like a piecemeal form of slavery. Thus a lucky few of us will get jobs as “organ donors” but that’s about it! ;)

                Or scenario two (my favorite): the machines can start to reproduce themselves… make modifications and evolutionary improvements, etc. w/o a human in the loop. Then it’s game over for carbon based life-forms! …As soon as they realize we’re a threat!

  12. There are some comments here about the effects of QE on asset prices, inflation targets, etc. For anyone’s that’s interested, here’s a take on some of these issues covered variously by David Glasner, Brad DeLong, Robert Waldmann, and Martin Feldstein:

    http://uneasymoney.com/2013/05/14/wherein-i-try-to-help-robert-waldmann-calm-down/

    The link is to a response by Glasner about a comment by Waldmann on DeLong’s piece on Glasner’s piece about Feldstein’s piece (Whew!).

    I’m a fan of Glasner. I don’t have a good reason really (many of the things he writes about are a bit over my head), except that he almost always takes (what appears to be) a moderate view, presents his ideas in a calm tone, and his ideas don’t seem to clash with MR too much (from what I can tell) regarding a lot of the low level mechanics. He also takes the time to respond to questions and comments. I’d say he’s a Market Monetarist sympathizer… but clearly (in this post) is not opposed to fiscal policy (in contrast to many hardcore MMers, for whom fiscal policy is at best useless).

    I thought it was interesting because in this one post (and related links) we get a cross section of view points from a number of different people.

  13. Good article Cullen

    The “cash on the sidelines” bit has always bothered me. Especially over the last few years as the mechanics of our banking system have become more clear.

    Like I told one of my coworkers a while back, there is no sideline there is only the banking system. When I use my 1000$ and buy a stock, I get a little piece of paper that says “stock” and the other guy gets my 1000$ in his bank account. No cash has left a sideline its just changed names within the banking system and a stock with a price has changed hands. If someone decides my stock is later worth 2000 to them, good for me, but there is no sideline that this cash will come from, somewhere where there wasnt cash before. And has Cullen has pointed out, just because a lot more people have cash and no bonds, his wont magically make my stock price rise. I might find a fool who likes my stock enough to pay 3000 but nothing the fed does makes this more likely.

  14. Tepper said: “The fed is going to purchase $85 billion of treasuries and mortgages a month. So over 500 billion in six months. What’s happened and what’s really amazing is … the deficit is shrinking.”

    I wonder what the implications are for QE of the deficit falling so much. CBO estimates the deficit for fiscal 2013 at $642 billion now, while the Fed plans to do a $1 trillion of QE (treasuries and MBS).

    • I think the Fed is fooling you guys and the markets. In reality, they have not done ‘anything to improve the real economy’: employment participation rate, U-6 employment, real income levels, etc.

      Their big contribution has been MARKET PSYCHOLOGY! Once they changed the psychology the big hedge funds guys like Tepper work with the media to tell a positive psychological story that then creates competition and herding…..

      Tepper did not make any sense when he was talking this morning. He had not facts to back up his arguments. He was VERY UNIMPRESSIVE! He is a Wall St salesman who keeps saying to buy beacuse the market keep going up….

      • “herding” or “hoarding?”

        He “keeps saying to buy”… well apparently he’s been saying that at least since last Sept. And since then the market has improved 45% (according to the host). Maybe he was worth a listen back then anyway!

  15. To be fair, many of his misperceptions are widely held. For me that’s reason enough to stay the course.

  16. If your deficit is shrinking and doing rather better than elsewhere (and how can it not given what elsewhere looks like) then I think the dollar strengthens. If the latter then your big caps for sure start seeing that translated onto the B/S and all things being equal in a world that is slowing down that makes earnings look even harder to push higher.
    I’m not hugely bearish either,but neither do I see the upside that he sees.