"...to control rates on the "long end of the curve' requires the Fed to purchase long-dated debt on the open market, a process known as Quantitative Easing. The buying helps push up bond prices and push down yields. It follows then that a process of large scale selling, by foreign central banks, or other large holders of bonds, should be known as Quantitative Tightening."
"The arrival of Quantitative Tightening will provide years' worth of monetary headwinds. Of course the only tool that the Fed will be able to use to combat international QT will be a fresh dose of domestic QE. That means the Fed will not only have to shelve its plan to allow its balance sheet to run down (a plan I never thought remotely feasible from the moment it was announced), but to launch QE4..."
From:
realclearmarkets.com/articles/2015/09/05/meet_qt_quantitative_easings_evil_twin_101811.html
Comments
What he labels "QT", most would probably describe as interest rates becoming normalized. Is that tightening? Well sure, but that is what 'getting back to normal' is. The alternative to getting back to normal, is to continue the interest-rate repression in place since 2008. -- I can't believe an Austrian economist like Schiff would favor that -- though he seems to just like to play Monday morning quarter back on central banks.
Central bank policymakers used the tools available to stem, then turn around the crisis. It would have been better if national legislatures in the OECD had lent their respective national banks a hand in providing economic/structural reforms. Unfortunately, democratic governments seem uniformly inept these days.
It seems Schiff is always predicting a USD crash -- always 'someday', beyond the temporal horizon. Crash against what exactly? The value of any currency is typically measured vs. other currencies. Is the USD in danger of crashing against the Yen? Euro? Renminbi? The fact is: China is weak. Its raw-materials suppliers, countries like Australia, Brasil, Canada, Russia) are consequently weak. Also as a consequence, the ASEAN countries which run trade surpluses are weak. And, Germany (Europe) which exports engineered products to China, will also weaken. Against this backdrop, which major currencies will the USD crash? (grasshoppers chirping in background) Especially as interest rates will be moving up here (albeit at a slow pace), while other countries engage in ongoing Q/E.
No doubt, at some point, when other countries' economies strengthen, the USD will decline. --- But that is not a crash; it simply will be due to increasing faith placed on foreign economies vs. the nadir of faith in which many investors hold them.
The tone of Schiff's commentary always strikes me as alarmist, leaving this reader to infer he thinks EVERY monetary policymaker is incompetent in the extreme or up to nefarious purposes (or both!). No doubt HE should make the decisions for the Fed, BOE, BOJ, ECB, and the silver lining would appear from that cloud. No doubt!
Many seem to believe that we are exceptional and we will be the reserve currency forever and ever. The decline in "American Exceptionalism" started years ago and has continued on, I just think many aren't willing to admit it or simply don't want to pay attention. Am I happy about it? No, but it is what it is. I mean, we're possibly looking at Donald Trump being our next president, a possibility that can only come out of considerable anger by many at the status quo. Yet, out of anger comes a result that will likely bring only further problems.
As I've said on here before, no politician wants to make difficult or unpopular decisions and are concerned only with political games. As a result, we throw money at problems and string together sugar highs, yet remain somehow surprised when none of it turns out to be sustainable.
Reserve currencies do not last (http://z822j1x8tde3wuovlgo7ue15.wpengine.netdna-cdn.com/wp-content/uploads/2014/06/gundlach1.png) and this one will be no different. Do I think it will happen tomorrow? No, but I do think that - within my lifetime and it wouldn't surprise me if it happened in the next decade - the dollar will probably no longer be the global reserve currency.
That is NOT me saying that the dollar will crash. That is me saying that things will look very different in the global economy and the dollar's role in it will change.
I suppose there's also the view towards the SDR and many believe that China was upset when it was not included in the SDR earlier this year.
Still, China wants in.
"In light of that, the PBoC's devaluation of the yuan could be viewed as an attempt to appear like a more qualified candidate for the SDR.
Notably, the IMF was pleased with the yuan's devaluation — especially because of the "more market-oriented exchange rate."
According to a press statement released by the organization on Tuesday:
The new mechanism for determining the central parity of the Renminbi announced by the PBC appears as a welcome step as it should allow market forces to have a greater role in determining the exchange rate. [...] Regarding the ongoing review of the IMF's SDR basket, the announced change has no direct implication for the criteria used in determining the composition of the basket. Nevertheless, a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward.
In short, China's shrewd play could be a step toward the yuan's inclusion in the SDR basket. And, as UBS legend Art Cashin suggested in his daily market commentary, "if that approval were given, we could be looking at shifts in the trillions of dollars."
http://www.businessinsider.com/the-imf-welcomes-chinas-yuan-devaluation-2015-8#ixzz3ktL5c3nR
Others, including Jared Bernstein, have tried to make a case that taking away the dollar's "exorbitant privilege" would be a good thing (http://www.nytimes.com/2014/08/28/opinion/dethrone-king-dollar.html?_r=0)
Speaking of "Exorbitant Privilege", the book by Barry Eichengreen is worth a read ("exorbitant privilege the rise and fall of the dollar", available on Amazon. I also enjoyed the Jim Rickards book, "Death of Money", but that's certainly going to not be a lot of people's cup-of-tea.)
---
"Schiff always seems to find a fly in the soup or a cloud around the silver lining."
Wasn't he going to be Ron Paul's Treasury Secretary? Anyways...Schiff is certainly not a cheerleader and it's astonishing to me how negative people are whenever any realism is injected into a conversation. I'm not saying Schiff is right, but I'm saying in finance there are far more cheerleaders than Schiffs and people complain like hell whenever someone like Schiff throws a note of caution and when a Schiff is right (see 2008, where he went on CNBC continually and said things like "house prices were not sustainable" and got laughed at by the moron anchors), people still don't listen.
My philosophy is generally hope for the best and prepare for the worst, but it's astonishing how no one learns a freaking thing and I think (normalcy bias, perhaps?) that perhaps they just don't want to.
People love all the cheerleaders who say the market is going to the moon and have a ridiculous hatred of anyone who says anything that they don't want to hear. When the unsustainable is revealed to be unsustainable, we don't turn to people who warned us about it, we don't want to take anything away from it, we just want to go back to the good times asap and we don't care about the cost or eventual cost.
Again, I'm not saying that Schiff is right - if anything, he's a tad one-note (as is Jim Rogers, as much as I enjoy listening to Jim Rogers) and those Euro Pacific mutual funds are not exactly lighting up the charts. I'm simply saying that, Geez, people take such absurd offense at any negativity when it comes to investments and when things go South, people who clearly predicted it are ignored while everyone goes, "WHOCOULDAKNOWN?" Well, the people who were screaming at the situation was unsustainable did.
The cheerleaders are rarely never questioned ("Dr. Siegel comes off as a very nice person, but he is an academic who has been bullish at some very wrong times. Importantly, his theories regarding equities for the long term have been wildly off, as bonds have outperformed stocks for one, five, 10, 30 and 40 years, which, according to his investment thesis, is impossible.", http://www.thestreet.com/story/11417253/1/kass-the-wisdom-of-jeremy-siegel.html) and the people who - heaven forbid - inject a bit of reality and concern - go back to being hated.
The cycle repeats itself and ultimately, the cycle will repeat itself something serious this time around, as this period will end badly once again.
Again, if you don't agree with a Schiff, that's fine, but what I'm saying is that anyone who basically isn't a cheerleader in financial markets is treated with contempt and when they're proven right, it ultimately changes nothing while all the people who are screaming about buying overpriced momentum stocks and saying "markets to the moon" are always forgiven and almost never even questioned after markets crash.
It is interesting to observe the relatively tight positive correlation between the changing level of the Feds balance sheet and the changing level of Chinese foreign reserves.
How serious a headwind might be posed by QT depends on how it evolves. But current events do appear to be moving in that direction. Also, how the Feds policy plays out over the short to intermediate term going forward is relevant to how investments will perform over that time horizon. So, it might be prove useful to keep the QT concept in mind as well as Schiff's comment about QE4.
I noticed Schiff failed to flesh out the mechanisms he thought would lead to the collapse of the dollar. So, I was also left puzzled by his closing comment. It would have been helpful if he would have at least included a comment or two about his reasoning. But, perhaps that will get taken care of in his next article.....