The best quote to describe today’s market action after the more robust British GDP numbers comes from the column in the London Telegraphby Jeremy Warner. It is an apropos comment that the FED and all policy makers should take to heart and it comes from that master wordsmith, Mike Tyson:


Today, the markets got hit from the British GDP number and it might have sent Britsh and possibly U.S. quantitative ease reeling to a later time. The market consensus was for a 0.4 percent increase while the actual number printed at 0.8 percent–double the predicted release. The British pound had been trading very soft against the world’s currencies making the highest high since the first quarter yesterday. The EUR/GBP cross, which reversed off the highs of Monday, immediately droppped another 1.5 percent, closing around 0.8750.
The FOOTSIE also was sold as British interest rates moved higher on the better economic data, with the 10-year GILT gaining 15 basis points. Until today the market had convinced itself that the Brits were following the FED into a new round of QE as the British economy remained mired in tepid growth and the Cameron government was embarking on an austerity budget program. The more robust GDP number may mean that the new round of QE may not be needed or that the BOE under Mervyn King may take a wait-and-see approach.
The depreciation of the POUND has given ENGLAND some economic relief as British goods have become much more competitive within the European Union. As Cameron has reminded the markets, the brunt of British trade is within the EU and since the beginning of 2007 the British currency has dropped 33 percent against its major trading partners. Now the question arises: Why does the British GDP have possible significance for the Bernanke FED? The quick answer is that the FED policy wonks openly admit that they are in unchartered waters in the QE realm and really don’t know the impact that all this liquidity enhancement will have upon the economy.
The huge buildup in the FED‘s balance sheet is unprecedented so there is no historical basis on which to rely. Some of the most dovish FED board members admit this. We ask if it would not be better to proceed slowly now that global growth may be picking up and the global equity markets are pointing to better growth ahead. Yes, I know that the EQUITIES are being lifted on a pool of liquidity and may not mean that the growth is sustainable. But that is why it may be better to hold some QE for a later date.
A reader of ours, KM, maintains that it may be better to invoke a type of POWELL DOCTRINE–come with everything you got–but we wonder if it is better to hold back reinforcements in case of another downturn. Let’s remember that five months ago Bernanke and company were on the center stage discussing ways to remove the QE. By August we were back looking for new ways to enhance QE while the FED began reinvesting all the MBSs that had been rolling off. This shows that the FED has gotten it badly wrong recently and they be in the middle of another possible misstep. If the economy were to turn up faster than recent FED missives have predicted the FED could really be in a terrible bind as it moves to retract an enormous amount of money from the system.
The FED meeting of next week will bring high market volatility for the conventional wisdom has been for a dynamic QE move by the FED. New York FED President, DUDLEY, openly stated that a 500 billion QE add would be the equivalent of a 50-to-75-basis-point ease. How he knows that I don’t know but it must emanate from one of his beloved models. The FED has the cover of the recent S&P and equity rally to stay its hand. Yes, the stocks, bonds and commodities will sell off but it will be a good test of where all these markets will find support when left on their own without more FED injections. BEN BERNANKE it is time to test the waters to see if the previous bouts of stimulus have had any real success before you dig the HOLE DEEPER. While markets are an important source of FEEDBACK, policy makers cannot be held captive to the talking heads and the wall street money machine. WHAT SAY YEA BEN?



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6 Responses to “Notes From Underground: ENGLAND GROWS AND BIG BEN’S FED MAY SHRINK”

  1. Kevin Donohue Says:

    Yes, in the immortal words of Mr. Tyson- Everybody has a plan until they get punched in the mouth.

    On a personal note, its always great to catch your appearances on TV, and thanks so much for Notes From Underground. I never miss a post.

  2. Danny Says:


    It seems that new Fed Presidents are becoming slightly timid about using overwhelming force with QE2 at this point. In WSJ today, they reported that the Fed was aiming to avoid the “shock and awe” strategy. It appears to me that the incremental impact of QE2 at this point would be marginal at best. The objective of QE is to move asset prices higher and interest rates lower, right? The hope that the effects are positive and manifest themselves in the real economy. BUT, if markets front run the Fed, which they have to a large extent, whats the point of actually going through with it? Asset prices are higher, interest rates are lower? To a large extent the Fed has accomplished its goal without even deploying a dime.

    So now the meat course…

    The market seems to be at these levels in many asset classes based almost entirely on significant QE2. Is the market setup for a sudden downward shock IF the Fed comes in the ring for a quick warm up rather than an all out brawl?

    Minor digression: Can the Fed have a material impact on economic decision makers (consumers and businesses) despite HUGE demographic (i.e. a far more conservative investor) and social macroeconomic trends (i.e. a restoration of the saver vs. spender)? Rising prices are little more than an insidious hidden tax on individuals if economic decisions/investment does not change as a result – or so it seems to me.


  3. yra Says:

    danny–the FED is getting nervous in some quarters because they are very concerned that being in unchartered waters that too much may be problematic–look we are still in a major deleveraging scheme which the FEd wishes to end –how far wil they go is the question—bernanke has Japan on his mind 24/7 and wants to badly prevent the Japanizing of the u.S. economy–we will write more in your response later

  4. yra Says:

    Danny–the concept of a downward shock is always with us but I stress must not be feared –for again if the market has any real sustenance it would right itself quickly–if it can’t then we can all sing with that other “HO”–tiny bubbles

  5. Arthur Global Practice Says:

    After the Nov. elections, forget about another bailout.

  6. Arthur Global Practice Says:

    Yra, i call your attention about the case study of BMW in the US. In its biggest foreign market (US), BMW gets skilled workers for less, $15 in the US, $30 in Germany. From the Washington Post.

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