what is QEll

Only if you can borrow using Fed Funds or under the discount window.

oops, that should be QEll or QE2.

What does have bearing is the return on cash - which is right now zero. So - don't pay 6% on borrowed cash while earning 0% on your idle cash.

And yet ironically more home purchases these days are all cash deals.

I am not sure but that stat may be tweaked by buyers who can't get credit now paying cash. An accountant was recently telling me that he tells his Florida clients to stop paying their mortgage, save money for a year or so, give the house back to the bank, and then buy one of the short sales with cash (saved from not paying mortgage). Gross IMO but apparently happening.

Village-one thing crossing my mind was that the market would return the same 6% interest rate I was going to pay to the mortgage lender. I'd only be breaking even but I'd have some liquidity. Thoughts?

rlmg, if you're asking what it IS, it's the second round of "quantitative easing":
http://en.wikipedia.org/wiki/QE2_(monetary_policy)#QE2

I'd say if you knew the market was going to return 6% that would make sense (+ cap gain taxes - tax benefit from mortgage). But in recent years, the market has been off 40%.

What QE2 did was reduce the supply of gov't bonds and increase cash. The idea was that the cash would need to somewhere(risk assets). So basically the duration of outstanding gov't debt decreased while cash increased. Bernanke himself mentioned rising stock prices as one outcome and thought we'd see a wealth effect (people feeling richer after their stocks went up), which some people thought of as the Barnanke put. Critics say the wealth effect from rising stocks is not the same as that from rising home prices. Anyway there are lots of Q.E. critics and the evidence regarding success is very questionable.

Thanks alan for the wikipedia link. After the definition, I guess the question is what does it mean for the 'little guy'.

Village- since I don't truly know what the market will return and really only hoping I'd break even in investing, I am a bit hesitant of jumping into it with borrowed money. It seems more of a likelihood I'd be on the losing end than the winning end.

Riversider-manipulating the economy. I'm beginning to see the light.

"We don't pay taxes. Only the little people pay taxes."
-- Leona Helmsley

WASHINGTON (MNI) The following is a transcript from the news conference with Federal Reserve Chairman Ben Bernanke, who repeated that the second round of large scale asset purchases was "effective":

CHAIRMAN BERNANKE: Thank you. First, I do believe that the second round of securities purchases was effective. We saw that first in the financial markets. The way monetary policy always works is by easing financial conditions. We saw increases in stock prices. We saw reduced spreads in credit markets. We saw reduced volatility. We saw all the changes in financial markets and quite significant changes one would expect if one were doing a normal easing of policy regarding the federal funds rate.

http://imarketnews.com/node/29995

So basically Ben said QE2 was targeting asset prices(e.g. financial assets)

QEII is a surefire way to get economic growth to slow to under 2%, increase joblessness, while at the same time causing a huge asset bubble in stocks and commodities, whose bursting is going to wreak even more havoc on the world economy.

It is a monetarist tool taken from the pages of Milton Friedman, which was the subject of Ben Bernake's doctoral dissertation under the chapter entitled, "Helicopter." The means by which it achieves its very pernicious end is by increasing bank reserves and hence the money supply, thus creating vast quantities of specie which has no useful productive outlet, which is therefore borrowed by hedge funds and others at negative real interest rates to buy corn index futures, raising the price of corn to the point where nobody can afford even a single Frosted Flake.

However, like all Ponzi schemes, as the bloat is withdrawn from the economy - in a process not dissimilar to the draining of a festering edema - prices fall to the point that margin calls are triggered, which leads to more forced selling, which leads to faster falling prices. We saw a preview of how this works in June 2008, when borrowing increased massively to paper over a sputtering economy and losses from worthless mortgages.

We are about to see it again.

impressive words.

monetarist
specie
pernicious
edema

not necessarily true stevejhx. the federal reserve did not substantially increase the amount of aggregate credit by depositing base money at banks. what they did do was sustain the amount aggregate credit outstanding because the private sector was unwilling to shoulder the burden (aka borrow and multiply the existing base money).

if the stock of base money (2.5trn) is sufficient in creating enough lending to increase aggregate demand, we'll see inflation before any contractionary effects. on the other hand, if it was the flow of funds that kept asset prices afloat, the end of qeii will indeed be a nasty turning point for nominal asset values.

we do have outs though i am not hopeful. if by some miracle the US can repair its fiscal situation aka entitlements and tax reform, while at the same time managing legitimate productivity gains, then we could make it out of the woods. base case though i think we're in for a sh1tstorm and decent amount of social unrest.

As usual, steve is in his mental bizarro land. The Fed is monetizing debt to pay for awful Keynesian deficit spending policies. It will wind up doing more harm than good.

LICCdope - it was Saint Ronald and George II who ran up the deficits. Hardly Keynesians they.

And you can't "monetize the debt" because the debt already is in money.

What a maroon.

d0 - lending does not increase aggregate demand; aggregate demand increases lending. That is the whole flaw of QEII.

The Fed also did not "deposit base money" at banks; the opposite occurs when the money supply is increased: banks increase their deposits with the Fed (not the other way around), which in turn allows them to lend more.

That is the difference between "printing money" a la the Weimar Republic, and increasing the money supply: the Weimar Republic just - literally - printed money, or deposited nonexistent money in banks. The Fed is doing it the opposite way, which is the correct way.

Just - the money has nowhere to go.

Except Long Island City Community College, for LICCdope to take a lesson in economics, and not the "home" type that he's used to.

Trying to put some numbers around QEII magnitude. As far as I can the total size of the US treasury market held publicly (by individuals, corporations, foreign governments, etc) is about $10 trillion. If this is correct, QEII at $600 billion would represent about 6% of the market. As a comparison China has about $1.2 billion of treasury holdings and Japan ~$900 million. It will be interesting to see the impact once the QEII purchases are completed in June, assuming the Fed completes and stops the program at that time as Bernanke said yesterday.

OOPS was off by a factor of 1,000 there on China/Japan. should be $1.2 trillion and $900 billion..so both larger than QEII

steve, everyone figured out long ago that you have no idea about which you speak. Do you really want to go through this and get embarrassed again?

As for your stupid reference to Bush- enough already. Yes, Bush was bad, and now Obama is doubly bad.

"d0 - lending does not increase aggregate demand; aggregate demand increases lending. That is the whole flaw of QEII."

What flaw?
Have you seen commodity prices, stock prices, revenue and profit numbers from all the fortune 500 companies, housing, etc. etc. etc.

Steve is a complete moron.

The guy who suggested SHORTING GOLD in the Fall of 2010.

OUCH!

"banks increase their deposits with the Fed (not the other way around), which in turn allows them to lend more."

Except banks are not lending, they are buying US treasuries and making the spread. Also, the fed is paying interest on reserves as one way of sterilizing the 'creation of new excess reserves' at primary dealer accts as they buy assets.

"steve, everyone figured out long ago that you have no idea about which you speak."

... if "everyone" is two sadsacks living in sinking condos in the Greater Creedmore vicinity.

BAD FAT OUCH FROM STEVE!

One of the biggest Gold move that started 5-6 months ago, this buffoon suggested SHORTING IT and call it a BAD investment.

http://streeteasy.com/nyc/talk/discussion/23710-why-gold-is-a-bad-investment

"living in sinking condos in the Greater Creedmore vicinity."

Going to be the best damn neighbor in all of NYC in 2-5 years.

You think you'll be able to move to NYC in 2-5 years? You'll just be deeper and deeper under water.

"You think you'll be able to move to NYC in 2-5 years? You'll just be deeper and deeper under water."

Deeper under water? Sorry, but i'm above water right now. Now that's a fact. I can prove it alan.

First, I never owned gold or suggested shorting it, buying it, or selling it. I'm in the Warren Buffett camp on that: it's useless to have.

Ericho - that's the bubble. Again, look at the spot price for corn. Do you really think the demand to EAT corn has gone up that much, or is it merely speculators buying corn and increasing the price? Compare the present action (since QEII) of corn with the June 2008 action, and get back to me.

Banks ARE lending, UD: to speculators. Because they know they'll get their money back. Just naked adding money to the system will not increase demand per se; Japan found that out, as households deleverage.

"Sorry, but i'm above water right now."
... yeah, you're above Newton Creek!!!!!!!!!!!!

Sometimes I don't understand why LICCdope is so angry. After all, at such a young age he's fulfilled his life's dream by buying a property in Long Island City, where he can live the rest of his life looking over the river at where he really wants to live: Manhattan.

Life in Long Island City sounds very masochistic for that very reason.

steve started a thread 5 months ago saying gold is a terrible investment, and now he says he never suggested selling it.

steve is as much a liar now as he was then.

How is that dream of renting in a dumpy building in the theater district working out for you steve?

It is a terrible investment, but since I didn't suggest buying it, why would I suggest selling it?

I'm delighted with my dumpy rental, LICCdope! It takes me no time to get to Manhattan, since I'm already here.

LICcomm, you mean this thread?:
http://streeteasy.com/nyc/talk/discussion/21108-lic-popularity-growing

Now, on to serious matter:

http://www.marketwatch.com/story/the-9-places-where-inflation-is-crushing-us-2011-04-28

Judging by the doubling of corn prices, and the huge run-up in stocks since QEII, I don't think there's a way for the Fed to manipulate a soft landing for this policy: even today, though mixed, stocks are unaffected by 1.8% GDP growth and 425,000 new jobless claims.

All caused directly by QEII: STAGFLATION.

If someone can tell me why stocks would increase 30% -40% when growth was slowing, I'm all ears. But since there is no rational explanation for that other than QEII-generated margin, I stick to my prediction of a crash.

I'm laughing at all of the "easy money" commentary: Bernake said just the opposite. If you listen carefully, he said the Fed was in the process of reversing course:

1. QEII will continue through June, then stop.
2. Since that would cause a panic, principal will be replenished for a while.
3. Then that will stop.
4. Then the Fed will look at raising interest rates.

Bernake, like Greenspan, isn't one to admit his mistakes, but the only way to stop inflation is to drive down the price of commodities. They are going to try to do it slowly. It won't work. The policy was monetarist drivel, and today's figures (and the ones to come in the future, I bet) will show how counterproductive it was.

More reasons:

http://www.marketwatch.com/story/pultegroups-1q-loss-widens-on-fewer-closings-2011-04-28

If commodity prices don't start to reverse soon - especially oil & food - the Fed will be forced to act faster and harder than they plan. And they won't, until the speculators are convinced that money will actually be scarce. The soft landing from inflation will not work.

I still remember the last Fed meeting before Lehman, when they said that their next policy move would be to tighten, just as the world was falling apart.

But Hank Paulsen said it was the best economy he had ever seen in his career.

Based on today's action in the stock market, given the news that it is reacting to, I predict that the Fed is going to have to do a quick about-face on yesterday's announcement.

This crash is going to be brutal when it comes, and come it must: it is all leverage, no volume, and as long as the free-money trade is on, inflation will continue to rise.

This chart is really scary:

http://www.marketwatch.com/investing/index/DJIA/charts

More indication of serious problems:

http://www.marketwatch.com/story/brazil-stocks-currency-hit-on-inflation-concerns-2011-04-28

Except banks are not lending, they are buying US treasuries and making the spread. Also, the fed is paying interest on reserves as one way of sterilizing the 'creation of new excess reserves' at primary dealer accts as they buy assets.

no, they are paying interest on reserves as another way to help banks increase earnings without exposing
capital. Think back to when the Fed began IOR policy. It made no sense if the goal was to spur lending.

I don't think I have ever seen such a disastrous policy in my life as QEII. It is causing stagflation, all countries around the world will be raising interest rates BUT the US, which will cause the dollar to sink even further, which will drive prices up even faster.

Today's activity on the stock market was nothing short of amazing: up 75 points on growth of 1.8% and an increase in jobless claims. If anybody tells me that this is a rally based on fundamentals, ya got some 'splaining to do.

I've talked to traders who think the Flash Crash happened for a reason - margin calls leading to margin calls. Today's volume on the NYSE was 148 million shares: nothing. It means margin, confirmed by the NYSE's reports on margin, which when the one for April comes out will show TONS more, I bet, b/c Uncle Ben said interest rates wouldn't be raised for 2 more meeting cycles.

It reminds me of the Flintstones when Betty and Wilma got their first credit cards: CHARGE!

This can only lead to disaster. P/E ratios are now higher than at any time since the dot.com crash, and 1929. I think we're going to start hearing from some FOMC members as early as next week, clarifying.

Oil at $112 a barrel is INSANE with 1.8% job growth, and it ain't China.

1.8% job growth = GDP growth. Ooops!

> But in recent years, the market has been off 40%.

Of course, so are some RE markets. And even if they're only off 10% with 5 to 1 leverage (your standard 20% down)... thats 50%. NYC would be 100%