Swedish House Mafia: ♪♫Don't you worry, don't you worry now…♪♫
From: DAVID ZERVOS (JEFFERIES LLC) [mailto:email@example.com]
Sent: Tuesday, March 05, 2013 11:18 AM
To: John Broussard
Subject: Don't you worry, don't you worry now
In the last week, there was an unusually clear message from the core of the FOMC. Ben spent hours answering questions in front of Congress last Tuesday and Wednesday - and then gave a strongly worded speech on Friday in San Francisco. On Monday, his number one sidekick Janet then delivered a even more powerful message in DC. Sifting through all the transcripts, the following takeaways are worth highlighting:
1. QE works - Asset purchases "have been reasonably efficacious in stimulating spending" by lowering long term nominal rates.
2. Jeremy Stein and Esther George should stop complaining - Monetary policy should not be considered as a tool to address financial stability issues. Rather, supervision and regulation of systemically important institutions should be used to "ensure that financial institutions are sufficiently resilient to weather losses and periods of market turmoil arising from any source".
3. Households have been jammed but at least their 401k's are up - The interest rate channel of transmission of monetary policy "has been partially blocked." However, "even if the interest rate channel is less powerful now than it was before the crisis, asset purchases still work to support economic growth through other channels, including boosting stock prices and house values."
4. We are not Japan - "Long term interest rates are low for good reason: Inflation is low and stable and, given expectations of weak growth, expected real short rates are low. Premature rate increases would carry a high risk of short circuiting the recovery, possibly leading -- ironically enough -- to an even longer period of low long term rates."
5. We will not create a 1994 event in fixed income markets as we exit - "...long term interest rates will rise as the recovery progresses and expected short-term real rates and term premiums return to more normal levels"; and the Federal Reserve has "new tools that could potentially be used to mitigate the risk of sharp increases in interest rates"
6. Seth Carpenter helped us create a "magic" new asset on the balance sheet called future remittances, hence we don't really care about short term NIM losses on the balance sheet during the exit process - "The Federal Reserve's purchase programs will very likely prove to have been a net plus for cumulative income and remittances to the Treasury over the period from 2008 through 2025, by which time it is assumed the balance sheet has been normalized"
And yes, Janet did say that "unusual" monetary policy will be with us until 2025!!!!! The results from the Ben/Janet tag team showcase over the last week should put to rest any worries about hawkish minutes, financial stability costs associated with doing more QE or a lack of commitment to keep the accommodative juices flowing. If we add the comments from Kuroda and Draghi over the last week, it should become painfully clear why risk assets are ripping globally.
In essence there are 3 guys with checkbooks which matter in this world - and they all will have hand cramps in the coming quarters/years as they furiously accumulate TRILLIONS in securities. Of course as the asset side of their balance sheets expands, so too does the liability side. And the only "safe" asset, as these fiat cash and reserve liabilities explode higher, is the one that has at least a chance of generating positive real returns - equity capital! So buy some more spoos and crank up the Swedish House Mafia - "Don't you worry, don't you worry now". Our 3 DJs are going to keep this party rocking for a LONG LONG LONG time!! We are going straight through the highs and then some! We can worry about the long term side effects from all this "chemical enhancement" another day! Good luck trading.
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