Friday, January 7, 2011
- QE In Perspective
I was having an email conversation with an opinion journalist who shall remain nameless (because I didn't clear this with him). We were going back and forth about the impact of inflation and he said that he was concerned that if we didn't get ahead of the issue, we were going to have a public debt crisis. I told him we already have one.
For the last 15 years or so, I've worked exclusively at 'Macro' hedge funds. My Resume includes names like Caxton Associates and Moore Capital, which along with the 7 or 8 other firms that are their peers, are all considered to be 'powerhouses' funds. But even at their largest, they typically have something between 15 and 20 Billion dollars under management, no more.
In fact, the industry legend is that Paul Tudor Jones helped his friend Louis Bacon start Moore Capital by referring those investors he was turning away from his own Macro hedge fund (for lack of capacity) to Louis's firm. I don't know if it's true anymore than anyone else - but it is a story that people tell. Anyway, 20 Billion seems to be a magic number in the Macro hedge fund space, and if you are managing more money than that your returns seem to suffer for it.
In the meantime if you look at this link, you'll see that the Federal Reserve has purchased more than 6 billion dollars worth of US Treasuries, on at least 12 of the last 30 days. On that pace, it would have taken them roughly three and a half days to have become one of the largest hedge funds in the world.
Sometimes I hear a talking head say that things must be (good/bad) because of what interest rates are indicating. But with the Fed buying that much of the issuance, the interest rates aren't telling anyone anything except that the Fed is open for business. The question that I and many of my peers are asking ourselves is not 'what do interest rates currently tell us', but 'what will happen to interest rates when the Fed (operating as the worlds largest hedge fund) stops buying bonds?'
I'm not saying we shouldn't be doing QE, on the contrary, I believe we should. What I'm saying is that if you think it will be painless for them to simply 'stop', then you're dreaming. The event that must be avoided at all cost is a run on the dollar. A run on Treasuries should be avoided too, because there is an excellent chance that it will lead to a run on the dollar. But without QE, we would very likely already have had one or both.
QE is buying us the time to undo some of the systemic fiscal problems with our public finances. It's working as far as that goes. And if we now act like grownups and address the fiscal insanity, then we can all go on more or less as we are. If not, then with QE in place the odds about 50 - 50 that we face economic oblivion. Those are bad odds because there are a lot of problems. But without QE I believe oblivion would be certain, so I'll take 50 - 50 any day.