Fed's QE2, a dangerous and unnecessary step: futures pioneer

Leo Melamed, the founder of financial futures, has labeled the U.S. Federal Reserves' second round of quantitative easing not only dangerous but unnecessary.

The Federal Reserve announced Wednesday it would buy another 600 billion dollars worth of U.S. Treasury securities to revive the sputtering U.S. economy.

"The U.S. Federal Reserve is taking a very dangerous and unnecessary step by undertaking a second round of quantitative easing policy," Melamed told Xinhua reporter in an exclusive interview here Friday.

"We have certain opinions as market participants. I think the Fed is taking a very dangerous step, because it's not clear that the QE2 is necessary, and it's also not clear whether it can achieve the purpose Fed intends," said Melamed, currently chairman emeritus of CME Group and CEO of global consulting enterprise Melamed & Associates, Inc.

"We already had a good deal of quantitative easing in the U.S, and so far it hasn't done any restructuring of the market. In terms of strength of the economy, our economy has not rebounded, so why would it be necessary to do it again, when the first round isn't helping. We should give it more time before we do anything else," he said.

Melamed warned it was a very dangerous move the Fed was undertaking. The danger was that it might not work to rejuvenate the economy but would create a falling dollar, which was not helpful for the economy and eventually would create an inflationary environment in the United States.

As for the rest of the world, Melamed indicated it would create a dynamic where every nation tried to lower the value of its currency so it could compete with the U.S. dollar. "If every nation competes to depreciate their currency, it's not a good thing," Melamed said.

"A currency war is not the right word to describe the current situation. War is an intentional act, I don't think the U.S. is intending to create a war climate, I think it's just a logical result, not an intentional war," he said.

Melamed admitted that the QE2 was very bullish on commodities, creating a surge in the price of commodities due to the influx of money. "But the danger is that there are no underlying reasons for the rise of the prices, it doesn't really change the supply and demand equations, the prices could suddenly break, and it will create a very dangerous climate," Melamed said.

As an independent voter, Melamed was generally very pleased with the mid-term election results and has confidence that newly elected officials will change the direction of the economy and solve the high-unemployment through tax and spending cuts.

"If we reduce spending and taxation, that will encourage the business community to invest more and create more jobs, and that's the best way to reduce the unemployment rate," said Melamed, "I don't believe the Federal government should be printing money, they should be creating an environment for jobs by inviting investment and cutting taxes."

Source: Xinhua
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US Poll results as crystal ball

Behind the headlines
By Bunn Nagara

US MID-TERM elections were never made for presidential incumbents. After two years into a presidential term, opponents become agitated as supporters grow complacent.

And so it was that last Tuesday President Barack Obama’s Democrat Party lost seats in Congress to the Republican Party, while maintaining a wafer-thin majority in the Senate. There was little change in the gubernatorial elections of 37 states and two territories.

A loss of seats in Congress for a sitting president’s party is not unusual. Of the previous 20 mid-term elections, there were 17 such losses.

However, the size of the loss this time is significant. The swing of some 64 seats is the biggest since the Roosevelt presidency’s 72-seat swing in 1938.

An inopportune combination of setbacks explains the Democrats’ present predicament: a weak economy, high unemployment and ambitious federal government programmes requiring vast public expenditure.
Together with tweaks to Bush-era tax breaks for the rich, it was enough to bring right-wing Republicans onto the streets to condemn Obama’s “socialism”.

Groups like the reactionary Tea Party movement were motivated ideologically, yet decry the administration for its ideological motives. That revealed themselves collectively as something of a riddle wrapped within a mystery inside an enigma, with little contribution to nation or society apart from the anticipated policy gridlock to come.

Much of the fallout from this particular mid-term is admittedly subjective. What then are the factual or substantive features?

One distinguishing notch is the cost of the exercise, which at almost US$4bil (RM12.38bil) in total is unprecedented. That naturally shifts the focus to its value for money, which is practically negligible.

Of course, mid-term results can be read as barometer data, usefully indicating the direction of political winds halfway through a presidency. But that purpose can be served by good opinion polling costing far less.

Now that the data indicates strong support for the conservative Opposition, there is talk that Obama may have to start diluting his policies. This could be the beginning of the end of his promised “change”.

His aides have said that he would “stay the course,” but they would say that anyway. With a Republican-controlled Congress to come from January, there may be little choice but to adulterate if not abandon his pledges – particularly those that could make a difference.

Still, little of Obama’s promised changes have materialised two years into his presidency. That means whatever reform that may yet come could be strangled at birth.

For months already, his critics had made themselves far more vocal and visible than his supporters, regardless of the merits of their arguments. They had staked the battleground where they would fight and win, banking on their savvy showmanship and extremist positions rather than any sense or reason in stating their case.

And they remain in the spotlight. Far from Obama’s supporters being sated with the success of their several campaigns for change, liberals and reformists continue to wait for the changes in relative silence.

The right-wing’s novelty value may not add up to much in terms of political maturity, coherence or even sanity, but with media attention it can acquire a multiplier effect in influencing popular perceptions of political incumbents. It would be a naive politician to dismiss their reach out of hand.

As the battle now stands, Obama, the consummate community organiser and campaigner via new media, is on the defensive, trumped by people who insist on repeating slogans often enough and loudly. These people have tasted victory, and are hungry for more.

Their two years of vilifying Obama over little or nothing seem to have paid off. So what is there not to repeat?

There is a strong current in US politics that elevates the frivolous and the bizarre to undeserved heights of significance. Thus the constant targeting of Obama personally, from being dressed in a turban by his host on a visit to Kenya in 2006 as senator to bowing to King Abdullah of Saudi Arabia and then to Emperor Akihito in Tokyo as president last year.

If Obama had been trying to show that he respected foreign cultures, it would be a significant departure from some of his predecessors. But supporters of the latter would naturally condemn him for that.

In policy terms, Obama’s working-class opponents would reject his federal programmes such as in health care even when these benefit them. This continues the kind of uncomprehending class-unconsciousness that denies its own self-interests, as seen during the presidency of George W. Bush in a right-wing Republican Party favouring the rich.

On a visit to Kuala Lumpur earlier in the week, Secretary of State Hillary Clinton said an incumbent party losing control of the House at mid-term is a self-correcting mechanism in US politics to keep things at the centre. If so, that does not bode well for Obama’s promised change.

After the costliest mid-term elections yet, the US president is now on the longest foreign excursion (10 days), including the longest stop in any country (three days in India). That should give his opponents back home more ammunition to use against him personally.

But anyone who thinks Obama is temporarily seeking an escape from the Congressional turmoil at home would be wrong. More than even his supporters in the US, his foreign hosts are extending their welcome based on the “hope” for “change” that he represents and had promised to deliver.

As some had forecast when Obama won the presidency in 2008, he would spend the first term settling down and focusing on re-election – only to find that in the second term, if he wins it, he would not have enough time to push enough meaningful changes through.

Currency war ! US$ going bananas over QE2

By IZWAN IDRIS
izwan@thestar.com.my

 Question mark over Fed's decision to print more money to revive economy

"As long as the world exercises no restraint in issuing global currencies...then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament" - Advisor to China's Central Bank Xia Bin

DURING World War II, the Japanese military government minted the infamous “duit pisang” notes to replace colonial currencies used in occupied territories of Malaya and Borneo island.

The new money entered circulation in 1942 but, as the tide of war in the Pacific turned against the Japanese, the price of what available goods in the local market sky-rocketed.

To raise funds for its war efforts and pay local producers, the Japanese simply printed more money and in bigger denominations.

Barely three years after “duit pisang” went into circulation, the market was awashed with cash that had no value. By 1946, these notes were worth less than the paper they were printed on.

According to my late grandmother, a sackful of “duit pisang” would get you a decent pillow – if you had sewn the bag with the cash in it.

Fast forward to today, the US Federal Reserve’s decision to print more money to revive its ailing economy would seem foolhardy. At least one member of the Federal Open Market Committee (FOMC) was against the plan.

The Fed’s latest round of asset purchases will add to the US$981bil of excess deposits that banks held in the central bank as at Oct 20.

“This suggested that a big proportion of the Fed’s quantitative easing had failed to generate growth and is sitting idle,” RHB Research Institute economist Peck Boon Soon says.

The idle funds, he says, may fuel inflation once confidence returns and money creation starts rising rapidly.
“Perhaps the Fed believed that it is easier to control inflation rather than deflation,” Peck says.

The Fed on Nov 3 announced a widely-anticipated move to buy more bonds from the market. This time around, it will limit itself to US Treasury and will spend an additional US$75bil a month doing that through June next year.

The latest “quantative easing” by the Fed, dubbed the QE2, will create US$600bil in greenback cash like magic.

It will add to the US$1.7bil the Fed injected into the economy between 2008 and 2009 under the first QE.
One key difference between the latest round of asset purchases and the 2008-2009 programme was the focus on actively pursuing the dual mandate of “sustainable employment and price stability” this time around.

But that is easier said than done.

“In reality, determining the scale and pace of purchases by tying them to statutory mandate will be challenging simply because there is no historical precedent to this policy approach,” says Thomas Lam, the economist at Singapore-based DMG & Partners Securities.

The company estimated that the US$600bil cash injection was equivalent to a “pseudo reduction” of 50 to 100 basis points on interest rate.

The FOMC on Wednesday left the key policy rate unchanged at near 0%, and continued to pledge to keep interest rate low for an extended period.

Money printing pushes yields down, which has the same effect as lowering interest rates by reducing borrowing costs.

While the Fed’s QE2 gamble was widely anticipated by the market, the news of its implementation had drawn strong criticism from China, major developing economies and even Germany.

Across the region, policymakers are fuming over the Fed’s loose monetary policy.

In recent months they have been struggling to control incoming waves of funds from overseas that fuelled unwarranted currency appreciation and rising prices.

“As long as the world exercises no restraint in issuing global currencies such as the dollar – and this is not easy – then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament,” Xia Bin, an advisor to China’s central bank, wrote in a newspaper managed by the bank.

The report was quoted by Reuters on Thursday.

At home, Bank Negara governor Tan Sri Zeti Akhtar Aziz says Asian central banks are “willing to act collectively if the need arises to ensure stability in the region.”

South Korea says it will “aggressively” consider controls on capital flows.

Analysts say the implementation of QE 2 will likely fan new bubbles across the region that is already frothing.
“For emerging markets, the combined impact of QE2 and the still accommodative monetary conditions in Asia could fuel a new round of asset price appreciation as investors borrow cheap money to invest in high-yielding assets,” CIMB Research’s economist Lee Heng Guie said in a report.

This high-yielding assets include property, gold, other commodities, as well as currencies.

Meanwhile, Fitch Ratings warns that strong performing markets in Asia risk importing the inappropriately loose monetary condition in developed countries, which in turn can lead to higher inflation and volatility in asset prices.

The Fed’s first round of QE totalling US$1.7 trillion, combined with Bank of England’s £200bil and Bank of Japan’s 21 trillion yen stimulus, fuelled a powerful rally in key commodity markets last year.

The UK’s Monetary Policy Committee on Thursday refrained from printing more money through QE, but kept rates at near zero on a raft of positive economic data.

The commodity rally fizzled out sometime in March this year, after the Fed completed its 12-month buying spree of Treasury and mortgage-backed loans under the first QE.

The run-up to QE2, which started way back in September, provided the second wind and boosted prices from gold to grains to new highs.

The markets may have greeted the QE2 with indifferent, but this is only because it was priced in months ago. Sugar price, for example, reached a 31-year high the day before the QE2 was announced.

“QE2 could spawn a commodity boom and inflate prices in nominal terms and bring about inflation, which could derail the recovery,” CIMB Research says.

The QEs were cooked up with the intention of lowering borrowing cost and boost the US recovery.

But, for all its intent and purpose, it now looks more like a dangerous gamble that puts the US dollar credibility at risk without delivering much growth.

By design, the QE was supposed to be pro-growth and pro-inflation, but the impact is being felt the most in emerging economies where price increases will do more damage than good.

On global gaming, Aussie dollar and SGX-ASX merger

Rising Australian dollar and national interest

WHAT ARE WE TO DO BY TAN SRI LIN SEE-YAN

JUST returned from Brisbane, Australia where I was a keynote speaker at the 2010 World Lottery Association Convention.

It’s a grand affair, attracting 800 participants, mostly involved in the lottery business around the world.

It also coincided with the Melbourne Cup. Enjoying this special event by having a bet, experiencing the party atmosphere and watching the big race, has become part of Australian folklore. Mark Twain said of the Melbourne Cup in 1895: “Nowhere in the world have I encountered a festival of people that has such a magnificent appeal to the whole nation. The Cup astonished me!”

In 2010, the global gaming market attracted revenues of between US$350bil and US$400bil, with casinos, lotteries and gaming machines accounting for close to 85%. The online component is beginning to edge up to 10%. Here, the push is led by the Organisation for Economic Cooperation and Development (OECD) group, representing three-quarters of this business. The world-wide lottery business is worth about US$200bil-US$240bil, growing at below 5% a year lately. Growth is, however, uneven – 20% in Latin America & Africa; 10% in Asia (23% in China, where revenues in the first eight months of 2010 amounted to US$16bil); flat in Europe and the United States.

In addition, global casino and other regulated gaming had revenues in the region of US$150bil in 2010, with 45% in the United States, 30% in Asia-Pacific and 20% in Europe, Middle East and Africa (EMEA). But growth is fastest in Asia-Pacific, up about 20% per year in 2008-2012; while US growth is expected at 4% and EMEA, 5%. Casino gaming accounted for 90%. In Asia-Pacific, business in China (Macau) is growing the fastest, rising by 59% in the first 10 months of 2010 from a year earlier, with revenues passing US$21bil for the entire year, while Asean-5 expanded just as fast with revenues of US$7bil. Australia and South Korea have revenues of US$2bil-US$3bil each – growing much slower annually.

Conventional wisdom that the gaming industry is recession proof is a myth. During the recent great recession, the Bank of America Merrill Lynch HY Gaming Index declined 56% from early 2008 to its trough in March 2009. However, since then the index has risen 136%.

The ride has been anything but smooth. Despite growing risks, Asia will lead economic growth this year and the next. The World Bank has upgraded China’s 2010 GDP growth to 10%. Meanwhile, the OECD cut growth estimates for its 33 members to 2-2½% in 2011, downgrading the United States to 1.75-2.25%.

Growth in Asian disposable income will continue to expand; so will growth in Asian household consumption of goods and services. Since the beginning of this decade, Asia’s gaming revenues have been the fastest growing – especially in Macau and Singapore. Latest record never ceases to amaze.

Back in 2007, most analysts figured the Macau market to be worth US$13bil in 2010. Today, based on recent results, it’s worth US$21bil. I am told that in the United States, every available table and slot machine serves 250 people. In South-East Asia and India, the number is as many as 45,000-50,000. So, Asian gamers are underserved.

It is estimated that Asians spend almost twice as much on gaming as Americans do. Singapore has gone from zero to near US$5b just this year alone. By 2012, Morgan Stanley estimates that Singapore could generate revenues of US$7-US$10bil. Macau took about the same time to hit US$6bil.

Undoubtedly, Asia provides the best prospects in gaming and betting. It will utilise advances in technology to enhance its innovative and creative potential to lead in contemporary interactive gaming entertainment, in a socially responsible way. For this vibrant, exciting and colourful industry, a bright future lies ahead.

The Aussie dollar

The Aussie dollar hit a 28-year high on the back of an unexpected interest rate hike on Melbourne Cup day. It has been hovering just below parity with the US dollar for some time. The growing strength of the Aussie dollar benefited from the Fed’s continuing efforts to drive US interest rates down (it’s already near zero). But its core strength is centred on a China-driven mining boom that has boosted its exports of iron-ore, coal and other minerals. Australia’s terms of trade – its export prices relative to its import prices, have doubled in the past decade to record highs. So much so its persistent current account deficit was all but eliminated last quarter. Above all, inflation is held well in check. The Reserve Bank had kept the benchmark interest rate unchanged since May and economists had predicted that the rate would stand pat again – indeed, swap traders betted there to be only a 23% chance of a rate increase, against a 60% chance before the 3Q’10 inflation rate turned weaker, thereby giving policy makers breathing space.

Over the past decade, the central bank has raised interest rates on Melbourne Cup day four times. True to form, it raised interest rates by 25 basis points to 4.75% on Nov 2 in the face of expectations that the US Fed will add massively once more to global money supply (on Nov 3 it unveiled plans to purchase US$600bil of US government debt over the next eight months). The Aussie dollar promptly reached past parity against the greenback, recording a high of US$1.0025. Since deregulation in 1983, the Aussie dollar has never been higher. Many see it as a proxy for Asia, and its worries about inflation reflect Asian central banks’ concern as well. Regional currencies also rallied – the Indian rupee, Thai baht and the Malaysian ringgit all gained against the US dollar. The euro traded above US$1.40, up 1.1%.

The rate hike shifted the Reserve Bank’s focus to fight inflation with a pre-emptive strike, even though the rise in consumer prices in 3Q’10 was well within its comfort zone. But like it or not, inflation is an obvious outcome of Australia’s strong economic growth. In Asia, growing domestic demand and rising food & commodity prices can be expected to push inflation higher. Most forecasts place Asia’s inflation in 2011 at 4%-5%, up from 3.3% previously. India’s case is more urgent – where inflation is running at above 10%, and too obvious to ignore. Tuesday’s rate increase is India’s sixth in just over seven months. It looks like its tightening cycle is not yet over.

SGX-ASX Merger

On the controversial Singapore Exchange Ltd (SGX)-ASX Ltd merger, for most Australians, this issue is divisive as it touches lots of raw nerves. The central question – Is it in Australia’s interest to proceed with the merger? Actually it’s a takeover since the SGX will pay A$8.4bil (US$8.3bil) to ASX for it. According to the CEO of ASX, “the combined exchange will be both more regionally relevant and globally relevant than the sum of its parts.” So, we can’t see how this is contrary to the national interest.

The takeover requires the approval of both governments and regulators. For the deal to go through, the Australian parliament needs to lift the ASX’s 15% single shareholder cap following a screening process by Australia’s Foreign Investment Review Board. The deal is expected to cut costs and better place the merged exchange to fight growing competition. The takeover creates a US$1.9 trillion market to become the world’s fifth largest exchange, rivalling Japan and Hong Kong. Politicians have voiced concern over the takeover. The leader of Green Party (a member of the sitting Gillard government) is a vocal critic. Temasek Holdings, a 23.45% shareholder of SGX, has since stated publicly that this Singapore-controlled wealth fund was not involved in the governance, operations or investment decisions of SGX. Frankly, Australians are not convinced.

Australia used to have a stock exchange in every state. In 1987, these markets were consolidated into the Australian Stock Exchange in Sydney. The Victoria government made what many still consider a “crucial” error in closing the Melbourne Stock Exchange. According to Prof Sam Wylie of the Melbourne Business School, the experience of Australian stock markets is best understood as a global process involving three discrete steps – consolidation, demutualisation and mergers across national boundaries. Australia has taken the first two steps; the United States, all three, where trading is now concentrated in New York city in the NYSE and Nasdaq. Inevitably, ASX will merge with a global exchange; if not SGX, then some other exchange.

It would appear that the global process of consolidation is inevitable. Whichever group the ASX joins, it has to be run commercially, regulated to meet Australian standards and free from government influence in its effective management.

The main objections to the proposed deal are that it’s not in line with national interest as it encourages shifting the processing, technology, analytical capacity, fund management and investment bankers to Singapore, and more importantly, passing management of ASX to the Singapore government; Australia is forsaking its ambitions to become an Asian financial hub; Australia does not allow major banks to be controlled from offshore, so why tolerate this for its stock exchange?; ASX is efficient, ahead in Asia in derivatives and in innovative products (initiated the REITs market in Asia-Pacific); and that the benefits (technology sharing, co-listing of stocks and access to new pools of capital) can be enjoyed without an ownership change.

Supporters of the deal cut at the very heart of Australian capitalism. They say it’s an arms-length business deal and as long as the boards of both stock exchanges deem it to be in their best interest and vital domestic interests are protected, why not?; on pricing, a 40% premium above market price of ASX is fair enough; national interests are ultimately protected by the Corporations Act of Australia; “the attractiveness of a combined pool of listings and a combined pool of liquidity would make this combination unique”; and for ASX, merger is inevitable and SGX is a good enough suitor.

The Australian government and regulators have the final say. This simply means politics as usual, involving interaction of vested interests and self-interest. The real issue behind the fuss – as I see it – is slippage in the separation of business from politics. The final outcome? Discarding all the “noise”, anger and resentment and no doubt, assurances to protect the national interest, the key issue focuses on national identity and how closely attached Australians are to its liberal free-market system which politicians so proudly and often identify with the national good. Only Australians can tell.

● Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest.

Global reserve currencies come with responsibilities, US currency war!

The U.S. Federal Reserve announced Wednesday it would buy 600 billion dollars of Treasury bonds, effectively printing money to jumpstart the flagging American economy.

The move is a boost to the U.S. economy but risks creating new capital bubbles for other countries.

The U.S. dollar is the most widely held reserve currency in the world today. The devaluation of the U.S. dollar plus an overly loose currency policy that leads to a sharp increase in capital flow will drive large amounts of hot money to newly emerging economies in search of profits.

The International Monetary Fund (IMF) has recently warned that Asia and other emerging markets are facing the double risks of a huge influx of foreign capital and an accumulation of inflation pressure.

Chinese Commerce Minister Chen Deming has also pointed out that "out-of-control" U.S. currency issuance and big international commodity price hikes would probably saddle China with imported inflation.

Ironically, one of the factors driving big international commodity prices up is the depreciation of the U.S. dollar, the main global reserve currency.

In the past few months, a vicious cycle of currency flow became obvious. The Fed launched a round of quantitative easing, causing an overflow of capital (hot money pooled in other countries). This led to imported inflation jeopardizing the economies of other countries, which were then forced to intervene in the foreign exchange market.

From the U.S. perspective, the purpose of increasing liquidity is to inject life into its faltering economy. But the direct consequences of the move might be disastrous to other countries. It might even drag others into financial turbulence.

Some economists did not rule out the possibility the U.S. government was deliberately waging a currency war by quantitative easing, depreciating the dollar, shifting the economic risks to others and pursuing the bonus that comes from having a reserve currency.

According to a report from the Organization for Economic Cooperation and Development (OECD) on Wednesday, continued loose monetary policy in many advanced economies will prompt capital to flow to emerging ones where it risks creating asset bubbles while putting upward pressure on their exchange rates.

OECD Secretary General Jose Angel Gurria said bubbles were generated in the emerging economies, which "still have a high level of inflation or ...(face) pressure of inflation," when advanced economies took advantage of their weaker and more restrictive monetary policies.

Nobel laureate Joseph Stiglitz said that, when trying to reignite the U.S. economy by printing money, the flood of money was almost surely contributing to global financial instability and prompted countries worldwide to intervene. And the result was a "more fragmented global financial market."

Last month, G20 finance ministers and central bankers promised in a joint statement to "pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels."

During the China-U.S. strategic and economic dialogue in May, the U.S. also vowed to adopt a proactive currency policy and pay attention to the impact of its currency policy on the international economy.

The reason why the outside world follow the attitudes of advanced countries so closely is that they are the source of the rivers of hot money.

Whether the world economy can achieve a sustainable recovery largely depends on whether the main global reserve currency countries can put into practice their promises to keep exchange rates comparatively stable and reduce the negative spill-over effect of their currency policies.

At the time when the world economic recovery is still unstable, it is an unshirkable task for the main global reserve currency countries to adopt responsible currency policies for the benefit of all.

Source: Xinhua
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