Unemployment Not Down, Inflation Not Up, QE Story Lives On

The summary of the Ben Bernanke story seems to be that so far – “I have a dual mandate: maximum employment while maintaining price stability. Right now prices are stable, so I will do all I can to improve employment.” (Derived from Source)

Simple. QE4, QE5 …

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The QE Clash: JPY Vs USD

There is now news of possible additional QE from BoJ – that means that there would be dilutive effects on the JPY. With the USD already getting diluted due to QE2, this is an interesting trade to watch, USD / JPY.

“The news of possible additional QE from the BOJ sent USD/JPY  higher in Asian trade with the pair hitting 82.40 before profit taking capped the pair. Despite the tonight’s rally, the price action in the pair is likely to remain subdued until Wednesday’s FOMC meeting as traders await the communique from the Fed.”

Statistics Source: fx360.

Now for the dollar to get stronger, Bernanke should signal the end of QE2 and rule out QE3. Will that happen? We will wait and watch.

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Blaming Bernanke For QE2

NYTimes has an article today titled “Stimulus by Fed Is Disappointing, Economists Say”. The key argument being put forth is that the bond buying program did not achieve enough – there has been no significant improvement in many parameters including growth inflation and employment.

This kind of blame is classic narrative fallacy. Let us look at the definition of Narrative Fallacy again:

“Our need to fit a story or pattern to a series of connected or disconnected facts”

This from the article:

“I wasn’t a big fan of it in the first place,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. “I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind.”

Thats classic “I told you so” – which is a clear symptom of Narrative Fallacy. We believe the response from The Economist – Who’s disappointed in QE2? nails it:

“The Fed chose a direction rather than a destination, and when its action left it short of the destination, it opened the door to criticism that the direction was wrong, when in fact it may simply have traveled an insufficient distance (perhaps thanks to unexpected headwinds). If you target a destination, you don’t run into that problem.”

Source: NYTimes, The Economist

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QE Will Not Add To Money Supply: Really?

Ben Bernanke explained the Fed’s move in the Washington Post the day he announced QE2. Read: What the Fed did and why: supporting the recovery and sustaining price stability. He makes an interesting claim there:

Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits.

Really? Let us see. The FOMC plans to buy 600 billion worth of bonds over the next few months. This FED needs to generate this cash from somewhere, it would electronically create this cash. Now its a different story if this cash would find its way into the market – that depends on lending decisions taken by banks.

Given the huge impetus on lending, and the street pressures on banks to turn in better numbers, there is a more than reasonable chance that this money would end up in the hands of the common man. 
But look at this argument from aleablog:

QE 2: Effects on Banks Balance Sheet

Note that, in this example, QE 2 changes the mix of the asset side of the balance sheet without changing the amount in deposits i.e no “money printing” or increase in size of the commercial bank balance sheet.

Something doesnt add up. A non-mandated increase in reserves – and Banks not touching thats for lending purposes? NOT HAPPENING.

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Hotel Occupancy Statistics: 2015 On Track To Be The Best Year On Record

We spotted this stat today –

“The U.S. hotel industry recorded positive results in the three key performance measurements during the week of 19-25 April 2015, according to data from STR, Inc.

The 4-week average of the occupancy rate is solidly above the median for 2000-2007, and solidly above last year.

Right now 2015 is even above 2000 (best year for hotels) – and 2015 will probably be the best year on record for hotels. ”

(Source)

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Meet The Biggest Trading Nation In The World

It is not the United States. Now you know that it has to be China. We spotted this stat today, that China surpassed the U.S. to become the world’s biggest trading nation last year as measured by the sum of exports and imports of goods (Source).

China’s total trade stood at $3.87 trillion, compared to the $3.82 trillion total trade number for US. How do we digest this stat?

We had recently spotted a stat showing the reach of capitalism in China – China is now the country with the largest income inequality in the world – . In China, the top 10% now take home nearly 60% of the income.

We are not implying that trade and inequality are related in any way, the bigger point is that China is evolving into a trade and business friendly nation. But there are many other implications of this fact – currency being the most important. China has been labeled by many as a currency manipulator – many people think that this is the single reason why China’s exports look so great. The largest trading nation in the world also happens to hold the biggest chunk of debt issued by – you guessed it – the second largest trading nation in the world. And China has its own problems with debt as well.

Remember, from a currency standpoint, US has some innovative thoughts floating around overall. They killed Gold long back, and have been printing some serious money in the last four years. What we are trying to say is this: China and US being the top two trading nations in the world, and China being a very important bilateral trading partner for many countries in the world – does not sound like a great positive for world trade. That might be a very harsh statement, but we are afraid it is closer to the truth than we think it is.

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Paul Graham: ‘Money Is Not Wealth’. Really?

Paul Graham writes very convincingly. So when he makes an argument saying Money is not Wealth and backs it up with strong points on how money is just a medium to move wealth but it is only wealth that can be created, it is very difficult to spot fallacies of any kind in the argument. But we spotted a weak signal of Narrative Fallacy in the argument.

While his argument on how it is wealth that needs to get created is spot on, he goes a little too far with the assumption that Money is just a medium. It used to be, in the old days when there was a more or less “fixed” amount of money. But in today’s world of operation twists and QEs, looking at Money as just a medium to move wealth around, would be a mistake. Why do we say that?

Not because Bernanke can print Money. But because, the premise of Paul Graham’s argument, which is that you need to create wealth – something people want, makes this critical assumption:

“The advantage of a medium of exchange is that it makes trade work. The disadvantage is that it tends to obscure what trade really means. People think that what a business does is make money. But money is just the intermediate stage– just a shorthand– for whatever people want. What most businesses really do is make wealth. They do something people want.”

The issue though, is that the medium is heavily manipulated these days. In a scenario where governments and central banks can essentially create money, just because they can, looking at Money as just an intermediate stage would be a serious mistake. It is very much part of the equation (unless attempts like Bitcoin change the concept of Money) – a central bank issuing currency based on an asset takes a totally different meaning when that asset is just trust.

Startups need to understand that the concept of creating Money is changing, and hence need to err on the conservative side, when the wealth they create, gets translated into Money. One example is valuation. Remember this is more or less free “money” (low interest rates) – the economy is bad but who cares – the cost of capital is unbelievably low, you shd count that in when you raise money, for example.

Is it not strange, that investors conveniently refer to a ‘bad economy’ and never refer to a zero percent interest rate scenario, which shd be the more relevant question – the cost of money?

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400 Billion: Size of ‘Operation Twist’ From FOMC

The Fed today announced that it will buy long term bonds and sell short securities – to the tune of 400 billion dollars.

“The Fed announced: “The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest ratesand help make broader financial conditions more accommodative.”

Statistics Source: CountingPips

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H1B Statistics: Only 8000 Applications In April

We spotted this today:

“U.S. Citizenship and Immigration Services told The Wall Street Journal this week that it received about 8,000 H-1B petitions from businesses in April, the first month the agency accepts them for the fiscal year beginning Oct. 1. That compares with 16,500 petitions in April 2010 and about 45,000 in April 2009, according to USCIS.

“It’s baffling that H-1Bs aren’t picking up if the economy is stronger,” said Steve Miller, a Seattle attorney who prepares petitions for employers in high tech, retail and other sectors.”

Statistics Source: WSJ

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India Mobile Statistics: Monthly Average Revenue Per User – 2.46 USD

“Average Revenue Per User (ARPU) for GSM-Full Mobility service declined by 10.16%, from Rs 122 in QE Jun-10 to Rs 110 (2.46 USD) in QE Sep-10, with Y-O-Y decrease of 33.1%. ”

“ARPU for CDMA – full mobility service declined by 1.34%, from Rs 74 in QE Jun-10 to Rs 73 (1.63 USD) in QE Sep-10. ARPU for CDMA has declined by 17.5% on Y-O-Y basis. ”

One way to digest these stats is to look at how these numbers look totally different when you bring scale into the picture. You should remember that 50 percent of smartphones in India have no data connection. And India has just 44 Million smartphone subscribers. So there it is – the growth potential – with just four per cent of the total mobile subscribers being smartphone users, the country’s year-on-year growth in smartphones is pegged at 52 per cent, higher than China and the US. And then, you have about 20 million plus people with smartphones but no data connection.

When you are talking about a target mobile population of 625-700 million, suddenly the 2.46 USD ARPU doesn’t look that bad. And the case for building an app for the Indian market looks stronger as well.

Statistics Source: TRAI

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