Asian stocks fall on fear of tapering, and fall again on expectations of non-tapering

File this one under “never reason from a price change”:

Asian markets fell Wednesday, with a stronger yen pulling Japanese stocks sharply lower, as the region reacted badly to a disappointing U.S. labor market report.

The September U.S. jobs report provided an unclear outlook for the world’s largest economy, increasing market expectations the Federal Reserve will keep its bond-buying program in place.

Fears of the Fed removing its easy-money policy resulted in a volatile summer for Asian markets, especially in Southeast Asia, and nonfarm payrolls were watched intensely as a possible forecast of the central bank’s intentions. The worse-than-expected jobs reading overnight reinforces the idea that stimulus will remain unchanged until next year.

Let’s clarify a few points.  It is true that fears of tapering raised long term bond yields last summer.  But it is not true that the more than 100 basis point run-up in bond yields was due to fear of tapering, as had been widely assumed in the financial press.  Bond yields are currently 2.5%, slightly lower than they were when tapering was expected, but far higher than a year ago, even though markets now expect an indefinite delay in tapering.  Most of the run-up in bond yields was due to factors unrelated to tapering fears. Perhaps stronger economic growth.  (Although I don’t see much evidence for that hypothesis either.)

So Asian markets fall on rumors of tapering, as tapering is expected to lead to higher interest rates and slower US growth.

And Asian markets fall on a weak employment report, as it portends slower US growth and lower interest rates.

What’s the common denominator?

IT’S THE GROWTH, STUPID.

PS.  Mark Sadowski and I are still discussing the Yi Wen paper from the St. Louis Fed.  I’m still struggling with the intuition behind the claim that a massive and permanent boost in the monetary base is not inflationary at the zero bound.  Is the liquidity trap expected to last forever?  If so, is that because the one time boost in the base is followed by a monetary policy that is tight enough to keep nominal rates at zero? Any help would be appreciated.


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16 Responses to “Asian stocks fall on fear of tapering, and fall again on expectations of non-tapering”

  1. Gravatar of Scott N Scott N
    23. October 2013 at 14:50

    Bond yields absolutely went up this year because of stronger economic growth – i.e., stronger non-farm payroll reports beginning with the one released the beginning of May. If yesterday’s payroll report would have surprised to the upside, I would have shorted bonds unmercifully. Unfortunately, that wasn’t meant to be (I’m still 100% in US stocks, however).

    If the payroll report is showing significant growth, then rumors of Fed tightening (i.e., taper) are viewed as confirming that the economy is doing well. The Fed needs to begin to think about tightening to slow the train down. This is what happened in 1994 (bond yields spiked upward when the Fed started raising rates) … and note that the market was right. This was the beginning of one of the greatest economic expansions in recent history.

    However, if the payroll report is showing significant weakness (like the last couple), then rumors of Fed tightening are viewed as the Fed abdicating its duty at a time when the economy is weak. The Fed is tightening the money supply at a time when the economy is not growing much at all. Investors get scared and buy safe assets causing yields to drop.

  2. Gravatar of TravisV TravisV
    23. October 2013 at 15:53

    Health Care Cost Inflation Is Tumbling

    http://www.businessinsider.com/what-health-care-cost-inflation-means-2013-10

  3. Gravatar of Geoff Geoff
    23. October 2013 at 16:42

    “Most of the run-up in bond yields was due to factors unrelated to tapering fears. Perhaps stronger economic growth.”

    Incorrect. The run up of bond prices is not due to economic growth. It was due to the liquidity effect of tapering.

    Economic growth has no effect on nominal spending, or interest rates. Higher economic growth leads to falling prices, unchanged spending, and unchanged interest rates, ceteris paribus.

  4. Gravatar of Dan S Dan S
    23. October 2013 at 17:20

    I never understood Krugman on that whole “the liquidity trap is not expected to last forever” thing. Here’s Krugman:

    “haven’t I been arguing that monetary policy is ineffective in a liquidity trap? The brief answer is that current policy is ineffective, but that you can still get traction if you can change investors’ beliefs about expected future monetary policy….the economy won’t always be in a liquidity trap, or at least it might not always be there. And while investors shouldn’t care about what the central bank does now, they should care about what it will do in the future. If investors believe that the central bank will keep the pedal to the metal even as the economy begins to recover, this will imply higher inflation than if it hikes rates at the first hint of good news – and higher expected inflation means a lower real interest rate, and therefore a stronger economy.”

    But…isn’t the whole point of a liquidity trap that you can’t get out of it? If the liquidity trap were real then why wouldn’t investors expect it to last indefinitely? But if the Fed CAN change inflation and inflation expectations right now, then in what sense is monetary policy impotent right now? The best thing I can come up with is that during normal times, a central banker can lower interest rates, which has the effect of boosting NGDP and/or inflation, but he doesn’t have to actually SAY that’s what he’s doing. He can just do it and still keep his conservative central banker credentials. But in a liquidity trap, he has to actually go on TV and admit in front of everyone that he’s aiming for a higher inflation target, which is infinitely harder!

  5. Gravatar of Gordon Gordon
    23. October 2013 at 18:11

    Scott, what of Lars Christensen’s view on China being a monetary superpower? The PBoC tightened its monetary policy yesterday. Do you think this is a contributing factor in the Asian market downturn?

  6. Gravatar of Benjamin Cole Benjamin Cole
    23. October 2013 at 19:59

    If the Yi Wen paper is “true” or even mostly true, the USA faces one of the greatest opportunities of all time: The chance to seriously pay down the US national debt with little or no consequences.

    We must ask John Cochrane, who has spent a professional lifetime agonizing about the rising federal debt, about this tremendous chance to alleviate his concerns.

    I must say, my expectation of economists is that even if the Wen paper is “true” they still won’t believe it. Monetizing debt is a cardinal sin, however salubrious the results.

    Like my Uncle Jerry says, “Even if it is true, I still don’t believe it.”

    Side note the Gordon: I worry about China, and the increasing “central bankerfercation” of their central bankers. Sans Western biases, China’s central bankers hitherto have been pro-growth, and not too concerned about inflation. But as their central bankers become immersed in the trade and more cosmopolitan, they are adopting the social mores of Western central bankers–that is that money should always be tight.

    The tremendous growth of China in the last 20 years has (in part) been the result of a robust, bullish growth-oriented People’s Bank of China. Those yuan have flooded into SE Asia.

    Oddly enough for American jingo-ists, tight money at home (in the USA) and loose money in China is leading to Chinese economic hegemony in the region.

  7. Gravatar of Ralph Musgrave Ralph Musgrave
    23. October 2013 at 19:59

    Is “a massive and permanent boost in the monetary base” inflationary at the zero bound? “Any help would be appreciated”. The following may be “help” – or hindrance – take your pick..:-)

    It all depends on whether the increase to the base is a net increase in what those pesky MMTers call “private sector net financial assets”. I.e. if the government / central bank machine just prints new money and does a helicopter drop (e.g. raises unemployment benefits, state pensions, etc), that would be stimulatory and possibly also inflationary because of the hot potato effect.

    In contrast, if the increased base comes about because of more QE, there is little effect. Reason is that at the ZB there is little difference between base and government debt: both are liabilities (of a sort) of the government / central bank machine, and both pay little interest. So swapping one for the other has little effect.

  8. Gravatar of J.V. Dubois J.V. Dubois
    24. October 2013 at 00:58

    This obsession of media to “explain” things based on latest news is pretty bad. When reading this I remembered Thaleb’s remark in Black Swan regarding the human tendencies to search for causes even in absence of direct evidence. He even provided one example involving Bloomberg.

    “On the morning of Saddam Hussein’s capture, Bloomberg printed an article stating that treasury prices rose because of his capture; a couple hours later, after treasury prices had fallen, another article was printed by Bloomberg blaming the fall on Hussein’s capture”

  9. Gravatar of libertaer libertaer
    24. October 2013 at 05:03

    Scott, Dan S said,

    “I never understood Krugman on that whole “the liquidity trap is not expected to last forever” thing…. If the liquidity trap were real then why wouldn’t investors expect it to last indefinitely?”

    Maybe I’m wrong, but these are my 2 cents.

    For Krugman a liquidity trap just means that you reached the zero bound on nominal interest rates and there is still no safe asset out there, which has better real rate of return than holding money (given an expected constant inflation rate). The natural real rate of interest is zero or negative.

    Has this trap to last forever? No, any moment there can come along an investment opportunity raising the natural real rate of interest, bringing back positive nominal interest rates. Krugman sometimes points out in the long run there will be wear and tear or new technologies…

    Now, if and only if people think the liquidity trap will end or might end, the central bank can end the trap immediately by promising not to keep inflation constant when the trap ends, i.e. the natural real rate rises again. By promising to overshoot in the future you make money unsafe in the present, forcing people out of money which raises prices via the hot potato effect.

    But if the trap goes on forever, if the natural real interest rate will never ever rise again, then a promise to overshoot can’t end the trap in the present, because in the future no safe asset will ever be a better investment than holding money, giving the central bank no opportunity to overshoot. More supply of base money will only be answered by a higher demand for base money.

    That’s why I think NGDP targeting by buying government bonds has no effect if the natural real rate is expected to be zero or negative forever while NGDP targeting by helicopter drops should work even if rates are expected to be negative till the end of time.

    Does this make sense to you?

  10. Gravatar of Bob Murphy Bob Murphy
    24. October 2013 at 05:37

    OK I’ll give you this one, Scott. I agree the article at first sounds fine but upon inspection contradicts itself.

  11. Gravatar of ssumner ssumner
    24. October 2013 at 07:22

    Dan, That’s a very complicated subject.

    Gordon. Yes that’s possible, I was just responding to the article’s claims, and trying to explain them assuming the empirical evidence was correct. I don’t know if it was.

    Ben, I suspect it’s not true.

    Ralph, If you are right about the MMTers, then they are even more misguided than I assumed. If correct, the US could print enough money to pay off the entire national debt without suffering any inflationary consequences. Not likely, and the zero bound doesn’t change anything, as it’s not expected to last forever.

    Libertaer, If the liquidity trap was expected to last forever there would be no such thing as government bonds in the first place, only cash with denominations up into the $100,000s. Bonds would be cash. So OMOs would be impossible, and thus it’s a moot point. But even in that case I’d oppose helicopter drops, there would be much more efficient techniques for boosting AD.

    In any case, that’s not the world we live in, so I wouldn’t worry about it.

  12. Gravatar of ssumner ssumner
    24. October 2013 at 07:24

    Scott N. Good point.

  13. Gravatar of libertaer libertaer
    24. October 2013 at 08:19

    Scott, you said:
    “If the liquidity trap was expected to last forever there would be no such thing as government bonds in the first place, only cash with denominations up into the $100,000s. Bonds would be cash.”

    I see your point, but concerning the question if we should ever equate bonds with cash, I remember someone writing this:

    “One common argument is that swapping cash for zero interest T-bills is useless, because they are perfect substitutes. I don’t view them as perfect substitutes at all. When I get in the car to go shopping at Walmart I don’t think “Hmmm, should I take cash or T-bills.” https://www.themoneyillusion.com/?p=7960

    “In any case, that’s not the world we live in, so I wouldn’t worry about it.”

    My world is Germany and it’s not that crazy to imagine a permanent negative interest rate given the demographics here (the same goes for Japan and other Asian countries). Nick Rowe once had a good post about that:

    “There is nothing theoretically impossible about a negative natural rate of interest. Even a very negative natural rate of interest.

    Suppose, for example, that there are large numbers of ageing baby boomers, and very few young people who will be working when the boomers all retire. The boomers all want to save for their old age, so they will be still able to eat when they have stopped producing goods themselves. And there just aren’t enough profitable investment projects to match desired saving even at a zero real rate of interest.” http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/10/negative-natural-rates-of-interest-and-ngdp-targets.html

  14. Gravatar of Doug M Doug M
    24. October 2013 at 09:07

    Most of the run-up in bond yields was due to factors unrelated to tapering fears. Perhaps stronger economic growth. (Although I don’t see much evidence for that hypothesis either.)

    Expected fluctuations in the money supply have every thing do do with changes in bond yields.

    There are some real reasons why interest rates are generally positive. e.g. a dollar in my pocket is more useful that a dollar promised to me next week.

    But what drives the daily fluctuation in bond yields? It is the expected value of a dollar at the maturity date compared to the value of a dollar today. And the value of the future dollar is a function of the money supply.

  15. Gravatar of phil_20686 phil_20686
    25. October 2013 at 01:32

    I missed your previous post on the Yi Wen paper:

    I would argue thusly: If money is endogenous away from the ZLB (as suggested empirically), then “keeping inflation fully anchored” is a commitment to a particular size of the monetary base at some time in the future, in which case the set up of the problem is in logical contradiction. You cannot have a permanent expansion larger than the markets think will be necessary to sustain the price level ten years from now, and keep inflation expectations fully anchored.

    Under the endogenaity of money, for any NGDP path, there is an expectation about the size of the monetary base going forward. If a permanent expansion is smaller than the expected size of the base needed for the expected NGDP path, then it does nothing, if it is larger then it lifts the NGDP path, but you cannot measure the first case and extrapolate into the second case – another example of over constraint – an announcement to expand the monetary base is expansionary if and only if the announced expansion is larger than the expansion needed to sustain the current path of policy. Otherwise, its a non binding constraint, and any empirical evidence when its non binding tells you nothing about how it will work when its binding.

    (PS: The ten percent output gap is presumably just using the reverse of okun’s law).

    PPS: Although I didn’t study the maths, I would guess that the place this model collides with intuition is the following: The productivity of workers is independent of the level of investment/debt. That is why they say that increasing debt decreases the efficiency of loans. Obviously if you assume that the productivity of workers is fixed, then its very hard for LSAP to affect the economy! (e.g they say …”in the absence of permanent
    productivity or technology changes about a third of the way down page 6)

    The counter argument is that demand does raise the output of workers, and that is a permanent rise in productivity, in which case you get a positive feed back on demand on top of whatever their model predicts..

  16. Gravatar of ssumner ssumner
    25. October 2013 at 05:34

    Libertaer, I doubt it. But if so you replace the debt with cash. But I would still oppose helicopter drops, it would make much more sense to invest cash in sovereign wealth funds.

    phil, You said;

    “I would argue thusly: If money is endogenous away from the ZLB (as suggested empirically), then “keeping inflation fully anchored” is a commitment to a particular size of the monetary base at some time in the future, in which case the set up of the problem is in logical contradiction. You cannot have a permanent expansion larger than the markets think will be necessary to sustain the price level ten years from now, and keep inflation expectations fully anchored.”

    That’s what was puzzling me too.

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