On the Continuance of the Low Rate Policy; QE by the ECB; Are Eggs Good for you?!

From: aditya rana
Date: Sat, Sep 13, 2014 at 1:11 PM
Subject: On the Continuance of the Low Rate Policy; QE by the ECB; Are Eggs Good for you?!

Hi!,

The Fed’s unconventional monetary policy has been in place for over five years, yet a vigorous debate continues about its rationale and impact on asset prices and the economy. And the big question which looms over the immediate horizon are the adverse consequences of the Fed’s reversal of its monetary policy. Paul McCulley, who recently rejoined PIMCO as their chief economist, has over three decades experience in ‘Fed watching" and has written a particularly insightful note on the subject. To summarise:

-Since 2012, the Fed not only publicly pegs the fed funds rates, but also provides its forecast ("forward guidance") of the rate over the longer run (currently at 4% – see graph below).

-What is new about the Fed’s policy, is that this forecast is now an explicit instrument of its monetary policy which implies that the Fed is seeking to explicitly influence long-term asset prices, which incorporate expectations of future policy rates.

-The 4% long-term forecast has existed since 1993, based on the Taylor rule which postulates a 2% real rate and 2% inflation, which is consistent with GDP growth at full-employment.

-Traditionally, the Fed has relied on the conventional banking system to transmit its monetary policy into the real economy and largely ignored the capital markets. However, subsequent to the financial crisis, it began to target long-term stock and bond prices.

-The Fed was forced to adopt this change of policy due to the "Liquidity Trap" – with policy rates at the lower zero bound, it was unable to get banks and the real economy (as they were in a deleveraging mode) to generate credit growth to spark a revival in incomes, prices and wages.

-The above requirement for unconventional monetary policy could have theoretically been avoided if fiscal policy was aggressive enough to cause a recovery in the real economy – but failing that, the Fed had no other viable option but to "dance with Wall Street".

-While printing money to reflate asset prices could cause somewhat of a "trickle-down" effect in terms of spurring demand, the main impact is through higher asset prices which help to drive down the economy’s debt-to-equity ratio – the key macro problem for the economy in the aftermath of a "balance sheet recession (i.e. too much debt versus equity)".

-The implications of utilising monetary policy to help an economy to escape a Liquidity Trap is the classic "rational overshooting" phenomenon as characterised by the economist Rudi Dornbush in 1976 (in the context of floating exchange rates) which formulates that the impact of monetary policies is felt more quickly and rapidly on financial asset prices than prices (i.e. inflation and wages) in the real economy, causing financial asset prices to "rationally" overshoot until real prices in the economy catch-up.

-The implications are that the Fed will continue with its zero interest rate policy until the increase in paper wealth sufficiently deleverages the economy, which in turn leads to an eventual recovery in the real economy. So Fed zero rate policy (i.e. the "Fed put") will continue until prices (inflation and wages) in the real economy recover, at which point there will be a "rational" re-pricing of financial assets.

-The transition process for a reversal of the Fed’s unconventional monetary policy started about a year ago with announcement of a tapering of QE, a necessary condition before the Fed even begins to consider an end to its zero rate policy. The "taper tantrum" of last summer was the first stage of this "rational" re-pricing process.

-However, subsequently bond prices have recovered as the market has rejected the Fed’s 4% forecast of the "neutral" policy rate, but not to levels prevailing prior to the taper announcement. Meanwhile, stocks are higher than levels prevailing prior to the taper announcement, as they have "rationally" adjusted to the market’s expectations of lower policy rates in the future.

-It is likely the Fed will keep interest rates low for a long time to support the economic recovery with the ultimate objective of causing a rise is real wages. Therefore, the risks of a bubble bursting induced by changes in Fed policy are low, with the main risk being a gradual decline in the share of profits of GDP.

-One of the most insightful pieces I have read on the rationale for QE and its transmission mechanism to the real economy. While the end of QE, and the subsequent announcement of a rate hike, could cause some turbulence in markets, the impact is likely to be relatively short-term and the low level of policy rates will continue to provide support for asset prices. Investors can either suck-up and ride the market volatility or lighten risk on rallies and add risk on sharp corrections.

-October will be an important month – not just because the end of QE3 by the Fed, but perhaps more significantly, the commencement of QE by the ECB. The recent decision by the ECB governing council was notable in this light – as Gavyn Davies commented in his FT blog:

-"This is indeed QE, and in significant scale. But its effects on expectations may be dampened by the fact that Mr Draghi was obviously so reluctant to admit as much. He said that the planned measures, including the TLTROs, were intended to “steer” the size of the balance sheet towards its scale at its peak in early 2012. This would be approximately E 800 billion larger than it is today (see chart below). This is a sizeable program.

-Importantly, the increase in the balance sheet will no longer be subject to the uncertainty of the take-up of the TLTROs. If this is small, then the asset purchases will be larger. The ECB has now taken charge of how large its balance sheet will be.

-Finally, what about fiscal policy? Mr Draghi stated clearly that the ECB would not be able to meet its objectives on growth and inflation without the help of more expansionary fiscal policy, always within the terms of the Stability and Growth Pact. The focus will now shift to governments and the Commission, and I continue to expect some significant fiscal action in the next three months. After much understandable scepticism from investors around the world, euro area policy is definitely on the move."

Are Eggs good for you?

Eggs have been touted as being nutritionally very valuable as they have the complete mix of the essential amino acids required for protein. However, what are the risks associated with egg consumption? In addition to increasing bad cholesterol, recent research has shown that they can increase the risk of cancer:

Michael Greger M.D., 8/2014

http://nutritionfacts.org/2014/08/21/why-the-egg-cancer-link/

-Two million men in the U.S. are living with prostate cancer — but that’s better than dying from prostate cancer. Catch it when it’s localized and the five-year survival is practically guaranteed, but once it really starts spreading, chances drop to one in three.

-“Thus, identification of modifiable factors that affect the progression of prostate cancer is something that deserves study,” noted Dr. Erin Richman and colleagues at Harvard. So, they took more than a thousand men with early stage prostate cancer and followed them for a couple years to see if there was anything in their diet associated with a resurgence of the cancer, such as spreading to the bone.

-Compared to men who hardly ate any eggs, men who ate even less than a single egg a day had a significant 2-fold increased risk of prostate cancer progression. The only thing worse was poultry consumption, with up to four times the risk of progression among high-risk men. They think it might be the cooked meat carcinogens that for some reason build up more in chicken and turkey muscle than in other meats.

-But what about the eggs? Why would less than once-a-day egg consumption double the risk of cancer progression? “A plausible mechanism that may explain the association between eggs and prostate cancer progression is high dietary choline,” the researchers suggested. Egg consumption is a determinant of how much choline you have in your blood, and higher blood choline has been associated with a greater risk of getting prostate cancer in the first place. So the choline in eggs may both increase one’s risk of getting it and having it spread.

Studies have associated choline consumption not just with getting cancer and spreading cancer, but also with significantly increased risk of dying from it. Those who ate the most had a 70% increased risk of lethal prostate cancer. Another recent study found that men who consumed two and a half or more eggs per week — that’s just like one egg every three days — had an 81 percent increased risk of lethal prostate cancer.

-Maybe that’s why meat, milk, and eggs have all been associated with advanced prostate cancer—because of the choline. Choline is so concentrated in cancer cells that doctors can follow choline uptake to track the spread of cancer throughout the body. But why may dietary choline increase the risk of lethal prostate cancer?

-Dietary choline is converted in the gut to trimethylamine (TMAO) so the Harvard researchers speculated that the TMAO from the high dietary choline intake may increase inflammation, which may promote progression of prostate cancer to a lethal disease.

-In the New England Journal of Medicine, the same Cleveland Clinic research team that did the famous study on carnitine repeated the study, but instead of feeding people a steak, they fed people some hard-boiled eggs. Just as they suspected, a similar spike in that toxic TMAO. So it’s not just red meat. And the link between TMAO levels in the blood and strokes, heart attacks, and death was seen even in low-risk groups like those with low-risk cholesterol levels. Thus, because of the choline, eating eggs may increase our risk regardless of what our cholesterol is.

-It’s ironic that the choline content of eggs is something the egg industry actually boasts about. And the industry is aware of the cancer data. Through the Freedom of Information Act, I was able to get my hands on an email from the executive director of the industry’s Egg Nutrition Center to an American Egg Board executive talking about how choline may be a culprit in promoting cancer progression. “Certainly worth keeping in mind,” he said, “as we continue to promote choline as another good reason to consume eggs.” With regard to the prevention of prostate cancer progression, chicken and eggs may be the worst foods to eat.

Here’s to keeping the intake of eggs, chicken and other meats to a minimum (if not zero)!

Regards,

Aditya

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