"Macro" Musings

[frommi]

Until the FED realizes that for a reflation/deleveraging it is necessary to print money until debt levels are back to normal, i doubt that we get rising stockprices. So perhaps we get QE4 at the end of the year and stock prices will rise again. Without it, all money coming in goes to debt repayments and not into the stock market. Thats my little theory, but who knows maybe i am wrong.

When the FED doesn`t react after a 15-20% market correction we will get the ugly bear market of the thirties again.

[dcollon]

James Montier: The Idolatry of Interest Rates

 

Montier_The_Idolatry_of_Interest_Rates.pdf

[giofranchi]

Hosington Management Q1 2015 Review and Outlook

 

 

Gio

HIM2015Q1NP.pdf

[Zorrofan]

Until the FED realizes that for a reflation/deleveraging it is necessary to print money until debt levels are back to normal, i doubt that we get rising stockprices. So perhaps we get QE4 at the end of the year and stock prices will rise again. Without it, all money coming in goes to debt repayments and not into the stock market. Thats my little theory, but who knows maybe i am wrong.

When the FED doesn`t react after a 15-20% market correction we will get the ugly bear market of the thirties again.

 

My fear is that the FED will intervene.....IMHO its FED intervention that will in the long run create much bigger problems than allowing a decent sized correction would.

 

cheers

Zorro

[ERICOPOLY]

Without it, all money coming in goes to debt repayments and not into the stock market.

 

For every buyer, there is a seller.  How does money go "into" the stock market?

 

You buy my shares:

Your money went into the market.

My money went out of the market.

 

It's a wash.

[ERICOPOLY]

I think what QE did was just reduce the supply of safe-haven US Treasuries.

 

It's like musical chairs.  The Fed took away the supply of chairs.  This leaves a pool of cash that instead needs to be invested someplace else (considering that interest rates on bank deposits are so unacceptable).

 

So it creates increased appetite for things like stocks and corporate bonds -- meaning a bidding war.

 

And that still results in an equal amount of cash on the sidelines (the people who sold their stocks).

 

The Fed could reverse the cycle by selling their holdings of government debt back to the people who hold the cash.  Or perhaps new issues by the Treasury would accomplish the same.

 

[frommi]

For every buyer, there is a seller.  How does money go "into" the stock market?

 

You buy my shares:

Your money went into the market.

My money went out of the market.

 

It's a wash.

 

You are right, not directly. But with the wealth effect rising stock prices create money when the stocks are used as a collateral for more debt.

People paying back their debt reduce the amount of money in circulation so the FED has to print new money to compensate for that or we get a shrinking monetary base and a rising dollar which is deflationary.

 

@Zorrofan Watch Ray Dalios video (

), without printing money the debt problem can not be solved in a "beautiful" way.

[jb85]

 

 

The Fed could reverse the cycle by selling their holdings of government debt back to the people who hold the cash.  Or perhaps new issues by the Treasury would accomplish the same.

 

I'm still trying to wrap my head around this would work.  Fed Assets as a % of GDP were just as high after WW2 as they are now.  Back then, Fed wound down assets gradually over 40 years, bottoming out (in terms of assets) in the early 1980s.  Possible they do that again?  creating mild inflation (<10%/yr) along the way?

 

 

[ERICOPOLY]

 

 

The Fed could reverse the cycle by selling their holdings of government debt back to the people who hold the cash.  Or perhaps new issues by the Treasury would accomplish the same.

 

I'm still trying to wrap my head around this would work.  Fed Assets as a % of GDP were just as high after WW2 as they are now.  Back then, Fed wound down assets gradually over 40 years, bottoming out (in terms of assets) in the early 1980s.  Possible they do that again?  creating mild inflation (<10%/yr) along the way?

 

I wrote a bit how i thought this would work in the link below, but the more I think about it, the more confused i get, and think my analysis has some major flaws in it.

 

 

I would think that unwinding the Fed assets would raise interest rates as there would be less private money available to chase down the yields.  Currently, after the Fed purchases Treasuries with QE dollars, it forces the resulting cash back into the market to buy more bonds or stocks (this chases down the yield and creates a bull market for bonds as well as stocks).

 

Higher interest rates would be a brake on inflation -- so why did you mention higher inflation?

[jb85]

 

 

I would think that unwinding the Fed assets would raise interest rates as there would be less private money available to chase down the yields.  Currently, after the Fed purchases Treasuries with QE dollars, it forces the resulting cash back into the market to buy more bonds or stocks (this chases down the yield and creates a bull market for bonds as well as stocks).

 

Higher interest rates would be a brake on inflation -- so why did you mention higher inflation?

 

yeah, that makes sense...After thinking about it, i was being lazy with my logic and assuming that b/c we had inflation at the end of the last instance of fed unwinding (1949-1984), that we would have inflation again this time.  Rates rose pretty steadily from 1949-late 1970s, in line with your idea that as private money leaves the system, rates rise.  that makes sense to me.

 

So outlining a scenario now...fed assets as % of GDP go from 20% (now) to say 5% in 2045.  Rates gradually rise from <3% now, to say 6-7% in 2045 as more private money is removed from the system.  Can we infer what inflation would be in 2045?  Would there be another "breaking the back of inflation" episode in 2045, or are they unrelated?

[rb]

So outlining a scenario now...fed assets as % of GDP go from 20% (now) to say 5% in 2045.  Rates gradually rise from <3% now, to say 6-7% in 2045 as more private money is removed from the system.  Can we infer what inflation would be in 2045?  Would there be another "breaking the back of inflation" episode in 2045, or are they unrelated?

 

Fed assets will go from 20% of GDP now to 5% of GDP in 2014 without the fed selling a single bond while reinvesting proceeds from maturing bonds. You are ignoring GDP growth - In 2045 GDP will be about 4 times larger than it is today.

[frommi]

yeah, that makes sense...After thinking about it, i was being lazy with my logic and assuming that b/c we had inflation at the end of the last instance of fed unwinding (1949-1984), that we would have inflation again this time.  Rates rose pretty steadily from 1949-late 1970s, in line with your idea that as private money leaves the system, rates rise.  that makes sense to me.

 

So outlining a scenario now...fed assets as % of GDP go from 20% (now) to say 5% in 2045.  Rates gradually rise from <3% now, to say 6-7% in 2045 as more private money is removed from the system.  Can we infer what inflation would be in 2045?  Would there be another "breaking the back of inflation" episode in 2045, or are they unrelated?

 

Isn`t it that the FED was forced to raise rates because of inflation? I think inflation was caused by the huge amounts of government spending during the war and the recreation of infrastructure after it, but thats only my guess. Following this logic the governments of the world (and/or businesses) would have to spend a lot more money to create inflation.

[jb85]

 

Fed assets will go from 20% of GDP now to 5% of GDP in 2014 without the fed selling a single bond while reinvesting proceeds from maturing bonds. You are ignoring GDP growth - In 2045 GDP will be about 4 times larger than it is today.

 

How would the 2014-2045 period be different than 1945-1985 period?  I'm assuming GDP will grow at about the same rate?  I still don't understand where the late 1970s inflation came from?  Oil price rises combined with a bunch of wages linked to inflation?  Seems like at least the inflation linked wage jobs have been eliminated/reduced?

 

 

 

Isn`t it that the FED was forced to raise rates because of inflation? I think inflation was caused by the huge amounts of government spending during the war and the recreation of infrastructure after it, but thats only my guess. Following this logic the governments of the world (and/or businesses) would have to spend a lot more money to create inflation.

 

Thats kinda my understanding...interest rates rose in response to inflation (volker).  Chicken or egg, which came first? i'm not sure.  If inflation was a result of high government spending, then why didn't inflation happen when money supply was highest?  inflation in the late 70s and 80s happened when money supply was actually fairly low.  See below graph:

 

http://i.imgur.com/LYtGEpV.png

 

 

[rb]

If nominal GDP grows at 5% (say 2-3%real + 2-3% inflation) then over 40 years it grows with a factor of about 4.3.

 

The 70s inflation was mainly a supply shock. First resources and then labour contracts. Btw, I think the money supply graph you're looking at is real/real, so it wouldn't tell you much about inflation. You may want to look at one that show's rate of change in nominal money supply.

[jb85]

If nominal GDP grows at 5% (say 2-3%real + 2-3% inflation) then over 40 years it grows with a factor of about 4.3.

 

The 70s inflation was mainly a supply shock. First resources and then labour contracts. Btw, I think the money supply graph you're looking at is real/real, so it wouldn't tell you much about inflation. You may want to look at one that show's rate of change in nominal money supply.

 

ahhh yeah that makes sense.  Raw change Yoy is a better measure (not as % of GDP).  I graphed YoY changes in m1 and m2 below, as well as plotted inflation (green line).  Still not seeing a ton of correlation

 

http://i.imgur.com/9swYH3u.png

[Vish_ram]

I found this surprising correlation (or causation?), between inflation and civilian labor force. A remarkable thing happened in 70's. There was a big addition to labor pool. I'm thinking that this influx of labor caused demand for everything to go up and hence the inflation. As labor growth shrunk, CPI followed suit.

 

http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1c0j

 

 

[SmallCap]

I found this surprising correlation (or causation?), between inflation and civilian labor force. A remarkable thing happened in 70's. There was a big addition to labor pool. I'm thinking that this influx of labor caused demand for everything to go up and hence the inflation. As labor growth shrunk, CPI followed suit.

 

http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1c0j

 

interesting, wonder if anyone ever ran this data against japan for the last 50 years.

[rb]

I found this surprising correlation (or causation?), between inflation and civilian labor force. A remarkable thing happened in 70's. There was a big addition to labor pool. I'm thinking that this influx of labor caused demand for everything to go up and hence the inflation. As labor growth shrunk, CPI followed suit.

 

http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1c0j

 

I'm sorry, but what you found is a statistical coincidence. An increase in labour force is deflationary. That's Econ 101.

[petec]

Don't forget the US (and therefore the world's reserve currency) came off the gold standard in 1971.  That was always likely to cause some price instability.  At the same time the US ceased to be the swing producer of oil and pricing power was handed to the Arabs who decided to use it as a political tool.  Add in years of government spending on Vietnam, and very powerful unions, and you have a recipe for inflation.

 

P

[wisdom]

Don't forget that the iron curtain limited global trade. There is a slide going around that shows that free global trade leads to low inflation. I believe it was in one of the slides by FFH a while back.

[petec]

Don't forget that the iron curtain limited global trade. There is a slide going around that shows that free global trade leads to low inflation. I believe it was in one of the slides by FFH a while back.

 

+1 addition of huge labour force to the world pool.

[stahleyp]

http://www.theguardian.com/business/2015/jun/01/the-liquidity-timebomb-fiscal-policies-have-created-a-dangerous-paradox

 

I know he's been bearish on and off since 2009 (per wikipedia) but I've been seeing these liquidity concerns pop up again and again over the past few months - namely with Dimon and Marks.

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[Liberty]

Relative margin debt:

 

http://econompicdata.blogspot.ca/2015/06/ignore-margin-debt-alarm.html

 

(thanks Bluegrass Capital)

[KinAlberta]

Relative margin debt:

 

http://econompicdata.blogspot.ca/2015/06/ignore-margin-debt-alarm.html

 

(thanks Bluegrass Capital)

 

He says: "So next time you hear anything about margin debt... ignore it."  Incredible. 

 

That may be like the "Roaring Twenties" talk would have been.  It also rather ignores many of the lessons learned less than 10 years ago during the debt crisis. Or as the old bankers quip goes: "There's no such thing as a bad loan, just good loans that go bad."

[Liberty]

He says: "So next time you hear anything about margin debt... ignore it."  Incredible. 

 

You're taking it out of context. He means that when this topic is usually covered, it is badly covered, so you can ignore the media's alarms about record margin debt because they are looking at the absolute numbers, which you can't parse properly on their own.

 

Unless you think that relative margin debt should go down as the market goes up over time. Otherwise, today's nominal margin debt must be just crazy compared to the nominal amount in 1980...

 

Absolute levels of debt simply don't matter. As anyone who took an accounting or corporate finance course in high school or college understands, what is relevant are levels of debt relative to asset and equity levels. Taken to the extreme... does someone worth $2000 with $5000 of credit card debt have the same debt problems as someone worth $2 million with $5000 of credit card debt? Of course not. What matters is the level of debt to the assets that debt is supporting.