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David Cretcher

 
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  • All-Weather Portfolio Mid-Year Review [View article]
    NonSurfer, No I mean that a significant, 3-4% upward move in interest rates would not be likely without a significant upward move in the inflation rate. Interest rates did move down in 2009, but so did inflation(deflation).

    We may see smaller moves in the interest rate due to central bank intervention and the market reaction to it and other current-events. But, I don't see a big move in interest rates without a change in the rate of inflation.

    In general, interest rates more or less track the inflation rate and in the long-term interest rates do not move too far off of inflation rates. The real interest rate, i.e. interest rate minus inflation, is relatively stable in the long-run. As shown on this graph. http://bit.ly/1mEufaC
    May 28 08:31 AM | Likes Like |Link to Comment
  • All-Weather Portfolio Mid-Year Review [View article]
    Yes, they can all move down together, typically in a low-inflation, bear market with rising interest rates. However, interest rates are highly correlated to inflation rates and it is unlikely there will be a big move 3-4% without a corresponding increase in general inflation A rise in inflation will increase the value Hull Assets. This should limit the intensity of the drawdown. To get the most out of this portfolio it is best to actively manage the allocations.
    May 27 06:26 PM | Likes Like |Link to Comment
  • All-Weather Portfolio Mid-Year Review [View article]
    Yes, they can all move down together, typically in a low-inflation, bear market with rising interest rates. However, interest rates are highly correlated to inflation rates and it is unlikely there will be a big move 3-4% without a corresponding increase in general inflation A rise in inflation will increase the value Hull Assets. This should limit the intensity of the drawdown. To get the most out of this portfolio it is best to actively manage the allocations.
    May 27 06:26 PM | Likes Like |Link to Comment
  • All-Weather Portfolio Mid-Year Review [View article]
    Webaplooza: I'm not sure how the two portfolios backtest. But, as I understand the Browne portfolio it is 25% Stocks, 25% LT Treasuries, 25% Gold and 25% Cash. The Cash in a portfolio acts like water in a glass of whiskey, it's the same stuff, just less of it. So that leaves a three asset portfolio that will look like Figure 3 above with the addition of Gold, watered down 25% with Cash. In my framework, Gold is a Wind Asset. It is speculative, to make money on Gold you have to sell it for more than you paid for it. Browne adds it as an inflation hedge, but the 30 year correlation between gold and inflation is almost zero (0.2%), so regardless of what the TV gold salesman tell us, I wouldn't rely on it for any inflation protection. The portfolio contains no real inflation protection and by my model is effectively 66% percent wind assets and 33% weight assets. I would recommend such a high gold allocation for the average investor.
    May 27 06:14 PM | Likes Like |Link to Comment
  • Lessons From Brazil, A Difficult Investment Climate [View article]
    gmmpa:

    The difference between asset price inflation and goods and service inflation is that one is good for market investors and one is bad. If you are a share holder you want asset-price inflation that causes the price of stocks to inflate, ie have the PE ratio increase, and you don't want goods and service inflation because it creates an asymetry by magnifying any loses.

    The mechanics of the Brazilian economy are interesting but outside the scope of this article.

    Basically, I'm just trying to shed some light on how much more difficult it is for many foreign investors and how US investors have it a little easier. It's the simple point that there are many variables for Brazilian and investors in smaller markets. 1) Unlike, the US investors they need to pay more attention to inflation and the foreign exchange market. 2) High inflation creates asymmetries in portfolios because a long-term loss with high inflation is much worse. It is also true the gain is also less, but less gain is an inconvenience, a magnified loss is a problem. In a high inflation economy, even a low- return portfolio is a loser. If inflation is 6% per year then for Brazilians, the market must go up at least 6% just to break even. This asymmetry is one reasons markets in general perform poorly in inflationary times. 3) That unlike investors in larger developed markets with low inflation, Brazilian and many foreign investors must look to international diversification, both in currency and investments. US investors do not have to do this. 4) Currency devaluation further magnifies the results of foreign investments. All of these variables, make a difficult investing climate in Brazil. By moving to other currencies and other markets some of these risks can be diversified for Brazilian investors. Not lowered, but diversified. That's all I'm trying to say.

    I'm not making a judgement on the Brazilian economy or if US investors should invest in the Brazilian stock market. I don't know what the Brazilian market will do, other than inflation will not help it. That's also outside the scope of the article. It's a risky emerging market with foreign exchange risk and high domestic inflation. If you're looking for an investment like that, the valuation is relatively cheap.

    Personally, for US investors, I think the Brazilian bonds are probably a less risky place. For US investors, there are long-term dollar denominated medium-grade Brazilian government bonds that pay nine percent or so sold on US exchanges. Nine percent is an equity return and there isn't any direct foreign exchange risk. At nine percent you'll have your money back in eleven years and you'll still own a bond that hopefully will be paid off.
    Apr 27 10:52 AM | Likes Like |Link to Comment
  • Lessons From Brazil, A Difficult Investment Climate [View article]
    gmmpa:

    The difference between asset price inflation and goods and service inflation is that one is good for market investors and one is bad. If you are a share holder you want asset-price inflation that causes the price of stocks to inflate, ie have the PE ratio increase, and you don't want goods and service inflation because it creates an asymetry by magnifying any loses.

    The mechanics of the Brazilian economy are interesting but outside the scope of this article.

    Basically, I'm just trying to shed some light on how much more difficult it is for many foreign investors and how US investors have it a little easier. It the short simple point that there are many variables for Brazilian and investors in smaller markets. 1) Unlike, the US investors they need to pay more attention to inflation and the foreign exchange market. 2) Inflation creates asymmetries in portfolios because a long-term loss with high inflation is much worse. It is also true the gain is also less, but less gain is an inconvenience, a magnified loss is a problem. In a high inflation economy even a low return portfolio is a loser. If inflation is 6% per year then for Brazilians, the market must go up at least 6% just to break even. This asymmetry is one reasons markets in general perform poorly in inflationary times. 3) That unlike investors in larger developed markets with low inflation, Brazilian and many foreign investors must look to international diversification, both in currency and investments. US investors do not have to do this. 4) Currency devaluation further magnifies the results of foreign investments. All of these variables, make a difficult investing climate in Brazil. By moving to other currencies some of these risks can be diversified for Brazilian investors. That's all I' m trying to say.

    I'm not making a judgement on the Brazilian economy or if US investors should invest in the Brazilian stock market. I don't know what the Brazilian market will do, other than inflation will not help it. That's outside the scope of the article. It's a risky emerging market with foreign exchange risk and high domestic inflation. If you looking for an investment like that, the valuation is relatively cheap.

    Personally, for US investors, I think the Brazilian bonds are probably a less risky place. For US investors, there are long-term dollar denominated medium-grade Brazilian government bonds that pay nine percent or so sold on US exchanges. Nine percent is an equity return and there isn't any direct foreign exchange risk. At nine percent you'll have your money back in eleven years and you'll still own a bond that hopefully will be paid off.
    Apr 27 10:52 AM | Likes Like |Link to Comment
  • QE Infinity - More Money Printing? [View article]
    At this time, QE is mostly creating excess reserves or reserves that are not backing any bank loans. A reduction would be one dollar of Fed owned bonds traded to one dollar of excess reserves. In theory, if the reserves were not excess the purchase of the bonds would result in a multiplied reduction in bank loans. In reality, because of low reserve requirements and reporting lags there really isn't any connection between the two. In practice, banks loan as much as they want to qualified borrowers. Banks are constrained by the availability of willing and qualified borrowers, not reserves.
    Oct 26 09:29 AM | Likes Like |Link to Comment
  • Allocating Within The All-Weather 4 ETF Portfolio [View article]
    Gardener, Treasury Inflation Protected Securities(TIPS) are guaranteed with the full faith and credit of the US and they are also guaranteed to index to changes in the CPI. Held to maturity investors will get their money back and the bonds will be forced by the indexing feature to correlate with moves in the CPI. It doesn't require historical evidence.
    Oct 25 11:50 AM | Likes Like |Link to Comment
  • QE Infinity - More Money Printing? [View article]
    No, the deposits are the reserves. A growth in deposits is a growth in reserves. When a bank loans money, unlike QE, it is money printing.

    It works like this. Bank A makes the loan knowing it doesn't have reserves. When the check from Bank A clears through Bank B, the Fed debits the reserve account of Bank A and then credits the reserve account of Bank B for the amount of the loan. Bank A is short ten percent. Bank B is over reserved by the amount of the loan.

    Bank A needs to come up with ten percent to reserve the loan. Through Fed Funds, Bank B loans Bank A ten percent of its new reserves to cover the loan it just made. Two weeks later the Fed asks Bank A, "Have you reserved the money for your car loan?" They say "yes sir, we borrowed it from Bank B".

    Where did the reserve money come from? Bank B got the money it lent Bank A from the loan check that cleared. Therefore, the system is self-reserving. It makes the reserves at the same time it makes the loan.

    Because of this structure, our banking system can loan a much money as it can find creditworthy borrowers.
    Sep 26 07:15 PM | Likes Like |Link to Comment
  • QE Infinity - More Money Printing? [View article]
    Yeah, I glossed over that, so as to not get sidetracked.
    The way fractional banking is explained in textbooks, isn't how it really works. Banks only need to reserve at most 10%, and there are lots of exceptions that effectively lower that to almost to zero. They also have about two weeks to come up with the reserve. If a bank doesn't have the reserve, it can borrow it from a bank with excess reserves and if that doesn't work it can borrow the reserves directly from the Fed. So, it is unlikely a banker would turn down a profitable loan because of a lack of reserves.
    The loans generate there own reserves, because when the bank makes a loan the money gets spent on a car, let's say, then the dealership deposits the check in their bank. The newly deposited check forms new reserves in the banking system. When the loaning bank needs to meet its requirements in two weeks the reserves generated by the loan are in the system and can be used to reserve the loan. Therefore, the system is self-reserving.
    So you're right for the purpose of lending, the excess reserves are irrelevant in the traditional sense of lending. They do come into play for Basel capital requirements, because the loans are considered "risk assets" and the reserves are "riskless assets", the banks need to have a certain amount of equity on their balance sheets behind the risk assets, but not the riskless assets. So, the reserves help to lower the capital requirements for banks. So, some of these excess reserves are being held to meet the capitalization requirements and that does slow down the bank's incentive to want to loan. But, that's a different story.
    This is probably a theme for a longer piece, but in a nutshell the banks have been going more into riskless bonds and assets that they don't have to back up with Basel capital and that creates a credit deadlock in the system and makes the M4 curve flatten (Exhibit 2) and bond prices increases. instead of a car or small business loan, they just buy a long dated Treasury or a government mortgage bond at 3% or more and keep the difference. Since they are risk-free they don't require any capital to back them up.

    The bottom line is we don't really have loose monetary policy, if we did we would see more bank lending to small business etc.
    Sep 26 11:00 AM | Likes Like |Link to Comment
  • QE Infinity - More Money Printing? [View article]
    Mr. Clark:

    The extra $90 is an increase in book value. Yes, it does increase how wealthy people feel--the wealth effect, phantom money, and yes, you're right, that is increasing, but it doesn't increase the money in circulation. It isn't caused by more money it is caused by fewer assets available for the public to purchase. A decrease in supply. The 85B the Fed buys in bonds must be invested elsewhere. The increase in asset prices is part of the Fed strategy behind QE. The "portfolio balance channel" in Fed speak. It is outside the scope of the article.

    When someone buys a share for $10 they transfer $10 in money to the seller. There is an asset transfer. When it is sold for $100, $100 goes from buyer to seller. The money stock is unchanged.

    The book value is just a snapshot in time, no one really knows what a share of stock is worth for themselves until they sell it. Hopefully, it will be worth $100, but if everyone is selling at the same time it may be $10.
    Sep 22 03:07 PM | 1 Like Like |Link to Comment
  • QE Infinity - More Money Printing? [View article]
    Uncle Pie:

    1) The Feds balance sheet must balance. It has roughly 3.7T in bonds as assets and 1.5T in circulating currency and 2.2T in bank reserves. A bank can use its reserves to buy another MBS but when it withdrawals the reserves the Fed will need to shed a bond from their assets. So, it should just wash out. Sort of reverse QE.

    2) The banks reserves could be loaned against, increasing the money supply. But, the current reserve requirement is effectively about zero and has been for a decade or more. So, banks are not constrained in issuing loans as long as they can find willing creditworthy borrowers. I don't think the excess reserves are a problem. Our banking system is never reserve constrained. Even if a bank doesn't have the reserves, it can always borrow them from the Fed.

    3) If a billionaire goes to a bank and takes a small loan out (IOU), and then writes a check(IOU) against the loan, is it a house of cards? No, as long as the loan is repaid. The US Government issues US currency it has an infinite amount of money to pay the loans off, because unlike the billionaire, it can just manufacture more money. The only downside is under specific circumstances, it can create inflation. As long as inflation is tolerable, it can issue IOUs without consequence.

    4) There is inflation, just not a lot of it in my opinion. And so what if there were? There are lots of countries that have function well with high inflation, including the US. My mother said that the high inflation of the 60-80s was the best thing that happened to them financially. Our house quadrupled in value and they paid it down with inflated wage dollars. What's so bad about that? It beats paying for a declining house value with flat wages and dollars. When's the last time you read an article on the benefits of inflation?

    All I hear on the news is how awful inflation is. The question is for whom? I lived through it, and it didn't seem that bad to me. Bankers hate it, but anyone that has an unpaid mortgage should welcome inflation. Retirees can protect against it with TIPS(TIP) and other methods. 70% of the population lives paycheck to paycheck what do they care, as long as it is indexed?

    5) I know there is a lot of nostalgia for gold, but the problem with the Gold Standard is the money supply is tied to stuff we did out of the ground. In years when the discoveries were slow the economy slowed, when we found it in Alaska the economy expanded. The money supply needs to grow with the economy, or else we get deflation. Also, there was no way to expand and contract it when the economy need more money at harvest time. That's why we dumped it for an elastic currency. It was sound for money holders, but terrible for farmers, industrialist, and ordinary folk.

    6) There is a lot of substance guaranteeing our fiat currency. We have the worlds largest navy we can shut down commerce in almost any country if we felt like it. But, if you run a blockade of the US, we are it is self-sufficient, we can feed ourselves and fuel ourselves – maybe the only country in the world that can. Neither Mexico or Canada are a threat. That makes us a militarily stable country. And stable countries make for stable currencies. We may not always be the reserve currency, but we will be it for a long time.

    6) There are a million extreme hypothetical scenarios that could lead to inflation or hyperinflation that would make a good book, but none I will use in a portfolio strategy. You need to keep a weather-eye on the horizon but, unlike Mr Rickards, I don't see much at the moment.
    We've only had one bout of money driven inflation, after WW1, and it wasn't hyperinflationary and I don't believe it is likely to happened again soon. Hanke also said most hyperinflations take about a day to stop, all you do is repeg the currency. I guess there are hypothetically scenarios where bacteria could they would wipe out the population, if the antibiotics don't work. If that happened, I guess, inflation wouldn't be a problem. It's just scare tactics, in my book. A little inflation. 4-6%, would be good for the economy, like in the 60s, we could pay down underwater mortgages.
    Sep 22 11:04 AM | 1 Like Like |Link to Comment
  • QE Infinity - More Money Printing? [View article]
    The cost of not reducing the balance sheet, is interest rates could remain low and the low rates could overheat the economy by encouraging excess borrowing.. But, currently the economy is underheated.
    Sep 22 09:40 AM | Likes Like |Link to Comment
  • QE Infinity - More Money Printing? [View article]
    1) Yes, QE is an asset swap.

    2) No, the excess reserves are in an account at the Fed offset by an equal amount of US Bonds. They are not being invested anywhere. Other non-bank investors that might have bought a US Bond are facing a shortage and in an attempt to get more yield invest elsewhere, like the stock market.

    3) Yes.

    The major downside to QE is that interest rates will rise. Investors will have more bonds to buy and the stock market will face more headwind. Bond buyers will be fearful, that with more bonds available , their bond values will decline.

    The only reason to stop it, is that the hawks on the Fed board, believe the low interest rates will overheat the economy and cause inflation. But, as I have shown, the data behind that is weak.
    Sep 22 09:10 AM | 1 Like Like |Link to Comment
  • QE Infinity - More Money Printing? [View article]
    Robert: I think your question is something most people struggle with. The Fed's buying power comes from its ability to issue credit money. All banks can issues credit money. It doesn't have the money nor does it borrow the money. It buys the bond on the open market and uses the bond to collateralize the new banknotes, which are, in turn, used to pay for the bond.

    In fact anyone can do what the Fed is doing. Think of it this way. I have a $1,000 Treasury Note. I'm going on a trip and I don't want to take it along. I say Robert will you hold on to my Treasury Note, I don't want to lose it. You say “sure”. I say “will write me a note that says you have my Treasury and that you will give it back to anyone who presents you with the note”. You say “sure”. You have in essence bought a bond with piece of paper. That's what the Fed is doing.

    Now you have an asset, the treasury note. I have an asset, an IOU for one bond. But, neither of us is richer. You “printed an IOU” for me but I gave up my Treasury Note. You didn't just give me the IOU without something in return, in which case I would be richer.

    The only problem is if I take your IOU to the grocery store and say “I want to pay for these grocery with this $1,000 IOU from Robert, and if you take it to him he will give you a Treasury Note”, they will tell me to take a hike.

    If you instead tell them you have an IOU from the US Government and you can use it to pay your taxes with it or pay down any debts you have, they will say yes. The only difference between your IOU and the Fed's IOU is yours is backed by you and theirs is backed by the United States Government. It turns out that's a big difference.
    Sep 21 05:52 PM | 1 Like Like |Link to Comment
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