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  • The Problem With The U.S. Stock Market And The Economy [View article]
    "Growth requires real investment it precludes immediate consumption."

    How does one flip a one sided coin?
    Mar 30 11:51 PM | 1 Like Like |Link to Comment
  • The Problem With The U.S. Stock Market And The Economy [View article]
    "So, how is accelerating the rate of increase in debt (i.e.; stimulus) on the backs of the American middle class a SOLUTION to this problem of too much debt?"

    Public and private debt are two different animals. Private debt must be settled, one way or another, as we owe it to someone. Pay it down or default. US government debt is of it's own creation, the government owes itself as the monopoly supplier of our currency. It's telling when the government can hold it's own debt at the central bank allowing private financial markets to reinvest their own savings. Private debt matters, government debt does not (not really, and with conditions.)

    "Increased debt is a solution because it allows government to grow larger, and when the political limits of taxation are reached, it can be inflated away over time in a fashion which not one in 100 people understands."

    Not really. Increased debt spending helps the private sector to grow as the government contracts them to produce things the government might suppose the economy needs. Or it can simply spend on it's own needs and the private sector responds. Inflating away US government debt it can always make good on makes no sense. It makes more sense for private debt, but it's not a tool I suspect we're going to employ - much to the dismay of the monetarists.
    Mar 30 11:50 PM | 1 Like Like |Link to Comment
  • The Problem With The U.S. Stock Market And The Economy [View article]
    "As a retiree on a fixed income, and with no debts, I would theoretically benefit from falling prices. Supposedly my purchasing power would increase."

    Me, too, Coffee...retired, de levered, and fixed income. I also retired in EM paradise and work for free in volunteer organizations. Wow, what hit us was the massive dollar inflows when the crisis broke. Wanna feel the sting of debasement, try -30% in two short years on top of 5% local inflation. Ouch. Still, I agree with you on a healthier US economy for all. I am not wishing for deflation, just normalization.

    I'm also pretty pissed the government decided not to borrow at low rates to buy something or contract out to the private sector to build something while the Fed hold's the government's own debt. It kind of defeats the purpose causing the Fed to over allocate funds to the economy, I dunno, hoping EM would be the engine of global growth, or something?
    Mar 30 11:34 PM | 1 Like Like |Link to Comment
  • The Problem With The U.S. Stock Market And The Economy [View article]
    "Having the government as the lender of last resort to homeowners might be a novel idea, but it has never been tried, and there is too much opposition from the banking industry, one not used to competition."

    Yea, home lending is the financial market's job. What the government can do is policy that helps home owners borrow.

    "Anyway, looking ahead, I see the real danger is the Fed becoming too aggressive about raising short term rates."

    You know, it seems almost ironic, but the Fed has gone to great lengths to make cash available for reinvestment. I think the key is, those dollars need to be attracted to the domestic economy with higher rates of return. There does seem to be a balance between attracting private capital (investment and credit availability) and borrowing on credit worthiness. Rates can seem to be out of balance. When they are, and with the lack of US monetary policy dollars flowing domestically, the Fed must keep up the flow. That holds rates low in the US and foreign growth returns more attractive.

    "We now have a systemic illness, an addiction to cheap money. We may never get over it." Yep. We simply become a source of cheap dollar funding with little growth tricking back to our organic domestic economy.
    Mar 30 11:18 PM | Likes Like |Link to Comment
  • The Problem With The U.S. Stock Market And The Economy [View article]
    "...that lending would be spurred and economic growth would follow." That includes lending to the government at low interest rates while the Fed holds a lot of Treasury debt.

    "...The stock market has roared to all-time highs," so much for the equity wealth effect.

    "The Fed has repeatedly stated that it cannot successfully carry the weight of an economic recovery by itself." Bernanke said as much when he spoke to congress. Now, Yellen simply says, "do no harm." In other words if you cannot help, get out of the way. It's quite an insult aimed at congress, when you think about it.

    "In my view, the Fed miscalculated..." Yep. Well, the Fed has to punch through the financial markets to reach main street. The government can get there directly.
    Mar 30 10:59 PM | Likes Like |Link to Comment
  • U.S. GDP Growth Isn't As Organic As We Thought [View article]
    EK, maybe I should not have said "it's all about" this or that. I do realize there are no absolutes. I guess the point I was making was massive capital flows seeking risk far out weight trade balances.

    The dollar empire does seem to spur growth, employment, inflation, credit worthiness, and returns globally. They not only produce products for us, they also consume them. I guess this is why I don't feel equities are oversold simply by loose money with no where to go. We have had some effect on global welfare with domestic policy.

    I am agreeing with you, and Bernanke, by saying the US would better serve growth through our own domestic consumption. Lots of headwinds to that, however, one of which is our own sluggish growth. I see investment dollars headed overseas seeking returns and spurring growth, resulting in dollar savings, and being reinvested in no small amount outside the US.

    This I blame on our own low rates while the ECB makes save EMU peripheral debt,for example, with a wide risk premium against low cost dollars. The euro is a nice example of where returns outweigh their meager growth. Each time dollars flow out of EM, they tighten their domestic policy to cool pressures from deflating currencies. This added yield re-attracts the very dollars that want to flow somewhere else.

    All I am saying is the US should be so lucky, we should be selling MBS to the world instead of our central bank. That won't happen at low rates.
    Mar 29 10:06 PM | Likes Like |Link to Comment
  • Will The Fed Lose Out? [View article]
    "But, at the end of the day, they'll just argue that mark to market does not apply to them because: "well, it jus doesn't!"" It doesn't as long as they keep the assets until maturity. This seems to be the reason they are testing a new interest bearing reverse repo facility.
    Mar 29 09:28 AM | 1 Like Like |Link to Comment
  • Janet Yellen Didn't Gaffe [View article]
    Thanks for the info, AllStreets. You're way more up on all that.

    You know, as mortgage rates creep up I become a little more hopeful about housing, maybe ironically. It may not grow as fast, but at least with some credit availability and creditworthiness, it should plod along like everything else. I think rates too low takes many less creditworthy, potential home owners out of the market, especially with lending standards revised.

    So, still, we need to see how the Yellen Fed works with longer term rates and forward guidance. They want 2% inflation which should push up longer term rates, maybe too much to stimulate housing. However, with inflation low, any rise in short term rates might choke off inflation expectations. It'll be interesting how they play this out.
    Mar 29 09:25 AM | Likes Like |Link to Comment
  • Frightening Fragility When Running Consensus Fails [View article]
    Are we going to expect the Fed to provide funding for MBS forever or are we going to allow the rest of the world to decide whether they are good investments. There is no shortage of money out there to flow back into the housing market. It just needs a return on investment to do so.

    With higher rates comes credit availability, too. To get 3.5% a home owner needs pretty darn good credit rating to qualify. So, there has to be a market balance between lender (credit availability) and borrower (credit worthiness), it cannot be skewed heavily in favor of the borrower who might not qualify.

    Also, lending standards should be improving to ensure mortgage securities are at least safe so there is no repeat of the defaults that stung many. Once bitten, twice shy. The risk has to be worth the return and the lending has to be based on sound standards. For those who want and qualify for a house, there should be little trouble getting one as rates and standards are in line with creditworthiness.

    It's a shame, really, home equity and consumption will lag with a slow expansion in home prices, but that's part of the problem with the system that makes a non earning asset our primary source of main street wealth effect. It requires a descent wage to service that debt.

    Personally, I prefer we get the Fed out of they way and tighten up our MBS product so we can sell them to those holding our monetary policy dollars instead of our central bank as investor of last resort. As the Fed implements it's reverse repo it'll be interesting how they can keep mortgage rates low enough to keep the housing recovery alive.

    MBS issuance is tighter for reasons other than, and possibly including, Fed withdrawal of stimulus. The trick is to get the private sector to underwrite home lending at market rates and let the Fed and it's low rates back off. Otherwise we'll never recover from stimulus.
    Mar 29 07:24 AM | 3 Likes Like |Link to Comment
  • Will The European Central Bank Go For QE? [View article]
    The ECB is driven by ordoliberal doctrine. It's the reason OMT has been ruled (in German courts) to be a violation of treaty and the ECB has not engaged in QE already. Anyone who thinks central bank stimulus is coming, in the form of EMU sovereign bond purchases, might be in for a surprise. The ECB is not the Fed and the EMU monetary system is different. Their ideology is not that of the US.

    The ECB may feel pressured to act, but we have to remember deflation in peripheral states leading to low prices and competitive wages is part of the recovery process rather that a scourge to the economy. They do not rely so much on government ability to borrow and spend even though the ECB has essentially made safe EMU sovereign bonds by "whatever it takes." That has been threatened by the German court ruling on OMT, however, which makes life interesting.

    If the ECB does act, and they may not seeing low inflation as a temporary phenomenon and part of the recovery process, it's likely they may buy US treasuries doing "whatever it takes." But, I am sure the markets are growing weary of jawboning. The euro is falling back, probably on the realization the ECB will not buy EMU bonds anytime soon. But, that works in their face as the euro pulls back from $1.40, just where they seem to want it. Remember, Draghi has the jaw bones of Arnold Schwarzenegger.
    Mar 29 01:42 AM | 2 Likes Like |Link to Comment
  • U.S. GDP Growth Isn't As Organic As We Thought [View article]
    "...almost as if QE wasn't really spending after all."

    I tend to believe EK is correct. One thing that sticks out in the chart above is why organic growth has been affected since 2012. If QE helped GDP, would it not have also shown some affect prior to 2012 when unemployment (with anomalies) was higher? Yes, inflation was closer to target then, generally. But, housing, bank lending, and private debt were elevated as well.

    The USD carry trade seems to be a way to inject dollars into the global economy in lieu of weak consumer spending. Normally, US consumer spending increases global production and dollars accumulate in savings. That USD savings then, returns to the US in the form of investment in US financial assets, such as MBS and US Treasury securities. It also funds some of our exports: dreamliners and the Empire State building. This flow seems to be a boon to earnings and global equities.

    Fed stimulus seems to replace the global flow of US consumption spending directly into global risk investment largely by passing the production and earnings normally driven by US consumer spending. However, that large global companies producing abroad on low cost labor seem to be reporting solid earnings and holding a lot of cash seems to suggest some consumption is occurring. The savings glut is occurring, but a lot of dollars remain saved and are not returning to the domestic economy in any great amounts. It appears foreign consumption is benefiting from US dollar inflows driving growth in global earnings - but it's not as much US consumer driven.

    This is the idea behind EM being the driver of global growth while Bernanke talked about the world benefiting from a strong US economy and supplying US consumer driven growth. That US driven growth was supposed to be "free money" being diverted from investment through government borrowing and spending back into the US economy creating aggregate demand and allowing the consumer to apply demand to global production. Instead, QE seems to have trickled down into foreign economies providing growth, jobs, inflation, returns, and just about everything else the US would love to have.

    There are no absolutes, however. Yes, some of that investment savings glut should make it's way back into the US in the form of production, say to purchase dreamliners and maybe the Empire State Building. But, it does not seem to spur much small business activity. The flow of US savings glut dollars still seems to be largely driven back into US investment in US financial assets: equities, bonds, and Government debt. But it's not flowing so much back into US consumption as it is seeking yield where yield can be found: gold, the euro, EM, frontier markets - almost anywhere but the US.

    US consumption dollars flow into global savings and return as US investment which is attracted by US returns and trickles down (apparently) into US consumption. Now, US investment results in a saving glut looking for returns in global growth regions as US investment offers low, unattractive returns. So, little is (or has been) trickling back down the the US consumer. This is why we need more attractive interest rates in the US - to attract our own monetary policy dollars and provide funds for home loans instead of relying on Fed flows resulting in huge plates of spaghetti being throw against the wall. The US get's to lick the stain of it's own monetary policy and nurse at the hind teat of our own fiscal policy. As Yellen said, she hopes fiscal policy will do "no harm to the recovery."

    US consumption is not dead, there is growth, spending, and all that. It's just weaker than normal (see retail.) But, our growth has to be largely, not totally, organic growth. QE has helped, no doubt as there are few absolutes, but it's largely overkill in the absence of fiscal policy diverting (sufficient) investment money back into US consumption directly. Global growth has been largely imbalanced in favor of global economies, EM especially. One can see that with the reaction of EM to US dollar tapering and tightening. Global growth is not a bad thing, mind you, it's just that our own massive stock of dollars should have done more work at home.

    In my view, the euro rally on deflation. When lots of dollars are seeking returns, it's all about returns.
    Mar 29 12:20 AM | 2 Likes Like |Link to Comment
  • IMF Deal Will Break Ukraine, Harm Global Stability [View article]
    Civil war and debt denominated in a foreign currency is a set up for possible hyper inflation event.

    Interesting article, looks like trouble and austerity ahead for the Ukraine. After the Greek example, they will definitely have to have their house in order before being affirmed member of the EMU. Who knows which way the Ukraine will slide, east or west, by the time that happens.
    Mar 28 07:46 AM | 3 Likes Like |Link to Comment
  • Why Is The U.S. Dollar's Value Collapsing All Of A Sudden? [View article]
    The dollar index is falling because it is heavily weighted by the euro, which in turn is heavily influenced not by growth in the EMU but by ECB comments and returns.

    There is no dollar currency war and hyper inflation is a not a threat. Demand for US securities is healthy.
    Mar 27 09:50 PM | 3 Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "Another question that comes to mind also is, to what extent can the "fluff" in the economy be deflated without it actually affecting the real economy?"

    Great question, maybe not much. Low rates affect housing and auto loans, most other consumption is on credit cards.

    I believe the Fed accommodates the free markets and the free markets make their own decisions on risk. Those decisions seem to be imbalanced toward global growth regions while the Fed implements US domestic policy. Imbalance is not really the same as mal investment, it's actually efficient investment that has unintended consequences of imbalance. It's not certain over investment in assets occurs automatically creating conditions of mal investment. Efficient free market decisions are probably still being made, including in US equities.

    The Fed seemed to continue easing policy through fiscal policy debates that result in deficit reduction and sequester. If the congress will not make money available to the US economy directly, the Fed will attempt it indirectly. Monetary policy is not working well in a vacuum.

    Capital flow adds to EM growth, but the US is not an export driven economy. I am not certain how much investment effects growth in EM rather than competing for their equities (on organic growth) and higher yielding bonds. It apparently does spur some growth and with the withdrawal of stimulus, their currencies depreciate spurring inflation and rate hikes. Those rate hikes, then, become attractive for risk in dollars, again. So dollars probably circulate abroad. The US should be so lucky.

    Bottom line, I think our own monetary policy dollars head to where they are treated best. Right now, at low rates, that is hardly in the US. It's cheap to borrow and expand production, but who is going to lend into a sluggish US economy in sufficient amounts when the government is being more austere leaving the aggregate demand portion weak. A lot of growth indicators are "green shoots," however retail is still in the dog house. That's not a good sign for a consuming economy.

    Above Joesph mentions withdrawing stimulus too early. I disagree, while they have to do so slowly, I think the Fed can't get rates at least off the zero bound soon enough. The trick is, can they keep home mortgage rates down through forward guidance without inverting the yield curve signaling a recession? And how will they implement their reverse repo to carry out forward guidance? Since equities do not appear over bought, IMO, they should survive a bit of tightening, especially if tightening brings dollars home so we can spend some of our own money on imports.
    Mar 26 10:08 PM | 2 Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "...the causal effect of lower equity prices on the real economy are highly questionable."

    Kaskade, when it boils down to it, your point strikes at the heart of the matter. There have been arguments that EM was going to be the engine of global growth. But with China trying to consume more of it's own production instead of ours a currency war makes little sense. It's probably not a bad idea for dollars to flow overseas if foreign dollar savings would return to the US. If that were happening with any level of vigor, we might see a stronger recovery.

    With interest rates pushed down, returns fall as well. Spreads are much better in Europe, Australia, and the growth regions of EM. I suspect that is where a lot of dollars get treated better or are simply saved. It seems the US dollar is doing abroad what it should be doing at home. This seems to be a natural thing to happen with monetary policy - investors seek risk and returns. This is where government spending should step in to provide some growth and returns to attract our own dollars.

    Returns must be very low, maybe too low, in the US outside of equities and bond prices. Our MBS are, well, once bitten twice shy so the Fed buys them providing underwriting funds for domestic real estate lending instead of selling them to the world.
    Mar 26 10:08 PM | 1 Like Like |Link to Comment