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  • Deflation Of The Shadow Banking System [View instapost]
    I agree. Exceptional.
    Sep 15, 2012. 08:47 PM | 1 Like Like |Link to Comment
  • There's No Longer A Bernanke Put [View article]
    Interesting. Can you explain? What do you mean with tax on money? Inflation? JasonC has made us aware of the fact that aggregate credit (Central Bank + commercial bank created money) has not been rising over the last years.
    Sep 15, 2012. 08:21 PM | Likes Like |Link to Comment
  • There's No Longer A Bernanke Put [View article]
    @my question was towards JasonC
    Sep 15, 2012. 08:19 PM | Likes Like |Link to Comment
  • There's No Longer A Bernanke Put [View article]
    What do you suggest to invest in then? No sarcasm, I am really curious, because - no intention to flatter - you have written some of the best informed comments in this thread.
    Sep 15, 2012. 08:12 PM | Likes Like |Link to Comment
  • There's No Longer A Bernanke Put [View article]
    Sorry, but your comment here is really hateful. Why do you have to react so aggressively to Jim, just because he has an opinion, that you are not sharing?
    Sep 15, 2012. 08:10 PM | 1 Like Like |Link to Comment
  • There's No Longer A Bernanke Put [View article]
    Ok. I think we are talking about two different things here.

    1. What you referred to: The short term effect of the market intervention of buying up bonds, driving up prices and driving down the yield. This is what happens now. It is good for existing bondholders.

    2. What I refer to: The long term effect of an increased money supply = inflation. Existing bondholders who are now happy because their bonds are priced at a yield of 1%. But as inflation picks up they still get 1% even though inflation maybe jumped suddenly to 11%. Each year they lose 10% of their investment. .....

    Now, maybe I missed something. ....
    Scenario 1: If the fed continues to manipulate the bond market, yields will remain at about 1% even if inflation is at 11%. Bondholders they can sell their bonds, without losing too much money. They can reinvest for instance in stocks that yield a much higher inflation-adjusted return. No private investor will hold the bond for extended periods of time but rather try to sell to the fed as soon as possible. 100% state financing through the printing press.

    Scenario 2. As originally described. If the fed discontinues to manipulate the bond market, then bond prices will fall significantly and the investor can be indifferent between selling the bond and investing into something different.

    To conclude: If the fed continues to depress yields and if inflation will pick up then bondholders can sell which means they are shielded from sudden jumps in inflation. This is unfair towards holders of non-govt fixed-income assets.

    Sep 15, 2012. 08:07 PM | 1 Like Like |Link to Comment
  • There's No Longer A Bernanke Put [View article]
    ------ Small synthesis of this discussion ------
    Wow, it took me quite some time to go through all of the comments and to think through them. Summarizing and evaluating all the different arguments raised could provide the basis for a very interesting article in its own ride.

    This is a bit too much work for me right now. Still, I would like to put down what I take from this discussion and what I belief myself.

    So we have Bernanke buying MBS issued by Freddie Mac/Mae etc.... Doing so 1) increases total money supply 2) decreases the yields and increases the value of MBS 3) increases the net rental yield, makes houses as an investment more attractive, which might increase housing prices and construction of new houses.
    There should be no effect on the risk profile of banks, since as JasonC explained the MBS are govt-guaranteed anyway. However lending out money to new home owners will become more attractive to banks since their financing costs go down (and they do not pass on all of the savings to customers).

    The questions are now.
    1. Is the US economy doing really bad? Was it necessary in the first place?
    2. Will the policy work?
    3. Will the policy create inflation and a weaker USD?

    On the first question. If one looks at the US stock markets: no, if one looks at the economy: maybe, if one looks at developments in China and Europe: yes. However Free cake pointed out global S&P companies and the US economy are not the same. I want to add that 1) the S&P has done remarkably well as compared to most other stock indices around the world 2) that there are huge differences among sectors, with some sectors like technology and pharma being cheap and defensive consumer stocks - yes the dividend stocks that Phillip Mause likes - being expensive. Bottomline: Things are not in the pinks, but it was not necessary.

    On the effect: The direct effect on the housing market should be there. However mortgages rates are already cheap, so the effect will be rather limited. The same for auto loans, which have been mentioned by rock_nj, which should become cheaper as well. Are the rates for other types of customer loans going to decrease? Who knows.

    What concerns the wealth effect: Well this effect is rather abstract. Demand is poor because there are a lot of poor indebted people. These guys will not consume more just because house prices go up a little bit. Not as long as they still own houses and the price increase actually gets them out of the reds. What is more as three_cheese_fondue mentioned, the market anticipated Q3 a long time ago. One could argue that it has already been priced into the stock market as well.

    What about inflation? JasonC rightfully pointed to level of aggregate credit (Fed money creation + commercial bank money creation) which has actually been flat for a couple of years now and is not increasing dramatically. Unlike the Weimar Republic in 1923 or Zimbabwe we do not have a collapse in production: So inflation - not issue. Not for the time being. If it was, a declining USD would lead to increasing import prices but also to higher exports. If the net effect is positive needs to be discussed. Inflation only has a redistributive effect if not anticipated, so inflating out only works if it is combined with measures of financial repression (which are already in place?)

    What is the right way for the US going forward? I would say a balanced approach of scaling down expenses (especially military, like F22/F23, having military bases all around the world) in order to fix the public deficit, a weaker USD to become more competitive in manufacturing, less regulation.

    As what concerns the long run I agree with the analysis of Seth. A larger percentage of income needs to go the lower and middle classes, so that people can make a living without taking on too much debt or having to take on two or three jobs. At the same time - I know that this is a very unrealistic idea - the whole society needs to become less consumerist. Maybe stricter regulations on consumer debt might help.

    One last note on the stock market: I find it surprising that companies like BHP or Joy Global jumped that much after Bernankes announcement. Sure a stronger US economy will mean higher demand. However the US is just one player and in terms of overall global demand developments in China should be much more important.
    Sep 15, 2012. 05:04 PM | Likes Like |Link to Comment
  • There's No Longer A Bernanke Put [View article]
    Where do you live?
    How high is your estimated rental yield then?
    Sep 15, 2012. 03:32 PM | Likes Like |Link to Comment
  • There's No Longer A Bernanke Put [View article]
    Excellent explanation. Unfortunately so few people are getting what you are saying.
    Sep 15, 2012. 03:26 PM | Likes Like |Link to Comment
  • There's No Longer A Bernanke Put [View article]
    How that? Those that hold monetary assets (like cash or bonds) with fixed coupon are the ones who lose. They see the value of their assets fall. Since the coupon is fixed interest income can not increase in order to compensate for the loss due to inflation.
    Sep 15, 2012. 02:50 PM | Likes Like |Link to Comment
  • Why QE3 Won't Spur Growth: Interest Payments On U.S. Debt [View article]
    I have some trouble to understand the logic of this article.
    If I understand you correctly, Katchum, your argument is the following
    1. Given the current budget deficit govt debt will rise over the coming years
    2. Given that govt bond yields are already close to zero, there is no way they can fall any further
    3. Given 1. and 2. govt interest payments will rise over the coming years

    Then I lost you. on your 4th point.
    4. "That leaves only about $40 billion to spur economic growth as the other $500 billion will go to interest payments on U.S. debt"
    You somehow you seem to assume that the govt increases taxes to finance the increase in interest payments. The govt is taking taxes from the masses and hands it over to the (more affluent) bondholder who just sit on their cash doing nothing with it.

    This is not reflecting reality. Money (unlike credit) is not just taken out of the system. So what happens in reality? Rising interest payments lead the govt + fed to do one of three things
    1. increase taxes to get the money from the taxpayer and to give it to the (new) bondholders
    2. issue additional bonds and sell it to the public, i.e. to pay for the increase in interest payments
    3. issue additional bonds and sell it to the fed

    In the first two cases we have simply a redistribution of money. Differences of the economic effect will only happen to the degree that there are different propensities for consumption and investments both abroad and domestic.

    In the third case we have an increase in the money supply, a short term economic stimulus and in the long term inflation
    Sep 15, 2012. 01:42 PM | 1 Like Like |Link to Comment
  • George Soros, Reflexivity and Market Reversals [View article]
    Exactly. It is thought-provoking and a good place to start a discussion.

    Unsubstantiated smearing like the one of the first guy who commented on the piece I find absolutely obnoxious.I think SA should start to ban arrogant people who are insulting others, giving them names. Quote: "but please be reasonable mind and not just a talking head."
    Sep 15, 2012. 10:10 AM | Likes Like |Link to Comment
  • A Rotten Apple [View article]
    I find it amazing how emotional and aggressive some of the readers are reacting towards the authors article. Of course the headline is meant to be provocative, but it is still surprising that a lot of people take it almost as a personal insult.

    What a lot of people fail to get is that there is a difference between a good company and a good stock. And that the past is not indicative of the future ;)
    Sep 12, 2012. 10:53 PM | Likes Like |Link to Comment
  • Understanding Smartphone Strategies By Breaking Down Phone Specifications [View article]
    Excellent article. Lets see what the new Apple will be able to do. Who knows, maybe it will enable all of us to travel to the moon. Of course faster-than-light! :D
    Sep 12, 2012. 05:44 AM | 2 Likes Like |Link to Comment
  • Arena Takedown - Is It Fair? [View article]
    Stupid question: What FDA news? I thought the registration was through. And the question was now if the European agency would also give green lights.
    Sep 12, 2012. 05:26 AM | Likes Like |Link to Comment