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  • You Thought QE Was Over? [View article]

    The bank reserves become part of the Monetary Base (M0). This increases systemic liquidity which keeps interest rates lower (to zero in fact in the case of Japan and the US). Changes in the outstanding balance of the monetary base due to monetary policy also lead to changes in the relative prices of assets by lowering the risk premium of asset prices (e.g. stocks). The increase in money base will also reduce the probability of liquidity shortage, and consequently affect the liquidity premium and relative asset returns.

    You can easily see the impact of the changes in the monetary base or in the bank reserves on stock price by plotting them both in quarterly actual changes. Percentage changes will also do, but the best visual effect is provided by actual change plots.
    Nov 25, 2014. 05:08 PM | 1 Like Like |Link to Comment
  • Passing The Baton: Can Central Banks Transfer Credit Creation To Commercial Banks? [View article]
    Mr. Greenwood,

    Bank reserves created by the QE programs become part of the Monetary Base (MB) not M2. The M2 money supply does not have bank reserves (required or excess) as components. For instance, Total Bank Credit is a line item in the Fed's balance sheet, which at this point is predominantly composed of bank reserves created the by the QE programs.

    For the composition of M2 Money Supply, here is Wikipedia for you:

    Traveler's checks of non-bank issuers

    Demand deposits
    Other checkable deposits (OCDs), which consist primarily of Negotiable Order of Withdrawal (NOW) accounts at depository institutions and credit union
    share draft accounts.

    Savings deposits

    Time deposits less than $100,000 and money-market deposit accounts for individuals

    And here is Wikipedia's itemized components of MB:

    Notes and coins in circulation (outside Federal Reserve Banks and the vaults of depository institutions) (currency)

    Notes and coins in bank vaults (Vault Cash)

    Federal Reserve Bank credit (required reserves and excess reserves not physically present in banks)
    Nov 20, 2014. 02:52 PM | Likes Like |Link to Comment
  • Our Leading Indicator Forecasts That The Eurozone Economy Will Be Better In The Next 9 Months [View article]
    "The indicator is developed with statistical models based on artificial intelligence algorithms studying over three hundred economic, demographic, political, financial, and digital transaction variables. A reading above 0 indicates that the Eurozone economy is forecasted to expand in the next nine months, while a reading below 0 indicates future contraction."

    Impressive. But you can probably have as good an indicator (it may even be better because it is not a black box) in the form of inverted benchmark yields vs GDP. It even gives a longer lead time -- 12 months versus your black box's nine.
    Nov 10, 2014. 04:29 PM | Likes Like |Link to Comment
  • John Hussman: The Stock Market Is Overvalued By 100% (Podcast) [View article]
    Mr. Hussman has been ranting about the market's overvaluation, week in, week out for almost ten years now. And one day he will be right; he could even be right twice -- like a broken clock.
    Nov 10, 2014. 04:23 PM | 2 Likes Like |Link to Comment
  • Falling Volatility Aids U.S. Dollar Strength [View article]
    Mr. A Sachais,

    You should really make a genuine comovement study between the US Dollar and the VIX before making this claim, which is so easy to disprove. There is a positive comovement between the two, a very distinct one, with the VIX leading the US currency by a few weeks. This means that when the VIX falls (very likely due to stock prices going higher), the US Dollar falls sometime soon thereafter. This is one basic reason why FX analysts call the US Dollar a safe haven currency. When there is trouble in the markets (risk off), the VIX rises and that pulls up the US Dollar as well. This comovement analysis is very elementary and should not be too difficult to do. If you have an email address provide it here and I can send the study to you to save you the trouble.
    Nov 10, 2014. 03:57 PM | Likes Like |Link to Comment
  • We Currently Favor Being Overweight The Bond Market [View article]
    Has anyone asked himself/herself why the long bond yield curve is collapsing if those projections of growth will persist? Yes the environment has been moderately good since the trough of the Great Recession in Q1 2009. But the expansion has been going for five years . . . growth cycles average 6 years, so by this metric, one should expect a mean reversion in the near future. The good growth numbers can not be projected ad infinitum. And the itemized analysis they present does make good sense. But above all, heed the warning from the collapsing yield curve. And by the way deflation is the immediate problem and risk, not inflation.
    Nov 3, 2014. 04:20 PM | Likes Like |Link to Comment
  • Why The Correction Didn't Become A Crash [View article]

    Looks like you got flattened by the stock market steamroller! Sold short at the wrong time?

    Why grouse? If you are an investor and if ZIRP brings in the bread for the table, why complain? The stock market is not the economy, my friend. Take it when you can -- the idea after all is simple for real investors -- better a rising market than a falling market, whatever the reason for it. Unless of course you shorted the market at the wrong time . . .
    Nov 3, 2014. 08:55 AM | 1 Like Like |Link to Comment
  • Why The Correction Didn't Become A Crash [View article]
    Salmo Trutta,

    Did you get that Nobel Prize in Economics medal yet?
    Nov 3, 2014. 08:42 AM | Likes Like |Link to Comment
  • Total War Over The Petrodollar [View article]
    These conspiracy theorists sometimes do not bother to get the bigger narrative correctly. They go for the sound bite, but miss out on logic on the bigger picture. The French guy died in Russia, for heaven's sake. The author's paranoia, admittedly, does not mean that some people may want the French guy dead. But to channel Freud, sometimes an accident is just an accident. Anyway, he wants to sell you a book, that why.

    This reminds me of another such theorists which claims that the ISIS in Iraq is a creation of the United States and Saudi Arabia, but are now bombing it to conceal their nefarious deed. Sometimes you wonder . . . no further comment necessary.
    Oct 31, 2014. 04:11 AM | 1 Like Like |Link to Comment
  • No, Higher Velocity Will Not Necessarily Mean Higher Inflation [View article]
    The M2 velocity yoy rate change -- not M2 yoy rate change. And the lag is 12 months not 16 months. Sorry, fat fingers.

    M2 Velocity is not a *rate* -- it is a ratio (GDP/M2).

    The above construct also correlates well with commercial banks' loan and leases on their balance sheet, and not surprisingly, the US Dollar TWI. The correlation with the USD TWI started in the early 1980s, which is probably due to the interest being allowed on NOW checking accounts, as you pointed out.
    Oct 26, 2014. 04:55 PM | Likes Like |Link to Comment
  • No, Higher Velocity Will Not Necessarily Mean Higher Inflation [View article]
    Mr. de los Angeles,

    Many blog writers make that very mistake you pointed out. In fact there is even no reason to compare these two variables in yoy rate change. Economic data have their varying frequencies due to the methodologies used in their determination. In this particular case, the best comparison of M2 yoy rate change would with Core CPI (not the headline CPI which is nothing more than Crude Oil plus) and Core CPI at 2Q rate change, with M2 rate yoy rate change lagged 16 months. The very good fit extends to the mid-1960 (I am limited by the data available to me)
    Oct 26, 2014. 04:18 PM | Likes Like |Link to Comment
  • The Ultimate Carry Trade: U.S. Banks Buying Treasuries [View article]
    "Whatever this process, it would also explain our stagnant economy in the midst of rampant money printing."

    It is a shame you obviously did not read or understand the excellent essay JasonC just wrote before you about the nature of the "rampant money printing" the Fed did in creating the "bank reserves" you allude to in your "money printing" statement.
    Oct 25, 2014. 03:38 PM | 1 Like Like |Link to Comment
  • What Is Going On In The U.S. Bond Market? [View article]
    " For example, expectations of both real GDP growth and inflation need to be reduced by half to get close to that number. To be clear, this does happen occasionally. During the financial crisis in 2009 real GDP growth expectations fell from above 1% in September 2008 to -2.5% in the second half of 2009."

    "As can be derived from the graph, the sum of real GDP growth and inflation has been pretty constant this year. More importantly, for both years the estimate of nominal GDP growth indicates a nominal bond yield of well over 5.0%. That is more than double the current 10-year bond yield. Based on these numbers there can be only one conclusion, yields are too low."

    Maybe the growth estimates for the next two years are indeed too high?

    The relevant question is why is the long bond yield curve collapsing?

    A focus on the 10 yr nominal bond yield is useless -- focus on the message of the diverging front-end (steepening) and the back-end (flattening) yield curves and you will get the answer to your question. No need for statistical analyses. The 10yr/5y yield curve is the best predictor of US economic activity with a lead of as long as 18 months. Go have a look.
    Oct 25, 2014. 01:55 PM | 1 Like Like |Link to Comment
  • What The Fed's Interest Rate 'Surprise' Means For Bond Investors [View article]
    Looking very logical at the surface, but your short duration play has to square with the fact that the front curve is steepening. And every day that passes, your portfolio loses in terms of price. The best thing to do is add duration and go out to the back end -- the 5y/30y is flattening sharply. You have a phenomenon where the front curve is steepening quickly and the back end is flattening sharply. Eight times in 10 since the 1960s, we had a recession within 4 quarters, whenever that happens. Look ahead, and not fall in love with your position.
    Sep 21, 2014. 02:29 PM | 2 Likes Like |Link to Comment
  • The Case Against Treasury Bonds [View article]
    For a self-proclaimed hedge fund trader, you show little understanding of how a sovereign country which issues a fiat currency controls its own destiny.

    ". . . bond vigilantes. . . already made their predatory presence known in the profligate nations of Europe, and they are expected to arrive here eventually". Those eurozone countries are not fiat currency "issuers" -- they are "users" and have no control over their financial destiny, unlike the US.

    ". . . policy responses will not be dictated by the US, but by the Mandarins in Beijing and Tokyo", "debt explosions engineered by Bush and by 'deficits don't count' Vice President Chaney"

    Meaningless ad hominem.

    "The outcome has permanently lowered standards of living for middle class Americans and reduced influence on the global stage." -- How can 50 percent of bond issuance to American citizens who decided to keep their savings in bonds have their standard of living lowered? For the rest of the 50 percent bought by foreigners, nobody forced them to buy -- they clamored to buy those assets due to the perceived safety of US Treasuries as investments. How does that reduce US influence?

    I too work for a hedge fund, and I have never seen anyone in the business display such low level of understanding of the dynamics of the bond market. Assuming, of course, that you are for real.
    Aug 13, 2014. 04:55 PM | Likes Like |Link to Comment