Friday, June 07, 2013

Chapter 9 - Monetary Medicine.

In the style of one of Team Macro Man's favorite Larson cartoons on Equine Medicine, one of our Macro Minors has created the Ben version.


Anonymous said...

C says
“A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery,” Bernanke said."

Mortgage rates approaching 4% have probably already done that without him doing a thing on policy other than failing to jawbone it enough.

If a rise in rates occurs faster than a rise in incomes then thud goes the disposable income and bang goes consumption.

The rise in rates some pundits say is positive is no such thing. Where that does exist it exists because incomes and disposable incomes have improved and the latter becomes leveraged via expanding credit and typically this also happens when assets have become more affordable relative to the former.

Now property prices fell for sure,but have incomes and disposable incomes risen enough yet to withstand higher financing costs?

Not here in the UK that's for sure hence the FLS needed to get anything going nationally, but the US? I wouldn't have thought so from the data updates, but there again I have not been keeping close track of that. Would have thought re rates and the impact on consumption/property that we were still in seesaw mode...that is higher rates/lower volumes of activity. Perhaps someone has cumulative data on incomes.

Polemic said...

Morning C, an early Saturday start for you? Agree re above but do feel that US is picking up and though this spike in mortgage rates may be unaffordable short term, the general path for US data is +ve and the two will self balance.

Havent got the data at hand... happy weekend.

Anonymous said...

C Says
I think that the cyclical dynamics for the US economy are +ve ,BUT they missed a step by tightening fiscally before they needed to. Indeed, they have got it the wrong way round. When the economy is strong enough to have escape velocity from tightening Fed policy then subsequently they have economic room and can tighten fiscally without undesired consequences.
I suspect the fiscal action will end up keeping the Fed policy in action longer unless they unwind it.

Look this really is macro in the largest sense. Global rebalancing means going forward the export/import ratio (debtor/creditor)of prior cycles will change for the West/East relationship. It has to because the debt in the West has become too high to sustain it hence the default/write downs etc.

Now with the US that rebalancing should be even more +ve, because of the change in the energy situation for them. The losers in this are the historic beneficiaries mostly in the Mid East. By the same token US debt will become an instrument more widely held by domestic entities hence more controllable through Fed policy in terms of costs of servicing it. I think they have a win win here.

Other than the stupid politics of it I don't understand why the need to get fiscal this year. Nonsense really. The huge beneficiaries of Fed policy could afford to be a bit more socially accepting for awhile longer, but that's the US for you and it's why their wealth distribution map is the way it is.

In terms of portfolio allocation I particularly like the idea of US small cap for the long term and I do mean long term who gives a f..k. Put it this way I set up an investment wrapper for my daughter that does nothing ,but feed that one theme. She can thank me via a Ouji board in about 30 years time.

Leftback said...

It's hard to explain how fake the recent US "housing recovery" is unless you see it with your own eyes. First of all, the activity is all in the Western crash markets of CA, NV and AZ. Lots of all-cash buyers, lots of would-be landlords. Lots of headaches for the future.

Not much real activity in a lot of other markets, which isn't surprising as median real wages continue to stagnate.

All eyes on Treasury auctions later this week, we suspect that demand will be decent given all the sad US data of recent weeks.

Equities becalmed in descending triangles, might be quiescent for a while. Vol sellers in charge.

Right now more interested in who is the next FX whipping boy after the NZD and AUD have had their beating. Looks like that could be done, so how about we sell Euros and bash Betty?

Leftback said...

More problems in Europe wouldn't be a big surprise at this time of the year. Comments from Karlsruhe about the constitutionality (and indeed the true nature) of Dr Aghi's bazooka might do it:

"We have looked at this so-called bazooka with sharp Germanic eyes, and we find it to be not only somewhat smaller than imagined but also rather floppy".

Greece suddenly looking less healthy, and all of the US Treasury Bears would do well to recall the main source of demand for their most hated instrument in recent summers....

Anonymous said...

7 3/8% yield now on PDI

Leftback said...

More on US housing. It's the prices, stupid.....

The Truth About Home Prices

PDI. Seems to be talking a shellacking, and not over yet. There is a tiny bit of panic in a variety of fixed income areas. Check out EMB since the beginning of May, for example. LB prefers the preferreds for dividend income and low volatility.

AGNC preferreds are at 7.81% yield here. Of course holding this assumes that Treasury and mortgage backed yields don't go to the moon....*

* Don't worry, they won't. The Fed will crash the equity markets if necessary to ensure that yields stay low. If they don't crash themselves first....

Leftback said...

A few technical notes here, with charts, on issues related to FX and bonds. I am in general agreement with the ideas expressed here on EURUSD (just about ready to move sharply lower), AUDUSD (move down done, set to rally before falling again) and TNX (the move up in yields is close to done). Not so sure about USDJPY, it's often tricky.

Thoughts on Bonds and FX

Anonymous said...

C says
"Don't worry, they won't. The Fed will crash the equity markets if necessary to ensure that yields stay low. If they don't crash themselves first".

And that is it in a nutshell. Govt yields will be capped ,because the Fed can if it think it needs to to stop yet another economic lapse. The only question we don't know is where that point is for them.

I think when it comes to Japan and JGB's people still need to be thinking in the same way. They are playing equity as a proxy for nominal growth and there is an obvious correlation with rate moves, but the BOJ can take down what it pushes up if those rates go where they don't want them to go, or at least that is what I think. I suspect the mistake there is to get too far directionally the wrong side of that correlation if it going to be a multi year program. It looks to me to have all the hallmarks of a seesaw process selling the excess on rallies an taking the dips when they inevitably come. The biggest issue staying outside the volatility emotionally not chasing too hard the smaller moves.