What's more important to savers: nominal or real rates?

Unlike most factories throughout the globe recently, the rumour mill has been working at full capacity this week.  The recent cuts to the Saudi budget and ministerial salaries brought with them conjecture that the persistently low price of crude oil had breached an important pain threshold, and that as a consequence a supply response would be forthcoming from OPEC.   Sure enough, yesterday's confab in Algiers confirmed a 750k bpd production cut.  While it remains to be seen whether this move eases the supply/demand balance- given that non-OPEC producers are also feeling the pinch, perhaps some may choose to fill the supply gap- it is nevertheless reasonable to think that the first cut is the hardest, and having crossed that particular Rubicon OPEC may follow suit again should the price of crude slide sharply again.

Meanwhile, in Europe just about every man, woman, and child have denied that the German government is going to step in to support Deutsche Bank.   So naturally, the story has emerged that in fact a rescue plan is being put into place, which could in extremis call for a government purchase of a significant stake in DB.  One can only imagine the reaction of the Italians if this were to occur.  Just remember kids:   in Europe, all animals are equal, but some animals are more equal than others.

Speaking of German banks and Italians, ECB president Mario Draghi testified before the Bundestag yesterday, touching on the sensitive issue of ECB policy and German banks.   Unsurprisingly, Draghi deflected blame for the travails of the European banking system, claiming that "many banks have been able to offset declining interest revenues..."  As a reminder, here's what the SX7E has done since the ECB imposed negative deposit rates on the Eurozone banking system:

Not exactly a home run, is it?   By way of comparison, the BKX in the US is roughly flat over the equivalent period.

Draghi also addressed the problem of low/negative yields for savers, repeating the modern macro orthodoxy that "what counts for savers is not the nominal interest rate but the real interest rate."   This has been repeated so often that it seems like it must be true, though it completely ignores the well-known phenomenon of money illusion (the tendency to anchor on nominal rather than real interest rates, and behave accordingly.)

Macro Man decided to do a little empirical investigation into how savers actually respond to shifts in real and nominal savings rates.  Unfortunately, the data history in Europe is not what we might like, and Macro Man was only able to lay hands on quarterly unadjusted savings rate data going back to the beginning of the last decade.   Still, we can do some digging and see if anything is there.   He chose to measure changes in the savings rate in conjunction with changes in deposit rates, reasoning that a decline in real rates should enccourage consumption and reduce the savings rate, whereas an increase in real rates should incentivize savings at the expense of spending.  He ran the numbers plotting y/y changes in real rates and savings rates (sadly, only available quarterly), and this is what he came up with:


As you can see, there generally does seem to be a relationship, and sure enough the correlation is positive, but not massively so; the R-squared is 0.10.  Still, it looks like the theorists are right; on this basis, a decline in real deposit rates is associated with a decline in the savings rate, and a rise with a rise.  If the theory is correct, we should see a weaker relationship with nominal rates:


Oh dear.   Oh dear indeed.   There are two relevant points about this chart, one of which is obvious and one of which is not.  The first is that the relationship has flipped; namely, lower nominal rates are associated with high levels of savings, and vice versa.  The second, which is not terribly apparent from the presentation of the chart, is that the statistical relationship is quite a bit stronger, with an R-squared of 0.24.  In other words, this appears to suggest that nominal rates exert a stronger influence on savings rates than real rates.

Of course, correlation does not necessitate causation.   In this case, given the paucity of the sample size, what we might actually be capturing is two factors that are impacted in similar ways by a single driver.  For example, periods of weak or negative economic growth tend to be associated with heightened uncertainty and thus higher savings...and also with easier monetary policy that drives down deposit rates.   In this case, it is not necessarily shifts in the deposit rate that impact savings behaviour, but the economic weakness that drove the reduction in the deposit rate to begin with.

At the very least, however, we can say that the study is inconclusive that real rates are more important for impacting savings behaviour than nominal rates.  To dig deeper, Macro Man switched gears and shifted his gaze to the US, where there is a long history on monthly personal savings rate data.   There is not, unfortunately, the average household deposit rate series that exists in the Eurozone, so he used 3 month T bill rates as a proxy for bank depo rates.

To control for the economic cycle, he also looked at shifts in the unemployment rate and their relationship to shifts in the savings rate.  He ran a series of regressions over different time periods to get a sense of the relative importance of shifts in the unemployment rate and nominal/real T-bill yields in explaining shifts in the savings rate.  (Long time readers may recall that shifts in nominal spending can be explained largely by changes in nominal income, and also a bit by changes in nominal wealth.)

The results are presented below, leading off with a time series chart of the four series since 1960 Unsurprisingly, it's largely a mishmash that's difficult to discern any sense out of.


However, the regressions yielded some quite interesting results.    As noted above, Macro Man regressed 1y changes in the personal savings rate with changes in nominal and real T bill yields, and also with  changes in the unemployment rate.  He ran the numbers over three time periods:  1960 to present, 1990 to present, and 2000 to present.   A summary of the results is set out in the table below.


As you can see, over the entire sample the unemployment rate has by far the most explanatory power over changes in the savings rate, with the largest coefficient and t-statistic and a high degree of significance.   Interestingly, changes in nominal yields are also statistically significant, but with a positive coefficient.   In other words, higher rates have been associated with higher savings, and lower rates with lower savings.  Economic orthodoxy wins!   Well, maybe.   Observe that there is essentially zero relationship between changes in real T bill yields and the savings rate over the last 56 years.   Remind me again why the economics profession has the horn for R*?

If we shorten the time scale, a fascinating change occurs.   Looking at data since 1990, we find that changes in nominal rates bear the strongest relationship to changes in the savings rate, but with the same negative coefficient that we saw in Europe!  Real yields also carry some explanatory power, with the expected coefficient.  The unemployment rate, meanwhile, falls just outside the realm of statistical significance.

Since the 2000, the negative relationship between nominal yields and savings has strengthened further, with the highest coefficient of the entire study.  Interestingly, the significance of real yields, while still important, fades when the 1990's are stripped out, and the unemployment rate is deemed utterly irrelevant.

So over the last two and a half decades, data from the US corroborates what we saw in Europe; shifts in nominal yields are more closely related to those in the savings rate than are real yields, and in the opposite direction expected by mainstream economic thought.  To highlight the difference in another way, Macro Man ran rolling 5 year correlations of the one year changes in nominal and real yields with those in the savings rate.



You can see the shift that seemed to occur in the relationship between nominal yields and savings in the early 1990's and has prevailed for most of the period since.   It has endured sufficiently long that it is difficult to call it a temporary aberration.   Ironically, that 5 year correlation has recently flipped positive (suggesting higher T bill yields should increase the savings rate), though Macro Man finds it difficult to place much faith in that development, given that nominal yields flat-lined for five years while the savings rate whipped around, as you can see below.  It is interesting to note, however, that the savings rate has declined 0.4% since the Fed hiked rates last December, consistent with the findings since 1990.


So is there an explanation for the apparently bizarre finding that nominal rates have a stronger (negative) relationship with savings rates than real rates do, contrary to theory?   Macro Man has an idea, which can be summed up in one word and one chart:  demographics.

As you can see, the median age in the United States was largely unchanged from 1960 to 1980, increased slightly by 1990, and rose steadily in the 90's and 2000's.  The median age is now roughly eight years older than it was in 1980.  Perhaps not coincidentally, Europe has also seen aging, and indeed is generally a much older society than the United States.

The causality between age and sensitivity to interest rates may not be particularly difficult to fathom.  As society ages, citizens pursue an asset allocation geared more towards fixed income, thus increasing the sensitivity to interest and deposit rates.   Older citizens heavily geared towards fixed income start with the premise of a desired level of interest income and work their way backwards.  The higher the nominal rate, the less principal must be allocated to fixed income investments to generate that income, and the more can be allocated to other things, including consumption.  The lower the nominal rate, meanwhile, the greater the principal must be allocated to fixed income...and the more risk averse the person will be, knowing that there is little cushion from such low interest rates.

While inflation and real rates of return impact the level of desired income, it seems reasonable to expect that those expectations and budgets are much slower to adjust than reacting to nominal interest income and its prospects, which are available with every monthly statement.

Interestingly, the findings presented here appear to corroborate those of an earlier IMF study performed on China, which is summarized here.  China, of course, faces its own demographic challenges which may explain the result there.

While this study was relatively limited in scope, the result was pretty clear.   In each iteration of the analysis performed in Europe and the US, changes in nominal interest rates exhibited a stronger statistical relationship with changes in savings behaviour than did changes in real interest rates.   More to the point, in a number of countries the data appear to suggest that lower rates actually encourage consumers to hoard savings rather than spend it.  The implication is that from a consumer's perspective, at least, the ongoing policy fetish with zero or negative interest rates is counter-productive, in line with a neo-Fisherian model of the world.

Sadly, prospects do not look good for getting the adherents of policy orthodoxy to challenge their accepted view of the world.   After all, as an exercise in science economics is pretty dismal indeed.

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Celeriac1972
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September 29, 2016 at 7:21 AM ×

Interesting stuff MM.

If you could add a boat-load of flannel, restate the same hypothesis/testing/results several times and copiously credit a load of irrelevant old guys we can call that a thesis....

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checkmate
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September 29, 2016 at 7:31 AM ×

"demographics" ,past that you are golden. You are actually into the thoughts processes of the sample data.
It's actually a counter intuitive issue and I expect that's why the majority of the economists have reached the wrong conclusions.

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checkmate
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September 29, 2016 at 7:36 AM ×

Pretend this was pasted onto the bottom of my last post so I appear less prolific.
Today I'm really going to be watching that USD/CAN$ because if that oil move can't follow onto it's immediate impact on this pair then it strengthens the case for any breakout trade.

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checkmate
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September 29, 2016 at 9:18 AM ×

Noted the strengthening of the CAN$ on the oil move ,but why? Are traders still thinking that oil means more to Canada than it does to the US? I'm no expert in oil and it's intricacies of types and different uses etc ,but at a superficial level world production shows; USA is the no1 produce by volume ahead of Saudi and well ahead of Canada who languish in 5th place at approx. 1/3rd the volume production of the USA.
Guess what I am pointing out is that at least in this superficial manner the USA balance of trade data stands to benefit from a change in oil price to a greater degree than Canada. So what is with the FX move unless of course this superficial approach is turned over by a more in depth appreciation of the oil market.
Any oil experts wish to jump in and supply such analysis?

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Anonymous
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September 29, 2016 at 9:57 AM ×

Up there with Keynes

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Anonymous
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September 29, 2016 at 10:24 AM ×

How did you calculate the real rate? Simply take CPI off?

The first correlation does look better, as you say. I wonder what would happen if you just took the discrete quarterly changes in both.

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washedup
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September 29, 2016 at 12:22 PM ×

@checkmate - CAD/USD should not necessarily benefit from higher oil in the new shale age - however, their banking sector and real estate are much more geared to oil than the US, and in the short run that matters more.

@MM thanks for those statistics - I wonder as the median age in the US increases, there will be enough of a backlash against low yields where that may in and of itself increase political pressure against repressive policies at CB's - after all, the Japanese are a bit more docile in these matters than Americans, and they have been the only population on which this has been exercised for a long enough time.

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Leftback
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September 29, 2016 at 1:05 PM ×

Nicely done, MM, and +1 for "has the horn", although you pinched "Rubicon" from my DBK missive yesterday (you're welcome). I trust you enjoyed the Big Sam debacle as much as the tabloids….. did you fancy the England job, by the way?

Punters are warming to LB's USDCAD idea; we are out at the moment. As @washedup points out, CADUSD follows the price of crude oil slavishly. Punters are advised to wait until the present squeeze in $wti is over before re-entering. Generally we have waited for the Bolly bands to bulge on CADUSD and WTI before beginning new shorts on both; we'll keep you posted.

The last two weeks have been an example of that old adage that you don't have to trade all the time and especially when you don't know what's going on or suspect nothing is going on; if you do trade you will end up losing money. LB has spent some Hammock Time and is generally the better for it. Now we are starting to re-examine the trading landscape. Usually we re-enter trades slowly after periods of low vol, and begin by trying to pick FX trades, then try to figure out fixed income. The latter is confusing at the moment, but we think shorting bonds is done for a while, and is probably a bad idea.

We wouldn't be shocked to hear that Nico is thinking of getting short Eurostoxx again.

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Macro Man
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September 29, 2016 at 1:55 PM ×

@ Anon 10.24. Yes, that's what I did. I also looked at deflating nominal yields with inflation expectations, but the latter are too sticky to differentiate much from nominal yields.

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wcw
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September 29, 2016 at 2:24 PM ×

> a neo-Fisherian model

What is that model? Not to pester, but folks here seem to be fans, but I have not been able to parse what underlies everyone's thinking. For reference, see my confused questions here.

On the savings rate, it absolutely makes sense to consider wealth effects. Is there a simple way to estimate the effects of higher rates for depositors versus their other effects?

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Anonymous
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September 29, 2016 at 2:30 PM ×

Dear Team MM,

Any idea why USD/JPY sold off today?

Thanks!

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Error404
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September 29, 2016 at 3:05 PM ×

"The causality between age and sensitivity to interest rates may not be particularly difficult to fathom. As society ages, citizens pursue an asset allocation geared more towards fixed income, thus increasing the sensitivity to interest and deposit rates. Older citizens heavily geared towards fixed income start with the premise of a desired level of interest income and work their way backwards. The higher the nominal rate, the less principal must be allocated to fixed income investments to generate that income, and the more can be allocated to other things, including consumption. The lower the nominal rate, meanwhile, the greater the principal must be allocated to fixed income...and the more risk averse the person will be, knowing that there is little cushion from such low interest rates."

What a different (i.e., better) world we would be living in if just one influential central banker had sufficient intellectual flexibility to read, understand, and act on the content of this paragraph.

More prosaically, can any members of the MacroMob report having had a conversation with a saver along the lines of, "That nominal rate I'm getting on the fruits of my life's labour is a bit of a dent in the old income stream, but not to fret....the real rate's looking juicy"? No. Thought not.

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Anonymous
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September 29, 2016 at 3:16 PM ×

negative real wage growth - especially after middle age, exacerbates that nominal rate sensitivity...

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EuropeanBull
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September 29, 2016 at 3:16 PM ×

In my opinion the most important driver USDJPY are FED expectations, which have marginally moved due to higher oil and its implications for the credit cycle, US capex etc.

Following this logic japanese stocks and JPYUSD are leveraged plays on the US cycle.
(whereas US equities underperform when the data gets to good)

Look back to Q1. Everybody talks about how the BoJ was not able to not convince the markets but in my opinion Yellen's EM/Commodity bailout and the broad Dollar weakness it triggered was at least as important.

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Macro Man
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September 29, 2016 at 3:27 PM ×

@ wcw see here and here for some primers on the neo-Fiserhian thinking.

@ anon 2.30, errr...USDJPY is higher today. There were some stops that were run in the gray zone (between NY close and TKY open) last night that explain most of the rally.

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wcw
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September 29, 2016 at 3:47 PM ×

@MM, I've read Williamson; I'll be kind and just say, I don't find him helpful.

Andolfato I had not read, and his piece I do find helpful. The nut is this: that higher rates lead to higher inflation 'must be qualified with the condition that _the fiscal authority passively accommodate the monetary authority's policy decision_' [emphasis original].

Is there something in this model that stimulates aggregate activity? Conventional models have central bank raises choke off marginal lending and depress aggregate activity.

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Macro Man
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September 29, 2016 at 3:53 PM ×

No, there is nothing to speak to aggregate activity. The presumption in the mainstream is that the impact of policy on activity, and the impact of activity on inflation, is dominant. I suspect that the qualifier that Andolfato includes implies that the fiscal authority at least partially offsets the growth impact of monetary policy, thus allowing the Fisher equality to hold.

I might also add, however in a liquidity trap scenario (actual or quasi), the impact of interest rates on cyclical activity is also muted/nonexistent, which allows the Fisher equality to hold. I have said previously that I don;t believe that policy effects are linear,m and this is one of the reasons why.

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Anonymous
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September 29, 2016 at 4:13 PM ×

Now imagine the intellectual somersaults the central bankers will perform when they start decisively hiking and inflation decisively accelerates as a result.

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wcw
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September 29, 2016 at 4:23 PM ×

All this makes me want to reread Hicks's infamous 1937 paper. Let me see.. here.

FD, I subscribe to the view that Hicks synthesizes Fisher into Wicksell, but welcome critique.

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AL
admin
September 29, 2016 at 5:33 PM ×

SOME DEUTSCHE BANK CLIENTS SAID TO REDUCE COLLATERAL ON TRADES ...... on BBG.

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Hotairmail
admin
September 29, 2016 at 5:38 PM ×

Possibly need to look into what constitutes 'savings rate/ratio' in your definition. Care is needed.

Counter intuitively from stats I've seen quoted in the past, it typically includes debt repayment. That also includes write offs which there have been rather a lot of in the USA. Also, we have the issue primarily in the uk where many mortgage rates are variable, that if interest rates decline, monthly payments decline - but also that repayments of capital actually go up in each monthly payment amount. It is one of those great unsung effects of the low interest rate environment - that banks simply can't shovel enough new mortgage credit out of the door to cover the increased repayments of capital due to ultra low rates...acting as a deflationary aspect to the money supply (which is about 2/3 mortgage credit in the first place).

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Leftback
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September 29, 2016 at 6:40 PM ×

I believe that we are starting to see the process of disintermediation as nimble clients begin to withdraw from trades with Deutsche Bank. In these cases, the counter-party who panics first clearly panics best, as they should be able to withdraw their capital before the institutional and/or regulatory gates come down. This sequence of events is following the pattern that we have seen play out previously with Lehman, MF Global and other institutions.

The volume of denials out there is growing and approaching a crescendo. No need for additional capital raises, no plans for any government assistance, no contagion risk..... which would be fine, except that we have heard this all before.

No-one lies more often or less convincingly than a highly leveraged and under-capitalized banker. We can expect to hear all kinds of eloquent lies from DBK, central bankers and governments going into the (3-day) weekend.

Monday is German Unity day and the exchange in Frankfurt is closed. Tuesday morning, I think that we will all wake up to Deutsche trading under €10, and we will then be in a whole new world. Something wicked this way comes....

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Anonymous
admin
September 29, 2016 at 6:46 PM ×

where is 12yo HFM moron?

he's too busy buying TFD. Or, he's crying to mammy for margin call money

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yassa
admin
September 29, 2016 at 6:49 PM ×

currently deeply regretting my "bargain hunt" at $12.57 a month or two back...

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Anonymous
admin
September 29, 2016 at 7:15 PM ×

I just had a thought... Let's say some punter with deep pockets builds massive short positions in various stock indices beforehand, and then sells all the DBK shares they can get their hands on. Wouldn't this be a no brainer, profitable trade? Markets have been keying off DBK share prices for a few days now, so this is what I would have done if I had a few billion to play around with.

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Anonymous
admin
September 29, 2016 at 7:32 PM ×

Anon 6:46 - I believe he's currently busy... with your Mom ;)

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Anonymous
admin
September 29, 2016 at 7:51 PM ×

@anon7:32pm a.k.a 12yo HFM moron

go f*ck yourself dickhead

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Macro Man
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September 29, 2016 at 7:52 PM ×

C'mon guys, save that for the playground.

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Sigma
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September 29, 2016 at 8:13 PM ×


I understand that boy plungers are very excited but why EURJPY is so strong given the circumstances?

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Anonymous
admin
September 29, 2016 at 8:30 PM ×

It is more to do with JPY and expectatin on tonight's Kuroda's speech. Maybe he is going to say something to move JPY, or not.

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AL
admin
September 29, 2016 at 8:38 PM ×

Agree with LB's comments.
Would add that underneath the apparent calm, intraday moves in the markets are somewhat schizo: sudden dumps, liquidity voids (talking european markets mainly here both equities and govvies, ehm, BTPs).
I am afraid we will move now to a headline driven market where making money for short term punts will be rather hard, no matter the side. We have seen this in the past when brief moments of hope are followed by sudden washouts of despair ..... until people decide that cash is not such a bad thing to have in the portfolio after all and will run for it and will run for USD.
After all, consensus was for a volatile summer. Did not happen. Now we feel there is a widespread view in favour of a classic Santas rally starting already in October. Not sure will happen this time around.
FWIW, we are now restricted from owning any DB's security in our portfolios and we can only trade with DB in cash products ..... we are nobody in the IM landscape. Imagine if some big fish applies the same.

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Leftback
admin
September 29, 2016 at 9:12 PM ×

Happy-Clappy punters out there are still selling vol and using the vix contango to generate income. These people are the spawn of the ZIRP Devil and Dame Janet and are the reason there is such an enormous short position in volatility vehicles:

http://www.marketwatch.com/story/a-misunderstood-vix-trade-that-comes-with-built-in-safety-cushion-2016-09-27

What could possibly go wrong?

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Skr
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September 29, 2016 at 9:20 PM ×

Anon 7:15

One would think, that with that kinda brainpower one would only be teasing oneself, with a few billion.

Best go for a couple of hundred billion

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Cityhunter
admin
September 29, 2016 at 9:55 PM ×

DB is in the headline. Curious no one has mentioned the housing bubble in China - the elephant in the room!

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scepticus
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September 29, 2016 at 10:24 PM ×



If a neo-fischerite Central Bank policy is implemented as described above (assuming the fiscal side does not seek to offset the monetary side) how long do you reckon we need to wait to tell if it's worked or not?

If it didn't work, what should they try next?

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Anonymous
admin
September 29, 2016 at 11:05 PM ×

what's your point?

there's been no timeframe mentioned for existing policy either. japan's been at it 20+ yrs.

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Fired Macro PM
admin
September 30, 2016 at 2:01 AM ×

I've held on to all my shorts from Monday (short AUD, Spooz, and GBP) but held back from adding more after Trump fumbled at the debate.

It was then followed by three consecutive indecisive moves in risk assets in general.

But now I think Spooz and other risk proxies are really really really look like they are about to roll over.

Spooz chart has "puke" all over it.

I'll be adding more to the said positions overnight during asian session.

Good luck everyone, it's going to be an interesting Friday - either we get a puke or we get a risk-on rally - chances of something in between is very low.

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Fired Macro PM
admin
September 30, 2016 at 2:08 AM ×

@leftback

I agree with you that that is a likely scenario but I dread three day weekends... govnt seems to do their best dirty work and work out a deal in the same period as well.

Thus, instead of a move down to 9, we open up with a gap to 12.

Or.. does the smoke have to get thicker and wilder before that even happens?

I sure hope it's the latter - at least for my positions sake.

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