Consequences of Fed policy - serial bubble blowing, the next stage...

[dhpar]

Quote from Pa(b)st Prime:

Don't take this wrong but my knowledge level of market history and causation is quite a bit greater than yours.

Example: When the NASDAQ "bubble" was developing in the 1990's what were real estate prices doing? Home prices throughout the 1990's were on their ass. So on one hand folks want me to believe Greenspan "created" the tech bubble then why didn't any of that cheap money flow into home prices? Or into the Nikkei as fueled by the equally accommodative BOJ?

In fact the explosion in real estate values didn't occur until after stocks topped in 2000. The greatest rise was in years 2003 through 2005-a period in which the Fed was RAISING THE FUNDS TARGET FOURTEEN TIMES.

And yes I consider myself and most everyone to be "assholes" when it comes to the wide range of predictions. Any one here think the Dolphins would go from 1-15 to vying for a divisional championship? Or think Matt Cassel without a prior NFL start or even a collegiate start to his credit would throw for 3600 yards entering today? Or that oil would break $110 in four months? I sure didn't.

Not to sound like a douchbag (which I am) but I've turned a 10k futures account in 2/06 into 360k in profits through Friday even with two trades that I lost 100k each on. Impressive? Not at all, because I'm just another lucky asshole. Recognize your gross prognosticative inadequacies or this game will eat you for lunch.....

ok. at first i thought i will just ignore this off. but as i know you are not a complete dumbass...let's comment.

A. let's not get into "who knows the history better" or "who makes more money in trading". I am glad you feel positive about yourself. to make you feel even better after several very good years in fi trading i am down 7 figures this year (on crude related investmets). it also brings some perspective here...

B. rates were not (very) low in 1990s and i never said that greenspan created the tech bubble by keeping rates low. we note that maestro might have indirectly contributed to it, by e.g. helping to bail out LTCM.
therefore i'm not sure i follow your argument above.

C. houses left their long term inflation adjusted equilibrium prices around after collapse of EM/LTCM/Russia. in 2000 they were already going up more than usual. around 9/11 they were running up and what greenspan did then?

atb and good trading in 2009

 

[dhpar]

i see that the political nihilism is becoming a prevalent philosophical attitude these days.
if i remember well that is the fourth out of five stages to recovery. looks like we could have a good 2009 after all.

http://www.all-about-soul.com/grief-cycle.html

 

[lrm21]

Booms and bust are part of the normal business cycle and it's human nature

However fiat money as controlled by the central bank plays a direct hand in manipulating the frequency and durations and thereby creating bigger booms and busts


Addressing previous points regarding no appearance of assets bubbles in other areas

One, no one truly where the next bubble lies it's only with the certaintity of hindsight
But you can make educated guesses based on fundemental analysis and some common sense

Two with regards Boj easing that did contribute to a bubble in US equities and via yen carry trade no one wanted to invest in japan because gov policies killed the economy but Investors where morethan happybyp take the free money and move it into other areas

We will now see the reverse in the US as dollars are taken out

Asset bubbles are naturally occuring it's the central bank with fiat money that creates hyper bubbles a and that's not good

 

[Cutten]

I agree that the Fed was not the *only* cause of the various asset price bubbles. However, to say that it had no impact requires an explanation of why bubbles did not occur when the Fed was tightening monetary policy, or rates were at high levels. Why did the bubbles get going just after huge monetary easing by the Fed?

If it were *purely* human nature that caused bubbles, why wouldn't bubbles occur in 1994, 1998 etc? Why is it always after a huge rate cutting program that assets go bananas?

IMO human nature causes bubbles, but "asleep at the wheel" central bank policy exaggerates them significantly. Contrast this to Volker-type central bankers - in that case one would expect *less* bubbles than in a pure free market system. However, as history has shown, guys like Volker come alone once per century. The rest of the time central banks are lumbered by apparatchiks who wouldn't know a bubble if it popped in their pants, and in any case do not have the knowledge or political balls to go countercyclical when it matters.

Let's face it, countercyclical monetary policy does not work. There are not enough independent-minded wise bureaucrats in government. Thus better to let the market dictate rates instead of it being set by a communist central planning committee.

Even if you think bubbles are 100% caused by human nature, a la Pabst, then this *still* strongly supports the abolition of central banks. If the Fed cannot lessen or stop bubbles, what is the point in it at all?

 

[libertad]

Cutten

Even if you think bubbles are 100% caused by human nature, a la Pabst, then this *still* strongly supports the abolition of central banks. If the Fed cannot lessen or stop bubbles, what is the point in it at all?

....................................................................................

Here is the mix....

Cash in system

Issue debt

Create cash
.................................................................................


The US banking system is largely insolvent....

There are no savings....

The majority of deposits have been squandered by supposed conservative financial institutions....
..........................................................................

Next question.....What to do ?

Create money....and more debt....oddly enough ponied on
poorer populations ?....Well maybe they were poorer before....but what about now ?
...........................................................................

No FED means massive bankruptcies and öff a cliff¨repricing of assets....

............................................................................

Why not a change in government structure and allow everything that is bankrupt to go through the process of repricing....

The US cannot afford its unfunded legacy costs anyway....The US is like a Giant GM.....

Without the debt/printing press....would the US not be bankrupt.....
.............................................................................

To be sure there would be a lot of SP500 stocks from $1 to $10.....Notice how many of the Nas100 and SP500 are less than $10......

The FED is changing the slope of the cliff....not the cliff....

 

[Pa(b)st Prime]

http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

You'll notice Cutten that by and large assets rallied hardest during periods of RISING FF targets. In fact by the 2000 index peak the Funds target was it's highest in eleven years!!. As yields collapsed this year have we see any asset bubble in stocks or real estate?

I'll provide this:There's a greater chance that the proliferation of ultra-low margined index futures have supported stocks since 1982 more than anything CB related. What price was SPX the day the S&P pit opened for business? Futures changed the margin requirement for a basket stocks from 50% to a de facto 5%. Sounds a lot like "loose lending standards" to these ears.....

Quote from Cutten:

I agree that the Fed was not the *only* cause of the various asset price bubbles. However, to say that it had no impact requires an explanation of why bubbles did not occur when the Fed was tightening monetary policy, or rates were at high levels. Why did the bubbles get going just after huge monetary easing by the Fed?

If it were *purely* human nature that caused bubbles, why wouldn't bubbles occur in 1994, 1998 etc? Why is it always after a huge rate cutting program that assets go bananas?

IMO human nature causes bubbles, but "asleep at the wheel" central bank policy exaggerates them significantly. Contrast this to Volker-type central bankers - in that case one would expect *less* bubbles than in a pure free market system. However, as history has shown, guys like Volker come alone once per century. The rest of the time central banks are lumbered by apparatchiks who wouldn't know a bubble if it popped in their pants, and in any case do not have the knowledge or political balls to go countercyclical when it matters.

Let's face it, countercyclical monetary policy does not work. There are not enough independent-minded wise bureaucrats in government. Thus better to let the market dictate rates instead of it being set by a communist central planning committee.

Even if you think bubbles are 100% caused by human nature, a la Pabst, then this *still* strongly supports the abolition of central banks. If the Fed cannot lessen or stop bubbles, what is the point in it at all?

 

[Pa(b)st Prime]

Quote from libertad:

Cutten

Even if you think bubbles are 100% caused by human nature, a la Pabst, then this *still* strongly supports the abolition of central banks. If the Fed cannot lessen or stop bubbles, what is the point in it at all?

Your's is a point I've made for years.

If we "think" that an asset is over valued by a large margin then cost of carry is a minor consideration. We'd have no interest in financing purchases regardless if our cost of money is 10% or zero. The year long implosion in housing, stocks and toxic against the backdrop of global CB rate reductions is the ultimate tale of the tape. You can lead a market to water but you can't make it go higher......

 

[Pa(b)st Prime]

I respect you also bro. Sorry about my earlier tone. I'm a dis-believer of much published housing data. Los Angeles as we know broke 42% in the early 90's, CT by at least a third and hardy Chicago was unched for years. Phoenix, Houston and Dallas broke so hard they caused the S&L fiasco. Yet the Realtors association wants us to believe national prices went straight up. IMO baloney. Edit: On second glance prices on your chart do indeed look flat throughout most of the 90's.

Yes home prices rallied as rates went lower after the tech meltdown. No argument. However my argument instead is that rates were in decline mode not just because of an accommodative Fed but because money flowed into lending rather than equity markets. Think about investor psyche. In 2001 what was a better use of capital: buy CMGI or write mortgages at 6%? Fed or no Fed money went hand over fist into fixed income.

Quote from dhpar:

ok. at first i thought i will just ignore this off. but as i know you are not a complete dumbass...let's comment.

A. let's not get into "who knows the history better" or "who makes more money in trading". I am glad you feel positive about yourself. to make you feel even better after several very good years in fi trading i am down 7 figures this year (on crude related investmets). it also brings some perspective here...

B. rates were not (very) low in 1990s and i never said that greenspan created the tech bubble by keeping rates low. we note that maestro might have indirectly contributed to it, by e.g. helping to bail out LTCM.
therefore i'm not sure i follow your argument above.

C. houses left their long term inflation adjusted equilibrium prices around after collapse of EM/LTCM/Russia. in 2000 they were already going up more than usual. around 9/11 they were running up and what greenspan did then?

atb and good trading in 2009

 

[dhpar]

Quote from Pa(b)st Prime:

i always enjoy reading your posts.
it often challenges my way too stubborn attitude.

but i know that you do not believe what you say when you suggest that fed has irrelevant influence on cycles/bubbles.
and the influence is very likely cyclical, i.e. negative - not counter-cyclical as was originally intended.

if fed guards the currency/pricelevel/fiat they should have set rates higher. not necessarily to attract foreigner capital but to discourage local consumption and stimulate more savings. i doubt there is anybody out there (in the past 5 years) that would claim that americans were not living above their means. and fed is the main player setting up the stage...

cheers

 

[achilles28]

Quote from Cutten:



The Fed has taken rates to 0-0.25%, and they are now talking about purchasing long-dated Treasuries. This is now in the process of creating an incipient bubble in the government bond market. The Fed is effectively granting a free put on bonds, as well as putting in a persistent bid which will get stronger once they actively intervene.
....

There is a simple way to avoid this problem: abolish the Fed. The US did fine without it before it was created, after all. Of course, this won't happen. Which is why the historic boom and bust in bonds *will*. It will probably take a number of years, but in the end the party will be pooped and you will be left to clean up the mess.

Thanks. Good analysis.

The FED already purchases roughly half of all Treasury Debt. Its intention to buy more long-dated bonds does two things:

1) underscores unwillingness from private and foreign capital to finance Treasury debt at these levels (net capital outflow)

2) increases % of Treasury debt "monetized" by FED.

This is very bearish for the USD. FOREX markets have confirmed this in recent weeks (15% drop in the USDX) and will continue to see a resurgence foreign currencies versus the Dollar.

Seems the best fundamental play is short dollar on pullbacks. Short bonds could be at least 6 months off. Money supply (read: inflation) is critical to yields and until banks blow out money supply with a resumption in fractional reserve lending, yields stay low reflective of deflationary conditions.

Agree 1000% about the FED's recurrent bubble blowing.

When does a person connect-the-dots and realize whats happening is a not an endless series of "unintended consequences"? The effects of money supply on asset values and interest rates is one of the most basic and well-studied relationships in economics. And to assume our brightest financial minds "misunderstood" principles germane to undergraduate economics and indispensable for graduate advancement??

Sheer ignorance. Private Interests control the FED and economic lifeblood of the United States.

Until people understand that, we continue down this road that only benefits a tiny group of Banking Elite that sit atop the pyramid engraved on the Federal Reserve Note. Not by coincidence, of course.

Thats just a little "in-your-face" bravado courtesy of the New World Order.