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

[lrm21]

Quote from ralph00:

Once again, I'd like someone to explain why the American experience (as far as bond prices) for the next decade will be different from the Japanese experience of the last decade.

The only difference (and it could be a major one) I see is the chronic current account surplus of Japan vs. the chronic current account deficit of the US. I suppose this means that Japan finances its gov't debt internally while the US finances its gov't debt from abroad.

Yep thats why many are predicting that this time around the collapse may be faster.

Japan was able to finance it because they had a high internal savings, We don't. Which they consumed dramitically in the process.

If foreign CBs dont buy our debt there is only so long the FED/Treas can play the game even by using our Banks to buy the debt.

But my sense is that any collapse is still at least a 2 years away.

Foreign CBs will work with FED they have been and they will continue to do so. Even, as Japan already indicated, going so far as to forgive some of our debt. However this will still come at a severe price. The days of the dollar as the reserve currency are dead.

People keeping comparing us to Japan a better example is Argentina, which also relied heavily on offshore Financing to fuel their expansion and had no internal savings. No doubt I don't expect the chaos of Argetina but we are still in for some bad days

In the 30's and 70's we went through major dollar devaluations. This time will be no different. Unfortunately however our fundementals are much worse.

 

[blackjack007]

Quote from dhpar:

wrong. low rates are the main reason we are where we are. you are right that "loose lending standards and poor oversight" played its role but that itself did not lead to overleverage and therefore it could have been treated on a micro level i.e. e.g. via bankruptcies and/or targeted government relief programs.

low rates multiplied an otherwise manageable problem and i would argue that "loose lending standards and poor oversight" is actually a corollary of these low yields. let's recall how everybody was chasing each basis point not so long ago...
note that the relaxation of lending standards came later in the bubble - not at the beginning - so it can't be a cause. rather it was a function of demand from securitization which had huge demand for leveraged investments from investors due to abnormally low yields (that did not beat even inflation)...

easy credit did not begin later in the cycle. i attended some real estate seminars in 2003 and they were providing lists of banks that would lend for *investment* properties with 5% down, nevermind for primary residences (which are even easier to get loans for). i myself qualified for option arms way back in 2003 for investment properties; yes the same type of loans that are blamed for the foreclosure epidemic. easy credit has been around for many years and was the cause of this bubble. don't tell me that if banks had all required 20% down, 30% dti, 2 years of full income doc, that we would have had a bubble even with these low rates. virtually all the foreclosures so far have been by people who never would have purchased except for the loose lending. they were the people who drove up prices.

 

[Troy McClure]

A great deal of blame is laid on the fed for leaving rates too low for too long in the early 1990s. Much of this was the result of the attack of 9/11/2001. Here is a link to a nice panicky financial commentary from a week after the attack, which did predict a bubble 'somewhere' emerging from the response:
http://www.financialsense.com/stormwatch/oldupdates/2001/0921.html
IMO tho fed acted nationally in response to a local disaster. Living nowhere near the attack, it seemed like the economy was 'ok', and rates were so low. Perhaps a better response from the fed would have been no response, or a very temporary one just after the attack. The economic fallout from the attack could of been handled politically by other means, such as targeted subsidies to airlines or NYC local tax relief, for examples.

OTOH, war is hell.

 

[dhpar]

Quote from blackjack007:

easy credit did not begin later in the cycle. i attended some real estate seminars in 2003 and they were providing lists of banks that would lend for *investment* properties with 5% down, nevermind for primary residences (which are even easier to get loans for). i myself qualified for option arms way back in 2003 for investment properties; yes the same type of loans that are blamed for the foreclosure epidemic. easy credit has been around for many years and was the cause of this bubble. don't tell me that if banks had all required 20% down, 30% dti, 2 years of full income doc, that we would have had a bubble even with these low rates. virtually all the foreclosures so far have been by people who never would have purchased except for the loose lending. they were the people who drove up prices.

once again - i agree with you. if we had 70% LTV we would be much better off today. but if we had high rates we would be much better off too because investors would not be pushed into low yielding exotic mbs/etc crap with 95% LTVs brokered to non-earners.

consequently these loans would never been made because mortgage providers could not lay them off their balance sheet...as they did with IBs...

get my point? atb

 

[Pa(b)st Prime]

Did the Dutch "Fed" cause the Tulip bubble?

Even the U.S. had a series of speculative bubbles way, way before we had a Central Bank.

Let's suppose the following. The Treasury has zero debt and there's no Fed. No 10 trillion in government debt competing with private issuance. No Fed board setting overnight bank rates. We'll further suppose the "market" sets mortgage/commercial paper/CD rates etc. Remember there's no Treasury benchmark because there's no Treasury debt. IOW's a complete "traders" market. We don't need Bernanke to mandate IBM corporates trading at a zillion basis points under GM debt, eh?

In my view there wouldn't be an IOTA of difference between the behavior of assets in a Fed less world vs. a "free market" world. Capital would still be allocated by banks/investors at disparate interest rate levels based on risk premiums. As history is a guide there would STILL BE periods when productivity gains spur excess capital into riskier (crappier) avenues based on yield differentials.

Michael Millikan had some interesting comments in the wake of the junk bond collapse. Millikan said that the first deals he brought to Drexel clients were solid. The cream of the crop. Hence these issuances were quickly subscribed. Upon seeing the success of these early deals investors came to Drexel and asked "can we buy some junk too"? Sure. The trouble was each subsequent bond issuance involved riskier balance sheets. There was only so much "good" debt to go around. Sooner or later the Old Maid would be played. Millikan provides an apt metaphor for ALL market implosions. Buying CME at 46 times earnings late last year was no different than a bank making a loan with skimpy lending standards. There will be times when capital accessibility outweighs value, there will be times when capital availability is too scant to purchase value. Ying-yang.

In all honesty those who "blame" external influences like Fed policy, bankers, speculators and regulations are probably not philosophical enough in their approach. One of my new found trading rules is to realize I'm no more or less an asshole than any other participant or policy maker....

 

[libertad]

Very interesting....


http://seekingalpha.com/article/107624-the-economic-history-of-interest


Fairly put....one should not tary with events one does not control....

In actuality....the equation just changes....and one responds....

The Xi's are just Xi's....some are new....some are old....some are more relevent than others....

All in all....just more possible Xi labels to consider in the currently used equation....
..........................................................................

So in a way....one knows one thing for sure....futures events will not be the same....and it does not matter "what the label is".....
and one only needs to account for the new Xl's....that are forming the current equation....

Good post.....

 

[dhpar]

Quote from Pa(b)st Prime:

Did the Dutch "Fed" cause the Tulip bubble?

Even the U.S. had a series of speculative bubbles way, way before we had a Central Bank.

Let's suppose the following. The Treasury has zero debt and there's no Fed. No 10 trillion in government debt competing with private issuance. No Fed board setting overnight bank rates. We'll further suppose the "market" sets mortgage/commercial paper/CD rates etc. Remember there's no Treasury benchmark because there's no Treasury debt. IOW's a complete "traders" market. We don't need Bernanke to mandate IBM corporates trading at a zillion basis points under GM debt, eh?

In my view there wouldn't be an IOTA of difference between the behavior of assets in a Fed less world vs. a "free market" world. Capital would still be allocated by banks/investors at disparate interest rate levels based on risk premiums. As history is a guide there would STILL BE periods when productivity gains spur excess capital into riskier (crappier) avenues based on yield differentials.

what a bunch of crap.

Quote from Pa(b)st Prime:

Michael Millikan had some interesting comments in the wake of the junk bond collapse. Millikan said that the first deals he brought to Drexel clients were solid. The cream of the crop. Hence these issuances were quickly subscribed. Upon seeing the success of these early deals investors came to Drexel and asked "can we buy some junk too"? Sure. The trouble was each subsequent bond issuance involved riskier balance sheets. There was only so much "good" debt to go around. Sooner or later the Old Maid would be played. Millikan provides an apt metaphor for ALL market implosions. Buying CME at 46 times earnings late last year was no different than a bank making a loan with skimpy lending standards. There will be times when capital accessibility outweighs value, there will be times when capital availability is too scant to purchase value. Ying-yang.
In all honesty those who "blame" external influences like Fed policy, bankers, speculators and regulations are probably not philosophical enough in their approach.

are you talking about michael milken. ok - we have cycles - we know that. that is deeply philosophical.

Quote from Pa(b)st Prime:


One of my new found trading rules is to realize I'm no more or less an asshole than any other participant or policy maker....

i am sorry to hear this...

 

[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.....

Quote from dhpar:

what a bunch of crap.




are you talking about michael milken. ok - we have cycles - we know that. that is deeply philosophical.



i am sorry to hear this...

 

[wiesman02]

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.....

Post of the month.

 

[scriabinop23]

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.....

Second that.. Post of the year. Correctly attributed causation is incredibly difficult to come by. You just can't blame the whims of the market on a figurehead...

Someone needs to build a "chart of bubbles" through the last 500 years and show their frequency... We'll see it has nothing to do with central bankers or money supply, but more to do with the human need to get excited about something, then dump it.