The Credit Crisis Financial Stocks Short Journal
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Here is Scot Sumner debuking the idea of the liquidity trap
http://www.themoneyillusion.com/?p=7387
"Can the Fed increase nominal national income when the economy is at the zero bound? If you donât think so, then you must believe that people behave as follows:
Suppose the Fed increased cash in circulation by 17%. If there is no effect on NNI, then the average person would react to the Fedâs action by increasing their âk ratioâ by 17%. The k ratio is the ratio of cash to income. So if you had an income of $100,000, and you held cash of $1000, your k ratio would be 1%. This is a variable that is obviously under your control. You choose your k ratio. Now we can see what is so amazing about the hardcore Keynesian view of liquidity traps. They are essentially arguing that if the Fed increases the supply of cash by 17%, the average person will react to that action by increasing their k ratio by 17%. But why? Is that how you behave? Do you watch how much the Fed increases the base, and increase your k ratio by that amount? Would you respond to the Fed boosting the cash supply by 17%, by increasing your personal cash holdings from $1000 to precisely $1170? Remember, if you only increase it to $1150, the liquidity trap no longer holds. I simply canât imagine any mechanism that would cause people to manage their cash that way."
http://www.themoneyillusion.com/?p=7387
"Can the Fed increase nominal national income when the economy is at the zero bound? If you donât think so, then you must believe that people behave as follows:
Suppose the Fed increased cash in circulation by 17%. If there is no effect on NNI, then the average person would react to the Fedâs action by increasing their âk ratioâ by 17%. The k ratio is the ratio of cash to income. So if you had an income of $100,000, and you held cash of $1000, your k ratio would be 1%. This is a variable that is obviously under your control. You choose your k ratio. Now we can see what is so amazing about the hardcore Keynesian view of liquidity traps. They are essentially arguing that if the Fed increases the supply of cash by 17%, the average person will react to that action by increasing their k ratio by 17%. But why? Is that how you behave? Do you watch how much the Fed increases the base, and increase your k ratio by that amount? Would you respond to the Fed boosting the cash supply by 17%, by increasing your personal cash holdings from $1000 to precisely $1170? Remember, if you only increase it to $1150, the liquidity trap no longer holds. I simply canât imagine any mechanism that would cause people to manage their cash that way."
"Nothing new here, just another reason why the traditional explanation of the liquidity trap is inconsistent with common sense. You really need to assume that currency injections are temporary. You canât get a liquidity trap by positing that people donât want to borrow at zero rates, or that banks donât want to lend. Thatâs not enoughâyou need to show why people would hoard the extra cash. And hoard exactly the amount of cash injected. And you canât do that in a way thatâs consistent with common sense unless you assume the cash injection is perceived as being temporary.
If people think itâs permanent, the average guy wonât hoard it (Ratex or not) and the savvy investor wonât hoard what the average guy isnât hoarding, as itâs not a good investment if prices are expected to be higher in the future. Bernanke doesnât have to convince the public, just the savvy investors. And they are already bidding up asset prices fast in anticipation of November 3rd, even without any commitment to a higher nominal target, so it doesnât look like much convincing is necessary."
If people think itâs permanent, the average guy wonât hoard it (Ratex or not) and the savvy investor wonât hoard what the average guy isnât hoarding, as itâs not a good investment if prices are expected to be higher in the future. Bernanke doesnât have to convince the public, just the savvy investors. And they are already bidding up asset prices fast in anticipation of November 3rd, even without any commitment to a higher nominal target, so it doesnât look like much convincing is necessary."
Hatzius, no FF hike till 2015
http://www.zerohedge.com/article/qe2-sealed-next-rate-hike-wont-come-until-2015-says-goldman
I believe that from a Taylor rule or Fed mandate perspective he could be right. The thing is, inflation expectations will unanchor at some point as the US fiscal imbalance remains large, this could lead to some kind of bond market rout which would force to Fed to raise rates even though from a UR point of view they rather not. Also commodity prices could be soaring in the next few years
http://www.zerohedge.com/article/qe2-sealed-next-rate-hike-wont-come-until-2015-says-goldman
I believe that from a Taylor rule or Fed mandate perspective he could be right. The thing is, inflation expectations will unanchor at some point as the US fiscal imbalance remains large, this could lead to some kind of bond market rout which would force to Fed to raise rates even though from a UR point of view they rather not. Also commodity prices could be soaring in the next few years
Fed says on minutes is studying targeting nominal GDP, very surprising since there wasn't any speech of any kind saying this. This makes me suspect some on the FOMC read the Scott Sumner blog(I'm serious, I do know that Fisher reads Tim Duy's blog), as he has been the leading authority that is pushing for NGDP targets for a while
If they do it though, the 10y is a mega short because they would likely go for 4-5%, which would send the yield on the 10y up a lot since they are so correlated
If they do it though, the 10y is a mega short because they would likely go for 4-5%, which would send the yield on the 10y up a lot since they are so correlated
Some updates from the Value Investing Congress here
http://www.marketfolly.com/
Tilson is still short XHB(so am I) and long BP
Ackman didnt give stock tips but did a Q&A(Weirdly says the US stock market is cheap, I dont know where he gets his valuation from)
Einhorn is short JOE(the stock dropped 10% 2 days in row so far)
http://www.marketfolly.com/
Tilson is still short XHB(so am I) and long BP
Ackman didnt give stock tips but did a Q&A(Weirdly says the US stock market is cheap, I dont know where he gets his valuation from)
Einhorn is short JOE(the stock dropped 10% 2 days in row so far)
An interesting discussion on monetary policy
http://www.econtalk.org/archives/2009/11/sumner_on_monet.html
http://www.econtalk.org/archives/2009/11/sumner_on_monet.html
This guy makes a really good point. Back in Sep 2008 after LEH failed, the Fed publish forecasts that predicted failure(They would miss their targets for inflation and the UR), yet they did nothing with the Fed funds rate at 2% even paid IOR to prevent the FF from going down. The fomc meeting was also one that I was confident the fed would ease and endup getting hurt because they didnt. This was right after the largest BK in US history and the biggest stock market decline since 9/11
I believe his idea of nominal GDP targeting makes a lot of sense(I'm not sure about his ngdp futures market though)
Greenspan on his book says that a 'just-in-time economy needs just in time monetary policy'. Looks like the Fed failed at that during the Leh depression as Velocity dropped way faster than they boosted the money supply(back then through 'credit easing' and the alphabet soup of lending programs that went unsterilized) as a result nominal GDP went down
Its amazing how the hawks can see this and think its ok because 'rates are low, the balance sheet is big', making similar mistakes to the hawks in the 30's
It is said sometime that because Japan had a high savings rate it was able to support its deficits but since the US doesnt have(although its going up lately) it might not. I question this view. It not like foreign buyers are pricing Japanese 30y bonds at 6% interest rates but dumb domestic buyers are at 2%, if that was the case the entire world would be shorting japanese bonds raising their rates(It would also show up at the CDS pricing, which the avg Japanese does not have access to, a good chunk of the financial world is way more than the buying power of domestic japanese buyers)
I'd say its more like in the absence of domestic buyers their rates would have been higher but only slightly higher through their lost decades. We have global markets with agents(hedge funds and other pools of capital) that quickly try to take advantage of mispricings and incorrect valuations
I'd say its more like in the absence of domestic buyers their rates would have been higher but only slightly higher through their lost decades. We have global markets with agents(hedge funds and other pools of capital) that quickly try to take advantage of mispricings and incorrect valuations