Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

[vinoveri]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

just cross-posting my remarks after the fed's announcement from the fomc thread:

i am quite sanguine about this move. i just finished watching ray dalio's 1 hour interview at the council on foreign relations, posted yesterday.
http://www.cfr.org/business-and-fore...o-video/p28984
not a lot you won't know, but well organized thinking about the global deleveraging cycle we're in. he says the least painful way such a deleveraging is managed is via a combination of austerity, debt-restructuring and money printing, along with fiscal stimulus to maintain demand. he says he thinks it less likely that we'll have a recession soon than that we'll have a depression, a self-reinforcing deleveraging spiral, triggered by over-emphasis on austerity. he also says the ratio of total debt [public and private] to gdp in the u.s. has been slowly going down, and that nominal gdp must remain above interest rates or we're in the soup.

so -back to my own thoughts- this fed move is just the latest. there is no SOLUTION to our problems. it's more like a chronic illness- not to be cured but to be managed.

While I haven't watched the video and don't disagree that there is not a simple fix-all solution and further agree that WE are all in this together, I'm somewhat weary of the continuing meme that how it's being handled is that best (implied: "best for all"); we know that in fact it is best for those with access to the cheap money/credit and those with capital to leverage/invest and take advantage of speculation when the cost of money is zero. Financial Repression is certainly not good for most.


You may be interested in this - again CFR related - same old experts - Bob Rubin and Jim Baker - advising us how perilous our situation is and how we need to get the fiscal house in order - Very smart guys no doubt and were I ten years younger I'd be a true believer, but we know what happened, as Hudson and other have said - we bailed out the banks et al and now we have to a fiscal/currency problem that we are ALL going to sacrifice for. Why do we listen to th same folks who were at least in some part responsible for the situation we are in? Did Rubin and Baker warn of sub-prime, lax regulator standard etc. 8 years ago when it really mattered?
http://www.c-span.org/Events/Policy-...t/10737434032/

[vt]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Clearly the housing market is holding up recovery. A recession next year worsens conditions. What to do?

If I were the President (based on what I've learned from EJ, thank you) I would try to enact the following in coordination with the Fed after the election or inauguration of the new President:

1. Since the government owns Fannie and Freddie, move to get all mortgage rates down to 2.75% or less for 30 year mortgages even with no equity in the home. Also allow a buyer of a foreclosed home to assume this low rate mortgage. Guarantee support for the banking industry that owns this paper so a rise in rates doesn't kill them. Remember: the federal government has $16 trillion in debt and cannot afford interest rates to rise yet. Result: stabilize the housing industry as much as possible.

2. Continue to move towards longer term debt sales to replace short term debt of the government.

3. Once most homeowners have locked in low, long term mortgage rates and the government has also lengthened their debt maturity, start taking steps to inflate the economy. This is necessary to reduce the size of the debt versus GNP.

4. Bring back Glass Steagall. After housing recovers a bit lower the mortgage deduction to $500K and only allow it on the primary residence. This is part of unwinding FIRE with much more to follow.

5. We have to start the process of TECI. First start to defund and downsize many of the FIRE related government programs (except residential housing). Reform government pensions and benefits, and reduce federal employment by attrition. Next, start moving federal money to public- private partnerships to rebuild the energy, transportation, and communications infrastructure. The federal budget would not decline, but simply shift away from FIRE to TECI.

6. Devalue the dollar? Inflate somehow? At some point higher inflation will come,but recovery will be slow. Back to the future of the 70's except with interest rates on 30 year treasuries topping at 6% to 7%. This is the extent of the bond panic I see. Nonetheless, debt will be tamed by making it smaller via inflation and some debt forgiveness.

[BadJuju]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

As someone that doesn't understand the market too well, I read into this as being a way to dangle the carrot and give nips of it to people. The 40 billion a month is a small taste of a bigger pie promise. Am I right in thinking this way?

[we_are_toast]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I'm having a problem getting too excited about this QE3. I'm not convinced that buying MBS's will necessarily translate to selling more houses. Interest rates are incredibly low now, and yet the new housing market is still lagging. There's a huge shadow inventory of existing housing that has to be cleared, and selling an exiting house doesn't translate to the same stimulus as selling a new house. Banks also have high requirements for down payments that may not change. It seems this may be up to the mortgage lenders as to how much stimulus this is actually going to be. If he had announced he was buying treasuries, and if congress cooperated with spending the additional money (very doubtful) it would have been immediate and big stimulus.

I'm betting against this rally lasting, but not too much.

[Slimprofits]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Today is the day bond market died.

[Slimprofits]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

They are reaching new comedic heights.


Front page of Bloomberg:

BREAKING NEWS Fed Officials Upgrade Economic Growth Outlook for 2013, 2014

[ST]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

the definition of QE has become muddled in the media - no U.S. gov't debt being bought, yet its deemed QE

[vinoveri]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Hard to imagine but three years into the so-called recovery home owners go delinquent on more than $200 billion in loans every single quarter, that's up from an average of $15 billion per quarter from 1990 until 2005.

Seems like the debt deflation is proceeding more rapidly than I thought. Good news no doubt for all those investors waiting in the wings.
With $10trillion in outstanding mortgages and 25% underwater, does not this mean (assuming the underwater folks are defaulting) that in 3 years those loans will be written off.

Winners from the housing bubble: speculators, flippers, banks-lenders, brokers, etc.
Losers from popping bubble: those who bought at top and did not sell; savers since 2008 b/c of ZIRP
Winners from popping bubble: BANKS, new round of privileged investors who get to use the cheap money to buy up cheap RE and rent it out.

Jefferson's quote is particularly apt to describe the situation:
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."

[rogermexico]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

EJ writes in:

We haven't quite decided yet. We are tending toward the assessment that I was wrong.

The stock market and global currency markets got exactly what they expected but the gold market got more.

If we can call this QE3 then the post-mortem on the prediction will be enlightening. I'll defer to the opinion of our members.

Again it appears I have erred on the side of optimism. It is quite remarkable just how hard the Fed has to paddle just to stay in one place.

This accelerates our time table for a U.S. bond market crisis.

EJ, I am reminded here of a quote from Warren Buffett.

"You can only be as smart as your dumbest competitor"

He was talking about how hard it is to compete with a business competitor who is willing to behave irrationally (lose money) but I think the same thing must apply in Fed Kremlinology when trying to predict behavior.

A very smart analyst who is usually right can make the mistake of thinking the analysand is as smart and therefore as predictable as the analyst.....

This looks like reasonably big QE3 to me at first blush. I was about 70/30 biased in favor of some QE3 and positioned accordingly, but this seems bigger than I would have bargained for.

[FRED]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

the definition of QE has become muddled in the media - no U.S. gov't debt being bought, yet its deemed QE

Technically it was QE:

Definition of 'Quantitative Easing'

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

[ST]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Technically it was QE:

Definition of 'Quantitative Easing'

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

ahhh...thanks for the clarification

[xPat]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

We haven't quite decided yet. We are tending toward the assessment that I was wrong.

Noble of you to both take the risk of posting this only a few hours before the announcement with a bold call, then to have the character to openly admit to being wrong. But I wouldn't go quite so far as to say you (and I, with a very similar opinion expressed in another thread several days ago) were wrong. I don't see it that way at all.

We expected the Fed to throw the markets a bone, but no actual QE3. What we got was a bone (extension of twist) plus what we have to admit was in fact QE3. But $40bn/month isn't all that much. We were both wrong when we predicted no QE3 today, but not as wrong as the masses who predicted an announcement of a $2tn program.

Far more importantly, you (and I) have predicted a massive coordinated CB easing from several CBs at the same time. I still think that's what it's going to take, and I don't think we're done yet.

So we both got the call wrong on new QE today. Big deal. The more important question is what comes next, and when and how it comes. The Fed no longer has the opportunity to play games creating speculation about the next FOMC meeting. By doing this open-ended, they don't have any more ability to talk up markets on hopes of another announcement at the next FOMC. So we got the long-awaited QE3, and it wasn't all that big. Yes, I and I'm sure many other iTulipers lost a few bucks this afternoon betting on a different outcome. But now that QE3 is out of the bag, now what? I think the answer is that the fed is out of bullets until a crisis warrants a massive, coordinated global QE event. I think the pop in equities probably has a bit farther to run, but nothing like QE1 or QE2. I predict a roller-coaster ride to year end, and disaster in 2013.

xpAT

[littleshark]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Noble of you to both take the risk of posting this only a few hours before the announcement with a bold call, then to have the character to openly admit to being wrong. But I wouldn't go quite so far as to say you (and I, with a very similar opinion expressed in another thread several days ago) were wrong. I don't see it that way at all.

We expected the Fed to throw the markets a bone, but no actual QE3. What we got was a bone (extension of twist) plus what we have to admit was in fact QE3. But $40bn/month isn't all that much. We were both wrong when we predicted no QE3 today, but not as wrong as the masses who predicted an announcement of a $2tn program.

Far more importantly, you (and I) have predicted a massive coordinated CB easing from several CBs at the same time. I still think that's what it's going to take, and I don't think we're done yet.

So we both got the call wrong on new QE today. Big deal. The more important question is what comes next, and when and how it comes. The Fed no longer has the opportunity to play games creating speculation about the next FOMC meeting. By doing this open-ended, they don't have any more ability to talk up markets on hopes of another announcement at the next FOMC. So we got the long-awaited QE3, and it wasn't all that big. Yes, I and I'm sure many other iTulipers lost a few bucks this afternoon betting on a different outcome. But now that QE3 is out of the bag, now what? I think the answer is that the fed is out of bullets until a crisis warrants a massive, coordinated global QE event. I think the pop in equities probably has a bit farther to run, but nothing like QE1 or QE2. I predict a roller-coaster ride to year end, and disaster in 2013.

xpAT

You can argue that this was a "small" coordinated move. China is doing more stimulus, the ECB is conditionally buying debt, and FED is doing a smaller, openended QE3. It seems like they've dipped their toes back in. Nobody is "all-in" here, because nobody wants to be, but it does seem coordinated.

I do agree with the overall thesis.

[metalman]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

You can argue that this was a "small" coordinated move. China is doing more stimulus, the ECB is conditionally buying debt, and FED is doing a smaller, openended QE3. It seems like they've dipped their toes back in. Nobody is "all-in" here, because nobody wants to be, but it does seem coordinated.

I do agree with the overall thesis.

ej tweeted qe3 lite...

[BK]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

The commentary by Mr Bernanke was most enlightening. During the Q&A session you can sense the Bernanke FIRMLY believes that the Fed Actions today will cause Americans 401K investments to increase, their home values to increase, and this euphoria will lead to more shopping by Americans - which will naturally lead to higher employment. Wow!

Ben is so sure of himself and his ability to pull back liquidity when the time is right......... scary.