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

[Chris Coles]

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

This is a well-written and cogent analysis. Thank you!

But it is not complete. One may equally well apply many of the same arguments you make against government, to those collections of powerful individuals who would dominate, even more than they now do, in a world with diminished government.

The absence of government does not imply the absence of corrupt and powerful groups who will control other people's lives. On the contrary.

Collected power exists with or without government, whether in the form of collectives, corporations, or bands of marauding militias. The strong will in general take advantage of the weak, given the opportunity to do so. And there will always be both strong and weak.

But a properly constructed and maintained government (which I am not claiming we currently have) has a chance of doing so in the interests of the overall good. i.e. to reduce net-value-destructive predation. This helps all members of a society, strong and weak alike.

The solution is thus not to dismantle government, but repair it. I'm in agreement that government as it is today is not the answer. But that is a very different thing than saying government, in any form and at any size, is a fundamentally destructive influence, that varies only in scale and not in kind.

Thus, I feel that you have only made the first part of the argument to support your conclusion, and the easier part at that.

Put another way, the statement I highlighted in bold makes the assumption that it is the size, or perhaps the strength, of government, that affects whether its impact is positive, or negative. This assumption is, in my opinion, entirely false. I hold that it is the structural balance of a government that determines whether it is effective, or destructive.

What is needed is thus a government that is structured to make corruption harder. Mandatory transparency into all aspects of governance and campaign funding is a start. And many further steps beyond that would be required as well. But simply saying "smaller is better" is, to my mind, throwing the proverbial baby out with the bath water.

Both of you make very valid points. Again, the overall problem is not confined to the USA; here in the UK we face exactly the same need to redefine the role and responsibilities of government. What has become very interesting is the realisation of the responsibility of intellect to speak to truth. None of us has all the answers, but many here on iTulip show a very good understanding of the overall problem; the need to fix rather than destroy. To show the courage to debate.

The great difficulty is getting across to those currently holding power; that they must listen to our input. On the other hand, they will see us as an enemy; someone that does not have their best interest at heart; which in a sense, is true. On the other hand, what is their best interest?

And that question automatically leads to another; how do you show to someone with their head down, working, (as they see it), their fingers to the bone, that all their work is leading the nation in the wrong direction?

Here in the UK, it would seem that my comments have so far produced the reaction that I am to be seen as a threat; that I must be such. So the real challenge is to answer the question ourselves; how do we get across that we see our role, not as a subversive influence; but as being ....... honourably loyal to the needs of the wider nation by making the comments.

It is very easy to say to someone, anyone, that they are wrong. Both sides are doing it to each other at one and the same time; the challenge is to make your case in a way that forces the truth out into the open so all can see it as such.

But again, both sides will each say theirs is the truth of it.

My analysis, my instincts, tell me that the only way to do this is to stick to the point we make and keep making it; regardless of the consequences to ourselves as individuals. That by so doing, we force the existing leadership to look inward to their own decisions; that by so doing, we force them to sit still, even for just a moment, and reflect upon what we are saying.

The overall problem as I see it, is very simple; we are not living within a true free market system, where if you fail, the basic rules everyone has to abide by; force you to have to change direction; retrench. Instead, by creating what I have often described as a feudal mercantile economy, the Western government system has become deeply feudal itself. That what we are witnessing is good old fashioned medieval feudalism.

Looking at the wider picture, the Western economies today are short of perhaps 100 million private sector jobs on the one hand, yet, due to long term policy decisions, (made certainly in honesty without any perception of the long term consequences), today, there is no functioning mechanism to fund the free enterprise equity capital to fund the creation of those much needed jobs. Rather than accept that very simple fact and act to put things right, government has embarked upon repeated attempts to create new jobs using all the tools at the disposal of a feudal government.

Yet, as we here know full well; their attempts simply will not work.

The challenge we face is to slowly, carefully, keep making the same points in such a way that, eventually, they come to see that we are not the enemy at the gates, but responsible citizens trying our best to get our message across; that they have to recognise they are all working to a set of rules that lead the wider nation away from freedom and success and instead, towards a continual decline.

The responsibility of the honest citizen is to speak to truth. Loyalty is not about never questioning the actions of existing leadership; it is being honest to our intellects and showing the courage of our convictions to say what we believe to be true; even if the leadership seem to not believe it to be so.

[Polish_Silver]

Bond Stability after 1947

I: What happened in the 1940s after the war ended when the U.S. government stopped rigging the bond market?
EJ: In the 1940s the risk of a sudden selloff was far more limited than today for several reasons. First because most of the bonds were held domestically. Second the exchange rate was fixed at the time; the small portion of overseas UST holdings did not impact, nor where they impacted by, the exchange rate.

EJ explains why the bonds did not crash after 1947: USD exchange rate was fixed. Bonds were held domestically. However, the bond prices must still "clear the market".

Long term bonds were still vulnerable to interest rate hikes and depreciation/inflation risk.
But perhaps the bond holders were not thinking along those lines. They were probably thinking that bonds were safer than cash in the bank, due to the 1930's bank run experience. Also, there were few alternatives: Gold was illegal (and price controlled), commodities are problematic, and people had been badly burned on stocks. So alternatives to bonds were very limited.
There's a big dimension of psychology in bond markers. Glad to get some data on inflation and rates after 1947.

[charliebrown]

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

Thanks for checking in Jtabeb. Have missed hearing from you. Agree that some R&R is good.

[charliebrown]

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

I was thinking along your lines. I did not expect any QE here.
Oil/Food prices high
Stocks high
and wait for the next shoe to drop in europe or the middle east before doing this.

So why?
Is there a known event on the horizon?
Why MBS? I have heard that there aren't that many 10y Ts left in circulation.
Also does this put the treasury on the hook to make good on the p and i payments on the bonds?
I'm sure the asset base on these bonds is slowly rotting away. Many of the underlying mortgages are going to go into default.
Without the treasury backstop, that means the FED will be creating money that will never be paid back.

[Slimprofits]

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

2 comments.

over at ftalphaville [and perhaps elsewhere, i don't know] it's called QEnfinity. doesn't sound lite to them, apparently.

re the purpose of this round of qe: i agree with osmose that it is aimed very specifically at the housing market. they are going to buy approximately half the monthly issuance of mbs, for an indefinite time until employment improves. this will lower mortgage rates, very directly lead to another round of refi's for those who can qualify, and stimulate the low end of the market and especially first time buyers. more first time buyers will promote more step-up buyers. i am very dubious that it will work, but this is what i think they have in mind.

http://ftalphaville.ft.com/blog/2012...ons-about-qe3/

3) Some have noted that the size of the new purchases, $40bn a month, is much smaller than both QE1 and QE2. So what?

For one thing, as bad as things are now, the circumstances leading up to those previous rounds were a lot worse (severe financial market strains before QE1 and a real threat of deflation before QE2).
But more to the point, we think the initial small size of the programme is feature rather than bug. Well, maybe.

We won’t repeat all of our thoughts from an earlier post. But the Fed’s previous easing programmes, though successful in their main objectives, were also flawed in that they both removed safe asset collateral from the financial system and failed to disabuse markets and economic agents of the belief that 2 per cent was an inflation ceiling. On Thursday, Bernanke tried the opposite script — smaller purchases to start and clear signs that 2 per cent is not a ceiling.

Will it work? We’ll see, but the hope is that the messaging itself is strong enough that the Fed will generate more economic activity per dollar of balance sheet expansion (precisely because the program is open-ended) than with lump sum purchases. In monetary policy parlance, the portfolio balance channel works better when accompanied by use of the expectations channel.

[we_are_toast]

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

Toast,

You are missing the point. Check out the price action in ITB and XHB. What Bernanke is doing is making people start buying houses instead of paying higher and higher rents. Think about it. If you put off a house purchase for a while because you thought inflation was dead, now you should hurry up with locking in that low mortgage rate, and buy a house. Inflation expectations. It is like an avalanche... " oh crap, better buy that house, and i will need some new furniture and appliances. Money will be worth less tomorrow, etc...etc"

With business owners: my truck fleet is 10 years old, better replace it now while financing is so cheap and the trucks have not gone up in price.

I'm afraid we'll have to disagree about this. I don't think the rate of future inflation is a big factor of many people looking to buy a home today. My guess would be that people are far more concerned about job location, family size, how much junk they have... Of course the lower interest rates will make a difference, but by how much? Are there really that many more people who will qualify for a mortgage, or chose to refi, or chose to buy a house when the rates are at 3% compared to 3.8%? I don't think so.

Will it work? We’ll see, but the hope is that the messaging itself is strong enough that the Fed will generate more economic activity per dollar of balance sheet expansion (precisely because the program is open-ended) than with lump sum purchases. In monetary policy parlance, the portfolio balance channel works better when accompanied by use of the expectations channel.

This concept of the FED creating future expectations of inflation, is a bit confusing to me. If the Fed can create inflation by buying MBS, can't they cut off inflation by dumping those MBS, along with raising overnight rates and using a bunch of other tools? And given how paranoid this FED is over inflation, can't we expect them to stomp on inflation before it meets our irrational exuberant expectations? So I'm not so sure we should fear the inflation the FED is "trying" to create. It's the inflation that the FED is forced to create, or beyond their control that is scary, and this doesn't look like it.

[Guest]

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

Toast,

When people look at mortgage rates, it is not the rate that matters. If the rate is 3 pct and you think it will stay there for 10 years, you won't rush to buy a home. If you think the rate will be 7 pct next year, that will force you to move.

[sunpearl71]

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

If the rate is 3 pct and you think it will stay there for 10 years, you won't rush to buy a home. If you think the rate will be 7 pct next year, that will force you to move.

This was one of the key aspects that I considered while buying a home 3 months ago, though the main reason was to provide more space to my growing children.

[radon]

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

I'm afraid we'll have to disagree about this. I don't think the rate of future inflation is a big factor of many people looking to buy a home today. My guess would be that people are far more concerned about job location, family size, how much junk they have... Of course the lower interest rates will make a difference, but by how much? Are there really that many more people who will qualify for a mortgage, or chose to refi, or chose to buy a house when the rates are at 3% compared to 3.8%? I don't think so.

But low interest rates are. They are going way out on a limb to backstop the most significant asset the "99%", or whatever that means, owns. For all the angst about helping the rich there are better ways to do it than pointing a money cannon at the housing market.

This concept of the FED creating future expectations of inflation, is a bit confusing to me. If the Fed can create inflation by buying MBS, can't they cut off inflation by dumping those MBS, along with raising overnight rates and using a bunch of other tools? And given how paranoid this FED is over inflation, can't we expect them to stomp on inflation before it meets our irrational exuberant expectations? So I'm not so sure we should fear the inflation the FED is "trying" to create. It's the inflation that the FED is forced to create, or beyond their control that is scary, and this doesn't look like it.

There is no exit. Once the return on debt drops below unity they can either continue with consecutive QEs until the currency crises or let the entire thing burn down in an apocalyptic deflationary cataclysm.

[Raz]

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

...
There is no exit. Once the return on debt drops below unity they can either continue with consecutive QEs until the currency crises or let the entire thing burn down in an apocalyptic deflationary cataclysm.

That's correct. Doug Noland explained this in 2010.

[DSpencer]

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

Toast,

When people look at mortgage rates, it is not the rate that matters. If the rate is 3 pct and you think it will stay there for 10 years, you won't rush to buy a home. If you think the rate will be 7 pct next year, that will force you to move.

This is definitely true for some people. But what percent of the population deciding whether to rent or buy thinks about this?

[ProdigyofZen]

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

I'm afraid we'll have to disagree about this. I don't think the rate of future inflation is a big factor of many people looking to buy a home today. My guess would be that people are far more concerned about job location, family size, how much junk they have... Of course the lower interest rates will make a difference, but by how much? Are there really that many more people who will qualify for a mortgage, or chose to refi, or chose to buy a house when the rates are at 3% compared to 3.8%? I don't think so.



This concept of the FED creating future expectations of inflation, is a bit confusing to me. If the Fed can create inflation by buying MBS, can't they cut off inflation by dumping those MBS, along with raising overnight rates and using a bunch of other tools? And given how paranoid this FED is over inflation, can't we expect them to stomp on inflation before it meets our irrational exuberant expectations? So I'm not so sure we should fear the inflation the FED is "trying" to create. It's the inflation that the FED is forced to create, or beyond their control that is scary, and this doesn't look like it.

Not to go too far off topic but has anyone watched The Year of The QB "The Brady Six"

In the first 20 mins of the hour long video when Tom Brady first arrives at Patriots camp Brady is recalling how he felt. He said he "called up his agent 2 weeks into camp and said hey I think I want to buy a house here" His agent replied are you nuts, you havent even made the team yet.

Brady said "yea I know I will make the team don't worry about that, I just want to get a good interest rate on my mortgage"

That should have been one of the key indicators of his future success!

After all he did go to Michigan, which has one of the best business schools in the nation for non-Ivy.

[ProdigyofZen]

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

Sure that may be the case but have you thought about this....

If interest rates for mortgages are currently 3% and you think interest rates will be 7% within the next 1 to 2 years what mechanisms and what is occurring in the economy to get to that 7%?

In other words, sure you will buy your house now for 200k at 3% but in 2 years if rates jump to 7% it will be worth 150k.............as the economy and housing crash from the doubling in interest rates.

[CanuckinTX]

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

Canuck,

You want to tell me you are just going to shovel money into that account earning zero, if you start seeing inflation pick up?

There is an awful lot of money in the US still. It will start to shift from bonds.

I've already got my gold and I'm sure as heck not going to just go spending money on stuff I don't need just because I have money lying around. Maybe I'm in the minority but that's the whole point I'm making anyway. The masses they need to be able to re-fi can't do it. 40% of people in CA are underwater and over 50% in Nevada. Florida is just as bad. The people that really need the money get no help from lower interest rates.

As jk says, I understand what the Fed's thinking is here, I just don't think it's going to work.

[ProdigyofZen]

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

Very Simple Grasshopper, THEY WON'T. They want a positive inflation rate (sorry should say a very negative real rate) and they want everyone to know about it. This is the mother of all asset price pumps (till we hit the wall again when gas hits$5-6 per gallon), then we get another ka. But, I think that after Obama gets re-elected, the bond market will not flinch. Over $1 T in defense cuts next year. The biggest Austerity in the US will be in the defense industry. Luckily, I think I'm in the only growth Industry in DOD right now. Just enough salve to goose the election, and then REAL pain next year as QE3 will not offset defense cuts. But till those cuts are announced IN DETAIL, yeah we got a rally in all risk assets, till may next year.

If I'm wrong and Romney wins, I think you are going to see a sell off on the risk side after the honeymoon rally, he's actively targeting Bernanke and pushing really hard for domestic austerity, (in all things OTHER than defense). Bond market will like that but risk assets won't. If Romeny succeeds in pushing through his domestic austerity agenda sans defense, dollar rallies strong, strong deflationary trend, dollar gets way overvalued and real economy grinds to a halt. And then we get a real no kidding big ka followed by big almost immediate poom. (Aka Argentina)


Assuming, of course, no IRAN strike, no unexpected crisis, and Draghi stays on the path of QE European style. As long as europe QEs at a slower rate than the fed, then we hit the wall first. Otherwise they do. But bottom line there is a recession coming hard core when gas breaks the $5 gallon thershold.

Lots of variables and ways for this to play out, my guess is May June next year if obama is re-elected, or if Romney wins (based on the end of the rally and gas crossing a threshold price)
Outcome seems the same, the only diff seems to be who will be left holding the bag in the White house when bad things happen.

Maybe I'm wrong and Romney is pandering to fiscal conservatives, but if he practices what he preaches, we are likely to hit the Big One (the one the bond market takes notice of) sooner than the Obama Scenario.

Obama = Gas Price driven demand destruction recession (inflationary)
Romney = Austerity led Super KA (followed immediately by Market driven POOM)

I actually think that the Romney path gets us on the Argentina Trajectory Faster than the Obama path.



Should have some clarity come November.

The "rhetoricalness" of my question "how are they going to raise rates if inflation hits 5% in thext 3-6 months" was apparently lost in internet forum purgatory !