The iTulip’s Great Insights Thread

[Sapiens]

http://www.itulip.com/forums/showpos...21&postcount=1
Here's the crux of it: Sovereign bond prices and yields across the curve are being driven not by inflation expectations but by the pricing of default risk in the commercial bond markets. As central banks increase liquidity to fight debt deflation as commercial bond default rates rise, inflationary pressures INCREASE even as sovereign bond prices rise and yields fall. We call this the default vs inflation Yield Vise.

At some point, sovereign bond purchasers on the long end of the curve will switch from pricing default risk to pricing inflation risk. If the switch is sudden, if the vice snaps open, long bond prices collapse and yields spike. The triggers are unpredictable, but we are working to identify a few possibilities.

Post those insights that light your candle.

[Guest]

Re: The iTulip’s Great Insights Thread

I believe Starving Steve has already posted this pithy insight elsewhere?

http://www.itulip.com/forums/showthr...4774#post24774

[Tulpen]

Re: The iTulip’s Great Insights Thread

- You won't solve a cheap money problem with more cheap money.
- Don't steal money from the next generation to solve the problems of today.

[Sapiens]

Re: The iTulip’s Great Insights Thread

http://www.tickerforum.org/cgi-ticke...t=22030&page=7

I wanted to jump in with a brief note to explain what strikes me as a significant difference in the way we think about the problem.

As much as we are fans of Mises and the concept of savings as the foundation of capital formation, we are also fans of Keynes because he invented a new way of thinking about economics in terms of capital flows versus transactions and static balances. If one keeps an open mind, and considers his profound observations and does not throw the baby out with the bathwater (there is plenty to criticize about Keynes), one finds our economy easier to comprehend and therefor future events easier to forecast.

True, the US has repeatedly abused its trade partners by selling first worthless stocks from companies whose balance sheets were blessed by corrupt accounting firms, then later sold securitized debt products that were blessed by corrupt ratings agencies. The question is, what has and can be done to offset the losses in debt issuance and financial asset sales, which has funded the US current account deficit, held interest rates low, and sustained the dollar. It has not only supporting the real estate but funded the wars.

The answer is now being offered by the markets: stocks down, gold up. This reflects a major shift in money flows.

http://www.itulip.com/images/moneyflows.....

What will happen is that as the credit markets become more dysfunctional, the Fed will shift to providing more credit to the government directly versus through the credit markets to consumers, business, and government. No Great Depression II, but an economy increasingly dependent on government spending.

It's critical to understand the economy in terms of credit and money flows versus levels. Otherwise, it's hard to understand what's going on.

2008-01-08 18:14:04

http://www.tickerforum.org/cgi-ticke...t=22030&page=8

Debt deflation = monetary deflation OR monetary inflation. The choice is POLITICAL not mechanical.

Red color emphasis, mine.

[zmas28]

Re: The iTulip’s Great Insights Thread

Post those insights that light your candle.

This issue (direction of long term interest rates) is critical to those of us whose retirement benefits are tied to it.
From: http://www.investmentpostcards.com/
Bud Conrad (Casey Research): What futures markets are saying about interest rates and the economy
“The combined effect of a slowing economy and the Fed cutting its rate to stimulate has caused the expectation for 3-month dollar-denominated investments called Eurodollars to drop in 2008 to below 2.5%, but then to rise into the future. (Despite the name, this has nothing to do with the euro currency).

“I interpret this to reflect a slowing in the economy through 2008, but that then the inflation will pick up, and investors will require higher rates to cover that inflation. It is part of recognizing that the Fed cuts rates by providing more liquidity. The result is that in the short run rates drop, but in the longer run inflation returns and rates have to rise to cover that inflation.”

Source: Bud Conrad, Casey Research – The Room, February 8, 2008

[zmas28]

Re: The iTulip’s Great Insights Thread

That was about short term rates, not long term rates: my error.
However, unless the yield curve inverts, I'd expect long term rates to also go up.

[grapejelly]

Re: The iTulip’s Great Insights Thread

"We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power."

- Alan Greenspan (Chairman of the Federal Reserve US Central Bank), appearing before the Senate Banking Committee on February 15, 2005, in response to Democratic Senator Jack Reed of Rhode Island on the topic of funding Social Security.

[Sapiens]

Re: The iTulip’s Great Insights Thread

I'll summarize: politicians make things hard for central bankers, such as by pressing inflationary fiscal policies that make central bankers appear ineffective and ruin their credibility. They stop cooperating with their own politicians and with each other – going on strike, as it were – and then things get really out of hand in ways that impact financial markets and Main Street, meaning the elite all the way down to Joe Sixpack, which forces government officials back to the table to address the political problem of who is going to get thrown under the bus to fix the monetary and currency problems that are causing the financial market and economic problems that are causing the domestic discord among participating members. Got it?

http://www.itulip.com/forums/showpos...08&postcount=1

[Sapiens]

Re: The iTulip’s Great Insights Thread

http://www.itulip.com/forums/showpos...16&postcount=1

See, Taleb is asserting that our problem is our inability to take into account and manage risk-- our lack of understanding of probability--our "academic economists running their deluded models." I simply do not agree. We have thousands of "quants" working in various capacities in government and private who have mastered statistical theory as well or better than Taleb and know how to apply it. They aren't deluded. What they are is out of the power loop just the way the rest of us are. Even if they perceive these escalating financial crises, there is not much they can do to stop them except try to draw peoples' attention to what's happening...But this is in competition with the message people get from most media outlets, where people are being systematically deceived.

[Sapiens]

Re: The iTulip’s Great Insights Thread

http://www.itulip.com/forums/showpos...40&postcount=2

The source of the problem is a banking system designed to maximize profits for lenders at the expense of prudent risk management. It is the application of ideology to financial markets, which in the end works out as well as the application of ideology to geopolitics – not well. My example is OTC CDS. As Martin Mayer has been pointing out for at least a decade, these should be subject to reserve requirements, same as deposits, and for the same reason. Some day they will. But imposing reserve requirements on CDS reduces their profitability, and more importantly the ability of banks to make new loans cheaply because they allow banks to save capital.

The entire system is madness, based on ideology not sound and practical theory, so of course it is crashing. Over the next few years much of the US banking system, starting with the GSEs, will be nationalized, restructured, and re-privatized. The process will take several years. This chart (thanks JK for the report that contained it) which I've modified shows where we are in the banking crisis and debt deflation process relative to the stock market.

The Fed believes that with respect to inflation, time is on their side. But while falling demand is lowering inflation expectations, as we can see in commodity prices, the seeds of future crises remain hidden in the system, such as the eventual CDS disaster, and these will require further drastic action by the Fed. They will not tend to encourage capital inflows that support the dollar, and in fact capital outflows may accelerate. In such an environment, and increase in confidence in the dollar will be short lived, and in any case only relative as confidence in other currencies will be declining as well as the US crisis spreads; I believe that the global economy is less dependent on the US but financial systems are more coupled than ever.

[Sapiens]

Re: The iTulip’s Great Insights Thread

http://www.itulip.com/forums/showpos...59&postcount=1

We have not for 100s of years had free markets in the sense that most people use the term today. Our recommendation to readers is: get over it. Focus instead on what kind of managed economy you want. A fair one or an unfair one? How to achieve fairness? Those are constructive questions. The "free" versus "un-free" argument is a red herring designed to distract the polity from the reality. It has allowed the grossly unfair FIRE Economy to grow under cover of "free markets," since 1980 to redistribute wealth to creditors.

[photoncounter]

Re: The iTulip’s Great Insights Thread

Don't have the link.

"The Key thing to realize is that the Debt/Money is increasing exponentially while the income is still in the linear phase. Since all money is debt, and carries an interest, the income can no longer service the debt, and the system collapses -- hence the drive to the "zero bound" -- But no matter how hard the FED/Govt tries, private banking interests (the real actors) will always charge a positive interest to make a profit -- and therefore unless the mindset shifts radically, the system is bound to collapse."

[Rajiv]

Re: The iTulip’s Great Insights Thread

That said,

From EJ

I remind readers that our comments and forecasts on central bank policy should not be construed as approval. We cannot help our readers prepare for the future if we try to impose our own theories on how the economy, financial system, and monetary systems should work. We are interested in what the Fed and other central banks are thinking, not how they should be thinking. We'll have time for that later. So far careful observation of that has yielded, unfortunately, accurate forecasts.
.
.
.
We continue to expect that the actions of central banks to halt deflation will, as usual, in the long run work too well.

For the uninitiated, those are stacks of Weimar Republic Banknotes

[FRED]

Re: The iTulip’s Great Insights Thread

Don't have the link.

"The Key thing to realize is that the Debt/Money is increasing exponentially while the income is still in the linear phase. Since all money is debt, and carries an interest, the income can no longer service the debt, and the system collapses -- hence the drive to the "zero bound" -- But no matter how hard the FED/Govt tries, private banking interests (the real actors) will always charge a positive interest to make a profit -- and therefore unless the mindset shifts radically, the system is bound to collapse."

Yes. It is the zero bound in the purchasing power of fiat money we're talking about in this current global debt deflation, not a zero bound in interest rates. That only matters when the price of money matters, which in a big deflation or inflation it does not, only the quantity matters, and thus the quality.

[D-Mack]

Re: The iTulip’s Great Insights Thread

That said,

From EJ

For the uninitiated, those are stacks of Weimar Republic Banknotes

How it feels to be a millionaire

www.youtube.com/watch?v=nb2aUIU9uc4