Whatever. We seem to be talking in circles. Inflation (CPI, PMI, Commodity indexes, really shitty stocks, however you want to measure it) is accelerating, overall economic growth is doing fine. It's inconsistent with money rates hugging zero. As I said before, some debtors can't handle higher money rates, but that's their problem. If you're barely hanging onto solvency at 1% money, guess what ... you're insolvent. Trichet alluded to this yesterday, saying numerous times, he's responsible for keeping prices in check for 330M people, not ensuring next to zero rates for those with too much debt. Bravo Mr. President! I have no special love for the ECB. I have no doubt that if something cause equities to correct 5% between now and April, they'll prolly find an excuse not to hike. BTW this is the QOTD ... Bernanke says the Fed âwill not allow inflation to get above low and stable levels.â He says it has learned the lessons of the 1970s. Heâs read the books. He can recite the theory. Yet a lifetime reading books about the Great Depression (and writing a few) didnât help him spot the greatest credit inflation since that catastrophe any more than reading âThe Ten Habits of Highly Successful Peopleâ would make him successful. Itâs the doing that counts. So before lending to the US government for 3.5% over ten years, bear in mind that when it comes to a real inflation fight, not one of the Fed economists youâre betting on has ever been in one. Indeed.
I'd say its inconsistent to raise rates in a banking crisis or on the verge of one, specially if you are not running a QE program
Hahaha, you're quoting the SocGen dynamic duo! The famous storytellers, Dylan and Albert. While they're certainly interesting and even shocking (by macro strategists' standards), there's unfortunately a lot less substance there, now that Montier has left. At any rate, as usual the story they're telling has quite a few holes in it.
Actually, that's just Grice, and it's a QOTD, not a bible to live your life by! Probably more valid than the line AEP (another great storyteller) dug out of some hack analyst for his column yesterday, and rushed to the board by Daal.
I agree, the problem from a trading perspective IMO is the extreme instability of all this. It's not like housing which ground on slowly for years, and propelled equities higher for two full years after the peak showed up in price data. Now we have pure speculative booms in some asset classes (equities), combined with something approaching panic buying in certain commodities, all against the background of China's investment bubble. The important thing to realize about the Fed's actions is that simply pumping banks' excess reserves is very unlikely to cause inflation, because the printed cash is not entering the real economy, and in practice the presence or absence of excess reserves does not affect whether banks can make loans (this is affected purely by interest rates, set by the Fed). As long as QE just produces a massive pile of excess reserves, there is not going to be inflation and the "inflation trade" is just a run-of-the-mill speculative bubble, rather than a symptom of enduring dollar debasement. If credit starts expanding again then we can start worrying about currency debasement. May 6th showed how vulnerable these markets are. Personally I will be looking to take "macro" trades when PE ratios are at 7-10 in the U.S., and once the EM bubble has popped to separate the true winners from the overhyped losers. Real estate is unlikely to be a good investment IMO, unless we see net rental yields getting to 6-7%+, in which case you can buy for the cashflow.
The Fed doesn't believe UST rates will rise much after QE2 ends because they are in the 'stock view' which says that Fed buying of USTs removes supplies from the market creating some kind of shortage effect which leaves interest rates lower than they would otherwise be. It seems that Bill Gross doesn't agree with this, he is in the 'flow view', which says the daily aggressive buying is what matters. I'd say history suggests Gross is favored to be correct instead of the Fed given he beat the market for so long
I disagree with you my friend, I explained this in depth in my previous journal. Just look at the numbers from QE1, $1.75T(IIRC) of assets bought, $1T in excess reserves by the end of it, this means $750B went out to 'circulate' in the economy, probably in the form of M2. I dont have the numbers from QE2 yet but I wouldn't be surprised if it was similar given how healthy M2 growth has been. If someone has the numbers I would love to see
Gross still has plenty of USTs but they have maturities of 12 months or less which seem to be classified as 'cash' by accounting rules http://www.cnbc.com/id/15840232?video=3000009781&play=1
Whether it is an asset bubble or the inflation specter makes no difference, trade what the market is doing. Both lead to higher prices, I don't see what the problem is unless you're short.