Thought Bubbles from the Deep

[DeepState]

no you did not, but you stated yesterday evening all the reason why "it is ridiculous to have a real cash rate of around -2%." Your points are solids and I just think the fed could raise even if i believe it missed the point a long time ago and may go in reverse early next year .
Note I have never expected you or anyone else to have a crystal ball into the future or give advices
Anyway i shut up and will just keep reading this thread passively

I am not as obsessed as printed market opinion is about the precise date of a potential lift-off. It is my view that the case for lift-off is very strong based on current activity and expectations of those making the decisions. It is now being explicitly discussed by Fed members as opposed to hints or statements of what must eventually happen.

Please feel free to remain an active thread participant.

 

[DeepState]

... can someone explain to me the difference between QE and Federal deficit spending unbacked by fresh Treasury issuance? No? Didn't think so. Their impact on the monetary base is identical!

In one case the spending attached to the monetary expansion is dictated by the private markets. In the other, it is by the government. Further, in the US, when QE took place, the additional money supply mostly sat on the Fed balance sheet as excess reserves. Monetary velocity of zero. The private market chose not to spend the cash. So we were left with the portfolio effects channel....high prices of liquid assets trying to stimulate real activity.

Nowadays, the big idea of the second is that the CBs looking to ease further might do so via direct asset purchases. That is, buying the underlying assets like factories and buildings... Pretty far-fetched in my view. But these are pretty far-fetched times.

 

[Valued]

Sometimes there is a benefit in watching someone speak. After yellen testified the markets priced in about 20% more chance of a rate hike. Interestingly, Yellen said nothing not already said previously in printed form. When I saw her speak I immediately doubled my exposure on a EUR/USD short. It was the way in which she said it, the words she chose, and the order of those words.

 

[sinner]

In one case the spending attached to the monetary expansion is dictated by the private markets. In the other, it is by the government. Further, in the US, when QE took place, the additional money supply mostly sat on the Fed balance sheet as excess reserves. Monetary velocity of zero. The private market chose not to spend the cash. So we were left with the portfolio effects channel....high prices of liquid assets trying to stimulate real activity.

I will need that explained to me like I'm a 5 year old please. Which case is which?

As I see it:

* Domestic private sector (corporate + household) consumes from productivity. Deficit financed with debt (mix of local and foreign sectors).

Essentially domestic private sector resides almost entirely in the credit economy, aside from physical cash which is base money.

The mechanism of paying me or me paying someone else is nearly always the transfer of bank credits (liability of the bank to the holder to chase down some base money) from one entity to another.

* Government sector consumes from taxes (no productivity).

However, Government spending mechanism is to credit the provider of goods/services with a bank credit (liability of the bank to pay the provider some base money) and also commensurate increase in bank reserves (liability of the Government to pay the bank).

This increases the monetary base, any issuance greater than total tax income is literally printing money until the Government issues bonds to cover the deficit, which shrinks the monetary base by a commensurate amount.

This mechanism is simplest to understand in that the Government does not issue a lump of bonds and then go out and spend the borrowings, rather the Government is consuming real goods and services on a continuous basis and issuing bonds for the deficit as they go.

Net spending greater than tax income + bond issuance is a permanent dilution of the monetary base to pay for real goods and services consumed by Government sector. This is merely an accounting identity, not a conspiracy theory, or a claim to say this is what the USG is currently doing.

To me this is the most important point. In such an event, an "increase in reserves held at the Fed" (read expansion in the volume of and dilution of base money) is not so much "unspent" private sector money but actually the nasty hangover of already spent Government sector consumption. Such an action undertaken by the CB of most countries, I think we can all agree, would have an immensely inflationary impact on the local currency unit.

* So at least from the interpretation above - feel free to point out where I'm going wrong - how is QE viewed? Well, the Bernanke Fed was swapping debt for base money.

The mechanism is essentially a reversal of Treasury issuance which paid for "already spent" Government consumption. Given the state of the USG Federal deficit relative to their balance of trade deficit, it's worth pointing out that certainly those dollars paid for the consumption of tangible/physical/real goods and services.

Monetarists seem to argue that there is no difference between the two (so they can be swapped without any problem!), but I would strongly beg to differ. The US monetary base is clearly the current "global monetary reference point" and all of those Eurodollars and foreign reserves held against the US sectors are denominated in the monetary base. The mechanism of QE represents a real dilution in their payment terms identical to net spending unbacked by bond issuance.

Nowadays, the big idea of the second is that the CBs looking to ease further might do so via direct asset purchases. That is, buying the underlying assets like factories and buildings... Pretty far-fetched in my view. But these are pretty far-fetched times.

Consider the following hypothetical:

The year is 2005 and BigCorp sees nothing but blue skies ahead so they take out a big loan via the corporate bond market to buy a bunch of factories and buildings. The bonds are largely taken up by BigBanks 1 through 10 and held as assets.

Now the year is 2015 and BigCorp is in the doldrums, under a lot of pressure because their blue sky projections didn't pan out thanks to the GFC. They're barely making payments and the bondholders at BigBanks are freaking out.

That's credit deflation. Bad for the company, bad for the banks, bad for everyone in general. Judging from the metrics, it's approximately where we sit today (in aggregate). Does it make sense that anyone involved in this picture would be lobbying for more deflation? I personally don't think so.

Imagine that next, the Fed comes along and buys all of those problem bonds off the banks and pays with an expansion in the volume of the monetary base. The banks no longer have bad assets on the books, and their books are not exposed to currency inflation risk from such an action (in fact they have an advantage over most other economic actors by being the first to loan that newly printed base money). The real value of the loan to the factory owner is significantly reduced and therefore much easier to repay. Nor does the Fed need to take a factory or building onto its balance sheet The only people who get screwed in this situation are those who have chosen to defer their consumption by holding USD denominated credit money.

That's hyperinflation. Everyone's happy (except for those saving in the local currency unit). Does it make sense that the US will (has already begun) happily throw the "USD as global reference point" and the USD savers under the bus in the race to meet a giant wall of credit deflation? I personally think so.

 

[sinner]

It is now being explicitly discussed by Fed members as opposed to hints or statements of what must eventually happen.

The rate set by the Fed is a function of the size of the monetary base relative to GDP. It is not a matter of jawboning.

Here's someone smarter than me saying it
http://www.cnbc.com/2015/10/25/fed-...balance-sheet-show-no-plan-for-rate-hike.html

Financial markets thrive on guesswork, partly because they constantly need to create 'events' to trade on.

But there should be no wild guesswork with regard to the Fed's expected policy changes. Any good Fed-watcher knows that a quick look at Fed's money market operations and at systematic balance sheet actions will show the kind of policy move being prepared.

...

There is nothing that I can see to suggest that the Fed is poised for an interest rate increase. In fact, there is evidence that a mild contraction of monetary creation earlier this year was reversed in June. Since then, the monetary base (the liability side of the Fed's balance sheet) has been expanding. Between the end of June and the middle of October, the Fed's monetary base increased by 3.5 percent.

Clearly, that is not a sign that the Fed is ready to initiate what is widely known as an interest rate normalization process, or, put more simply, the departure from the current 0-0.25 percent interest rate target. This key policy rate is systematically kept around the middle of that range.

Dr. Michael Ivanovitch is an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia Business School.

This chart courtesy of John Hussman:
http://www.hussmanfunds.com/wmc/wmc130304.htm

 

[DeepState]

Sometimes there is a benefit in watching someone speak. After yellen testified the markets priced in about 20% more chance of a rate hike. Interestingly, Yellen said nothing not already said previously in printed form. When I saw her speak I immediately doubled my exposure on a EUR/USD short. It was the way in which she said it, the words she chose, and the order of those words.

?? I am not seeing the change in outlook around the time of the Yellen Testimony to the House, which went for three excruciating hours...you have stamina and very poor sleep hygiene (!!). The odds did improve leading into the speech itself...but didn't do much during or afterwards. It was worth around 5% likelihood before she opened her mouth on the record. I do see a substantial shift of approx. 20% (not sustained in full) following the NFP surprise the next day. I think Euro didn't move much at all in or around the testimony. It did, however, move in accordance with general USD strength following the NFP surprise. All in all, I would have to ascribe recent USD strength to the NFP surprise for the most part. If listening to Yellen speak helped you with that position, all's good.

 

[DeepState]

The rate set by the Fed is a function of the size of the monetary base relative to GDP. It is not a matter of jawboning.

Here's someone smarter than me saying it
http://www.cnbc.com/2015/10/25/fed-...balance-sheet-show-no-plan-for-rate-hike.html




This chart courtesy of John Hussman:
http://www.hussmanfunds.com/wmc/wmc130304.htm
View attachment 64987

Love it.

This obsession with the volume of money is rather dated and are remnants of the pre-Volcker era monetary policy. For any given level of money supply, there are a wide range of potential levels of output. Creation of credit occurs within the limits of prudential standards and is affected by the prevailing level of interest rates as determined by the various relevant authorities which leaves a rather large amount of money supply as an endogenous issue. Sure, you can helicopter drop cash and create inflation with immediate expenditure, or you can increase the balance sheet sizes and watch them sit idle as a lowflation environment remains in place. Money volume increment via official channels by itself does not drive economic activity. The money multiplier is more an outcome, rather than a strong, direct, economic driver. Fed officials are also not paid by the word spoken.

When you look through the concept of inflation targeting which has become the most favoured policy target since New Zealand* embarked in it, what matters is inflation expectations measured in the currency of the realm. The other key objective is full employment (expressed or implied). When you look at the watch list for the Fed, there are heaps of things which they look for when deciding what to do. Money volume, beyond looking at the strength and soundness of the financial system and availability of appropriate credit, hardly rates a mention. What rates a mention, ultimately, is inflation relative to target and GDP relative to target (and their sustainability). The most widely acknowledged relationship is not the inverse curve per Hussman but the Taylor Rule.

The Hussman relationship is capturing a lot of secular issues and assigning a rather strange/obtuse explanation to it. Doesn't the Fed set rates and create conditions to determine the money base at the same time? Given the money base is much more flexible than GDP, it is seriously odd to claim that rates will stay low because the money base is high. The Fed will raise rates and then, well after that, figure out what it wants to do with the money base. At present, it does not intend to shrink the balance sheet beyond interest payments for several years.

* What is it with this place? All Blacks, America's Cup, 2nd highest wealth per adult, Inflation Targeting pioneers, Hakka, Rachel Hunter, Russell Crowe..

 

[sinner]

he Fed will raise rates and then, well after that, figure out what it wants to do with the money base. At present, it does not intend to shrink the balance sheet beyond interest payments for several years.

http://www.colorado.edu/economics/courses/econ2020/section11/section11.html

It is important to realize that the Fed only directly controls one out of many different interest rates. The Fed has direct leverage over what is known as the Federal Funds rate. The Fed Funds interest rate is directly linked to the amount of monetary reserves in the banking system. To increase the Fed Funds rate, the Fed will drain reserves from the banking system by selling some of its inventory of government debt to banks. To decrease the Fed Funds rate, the Fed will increase banking system reserves by purchasing some of the government debt present in the banks asset portfolio. By changing the Fed Funds rate we assume that all other financial interest rates change by a similar magnitude and in the same direction.

...

In a nutshell, this is how Fed policy works. The Fed is always monitoring the economy for undesirable future changes. When the policy committee of the Fed, known as the Federal Open Market Committee (FOMC) decides that thinks look rough, they will initiate or continue either an expansionary or restrictive monetary policy. With the new policy, the New York branch of the Fed rapidly begins a net purchase or sale of government debt in exchange with various banks in order to change the level of banking reserves and the Fed Funds rate. Almost immediately, financial markets adjust other interest rates based on Fed policy.

The claim is not that "the Fed can't hike because the balance sheet is big". Nor is the relationship shown by Hussman akin to the Taylor Rule, the latter being a prescription for the way things should be, while the former is merely a record of the way things have played out in reality. But as you can see from the above, it is "like they teach in school"

The claim here is rather that, given the observed relationship and understanding that the mechanism of transmission between policy and the desired FFR is via changes in the volume of the monetary base (via net exchanges of Government Treasury debt) as a ratio of GDP, speculation about the path of future rates can be inferred by forecasts of monetary base volume and GDP.

Given that nominal GDP has been consistently below Fed forecasts, and the monetary base has continued to grow we can see why the FOMC has consistently remained steady despite all the talk about (and subsequently crushed trades betting on) hiking rates.

Those forecasting rate normalisation are implicitly giving a pretty strong forecast of GDP growth or commensurately strong forecast of monetary base reduction.

At present, it does not intend to shrink the balance sheet beyond interest payments for several years.

Agreed...

 

[DeepState]

I will need that explained to me like I'm a 5 year old please.

No five year old who has only reached the stage of Piggy-Bank Monetary Economics 101 is going to get this stuff.

Fortunately you seem rather more knowledgeable or are otherwise a prodigy. Maybe both.

To me this is the most important point. In such an event, an "increase in reserves held at the Fed" (read expansion in the volume of and dilution of base money) is not so much "unspent" private sector money but actually the nasty hangover of already spent Government sector consumption. Such an action undertaken by the CB of most countries, I think we can all agree, would have an immensely inflationary impact on the local currency unit.

Depends. Take a look at Japan.

The sort of thing you are referring to happens in war time when the monetary base is sometimes heavily expanded just to pay for materials and soldiers. Your history will note that high inflation is the cost for the loser.

* So at least from the interpretation above - feel free to point out where I'm going wrong - how is QE viewed? Well, the Bernanke Fed was swapping debt for base money.

Pure QE is supposed to be separate from deficit financing. It is an effort to reduce the rates at the longer ends of the curve and stimulate credit.

Lower long term yields: Buy long term gov't bonds and other stuff. Will push rates down and thus - hopefully - stimulate investment activity.

Stimulate Credit: If the banks are impaired and their balance sheets are stock full of crap apart from liquid government securities which can't be loaned or function as currency, if the central bank buys the gov't bonds from them and issues loanable reserves, it is supposed to free up credit for lending purposes - allowing money supply (M1 and higher) to grow.

No matter what the deficit/surplus is, such actions will have such influences. In the case of the US, other things were going on which meant that the credit easing part did not function.

What you are reasonably concerned for is completely unbridled deficit spending which is financed by the CB. The concept of independent central banking is supposed to put some distance between the pressures of government and the need to maintain the faith in the currency. Additionally, I believe that most central banks doing this are compelled to purchase the bonds on the secondary market, meaning market prices.

Imagine that next, the Fed comes along and buys all of those problem bonds off the banks and pays with an expansion in the volume of the monetary base. The banks no longer have bad assets on the books, and their books are not exposed to currency inflation risk from such an action (in fact they have an advantage over most other economic actors by being the first to loan that newly printed base money). The real value of the loan to the factory owner is significantly reduced and therefore much easier to repay. Nor does the Fed need to take a factory or building onto its balance sheet The only people who get screwed in this situation are those who have chosen to defer their consumption by holding USD denominated credit money.

That's hyperinflation. Everyone's happy (except for those saving in the local currency unit). Does it make sense that the US will (has already begun) happily throw the "USD as global reference point" and the USD savers under the bus in the race to meet a giant wall of credit deflation? I personally think so.

Except that's not what they have been doing.

 

[DeepState]

http://www.colorado.edu/economics/courses/econ2020/section11/section11.html


The claim is not that "the Fed can't hike because the balance sheet is big". Nor is the relationship shown by Hussman akin to the Taylor Rule, the latter being a prescription for the way things should be, while the former is merely a record of the way things have played out in reality. But as you can see from the above, it is "like they teach in school"

The claim here is rather that, given the observed relationship and understanding that the mechanism of transmission between policy and the desired FFR is via changes in the volume of the monetary base (via net exchanges of Government Treasury debt) as a ratio of GDP, speculation about the path of future rates can be inferred by forecasts of monetary base volume and GDP.

Given that nominal GDP has been consistently below Fed forecasts, and the monetary base has continued to grow we can see why the FOMC has consistently remained steady despite all the talk about (and subsequently crushed trades betting on) hiking rates.

Those forecasting rate normalisation are implicitly giving a pretty strong forecast of GDP growth or commensurately strong forecast of monetary base reduction.

....which would all be fine if it were actually true. Except it really doesn't work at the magnitude implied. Here is a chart showing the movement is the Fed Effective rate for the last 25 years and the movement in Money Base. The Fed Rate has moved a lot in the past with barely noticeable (I guess there must be some if I was to zoom the graph in 100x or so) coincident movement in the money base.



More recently, since GFC, the money base expanded hugely. It wasn't to push the Fed rate towards zero. It was to push the longer end of the curve down and lubricate the credit mechanism. The Fed could have held the Effective Rate at close to zero without needing to expand the balance sheet to this degree. Instead, it chose to also reduce the rate at the end of the curve.

There is zero need to forecast a rate of 2% for the Fed rate in two years from now and for it to need a substantive reduction in the money base at the same time. The Fed guidance says as much. The mechanisms are in place and have been tested. What will happen to the monetary base in future will depend on a number of things, not least of which is the US Federal deficit and also foreign demand for treasury securities.

It is also interesting that a Taylor rule, which is "a prescription for the way thing should be" makes no mention of the money base.

 

[craft]

Love it.

This obsession with the volume of money is rather dated and are remnants of the pre-Volcker era monetary policy. For any given level of money supply, there are a wide range of potential levels of output. Creation of credit occurs within the limits of prudential standards and is affected by the prevailing level of interest rates as determined by the various relevant authorities which leaves a rather large amount of money supply as an endogenous issue. Sure, you can helicopter drop cash and create inflation with immediate expenditure, or you can increase the balance sheet sizes and watch them sit idle as a lowflation environment remains in place. Money volume increment via official channels by itself does not drive economic activity. The money multiplier is more an outcome, rather than a strong, direct, economic driver. Fed officials are also not paid by the word spoken.

This money volume debate has been going on for some time. A couple of my previous posts - which is still how I see it.

This is the full data set for US Money Supply to GDP.

View attachment 51740


When demand is outstripping supply, monetary policy works like pulling on a string. When supply outstrips demand it flips to be like pushing on a string.

Last time the demand/supply balance flipped in 1929 it took up to and including WW2 before the excess supply was absorbed and the liquidity had to be drained.

Money supply is a symptom not a cause of imbalances in the global economy – and that imbalance is too much supply which is directed at consumer bases without the demographics or productivity to afford it.

https://www.aussiestockforums.com/forums/showthread.php?t=26605&p=765740&viewfull=1#post765740

Currency is just a small part of the money supply.

Currency is a liability for the Fed. If they purchase 'already existing debts' then they add to liquidity by enlarging their balance sheet but not to the money supply. If they add 'new' assets to their balance sheet (ie by financing new government debt) they are adding to both liquidity and the money supply. If they printed currency (debt for them) but did not enlarge the balance sheet by recording it as a debt and the corresponding asset owed to it by whoever the money was given too (ie the government) then you would have true inflationary currency printing.

A lot of what people call running the printing press is not even adding to the money supply it is just providing liquidity (and transferring default risk to the public) The remainder of the feds "printing” is nothing more then equivalent to money creation in the private sector and it is not keeping up with private deleveraging.

The reality is almost diametrically opposed to the “printing press” myth. It was the run up to the GFC when people should have been talking about the printing press -when it was getting a real work out by the private sector and sovereigns with trades surpluses and pegged currencies.

The liquidity will only become a problem if an appetite for private borrowings returns and it is not efficiently drained at that time, until then it simply exists as excess reserves.

https://www.aussiestockforums.com/forums/showthread.php?t=24006&p=676965&viewfull=1#post676965

 

[craft]

Thought for the moment: When people talk about the option value of cash, how are you supposed to figure out what that value is? This type of assessment is needed so you can determine whether it is better just to invest in something else that you think might make you money.

Trigger for thought: Recent El Erian article in FT.

Well I've got nothing to add for this one because it is still the question that I probably feel I have the most underdeveloped answer for.

Sorry wasted post - just acknowledgement of a an intriguing thought raised.

 

[sinner]

Except that's not what they have been doing.

That section was supposed to be a hypothetical demonstration of political expediency. But I do find it strange to claim they haven't been doing this when the Fed bought literally half of all gross MBS issuance in 2014...

....which would all be fine if it were actually true. Except it really doesn't work at the magnitude implied.

It is true. Again find it a bit strange to hear a claim like this after having it explained by a former Fed economist.

Clearly, that is not a sign that the Fed is ready to initiate what is widely known as an interest rate normalization process, or, put more simply, the departure from the current 0-0.25 percent interest rate target. This key policy rate is systematically kept around the middle of that range.

When you say it doesn't work at the magnitude implied, I'll point out that there is no implication that there is a one-to-one relationship between the FFR and monetary base. Only that the monetary base is directly linked as the transmission mechanism to the FFR. The relationship as shown in the scatterplot is monetary base as a ratio of GDP. Consider as an example the case of a strongly growing GDP, the ratio of MB to GDP would be naturally falling (i.e. implied raising of rate) and so the Fed must increase the monetary base by a little (commensurate amount) just to stay steady.

But regardless, just to demonstrate the point (since the rather clear scatterplot does not seem to be sufficient).



I guess you must consider the trends and timing of peaks and troughs here to be mere coincidence?

More recently, since GFC, the money base expanded hugely. It wasn't to push the Fed rate towards zero. It was to push the longer end of the curve down and lubricate the credit mechanism. The Fed could have held the Effective Rate at close to zero without needing to expand the balance sheet to this degree. Instead, it chose to also reduce the rate at the end of the curve.

Yes.

 

[sinner]

This money volume debate has been going on for some time. A couple of my previous posts - which is still how I see it.

Find these quotes pretty difficult to understand due to the nomenclature used. Do note that I already tried to share a FOFOA link explaining my view with no response. Yes the posts are long but the discussion cannot be covered in a few short sentences.

This is the full data set for US Money Supply to GDP.

That is a chart of the St Louis Adjusted Monetary Base to GDP?

Monetary base is not the same as money supply.

https://en.wikipedia.org/wiki/Monetary_base

The monetary base should not be confused with the money supply which consists of the total currency circulating in the public plus the non-bank deposits with commercial banks.

Please clarify.

Money Supply/GDP would actually be the inverse of velocity. Most measures of Money Supply (M1, M2, M3) only include the physical currency portion of the monetary base.

Currency is just a small part of the money supply.

When you say currency here, are you referring to the monetary base? Or to the relatively small portion of base money which is made up by currency?

Currency is a liability for the Fed.

The monetary base, excluding physical currency, is a liability for the Fed to render physical currency to the holder (commercial banks).

If you're claiming physical currency is a liability of the Fed, what precisely do you think the Fed is liable to the holder for? I actually have a USD handy on my desk, what it says on there:

THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.

No mention of any liability on the part of the Fed, only a legal proclamation that you can clear debts with it.

and here

If they add 'new' assets to their balance sheet (ie by financing new government debt) they are adding to both liquidity and the money supply.

Please clarify what you're referring to here by "liquidity" and "money supply".

 

[DeepState]

1. That section was supposed to be a hypothetical demonstration of political expediency. But I do find it strange to claim they haven't been doing this when the Fed bought literally half of all gross MBS issuance in 2014...



2. It is true. Again find it a bit strange to hear a claim like this after having it explained by a former Fed economist.



3. When you say it doesn't work at the magnitude implied, I'll point out that there is no implication that there is a one-to-one relationship between the FFR and monetary base. Only that the monetary base is directly linked as the transmission mechanism to the FFR. The relationship as shown in the scatterplot is monetary base as a ratio of GDP. Consider as an example the case of a strongly growing GDP, the ratio of MB to GDP would be naturally falling (i.e. implied raising of rate) and so the Fed must increase the monetary base by a little (commensurate amount) just to stay steady.

4. But regardless, just to demonstrate the point (since the rather clear scatterplot does not seem to be sufficient).

View attachment 64999

I guess you must consider the trends and timing of peaks and troughs here to be mere coincidence?



Yes.

1. Your comments related to taking junk off the balance sheets of banks and socialising losses. The Fed does not buy stuff of that nature within its programs. RMBS securities were purchased. They were the higher grade stuff which were guaranteed by government-sponsored entities. No losses were taken. The same could not be said for Lehman or Bank of America.

2. “Those forecasting rate normalisation are implicitly giving a pretty strong forecast of GDP growth or commensurately strong forecast of monetary base reduction”. Perhaps. Could be that this function is that Fed Rate = A + B x (MB/GDP+C)^(-1) + Error, where B is rather close to zero for the horizon of the next couple of years. In this sense, it could be true. But I’m stretching here to find some common ground as you seem to imply a rather higher R-squared.

My point is that these two things are not necessarily linked tightly enough to care too much about this when it comes to the lift-off question. You seem to demand respect of this relationship as if it were physics. A very viable path for the Fed is to raise official rates to 2% and only then ceasing reinvestment...which will see the balance sheet shrink more materially from that point only. This is a violation of the Hussman relationship and any implication that a prediction of a Fed Rate rise necessarily comes with some major move in the MB/GDP in order to be consistent. If it were to occur, this would lie outside of the relationship implied by quite some margin and would seemingly defy what you think should happen. The Hussman relationship and use is basically saying that the monetary policy balance sheet expansion entry and exit of the Great Depression era, and the entry pattern for the most recent GFC episode for the latest expansion has to be the path laid for exit (Fed rate vs MB/GDP). No, it does not.

So, as if to prove the point, the Fed members are forecasting that they will raise rates to around 2% by around Q1 2017 and for there not to be a reduction in the balance sheet size anywhere near the magnitude this seemingly compulsory repeat of history, forwards and backwards, seems to call for. The Fed has said, after lift-off (as in, not necessarily the very next second) they will consider whether to cease or reduce Treasury reinvestment - almost half of which will take more than five years to roll off if commenced immediately. They expect to hang on to all their MBS - the great bulk of it is over 10 year maturity. This says nothing of the usual liquidity operations going on in the background. Their nominal GDP forecasts aren’t astronomical either. Somewhat below the post 1971 non-recession average.

So the very people who set these rates and determine the balance sheet size are violating this relationship which you seem to think is inviolable and which Hussman places weight on. The Fed thinks rates will get to 2% for almost no change to the MB/GDP ratio. Certainly any change would be far less than implied by this discourse.

The Fed economist can say what he wants about a minor variation in the balance sheet and that the signal from this implies no rate rise coming. Apparently the Fed voting members think otherwise when, for instance, they state it in public that rates should rise really soon. Given Fed communication is vital for setting expectations, I would rate their jawboning over examination of obtuse stats by a technocrat trying to infer what the Fed is really thinking when they are saying something else and taking what they say very seriously.

3. Yep, no probs.


4. The new chart adds a time dimension, which is helpful given that all time periods in monetary history are hardly equally relevant for today’s situation. Except that this chart does not go back as far as Hussman’s chart. This is relevant because most of the dots on Hussman's right hand side come from the Great Depression era. Those relationships have occurred, though there is a bit more going on that a two-axis diagram might suggest#. I would add that this relationship in Hussman’s chart is technically “spurious” if being regarded as a valid regression as well – which is clearly the implication. But someone else can jump in to discuss this. It’s not good science.

In any case, the implications drawn from them are the issue to hand.

You clearly assert that a move on the Fed rate to 2%, say, must be accompanied by some dramatic reduction in the Monetary Base (and, thus, the MB/GDP ratio…because nominal GDP is not going to do it for you in the next 18 months).

The Fed members do not agree. I do not agree either.

Hussman and Sinner think it must be so. That’s fine.

# For example, what changed in terms of monetary policy objectives and use of tools around the base of the MB/GDP time series? It’s rather important to allow for major regime shifts in non-stationary data to avoid drawing incorrect assertions assuming they are stationary.

 

[DeepState]

Been a rough year for global macro hedge funds.

BlackRock closed the Global Ascent product yesterday. This fund was in the walk-on-water category in prior years. It joins closures by Fortress, Bain, Renaissance Capital and funds backed by fmr Tiger Hedge Fund founder Julian Robertson. Huge names.

 

[DeepState]

CALPERS got a bargain for its billions:

 

[DeepState]

1 March 2015

Quick Take-outs:

+ Downgrade based on lower than forecast Assisted Repro cycles (ARS). Has every reason to rebound to historical norms unless infertile women have stopped wanting babies and/or men have stopped wanting to try put babies in them. I have no evidence of either.

10 March 2015

ART is cyclical. It is a 'luxury', unlike pharma or getting so sick you end up in hospital. They are price sensitive and appear impacted by macro conditions. For DCF, some allowance for this is probably sensible.

25 Nov 2015

Adding to the list of curious stats.... I understand that IVF treatment cycles are picking up. Now that's a sign of confidence in the economy more broadly than just the rarified air of ill-gotten gains.

Today: Yeah baby

18 Feb 2015

Wife: "yeah, but it can go down as well".

Duly noted sweetheart.

 

[skc]

Today: Yeah baby

That's what they say when couples successfully conceive with MVF.

It feels like a no brainer with the industry data at hand... I traded some VRT on the back of the news as well and worked a treat - even though VRT didn't nearly get enough cheering on its own AGM.

 

[VSntchr]

That's what they say when couples successfully conceive with MVF.

It feels like a no brainer with the industry data at hand... I traded some VRT on the back of the news as well and worked a treat - even though VRT didn't nearly get enough cheering on its own AGM.

So did I, although I was a bit worried with it given that MVF gave a fair bit of weight to the statements around gaining market share, clearly at a loss to VRT. This had me hovering closely and in the end I didn't really maximise the trade.

Although perhaps an expanding industry pie obviously means share isn't as critical is in something like TV ratings.