Jump to content
House Price Crash Forum

Recommended Posts

  • Replies 2.7k
  • Created
  • Last Reply

Top Posters In This Topic

https://wolfstreet.com/2018/01/29/us-treasury-yield-curve-steepening-or-flattening/

 

' The two-year yield jumped 5 basis points to 2.13% on Friday, the highest since September 2008, continuing the spike that started on September 8, 2017, shortly before the Fed announced the QE Unwind start-date:

image.png.7f2eb691fb74c1f96333013e0b58d95e.png

The whole mid-range of the yield curve has moved up. The five-year yield jumped 6 basis points to 2.47% on Friday. The seven-year yield rose 5 basis points to 2.60%, up from 2.33% at the end of December.

Link to post
Share on other sites

http://www.icis.com/blogs/chemicals-and-the-economy/2018/01/us-treasury-benchmark-yield-heads-4-30-year-downtrend-ends/

'The US 10-year Treasury bond is the benchmark for global interest rates and stock markets.  And for the past 30 years it has been heading steadily downwards as the chart shows:

  • US inflation rates finally peaked at 13.6% in 1980 (having been just 1.3% in 1960) as the BabyBoomers began to move en masse into the Wealth Creator 25 – 54 age group
  • Instead of simply boosting demand, as during the 1960s-1970s, they began to work and create new supply
  • This meant supply/demand began to rebalance and interest rates then peaked at 16% in 1981

By 1983, the average Western Boomer (born between 1946-1970) had arrived in the Wealth Creator cohort, which dominates consumer spending, and the economy really began to hum.  There was a final inflation scare in 1984, when US inflation suddenly jumped from 3% to 5%, but after that the trend was downwards all the way.

The Boomers were the largest and wealthiest generation that the world had ever seen.  Their move to become Wealth Creators completely transformed the inflation outlook, as more and more Boomers joined the workforce.  And they transformed the economy by moving it into the NICE era of Non-Inflationary Constant Expansion.

Central bankers took credit for this move, claiming it was due to monetary policy.  But in reality, people are the key element in an economy, not monetary policy.  You can’t have an economy without people.  And sadly, the idea that the US Fed Chairman Alan Greenspan had somehow become a Maestro, blinded everyone to 2 key issues for the future:

  • Life expectancy was rising rapidly, meaning that the Boomers would not normally die just after retirement.  Instead, they would likely live for another 15 – 20 years after reaching age 65
  • From 1970, fertility rates had fallen below replacement level (2.1 babies/woman) across the Western world

This combination of a rise in life expectancy and a collapse in fertility rates was creating a timebomb for the economy.

THE RISE IN LIFE EXPECTANCY AND COLLAPSE OF FERTILITY RATES CREATED AN ECONOMIC TIMEBOMBUS-spend-Jan18.png

Western economies are based on consumer spending.  And spending declines once people reach the age of 55 – they already own most of what they need, and their incomes decline as they approach retirement, as the second chart shows:

  • There were 65m US Wealth Creator households in 2000, who spent an average of $62k ($2017)
  • There were only 36m in the 55+ cohort, who spent just $45k each
  • In 2017, there were 66m Wealth Creators (almost the same as in 2000) who spent $64k each
  • But there were now 56m in the 55+ cohort, who spent just $51k each

The rise in 55+ spending was also only temporary, as large numbers of Boomers have just reached 55+ and have not yet retired.  Spending by those aged 74+ was down by nearly 50% versus the peak spending 45-54 age group.

BELIEF IN MONETARISM LED TO THE DOTCOM AND SUBPRIME DISASTERS 
The dot-com crash in 2000 should have been a wake-up call for the failure of monetarism.  It also, after all, marked the moment when the oldest Boomers began to join the 55+ cohort.  But instead, policymakers thought monetarism could solve “the problem” and cut interest rates to boost the housing market – causing the subprime crash in 2008.

One might have thought – as we wrote in Boom, Gloom and the New Normal in 2011 – that this disaster would have destroyed the monetarism myth.  But no.  Abandoning monetarism would have led to a difficult conversation with voters about the need for everyone to retrain in their 50s, and prepare to take on new, and less physically demanding, roles.

Instead, policymakers tried to replace lost BabyBoomer demand by printing vast amounts of free money via the Quantitative Easing and Zero Interest Rate Policies.  Their aim was to avoid deflation, as inflation had fallen to just 0.6% in 2010 – although why this was a “bad thing” was never explained.  But in reality, they were running uphill, and the pace of the climb was becoming more vertical, as the average Western Boomer joined the 55+ cohort in 2013.

Of course, flooding the market with cheap money boosted asset prices, as they intended.  Stock markets and house prices soared for a second time. But it also created a major new risk.  More and more investors began to panic as they hunted through the markets, trying to obtain a decent “return on capital”.  They assumed central banks would never let markets fall, and so gave up worrying about the risk of making a dud investment.

INTEREST RATES ARE NOW HEADED HIGHER AS PEOPLE WORRY ABOUT RETURN OF CAPITAL
The end of the Bitcoin bubble has highlighted the fact that that risk and reward are normally related.  Most investments that offer potentially high rewards are also high risk – a lot has to go right, for them to make the possible return.  This process of price discovery – the balance of risk and reward – is the key role of markets.

Left to themselves, markets will price risk properly.  But they have been swamped for the past decade by central bank liquidity and their crucial role has been temporarily destroyed.  Now, the fact that the US 10-year bond has broken out of its 30-year downtrend tells us that markets they are finally starting to regain their role.

How high will interest rates now go?  We cannot yet know, and we can also be sure they will not move in a straight line as central banks will continue to intervene.  But as more and more investments, like Bitcoin, prove to be duds, so more and more investors will start to worry about return of capital when they invest.

4% therefore looks like the next level for rates, as we are now trading within the blue bars on the chart.  It may not take very long for this level to be reached, given the fact that the world now has a record $233tn of debt – 3x the size of the global economy.  After that, we shall have to wait and see.'

Link to post
Share on other sites

Hes got a few of his numbers wrong.

Baby boomer cohort is 1945-65, with the bulk in the first 10 years.

The 'boomer's earn money and spend' ended 20 years ago - a lot were retiring in their 50s. One surprising thing i nthe states is the number of people quitting work really early. Some were spending their earnings, some were going for the disability. Previous generation would work til 70s.

 

Link to post
Share on other sites
9 hours ago, Sancho Panza said:

Left to themselves, markets will price risk properly

This is manifestly untrue. Markets were left to themselves prior to 2008 as never before. They conspicuously failed to price risk properly. Market entropy increased without limit until the point of structural failure.

tumblr_m678xczbji1qedb29o1_r1_500.gif

Link to post
Share on other sites
4 hours ago, zugzwang said:

This is manifestly untrue. Markets were left to themselves prior to 2008 as never before. They conspicuously failed to price risk properly. Market entropy increased without limit until the point of structural failure.

tumblr_m678xczbji1qedb29o1_r1_500.gif

They weren't left to themselves before 2008.There was a completely false sense of security created by the appearance of regulation where actually very little was being done.

Link to post
Share on other sites

Shaun Richards today

https://notayesmanseconomics.wordpress.com/2018/02/02/what-are-the-consequences-of-rising-bond-yields/

'

'The Bank of Japan took on the market and won—for now.

As Japanese 10-year bond yields threatened to break through the 0.1% mark early Friday, the bank threw down the gantlet and offered to buy out every player in the market. '

 

If we step back for a moment it is hard not to have a wry smile at the Bank of Japan defending a yield on a mere 0.1%!  Not much of a yield or a bear market is it? and offered to buy out every player in the market.

Also I guess if you own 40% or so of a market as the Bank of Japan does you too would be touchy and nervous about any rise in yield and fall in prices

The UK

This is an intriguing one as you see the ten-year Gilt yield has risen to 1.58% this morning  Here is how Bloomberg reflects on this.

Ten-year gilt yields climbed five basis points to 1.58 percent as of 9:29 a.m. London time, after touching 1.59 percent, their highest level since May 2016. The yield has surged about 40 basis points this year.

This is considered a bear market which as someone who has definitely seen such moves in a day and maybe when we were ejected from the ERM in 1992 maybe an hour is hard to take. So let us settle on a QE era bear market. Also the QE link comes back in as the high for UK Gilts was driven by the panic buys of late summer 2016 when the Bank of England dove into the market like a kamikaze pushing the yield down to 0.5%. From time to time apologists for such moves claim that QE does not make losses but if you pay 120 for something and get back 100 at maturity what is that please?

Comment

There is a lot to consider here and let us start with the economics. A rise in bond yields tightens monetary conditions and in that sense is a logical response to the better economic environment. However it is awkward for central banks who have paid more than the 100 they will get from their treasury on maturity as politicians have got used to spending the explicit and implicit profits. If they sell their holdings then they will exacerbate the price falls and weaken their remaining stock.

Moving to the foreign exchanges we have seen something rather odd. If you buy the US Dollar you get 2.8% right now if you put the money in a ten-year US Treasury Note whereas if you buy the Japanese Yen you only get 0.9%. So the US Dollar is rising right? Eh no, as I have covered many times. Of course some may be buying now thinking that an US Dollar in the 109s is attractive combined with picking up a 2.7% relative yield. Similar arguments can be made for the Euro and UK Pound £ albeit with smaller yield differentials.

 

Link to post
Share on other sites
On 2/2/2018 at 9:26 AM, zugzwang said:

This is manifestly untrue. Markets were left to themselves prior to 2008 as never before. They conspicuously failed to price risk properly. Market entropy increased without limit until the point of structural failure.

tumblr_m678xczbji1qedb29o1_r1_500.gif

Markets are a voting system not a proving system.

 

Link to post
Share on other sites
On 1/30/2018 at 11:58 AM, spyguy said:

10Y gilts @ 1.45%

10 basis points up on 1 week.

~30 basis points on a month.

Thank fux Gidiot did 'the right thing a removed the UK large structural deficit ....

Less than 7 days later an 10Y Gilt @ 1.58%

Link to post
Share on other sites
8 minutes ago, frankvw said:

I was surprised the thread was quiet today. Quite a busy market this morning with expectations the BoE will be forced into earlier rises, possibly starting March or April, possibly more than the two 0.5% earlier signaled.

Alternatively, the UK economy is simply too weak to support another rate hike this year... or ever?

https://uk.news.yahoo.com/dominant-sector-british-economy-slowing-093437322.html

Quote

"The pace of UK economic growth slowed sharply at the start of the year as January saw a triplewhammy of weaker PMI surveys," Williamson added.

As Williamson notes, the sector's slowdown completes a trilogy of dreadful PMI data over the last week, which suggests that the health of the British economy is not particularly rosy at the start of 2018.

First, last Thursday, IHS Markit's manufacturing PMI was below expectations, with Rob Dobson, a director at the data firm saying that "the UK manufacturing sector reported an unwelcome combination of slower growth and rising prices at the start of 2018."

Then, on Friday, a PMI survey showed the construction sector "teetering on the edge of contraction," and possibly heading towards recession in 2018.

 

Link to post
Share on other sites
1 hour ago, zugzwang said:

Alternatively, the UK economy is simply too weak to support another rate hike this year... or ever?

https://uk.news.yahoo.com/dominant-sector-british-economy-slowing-093437322.html

 

Can't see any BOE rate rises this year while the economy remains relatively weak to prior years. Brexit uncertainty will continue to weigh and it doesn't look like there are any wage led inflationary pressures this year to make them move.

Market rates like Gilts on the other hand will continue to key off global rates, namely US treasuries. I expect 10yr UST to hit 3%, not sure if we go much beyond that unless we see core CPI begin to rise. Wages jumped from 2.6 to 2.9% annual gain last payroll number release but this figure is volatile on month on month basis. Would like to see a few more months, if US wage inflation breaches 3.5% this year then 4% on 10yr UST is a realistic possibility this year.

We're still a long way away from more 'normal' market rates of US 10ys @ 5to 6 % just to put where we are in perspective. 

Link to post
Share on other sites
5 hours ago, moneyscam said:

Can't see any BOE rate rises this year while the economy remains relatively weak to prior years. Brexit uncertainty will continue to weigh and it doesn't look like there are any wage led inflationary pressures this year to make them move.

Market rates like Gilts on the other hand will continue to key off global rates, namely US treasuries. I expect 10yr UST to hit 3%, not sure if we go much beyond that unless we see core CPI begin to rise. Wages jumped from 2.6 to 2.9% annual gain last payroll number release but this figure is volatile on month on month basis. Would like to see a few more months, if US wage inflation breaches 3.5% this year then 4% on 10yr UST is a realistic possibility this year.

We're still a long way away from more 'normal' market rates of US 10ys @ 5to 6 % just to put where we are in perspective. 

 

Ten years to fix it, and guess what? It's still broke!

keen-graph-1024x825.png

Edited by zugzwang
Link to post
Share on other sites
22 hours ago, zugzwang said:

Alternatively, the UK economy is simply too weak to support another rate hike this year... or ever?

https://uk.news.yahoo.com/dominant-sector-british-economy-slowing-093437322.html

 

Ever remember the stagflation of the 70's? When the economy was tanking and inflation and interest rates still surged? Or the big bust in the late 80's/early 90's, when the economy was on the floor and rates were quadrupled to fight currency flight? If things do turn, it doesn't matter what the economy does or what the government or BoE would prefer, they are dwarfed by the markets when sentiment turns. There is definitely a lot of commentary now, after yesterday, that markets are expecting an inflation uptick in the US now in a stagflation cycle. The UK has always been dragged along by the US economy, they are our largest trading partner and the City/Sterling has always been intimately linked with Wall Street. But, we've been here before a few times over the past decade. Interesting to keep more than an eye on at the moment.

Link to post
Share on other sites
50 minutes ago, frankvw said:

Ever remember the stagflation of the 70's? When the economy was tanking and inflation and interest rates still surged? Or the big bust in the late 80's/early 90's, when the economy was on the floor and rates were quadrupled to fight currency flight? If things do turn, it doesn't matter what the economy does or what the government or BoE would prefer, they are dwarfed by the markets when sentiment turns. There is definitely a lot of commentary now, after yesterday, that markets are expecting an inflation uptick in the US now in a stagflation cycle. The UK has always been dragged along by the US economy, they are our largest trading partner and the City/Sterling has always been intimately linked with Wall Street. But, we've been here before a few times over the past decade. Interesting to keep more than an eye on at the moment.

I certainly think the 1970s are a good representation of where we are at present. i.e. the point at which Keynesian prescriptions for recovery fail. The stagflation we've experienced in the last five years is really the visible manifestation of an underlying economic disorder and fragility not strength. My own belief is that the world's economies (including the US) are far weaker than the headline figures suggest because the fundamental issues from 2008 involving the exponential build up of private sector debt still haven't been addressed let alone resolved.

Link to post
Share on other sites

The last decade has been interesting to watch since the central banks have coordinated policy and colluded with each other worldwide to not provide  capital much alternatives, apart from fluctuations in gold, crypto-currencies and assets (particularly property). If one of America or China breaks out of line too far with the others (maybe the EU but less so), then things do get interesting. The Chinese mis-reporting and debt situations are gaining increasing scrutiny but the US is looking volatile now. I have personally been expecting a sterling currency run or social disorder to kick in at some point in the next couple of years here in the UK, simply due to debt levels, but if the US carries on in the same vein for the rest of the year, then maybe  it goes before the UK and then that becomes the black swan to expose the incredible inbalances in the UK economy. The FED doesn't have much ammo left and if it loses control now it will be interesting to see the FED's response this time. Guess we'll see over the next month whether 10yrs make a meaningful breakout from this point.

Link to post
Share on other sites

The headline inflation rates are bullcrap anyway. Ignoring the removal of housing costs over the past couple of decades (to allow asset speculation and debt expansion), my grocery bills over the past year have ranged from 10-50% markup on everything. I was just checking my receipts recently. I buy a similar shop each week and compare a number of receipts from previous years. I mostly shop at Sainsbury's and Waitrose, some stuff at Aldi. There isn't one item equal or less than last year, about a quarter of the lower priced items such as bottled water, soups, juice, have gone up 50%! Even my favourite coffee machine capsules, that have only risen 10%, have cut the pack from 20 items to 15. These kind of food stats are not shown anywhere near the same in official figures. Factor in fuel and the imminent increases in council taxes in the pipleline, I don't think the government and BoE will be able to make folk swallow this bullcrap for much longer.

 

Link to post
Share on other sites

Even if you take the official indices as accurate, a quick check of the historical RPI vs say, 10 years ago shows RPI in 2017 at 278.1 vs  210.9 in 2007. 

http://www.swanlowpark.co.uk/retail-price-index.jsp

That means that general prices are now about 1/3 higher than they were in the year of the financial crisis, even taking the official figures.  I w

Have salaries gone up by 1/3-  I think not!

 

Link to post
Share on other sites
On 1/30/2018 at 11:58 AM, spyguy said:

10Y gilts @ 1.45%

10 basis points up on 1 week.

~30 basis points on a month.

Thank fux Gidiot did 'the right thing a removed the UK large structural deficit ....

1 week later ....

10Y Gilt @ 1.64%!!!!!!

20 basis points in a week FFS!

Link to post
Share on other sites
1 hour ago, spyguy said:

Fux me 10Y Gilt -  1.69%

Seriously. Is there no one in the consumer financial press looking at the yields?

And is there noone working in the public sector putting the 'rising yield + large UKGOV debt' together?

Maybe 25bp higher than a year ago, same as 2 years ago, significantly lower than yields 3 and 4 years ago.

Link to post
Share on other sites
39 minutes ago, guest_northshore said:

Maybe 25bp higher than a year ago, same as 2 years ago, significantly lower than yields 3 and 4 years ago.

Yes + No.

Gilts have been actively messed with by the BoE for the last 5+ years, yield beaten down, market pricing beaten out.

https://www.bloomberg.com/quote/GUKG10:IND

The BoE has steeped aside or the market no longer believes its spin.

Link to post
Share on other sites
3 hours ago, spyguy said:

Fux me 10Y Gilt -  1.69%

Seriously. Is there no one in the consumer financial press looking at the yields?

And is there noone working in the public sector putting the 'rising yield + large UKGOV debt' together?

 

There's a lot of equality, diversity and inclusion in the civil service these days.

skynews-diane-abbott-shadow-home-secreta

Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    No registered users viewing this page.

  • 441 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.