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ParticleMan

Great Expectations

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So here we are, it's near as dammit October, and the sky hasn't fallen in... yet.

Significantly, we have the G20 on, and let's see what's topical...

http://www.bloomberg.com/apps/news?pid=new...id=aZvtXjtnzyWg

The message from Warsh, 39, one of Chairman Ben S. Bernanke’s top advisers during the financial crisis...

:

“Nonetheless, I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities.â€

:

The Fed has already begun cutting back some of its emergency aid to financial firms as part of its so-called exit strategy from a $1 trillion credit expansion.

:

The central bank said yesterday it will further shrink auctions of cash loans to banks and Treasury securities to bond dealers, reducing the combined initiatives to $100 billion by January from $450 billion. The Fed cited “continued improvements†in financial markets.

... which contrasts rather sharply with the language used at the height of the crisis...

http://www.forbes.com/2008/11/15/financial...laration_2.html

In consultation with other economies and existing bodies, drawing upon the recommendations of such eminent independent experts as they may appoint, we request our Finance Ministers to formulate additional recommendations, including in the following specific areas:

* Mitigating against pro-cyclicality in regulatory policy

... where the fear was that policy would reinforce the recessionary half of the cycle as it had reinforced the growth half.

Now at the risk of shameless self-aggrandisement, we need to appreciate what it is precisely that makes the US special :-

No other nation on this planet is capable of altering its GDP growth rate as quickly as the US as no other nation on this planet sacrifices both short- and long-term human welfare (note, not specifically that of its own citizens) at the alter of continuous productivity improvement to the degree America does (the exporting nations sacrifice it at the alter of continuous capital improvement instead which is what has created the outcome described above - which we are now committed to).

Now. As we all know, the US bailed out her banking sector by blowing out her fiscal position; and entirely predictably...

2a-euro-us-5y-Large.gif

... her currency (which had actually begun to strengthen vis-a-vis asset prices by then in the face of the deflationary bust before it) followed suit.

This reassured the asset markets enough...

trek2.gif

... to start one of the largest (if not fastest) bull rallies seen in a generation.

So why, high on the cheap smack of recoverehed asset prices...

pail43.jpg

and freshly minted happy money would the Fed choose to change direction?

I've been thinking about this some and my best guess is that they're seeing signals of increased savings - money, I surmise, is being pulled from circulation and "invested" in inflationary hedges (in the sense that real yields are essentially nil and that the activity is more akin to saving than investing).

Paradoxically, QE is causing monetary velocities to fall.

toyotadog.jpg

And much like a storekeeper with plunging trade volumes, I think the Fed's next move will be to decrease the float.

Prepare for liquidation?

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“Nonetheless, I would hazard the view that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities.â€

You've got to love how they speak, it's like English but in a foreign language.

This does seem to suggest that policy will change quickly and without warning. Interest rates to go up?

http://www.plainenglish.co.uk/

Have these people ever tackled the Fed?

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And much like a storekeeper with plunging trade volumes, I think the Fed's next move will be to decrease the float.

Prepare for liquidation?

You're being a bit cryptic here. Are you suggesting that the Fed are going to decrease their money creation activities in order to provoke deflation fears, therefore leading to a sell-off of public stock, with a (theoretical) resultant increase in money velocity via increased consumer spending?

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You're being a bit cryptic here. Are you suggesting that the Fed are going to decrease their money creation activities in order to provoke deflation fears, therefore leading to a sell-off of public stock, with a (theoretical) resultant increase in money velocity via increased consumer spending?

He's always cryptic, it's why we love him.

Yes, the fed is about to lean on gold very heaily indeed in the hope of making their otherwise worthless cack attractive. They can't keep doing this so the real question is -

When does the fed fail?

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Paradoxically, QE is causing monetary velocities to fall.

[

Is it paradoxical?

If you're, for instance, a pensioner (or similar) who has just seen your income on savings drop by around 80% the last thing you do is rush out and spend. You slash your spending to the bone and hoard every penny you can. That's entirely rational.

QE and slashing yields has had a predictable outcome on anyone who isn't in a cushy, well paid government or central bank job.

If they want velocity to increase they need to get yields up.

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So here we are, it's near as dammit October, and the sky hasn't fallen in... yet.

Significantly, we have the G20 on, and let's see what's topical...

SNIP

very interesting analysis.. thanks :)

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