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Bernanke's Worst Nightmare

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http://www.minyanville.com/business-news/the-economy/articles/Bernanke2527s-Worst-Nightmare-Rising-Real-Interest/5/28/2013/id/50031?page=1

What seems to be lost in the monetary debate is that this persistent drop in inflation defies the primary purpose of quantitative easing, which is designed to lower real interest rates. In fact, with nominal yields rising in the face of falling inflation and thus raising real interest rates, the US economy is now closer to a deflationary death spiral than at any time during the Fed’s unprecedented policy designed to prevent just such an outcome.

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It's not his nightmare it's his dream come true. He now has the office to go and turbo charge the presses using the argument that it doesn't cause inflation . The inflationary fears would have been his biggest stumbling block in terms of opposition to printing away the debt .

I think we will see the the dj at 20000 before long ( IMHO )

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Fiscal tightening meets monetary tightening.

Why are people buying gold again?

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What seems to be lost in the monetary debate is that this persistent drop in inflation defies the primary purpose of quantitative easing, which is designed to lower real interest rates. In fact, with nominal yields rising in the face of falling inflation and thus raising real interest rates, the US economy is now closer to a deflationary death spiral than at any time during the Fed’s unprecedented policy designed to prevent just such an outcome.
Though he wouldn’t admit it, Bernanke met his match in 2011. The consumer balked at attempts to stimulate aggregate demand via inflationary policy of negative real interest rates, and ever since, has been raising real interest rates by reducing inflation through lower aggregate demand. This is perhaps the most unappreciated yet significant market development since the financial crisis.

Rising real interest rates is Bernanke’s worst nightmare. Everything he has worked for in academia and implemented in monetary practice is imploding before his very eyes. Contrary to his assertion in 2002, aggregate demand in the real economy has in fact met the limit of monetary policy, rendering QE’s impact ineffective and obsolete.

Thanks crashing. I've been trying to process all the implications of the observations in that link you posted a week ago. It all looks finely balanced for the moment, trying to hold off deflation.

The sixth straight month of gains in the so-called real consumer spending reflected a 0.3 percent decline in a price index for consumer outlays. It was the second straight monthly decline in the index and the largest drop since July last year.

http://www.reuters.com/article/2013/05/31/us-usa-economy-idUSBRE94T0HI20130531

Real US household incomes are taking a bit of a beating too, and would be more if it weren't for dividends from the stock market.

http://articles.chicagotribune.com/2013-03-01/business/chi-us-incomes-see-largest-drop-in-20-years-20130301_1_percentage-of-disposable-income-tax-hikes-inflation-and-taxes

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... because of it's (different) correlation when compared to my other assets. Namely Equities (UK, US, EU, Japan, Aus, EM's), Property and Index Linked Gilts.

'different' as in all the other asset classes are rising and gold has been falling for 2 years due to rising real rates you mean?

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Why are people buying gold again?

You could equally ask .Why are people selling gold again?

Because some one must be selling for people to buy

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' the US economy is now closer to a deflationary death spiral blah blah blah'

If the nutters at central banks had not created the bubble we would not have been facing this calamity in the first place. But they knew better. Then when it looked like there was going to be a correction, which would have been over years ago, they stepped in with the big ideas. Now we've had the best part of a decade of depression and misery they start telling us we a close to a deflationary death spiral. Well boo hoo.

I'd take a deflationary death spiral over Bernanke and King's management, if you can call creating a disaster and turning it into a catastrophe management, any day of the week.

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http://www.bloomberg.com/news/2013-06-06/dimon-predicts-volatility-as-global-liquidity-returns-to-normal.html

Global markets will face increased volatility as central banks bring interest rates back to normal levels, JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said.

“We should all hope for a normalization of interest rates -- that’s a good thing,” Dimon said today during a panel discussion at the Fortune Global Forum in Chengdu, China. “As we go back to normal, it's going to be scary, and it's going to be kind of volatile.”

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June 3, 2013: 5:00 AM ET

Most of the big banks say they will make money from rising rates.

"Something like 20 of the 25 biggest banks in the nation will tell you they will make money when interest rates rise," says Glenn Schorr, a top bank analyst at Nomura. "But when you listen to regulators you still hear fear."

For the time being, bank investors seem to be siding with the CEOs. Shares of the big four banks, Bank of America (BAC), Citigroup ©, JPMorgan Chase (JPM), and Wells Fargo (WFC), have all been rising lately despite the recent rise in rates.

The problem is that's not the way things have played out before. Rising interest rates, particularly sharp increases, have generally been bad news for banks' bottom lines. That's what happened in 1994 when the rates jumped 3%.

But bank analysts say it could be different this time around. We are starting at a much lower point on interest rates than we did nearly two decades ago. Recently, the extreme low interest rates have been a negative for banks, pushing down their net interest margins, which is the difference between what a bank pays for funding and what it gets back in interest when it makes a loan. The analysts say rising rates will significantly improve the banks' lending profits, especially since the big banks have vastly more deposits, on which the banks pay close to nothing to savers, than they did two decades ago.

more at http://finance.fortune.cnn.com/2013/06/03/jpmorgan-dimon-bond-bet/

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Alan Greenspan, former chairman of the Federal Reserve has different idea.

Greenspan said on CNBC: the central bank needs to begin cutting back on its unprecedented asset purchases and move toward stopping them altogether. “The sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve, which everyone agrees is excessive, the better.” “The issue is not only a question of when we taper down, but when do we turn? And I think that the markets may not give us all of the leeway we would like to do that.”

Asked if he thinks the economy is strong enough to drop the policy, known as quantitative easing, to zero, Greenspan said “we’ve got to do it even if we don’t think it’s strong enough.” He said the central bank will have to proceed cautiously. “If we do move too rapidly with respect to Fed action, it will really shock the market,” Greenspan said. “Gradual is adequate, but we’ve got to get moving.” Link

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You could equally ask .Why are people selling gold again?

Because some one must be selling for people to buy

What about if you buy into the stock market, there is also somebody on the selling side.

On the Crimex there has been selling due to a number factors, people taking physical, due to increased concerns of counter party risks since Cyprus, and the bullion banks selling to meet physical demand in the East.

Switzerland refines three-quarters of the world's gold and there are 5 week backlogs in production, even though they have increased their refining.

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So far 23 Central Banks have been cuting rates in 2013. CBs in Albania, Angola, Australia, Azerbaijan, Belarus, Botswana, Columbia, Denmark, Eurozone, Georgia, Hungary, India, Israel, Kenya, Korea, Mexico, Moldova, Poland, Serbia, Sri Lanka, Thailand, Turkey and Uganda have cut.

Rates have risen in 4 countries, Brazil, Egypt, Ghana, Tunisia,

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Though he wouldn't admit it, Bernanke met his match in 2011. The consumer balked at attempts to stimulate aggregate demand via inflationary policy of negative real interest rates, and ever since, has been raising real interest rates by reducing inflation through lower aggregate demand. This is perhaps the most unappreciated yet significant market development since the financial crisis.

Rising real interest rates is Bernanke's worst nightmare. Everything he has worked for in academia and implemented in monetary practice is imploding before his very eyes. Contrary to his assertion in 2002, aggregate demand in the real economy has in fact met the limit of monetary policy, rendering QE's impact ineffective and obsolete.

Above from crashing's original link story. 'Aggregate demand has met the limit of monetary policy.' I can believe in that. The recoil from a taper could be quite something, and perhaps UK not able to get away with more QE.

Nothing new that's solid to report on really, but I like this thread as it touches on a few things that may be triggers for HPC.

30 August 2013

US consumers spend less than forecast in July

_69567455_177977272.jpg

US consumers barely increased their spending in July, as workers saw their salaries shrink because of government spending cuts.

Spending increased by 0.1%, according to the US Commerce Department.

Big-ticket items, such as cars and fridges, saw the biggest declines.

Consumption makes up 70% of the economy, and the run-up to the new school year, starting in July, is typically the second-biggest shopping period of the year.

Large retailers such as Wal-Mart, Macy's and Kohl's have warned in recent earnings reports of sluggish consumer demand, as US job growth continues to lag and wages stagnate.

Further uncertainty over the timeline of the US Federal Reserve's decision to slow down its policy of propping up the US economy by keeping rates low has led to stock market volatility and increasing mortgage rates.

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Above from crashing's original link story. 'Aggregate demand has met the limit of monetary policy.' I can believe in that. The recoil from a taper could be quite something, and perhaps UK not able to get away with more QE.

Nothing new that's solid to report on really, but I like this thread as it touches on a few things that may be triggers for HPC.

Tapering is much more a question of politics now than economics. The problem is that the electorate can easily identify tapering with the following economic hardship. The politicians will find it difficult to shift the blame somewhere else (Dave will probably try the "it started in America" routine).

Some might argue that the US is best placed to take hard economic decisions now, in the 2nd presidential term.

It's a simple question of whether they decide to continue and end up blowing up the problem even more, causing more chaos when it eventually unwinds, or want to take the pain now.

For me it is very difficult to call what they actually will do. My best guess would be some sort of "Taper Lite". "Taper lite" in itself though may be enough to cause significant colltoral damage to the UK, which I guess the US will not give a stuff about.

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Tapering is much more a question of politics now than economics. The problem is that the electorate can easily identify tapering with the following economic hardship. The politicians will find it difficult to shift the blame somewhere else (Dave will probably try the "it started in America" routine).

Some might argue that the US is best placed to take hard economic decisions now, in the 2nd presidential term.

It's a simple question of whether they decide to continue and end up blowing up the problem even more, causing more chaos when it eventually unwinds, or want to take the pain now.

For me it is very difficult to call what they actually will do. My best guess would be some sort of "Taper Lite". "Taper lite" in itself though may be enough to cause significant colltoral damage to the UK, which I guess the US will not give a stuff about.

No, especially since we have embarrassed them on Syria? Was (Is it still?) Syria and the inevitable mission creep going to be the distraction to start unwinding a bit?

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[/b]

No, especially since we have embarrassed them on Syria? Was (Is it still?) Syria and the inevitable mission creep going to be the distraction to start unwinding a bit?

Very plausible, a ready-made excuse for govt. Plus an oil price spike would certainly help the big boys run off their positions in housing and bonds over the next few months, just as they did in 2008 following the infamous $200bbl call from Goldmans. I've wound up my energy/oil exposure since the summer in anticipation of such an event. Looking good so far. Big ramp in equities coming this week and next as Bernanke throws cash at the markets to lend legitmacy to the Taper. He never leaves anything to chance.

.

Edited by zugzwang

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  • 242 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%



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