Financial Repression Is Drawing To A Close ....

[LuckyOne]

The fear that financial repression will be permanent rather than temporary seems to be reaching a conclusion.

TIPS / Linkers etc seem to be yielding positive real returns across shortening terms.

Is this the final hurrah for the opportunity for rational real returns or the endgame for the "NIRP NIRP NIRP" crowd in real terms?

If we are reaching the endgame of financial repression, which asset misallocations will hurt people the most?

My guess is property investments at the wrong yield but I am willing to consider other alternatives.

[Dorkins]

Financial repression is not over. The hands of the central banks have not been forced by the markets, and there is almost no desire from the electorate or politicians to change their behaviour. Interest rates will resume their downward path soon.

[dances with sheeple]

The fear that financial repression will be permanent rather than temporary seems to be reaching a conclusion.

TIPS / Linkers etc seem to be yielding positive real returns across shortening terms.

Is this the final hurrah for the opportunity for rational real returns or the endgame for the "NIRP NIRP NIRP" crowd in real terms?

If we are reaching the endgame of financial repression, which asset misallocations will hurt people the most?

My guess is property investments at the wrong yield but I am willing to consider other alternatives.

I.O, many multiples of salary property on the borders of super-prime London areas, bought by people that cannot really take a serious hit to their "wealth"?

[ZeroSumGame]

Financial repression is not over. The hands of the central banks have not been forced by the markets, and there is almost no desire from the electorate or politicians to change their behaviour. Interest rates will resume their downward path soon.

Erm bond yields tending upwards, long-dated stuff dropping in value. US mortgage rates trending upwards.

Actually I do think the market is beginning to force the bankers' hands. Even banks are wishing a return to higher interest rates, as they're finding it harder and harder to gain yield with lower rates. (Plenty of stuff to read about from the FT).

I think we'll see some movement that even the Fed can't cope with.

[TrevorS]

Erm bond yields tending upwards, long-dated stuff dropping in value. US mortgage rates trending upwards.

Actually I do think the market is beginning to force the bankers' hands. Even banks are wishing a return to higher interest rates, as they're finding it harder and harder to gain yield with lower rates. (Plenty of stuff to read about from the FT).

I think we'll see some movement that even the Fed can't cope with.

Black Wednesday was one hell of a ride. And that only cost a few billion.

[oracle]

Financial repression is not over. The hands of the central banks have not been forced by the markets, and there is almost no desire from the electorate or politicians to change their behaviour. Interest rates will resume their downward path soon.

nope, the financial repression will come to an extremely abrupt halt when the PTB get too greedy and try to RAISE interest rates a bit too quickly.

then we really,truly will see reposession/repatriation of ill-gotten gains of the highest order.

not because the proles want to take their wealth........because the proles want them dead. end of.

[scepticus]

The fear that financial repression will be permanent rather than temporary seems to be reaching a conclusion.

I disagree. Let see what happens. As I said on the gilts thread the recorded higher yield on government debt is a result of various investors moving to insured cash (a privilege accorded to them by the very governments now hit with higher yields) and, as a result, getting the cash rate of near zero.

Thus the headline risk free rate rising on 10 year yields is only a consequence of most investors giving up what yield was on offer to sit in cash at 0%.

Now, if the rise in yields was co-incident with the rise in value of other non-bond investments like equities or real estate then we would rightly think that investors were deserting public sector investments for private sector ones.

But these asset classes are also falling so what we see is a movement from one class of government security into another. Cash is a government security.

[oracle]

But these asset classes are also falling so what we see is a movement from one class of government security into another. Cash is a government security.

...monopolisation of said method of cash is government security.

..no guarantee that monopoly will still be in existence at the end of this.

[scepticus]

...monopolisation of said method of cash is government security.

..no guarantee that monopoly will still be in existence at the end of this.

Quite so. But nevertheless, the current market movements are a movement from one class of government security (govvies) and various private securities, into another type of government security (cash).

Thus, the NET movement, is from private securities, into public sector ones.

Would you dispute my logic?

Edited June 25, 2013 by scepticus

[LuckyOne]

Financial repression is not over. The hands of the central banks have not been forced by the markets, and there is almost no desire from the electorate or politicians to change their behaviour. Interest rates will resume their downward path soon.

We are at an interesting crossroads. It has appeared that the monetary authorities have cornered fixed income markets over the last few years. They may be about to learn the same lessons that the Hunt brothers learned in the silver market in the 70s and 80s. Buying in large amounts may give the impression that you have cornered the market and gives you complete pricing power. Eventually, you find out that the market is bigger than you are and and end up in a world of hurt.

It would be interesting to know the daily changes in the mark to market of the Fed, BoE etc balance sheets.

[LuckyOne]

I disagree. Let see what happens. As I said on the gilts thread the recorded higher yield on government debt is a result of various investors moving to insured cash (a privilege accorded to them by the very governments now hit with higher yields) and, as a result, getting the cash rate of near zero.

Thus the headline risk free rate rising on 10 year yields is only a consequence of most investors giving up what yield was on offer to sit in cash at 0%.

Now, if the rise in yields was co-incident with the rise in value of other non-bond investments like equities or real estate then we would rightly think that investors were deserting public sector investments for private sector ones.

But these asset classes are also falling so what we see is a movement from one class of government security into another. Cash is a government security.

All asset prices have risen due to the reduction in the discount rate applied to future cashflows caused by the manipulation of bond prices by central banks. This disease has spread well beyond the bond market. It shouldn't be a surprise that stocks, bond prices (prices move inversely to yields), real estate, commodities, commodity currencies etc are all moving lower simultaneously.

Investors are often not that smart. The Fed recently told them that they will taper their asset purchases when the data start to look better. Surely no-one should be too surprised by this announcement.

The market also knows that absent the Fed's asset purchases, the 10 year Note would yield something like 3.5% to 4% at this stage of the cycle but always thought that un-manipulated yields were further down the road than they actually turned out to be.

Now that the data are starting to look better (yesterday was just another confirmation in the US) and un-manipulated yields are staring people in the face, the market is uncomfortable with holding assets at the prices prevailing just a few weeks ago.

They seem to be saying that they are willing to give up 2% for 10 years and hold cash at 0% for 12 months and then reinvest the cash at 3.5% to 4% in 12 months time for 9 years (either explicitly in bonds or implicitly by buying future cashflows at higher discount rates i.e. lower prices). Tapering asset purchases will be sufficient to cause this to happen. Raising the Fed Funds / Bank Rate etc are not necessary, especially in the US where changes in longer term, fixed rates have a larger economic impact than in the UK.

Edited June 26, 2013 by LuckyOne

[winkie]

They seem to be saying that they are willing to give up 2% for 10 years and hold cash at 0% for 6 months and then reinvest the cash at 3.5% to 4% in 12 months time for 9 years

[TheCountOfNowhere]

Physical repression to commence.

[zugzwang]

What comes after financial repression? Financial depression.

[zugzwang]

All asset prices have risen due to the reduction in the discount rate applied to future cashflows caused by the manipulation of bond prices by central banks. This disease has spread well beyond the bond market. It shouldn't be a surprise that stocks, bond prices (prices move inversely to yields), real estate, commodities, commodity currencies etc are all moving lower simultaneously.

Investors are often not that smart. The Fed recently told them that they will taper their asset purchases when the data start to look better. Surely no-one should be too surprised by this announcement.

The market also knows that absent the Fed's asset purchases, the 10 year Note would yield something like 3.5% to 4% at this stage of the cycle but always thought that un-manipulated yields were further down the road than they actually turned out to be.

Now that the data are starting to look better (yesterday was just another confirmation in the US) and un-manipulated yields are staring people in the face, the market is uncomfortable with holding assets at the prices prevailing just a few weeks ago.

They seem to be saying that they are willing to give up 2% for 10 years and hold cash at 0% for 12 months and then reinvest the cash at 3.5% to 4% in 12 months time for 9 years (either explicitly in bonds or implicitly by buying future cashflows at higher discount rates i.e. lower prices). Tapering asset purchases will be sufficient to cause this to happen. Raising the Fed Funds / Bank Rate etc are not necessary, especially in the US where changes in longer term, fixed rates have a larger economic impact than in the UK.

Good post. I'll add a couple of brief points. Investors are smart but undisciplined. The bigger the institution the harder it is to keep control over what gets spent and where. When questioned about their motivation most of the individuals in Lehman's saw management as 'the enemy' continuously scheming against them. Similarly, the whale at JP Morgan was on one side of the trade while other parts of the bank were unwittingly on the other. In aggregate, this can make investors look very stupid, as you say.

As for giving up yield? A simpler explanation is that speculators need cash urgently to make good margin calls elsewhere. In this case, China.

[scepticus]

The market also knows that absent the Fed's asset purchases, the 10 year Note would yield something like 3.5% to 4% at this stage of the cycle but always thought that un-manipulated yields were further down the road than they actually turned out to be.

I'm not disputing that but what I have been saying is that this is an outcome of investors giving up yield to sit in cash.

They seem to be saying that they are willing to give up 2% for 10 years and hold cash at 0% for 12 months and then reinvest the cash at 3.5% to 4% in 12 months time for 9 years (either explicitly in bonds or implicitly by buying future cashflows at higher discount rates i.e. lower prices). Tapering asset purchases will be sufficient to cause this to happen. Raising the Fed Funds / Bank Rate etc are not necessary, especially in the US where changes in longer term, fixed rates have a larger economic impact than in the UK.

If they continue to sit in cash then government bond yields will fall again before they can re-invest unless an improvement in the economy (for that you can read an improvement in the capacity for borrowers and issuers of equity to provide a larger income stream) causes an increase in the velocity of money.

Check out this graph of MZM velocity against the fed funds rate.

Now, unless MZMV picks up there won't be any sustained rise in nominal yields that will permit later reinvestment at lower bond prices.

In my view the rise in real yields is more likely indicative of a coming deflationary pressure than it is indicative of an improvement.

The yield curve is an indication of expectations, not reality. Unless money velocity picks up to validate those expectations the yields will be headed down again.

Watch money velocity, that is the tell here.

[LuckyOne]

I'm not disputing that but what I have been saying is that this is an outcome of investors giving up yield to sit in cash.

If they continue to sit in cash then government bond yields will fall again before they can re-invest unless an improvement in the economy (for that you can read an improvement in the capacity for borrowers and issuers of equity to provide a larger income stream) causes an increase in the velocity of money.

Check out this graph of MZM velocity against the fed funds rate.

Now, unless MZMV picks up there won't be any sustained rise in nominal yields that will permit later reinvestment at lower bond prices.

In my view the rise in real yields is more likely indicative of a coming deflationary pressure than it is indicative of an improvement.

The yield curve is an indication of expectations, not reality. Unless money velocity picks up to validate those expectations the yields will be headed down again.

Watch money velocity, that is the tell here.

I have often wondered whether the collapse in the velocity of money is a symptom or a cause.

When returns are very low, there is no opportunity cost to leaving money on deposit so we might lose some velocity because people don't feel the need to actively manage balances.

I do agree that velocity is important but wonder about its correlation to the level of rates or to the expected changes in rates and whether velocity ought to be controlled for the level of rates.

This is a question rather than a theory.

Edited June 26, 2013 by LuckyOne

[scepticus]

I have often wondered whether the collapse in the velocity of money is a symptom or a cause.

When returns are very low, there is no opportunity cost to leaving money on deposit so we might lose some velocity because people don't feel the need to actively manage balances.

I do agree that velocity is important but wonder about its correlation to the level of rates or to the expected changes in rates and whether velocity ought to be controlled for the level of rates.

This is a question rather than a theory.

the relation between velocity and rates is obvious from the chart I posted - a change in velocity is followed by a change in FEDFUNDS, never the other way about. There is less correlation with long duration rates because like I said those reflect expectations. Here is a chart with the 10y added:

what is true is that no sustained jump in the 10y happens without a corresponding underlying increase in V.

It is also well documented that the short interest rate is exponentially related to velocity. E.g. velocity rises exponentially as the rate rises.

The causality of high interest rates is thus extremely high money velocity.

[Venger]

The fear that financial repression will be permanent rather than temporary seems to be reaching a conclusion.

TIPS / Linkers etc seem to be yielding positive real returns across shortening terms.

Is this the final hurrah for the opportunity for rational real returns or the endgame for the "NIRP NIRP NIRP" crowd in real terms?

If we are reaching the endgame of financial repression, which asset misallocations will hurt people the most?

My guess is property investments at the wrong yield but I am willing to consider other alternatives.

All asset misallocations. Only people in cash/liquid deposit, matter now. Gaining from doing nothing but being patient against huge over-valuations in the debt world.

ue Jun 25, 2013 12:59pm EDT

(Reuters) - U.S. inflation-linked government bonds have tumbled to levels that analysts say approach those common in periods of financial crisis, a sharp turnaround for what has been one of the best-performing bond classes in recent years.

..But the relative illiquidity of Treasuries Inflation-Protected Securities and the large number of long positions in that market made the rout in these securities even worse as investors headed for the exits. TIPS have been strong performers in recent years as investors sought protection on the expectation that bond purchases would increase inflation.

The DFA Dimensional Retirement Fixed Income Fund, with $2.1 million in assets, is down 23.1 percent on the year while the $350 million Pimco Real Return Asset Fund has lost 16.4 percent, Lipper data show.Inflation measures have tumbled and are well below the Fed's long-term target of around 2 percent. Personal Consumption Expenditures (PCE) fell to a record low 1.05 percent on the year in April, the most recent data available. The Consumer Price Index (CPI) is running at 1.4 percent.

http://www.reuters.com/article/2013/06/25/us-usa-markets-inflation-bonds-idUSBRE95O12G20130625?feedType=RSS&feedName=businessNews

[winkie]

All asset misallocations. Only people in cash/liquid deposit, matter now. Gaining from doing nothing but being patient against huge over-valuations in the debt world.

When everything is falling.....cash liquidity has to be worth more than most if you need to eat.

[wonderpup]

Is China a factor in this at all? It does seem strangely coincidental that 'tapering' is mooted just as China seems to be altering it's own strategy:

If the Chinese government no longer wants to provide unlimited liquidity then the whole burden of sustaining the bubble would fall on the Fed. Mr Bernanke considers this to be far too dangerous and for this reason he may have brought forward the Fed’s exit from QE. In this reading, the Fed’s signal that it is exiting QE has nothingto do with the actual health of the US economy and everything to do with China’s economic situation and government intentions. Bernanke seems determined to reduce QE for reasons that have to do with China.

http://yanisvaroufakis.eu/2013/06/22/the-australian-dollar-chinas-bubble-qe-exit-and-the-eurozone-guest-post/#more-3845

The Americans always assume that they can act in total isolation from the rest of the world- but maybe this is not the case when an entity as large as China is involved?

[R K]

Good post. I'll add a couple of brief points. Investors are smart but undisciplined. The bigger the institution the harder it is to keep control over what gets spent and where. When questioned about their motivation most of the individuals in Lehman's saw management as 'the enemy' continuously scheming against them. Similarly, the whale at JP Morgan was on one side of the trade while other parts of the bank were unwittingly on the other. In aggregate, this can make investors look very stupid, as you say.

As for giving up yield? A simpler explanation is that speculators need cash urgently to make good margin calls elsewhere. In this case, China.

This.

Margin call top trumps.

Temporary sweet spot in real yields.

Real estate and equities have been rising since the end of the bond bull last July however, but recent pace is clearly just deleveraging, move along..........

[Venger]

Temporary sweet spot in real yields.

Real estate and equities have been rising since the end of the bond bull last July however, but recent pace is clearly just deleveraging, move along..........

We'll be moving along alright, when prices in Hale and most other sought-after areas crash 35-50%.

[R K]

We'll be moving along alright, when prices in Hale and most other sought-after areas crash 35-50%.

Believe whatever makes you happy.

[Venger]

The fear that financial repression will be permanent rather than temporary seems to be reaching a conclusion.

*Sigh.

Anything happening?

Ever more fear it is so (permanent), but so utterly embraced with joy it is the case by many others.