Wednesday, Aug 12, 2015

This screams DEFLATION and RATE CUTS

Telegraph: Markets rocked as China's renminbi tumbles to four-year low

Given our dependence on Chinese imports, this devaluation WILL exacerbate DEFLATION. With this happening now alongside collapsing commodity prices, both being part of the same trend, we should see minus 2% deflation before we see plus 2% inflation. UK Govt would be forced to cut rates, igniting economic growth and house prices here. Expect panic from Carney. Remember, BOE affects but does not control global capital flows, and most of Carney's speeches are designed to maintain the illusion that the central bank is in control, when in reality it is just another market participant. They were behind the curve in 2008 and panic cut rates. They will be behind the curve in 2015, when they plunge into negative rates.

Posted by libertas @ 05:45 PM (8154 views)
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42 Comments

1. This comment has been removed as it was found to be in breach of our Blog Policies.

 

2. icarus said...

"(a) rates rise.........often co-incides with house prices rising"..........."house prices FELL whilst interest rates COLLAPSED in 2008 (and other examples of rates and house prices moving in synch)" - (libertas 12 August 4.52pm)

UK Govt would be forced to cut rates, igniting.......house prices here - (libertas 12August 5.45pm)

Wednesday, August 12, 2015 06:34PM Report Comment
 

3. Bobbo said...

It's a bit of a stretch to claim that with the world economy stumbling a rate drop from the BoE is going to magically send the economy and prices into the stratosphere.

More likely. Chinese investors sell down offshore assets to cover margin calls and to capitalise on currency movements. With know buyers in place to replace them there is only one way UK asset prices can go.

That's down in case I am too subtle.

Wednesday, August 12, 2015 06:40PM Report Comment
 

4. mister ed said...

Icarus @2

I would have been more surprised if you'd found two posts that were actually consistent. :-)

Wednesday, August 12, 2015 06:52PM Report Comment
 

5. libertas said...

Mister Ed and Icarus. The situation could be different this time if rates are cut into economic growth due to global deflation.

My initial point was that there is not a linear relationship between interest rates and house prices. I focussed on how prices have fallen as rates have fallen to make the point that rising rates do not necessarily coincide with falling house prices, but it is also possible for house prices to rise when rates fall, if they fall due to external deflation shocks, coinciding with internal economic growth and strength of demand.

The lack of any linear relationships between economic metrics is why economic forecasting is so difficult.

Wednesday, August 12, 2015 07:55PM Report Comment
 

6. mister ed said...

"The lack of any linear relationships between economic metrics is why economic forecasting is so difficult."

Yup. And yet you keep on doing it, wild speculation after wild speculation.

Wednesday, August 12, 2015 08:13PM Report Comment
 

7. This comment has been removed as it was found to be in breach of our Blog Policies.

 

8. libertas said...

Clearly the pressure on the renminbi will continue to build, he said. Mr Christensen estimated that if China allowed the yuan to trade freely, it could fall by between 10pc and 30pc.

------------

This, from the article shows the potential downside. Can you imagine Carney raising rates if Chinese imports reduce in cost by 10 to 30% ?! Note, these are so key to the supply chain that most other country's we import from are taking goods and resources from China, so it should reduce import prices across the board.

Continued Eurozone weakness and continued Sterling ascendency create a perfect deflationary storm that could cause Carney to panic rate cut, but so long as our economy is strong relative to mainland Europe, Sterling will nonetheless maintain its steady rise.

Thursday, August 13, 2015 04:20AM Report Comment
 

9. libertas said...

http://www.zerohedge.com/news/2015-08-12/albert-edwards-prepare-sub-1-treasury-yields-and-another-financial-crisis

"We have long believed that we are only one misstep from outright deflation in the west with core inflation in both the US and eurozone at just 1%. We expect the acceleration of EM devaluations to send waves of deflation to the west."

(Note, UK inflation is lower still at 0%)

The article states that there will be no normalisation of interest rates. Again, this is an odd statement. There is no long term normality for rates, which fluctuate wildly over time in long cycles.

Thursday, August 13, 2015 04:31AM Report Comment
 

10. mister ed said...

I like it when you talk dirty. Tell me more about your prediction that Heathrow Airport will be demolished and turned into a housing estate once Boris becomes PM. That made me all moist, that did.

Thursday, August 13, 2015 07:00AM Report Comment
 

11. libertas said...

Chinese Devaluation Extends To 3rd Day - Yuan Hits 4 Year Low, Japan Escalates Currency Race-To-The-Bottom Rhetoric
Submitted by Tyler Durden on 08/12/2015 - 21:21
The "one-off" adjustment has now reached its 3rd day as The PBOC has now devalued the Yuan fix by 4.65% back to July 2011 lows.

PBOC tries to reassure: *CHINA PBOC SAYS YUAN REMAINS STRONG CURRENCY IN LONG-TERM

http://www.zerohedge.com/news/2015-08-12/china-devalues-yuan-3rd-day-4-year-lows-argentina-suffers-losses-japan-escalates-cur

Thursday, August 13, 2015 07:30AM Report Comment
 

12. mister ed said...

No, no, no...

The Heathrow-airport-turned-into-housing-estate stuff. That's what I want, and need right now. Don't hold back. Ooooh..

Thursday, August 13, 2015 07:56AM Report Comment
 

13. icarus said...

@6 (4.13 am) "(Central banks) are subject to rather than in control to global capital flows that are largely beyond their control". It depends on which central bank we're talking about. Look at the massive capital flows from Latin America and other 'emerging markets' in 2013 to Europe and the US when the Fed signalled QE tapering and possible IR increases in the pipeline. And the Fed doesn't necessarily work alone ; it gets big banks to do its bidding and they comply because they have a mutual symbiotic relationship with it.

Thursday, August 13, 2015 09:59AM Report Comment
 

14. libertas said...

Even then, central banks can manipulate markets for only short periods of time. They cannot seriously impact long term secular cycles. In particular, interest rates, which rose from the 1930s to about 1990 and are now in secular decline, worldwide. In the end, these manipulations are part of the market and part of the secular cycle, so end up being blips in the chart when you zoom out to the long cycle.

Thursday, August 13, 2015 10:24AM Report Comment
 

15. mister ed said...

@13
"They cannot seriously impact ..."

I like a man who uses nouns as verbs, even more than a man who engages in rampant speculation.

Thursday, August 13, 2015 10:46AM Report Comment
 

16. libertas said...

Mr Ed, it is rampant speculation and an act of faith by others that Central Banks are in control and that there are any linear relationships between metrics such as house prices and interest rates. Which economic church and denomination are you a part of?

Thursday, August 13, 2015 10:57AM Report Comment
 

17. mister ed said...

@15
The Church of Common Sense

I make decisions based on what I think is good for me and my family at a time that is good for me and my family.

Of course there are no "linear relationships between metrics such as house prices and interest rates". That's why you've posted on this forum scores of times saying that interest rates will go negative and consequently "house prices will soar"... because there is , er, no relationships between metrics such as house prices and interest rates. (Uh?)

If there's anything I like better than a man who uses nouns as verbs, it's a man who can contradict himself while keeping a straight face.

Now, tell me more about that housing estate to be built over the soon-to-be-flattened Heathrow Airport...

Thursday, August 13, 2015 11:35AM Report Comment
 

18. icarus said...

@13 (10.24am) everything, including human history, is just a blip from certain perspectives.

These long cycles you mention work only if history doesn't move on. These mechanisms ticking away behind the backs of historical players work only if you're highly selective regarding the framework you choose and the data you put into it.

Many economists see periods like the 50s and 60s as expansionary, with fast growth in the 'real' economy of savings and investment in producing and consuming goods and services and contrast this with the financialisation (investment in assets, or, in the case of the Northern Italian city states a few hundred years ago, in state-building) where investment in productive activity takes a back seat because there are more effective ways to accumulate capital or gain political power. When there's such a profound change in economic orientation can you really talk about some immutable and regular cyclical mechanism ticking away in the background?

And central banks (mainly the Fed and its buddies in big US banks) don't only set interest rates. They are also capable of manipulating bullion prices (especially downwards over the past 3 years) in order to maintain the strength of the dollar. Then there's the question of whether there's a connected hierarchy of central banks, in which you-know-who sits at the top. That would give it enormous influence.

Then there's the trillions ($20 trn?) of liquidity injections (QE, ZIRP) which flowed massively into emerging markets from 2009 to 2012-3 (as advanced economies were limp and emerging economies were taking off). The Fed's tapering and possible IR rise announcements 'recalled' those trillions of dollars into advanced economy assets, crippled Latin American and other emerging economies and inflated property, stock and bond prices.

Thursday, August 13, 2015 01:20PM Report Comment
 

19. hpwatcher said...

Then there's the trillions ($20 trn?) of liquidity injections (QE, ZIRP) which flowed massively into emerging markets from 2009 to 2012-3 (as advanced economies were limp and emerging economies were taking off). The Fed's tapering and possible IR rise announcements 'recalled' those trillions of dollars into advanced economy assets, crippled Latin American and other emerging economies and inflated property, stock and bond prices.

What could possibly go wrong?

Thursday, August 13, 2015 07:19PM Report Comment
 

20. libertas said...

Icarus, central banks want you to think they set interest rates. In reality, they compete for capital on behalf of their government with the private sector. Their rates are generally a reaction to market rates, not leading, because private, global markets are larger and respond by the minute, whilst central banks respond monthly, with less clout than the private bond markets.

They can mainly shift markets temporarily due to a well orchestrated misperception that the are in any way in control of the economy over the long term.

In 2008, private swap rates led the fall in interest rates. Central banks panicked and followed them down and did not lead them.

Thursday, August 13, 2015 09:22PM Report Comment
 

21. debtserf said...

Sounds like someone's been on the hippy crack again.

Rate cuts?? From 0.5...to -5% perhaps? And in your oxygen-starved 'economics' hallucination we will all be paid handsomely to take out humongous mortgages, right?

Your whole thesis - if that's the right word for these oxygen-starved hallucinations - is that our over-dependence on cheap Chinese tat now guarantees deflation, and NIRP; which will in turn spur economic growth and booming house prices.

So why would house prices be immune in a deflation again? If oil can rise and fall on the back of easy credit, then why not property? Crossrail?

It's impossible to tell whether you are a troll, a sock puppet, or just insanely stupid, but either way you are clearly a gibbering simpleton.

Thursday, August 13, 2015 09:58PM Report Comment
 

22. pete green said...

What is more dangerous? A gibbering simpleton or a mildly schizophrenic obsessive with the need to bend reality to prove the over simplified ideas twirling in thier head.

Friday, August 14, 2015 07:16AM Report Comment
 

23. mark said...

With fracking appearing in nearly every county there won't be anywhere safe to live in the UK

In North Wales they are planning to set fire to coal seams to extract gas, anyone ever seen a coal seam fire, near impossible to put out.

So far every government in the past two decades in the UK has been corrupt and is not working for the public they are working for their own pockets

Friday, August 14, 2015 08:29AM Report Comment
 

24. libertas said...

Crude oil has hit the $41 handle. Dropping beneath the 2008 low. From here, I have a target of $20, but prices could briefly touch $5 or $10, because all those tankers full of oil need to start dumping and finding customers.

China, Austraila, Canada, other oil producers in the Middle East will viciously cut rates. Growth in oil consuming countries will leap, with imported deflation and capital in flows to UK and U.S. Requiring rate cuts to negative territory, similar to the situation in Switzerland.

In this scenario, I can see negative rates in the UK co-inciding with panic house buying, because it will coincide with capital shifts from the Eurozone. From here, our national debt becomes an income yielding asset, as people invest in Sterling for capital appreciation in the currency and bond prices.

I can see $41 oil being a new ceiling if prices collapse, until China recovers.

Friday, August 14, 2015 08:31AM Report Comment
 

25. mister ed said...

@ initial post by Libby
"UK Govt would be forced to cut rates, igniting economic growth and house prices here."

@15 by Libby
"It is rampant speculation and an act of faith by others that Central Banks are in control and that there are any linear relationships between metrics such as house prices and interest rates."

So cutting rates ignites house prices, but there is no relationship between house prices and interest rates.

You really couldn't make this stuff up.

Anyhow, Libbo has turned his attention to oil prices now in order to take the "discussion" away from his contradictions about interest rates. Classic ruse of the BS merchant. When losing the arguement, change the subject. :-)

Friday, August 14, 2015 09:17AM Report Comment
 

26. icarus said...

libertas @19 (9.22pm). Why do investors examine every word (including between the lines) in Fed announcements as if they were the Delphic oracle delivering Apollo's infallible prophecies? And my example @17, shows how a mere announcement by the Fed recalled trillions of dollars from 'emerging' to 'advanced' economies - without any IR change. The Fed set rates near zero by QE - isn't that the elephant in the room that tramples on the idea that central banks have little control over interest rates? .And of course it's in charge of printing the reserve currency to pay off its debts (so USTs can be a 'flight to safety').

And the Fed acts close association with government, regulators and big banks to manipulate markets with the twin aims of keeping IRs down (and asset prices up) and the dollar up (despite the fact that currencies normally collapse when such an enormous amount of money and debt are created).

Private swap rates? Libor was manipulated if you're talking about inter-bank loans, and interest rate swaps were issued by private banks in synch with what the Fed was doing and with the same purpose of flattening interest rates and profiting from that. Bankers, seeing that policy (aided by their own Libor manipulation) was to keep IRs down, sold the swaps (banks won if IRs stayed down, punters won if they rose) often to municipal governments (many outside the US) who later couldn't afford rubbish collection as a result. (So banks profited from these trades in addition to ZIRP/Libor manipulation, which boosted the value of assets on their books, which in turn enabled them to borrow more from the Fed.)

The Fed and regulators can do a lot by doing nothing - the Fed knew about Libor manipulation for years before it moved on it in 2012. Then there's the message it sends out that there are ways to reduce the risk of banks' potential losses on derivatives (load them onto depositors and taxpayers e.g. Citigroup's credit default swaps), thereby encouraging trade in them.

Friday, August 14, 2015 09:35AM Report Comment
 

27. libertas said...

Icarus, investors follow the Fed's words because the Fed can manipulate markets in the short term. Most traders trade in real time and trade off wafer thin margins on day trading, so can trade off the Fed's words. What I am saying is that the long term trends, those relevant to, for example a persons life time or a 25 yr mortgage, are driven by global capital flows that central banks cannot control.

Central banks can change things this week, and maybe a couple years ahead, but if global capital flows are heading towards deflation, they cannot stop that.

Friday, August 14, 2015 10:42AM Report Comment
 

28. libertas said...

Icarus, investors follow the Fed's words because the Fed can manipulate markets in the short term. Most traders trade in real time and trade off wafer thin margins on day trading, so can trade off the Fed's words. What I am saying is that the long term trends, those relevant to, for example a persons life time or a 25 yr mortgage, are driven by global capital flows that central banks cannot control.

Central banks can change things this week, and maybe a couple years ahead, but if global capital flows are heading towards deflation, they cannot stop that.

Friday, August 14, 2015 10:42AM Report Comment
 

29. icarus said...

IRs near zero for seven years. Traders and investors using dollars provided by central banks' 'liquidity injections'. Fed/regulators enabling all kinds of dodgy trades and leverage. Libor manipulation. Manipulation of bullion prices (soaring demand for physical gold, plummeting gold prices). And then painting yourself into a corner so that ZIRP becomes necessary to keep the boat afloat. These are the things the Fed does or allows in order to keep IRs down and the dollar up.

Friday, August 14, 2015 11:03AM Report Comment
 

30. cyril said...

I can see that low inflation leads to low interest rates as a matter of policy - and so house prices will continue to rise if rates are low. But high inflation has been good for the housing market in the past because it reduces the value of people's mortgages over time. Maybe Jeremy Corbyn's idea of quantitative easing to reinvest in coal mining isn't such a bad idea after all.

Friday, August 14, 2015 11:50AM Report Comment
 

31. Maske2g said...

Hilarious that he berates you guys for "not understanding the complexities of economics" yet he can afford 1400 quid a month for his mortgage and chooses to live in a pisshole like Enfield.

Why has brains not got a higher paying job? Why can't he afford a 700-800 grand house?

Think of those questions before biting to the nonsense

Friday, August 14, 2015 01:59PM Report Comment
 

32. libertas said...

As I have said many times before, everybody is presuming that interest rates are pausing at 0% before they rise. However, ongoing developments suggest that they are pausing before plunging into negative territory. As with jumping into a tepid swimming pool, the hard bit is jumping in, but soon enough, governments and corporations will be dependent on negative rates and will be fearful of positive interest rates.

Every situation produces and sustains its own vested interests and there are always winners and loosers (except in nuclear warfare).

Friday, August 14, 2015 09:35PM Report Comment
 

33. quiet guy said...

I agree with the idea that China's recent currency moves could drive global deflation and delay interest rate rises again (sounds familiar?)

http://www.theguardian.com/business/2015/aug/12/chinas-currency-devaluation-could-spark-tidal-wave-of-deflation

I'm sceptical that about the scenario in which "our national debt becomes an income yielding asset." How much lower can UK mortgages go now? All new "tracker" mortgages have a collar to ensure that payments cannot drop much further hence the risk appears to be all one way going forward. Despite the recent Chinese events, fixing now looks like a reasonably good insurance policy.

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/11762045/End-of-cheap-mortgage-boom-as-big-banks-raise-rates.html

Sunday, August 16, 2015 08:08AM Report Comment
 

34. libertas said...

quiet guy, debt is an asset when it yields negative interest rates.

People will pay negative rates in Sterling if they see it as a safe have to European notes that pay 0%.

Sunday, August 16, 2015 03:16PM Report Comment
 

35. mister ed said...

@32
Then remortgage your house and get into another 500K of debt.

Even better, then take that 500K and play the market, betting that interest rates will go negative.

Going to do it? Course not. Talk is cheap. :-)

Sunday, August 16, 2015 06:47PM Report Comment
 

36. quiet guy said...

@Mister Ed

In fairness to Libertas, we have to make a distinction between consumer debt being offered at negative interest rates (ain't gonna happen) and gilts interest rates which could theoretically go negative. Some German bonds have been sold at negative interest rates.

http://www.wsj.com/articles/germany-sells-five-year-debt-at-negative-yield-for-first-time-on-record-1424871074

Where I disagree with Libertas is that consumer lending interest rates can go much lower.

Sunday, August 16, 2015 09:10PM Report Comment
 

37. mister ed said...

@34

I concur.

I'm really just having a bit of fun with Libby, pointing out that his predictions and speculations are just hot air. If he really believed what he said, he'd take action and take advantage of his "superior knowledge".

Of course he doesn't, mainly because he contradicts himself so much he wouldn't know what to do for the best.

Still, I find his posts hugely entertaining, and they often bring a smile to my face on a dreary day.

Sunday, August 16, 2015 09:17PM Report Comment
 

38. libertas said...

Huh?! "if he really believed what he said, he'd take action". Ehem. I did take action!! I chose a variable rate when 90% of others are going onto expensive fixed rates.

Sunday, August 16, 2015 09:25PM Report Comment
 

39. mister ed said...

LOL, a variable rate.

I meant really put your money where your mouth is and take out some highly-leveraged futures positions based on the presumption of a fall in interest rates.

Some chance. As I said: talk is cheap.

Sunday, August 16, 2015 11:08PM Report Comment
 

40. libertas said...

Mister Ed, having just completed my first house purchase, I do not have spare cash I can afford to loose that can be highly leveraged. Going for a variable rate is sufficient risk for me at this stage. It may sound meagre, but 90% or so of other purchasers are buying expensive fixed rate mortgages on the persistent rumour that rates are to rise.

Monday, August 17, 2015 10:36AM Report Comment
 

41. jack c said...

@ libertas, people buy Fixed rate mortgages in the main because it provides the certainty of knowing precisely what the monthly payment is going to be (budgeting). The hedge against rising rates is a secondary matter in my experience.

As for fixed rates being "expensive" try talking to someone (like me) who held a mortgage in the 80's and 90's ! It is frankly laughable that people can't tolerate a tiny increase of 0.25% and if indeed they can't then the whole economy is as phoney as HPW often suggests.

Monday, August 17, 2015 12:04PM Report Comment
 

42. mister ed said...

@38
" I do not have spare cash I can afford to loose..."

But why would you lose it? On this very thread you've stated you firmly believe that interest rates are going negative. If that were the case, you could only win.

The fact that you concede you might "loose" shows you are not really convinced that rates are going negative.

Monday, August 17, 2015 01:12PM Report Comment
 

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