Doc and Chris talk Secular Stagnation, and where we’re headed
After his own brief absence, the Doctor is in today!
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No, but I’ve already spoken with one of two people I know of who were at the mtg…more to come
Thanks Chris.
Looking forward to hear your thoughts based on the feedback you received.
Best to you,
LPG
No, but I did read his commentary from yesterday and thought he made an excellent observation. In effect it goes like this….if the Fed raises interest rates it will induce inflation.
At first reading that idea sounds crazy because (of course) we all know that rate increases are a response to inflation and not the other way around. But I think he has got this right.
Rising rates suggest confidence in the economy (demand for capital) and as those rates increase then both business activity and investment pick up steam. The out-take is that velocity comes off the floor and starts to go back up from its very low levels as consumers respond.
In effect….we pick ourselves up from our own bootstraps.
Now, Martin did not actually say any of that. I am merely giving an interpretation of a post he left that more or less made the point that rising rates are going to be stimulative and by their adjustments upwards will actually promote business to respond in such a way that inflation itself will begin to rise in anticipation of the changes that are coming.
The analogy would be to real estate purchase growth. As rates fall everyone assumes buyers will rush in. But actually it is the opposite. It is when rates start to rise that people make the decision to jump in before the cost of money goes higher.
If I am correct about what he is saying then that was an excellent point.
Don’t forget the high unemployment and stagnant wage rates. People in that situation won’t be buying or renting unless the prices are insignificant or unless those people are out of their minds. A responsible person will shun the real estate market until the prices are equal to or less than 6000 man hours and shun renting until the rents are a weeks pay per month or less. Real estate must crash and burn in a zero bid and normal interest rate environment before a economic recovery is possible and real estate has to become the most profane word and stay that way for generations before sanity is restored.
Interesting; in some situations, raising interest rates can cause inflation. However, if the Fed raises the fed funds rate, it may not have that effect. The market place determines long term rates and you might just get an inverted yield curve which often portends recession. If the Fed does raise the fed fund rates even a little, it’ll increase the cost of Americans for mortgages, car loans, and credit card debt. Also, increases are probably already baked into long rates.
The Federal Open Market Committee (FOMC) meets eight times a year to determine the federal funds target rate. This rate influences the effective federal funds rate through open market operations or by buying and selling of government bonds (government debt). More specifically, the Federal Reserve decreases liquidity by selling government bonds, thereby raising the federal funds rate because banks have less liquidity to trade with other banks. Similarly, the Federal Reserve can increase liquidity by buying government bonds, decreasing the federal funds rate because banks have excess liquidity for trade. Whether the Federal Reserve wants to buy or sell bonds depends on the state of the economy. If the FOMC believes the economy is growing too fast and inflation pressures are inconsistent with the dual mandate of the Federal Reserve, the Committee may set a higher federal funds rate target to temper economic activity. In the opposing scenario, the FOMC may set a lower federal funds rate target to spur greater economic activity. By increasing the Fed Fund’s Rate the Fed is attempting to unload some of their bond portfolio. They are essentially putting their toe in the water.
What happens when you raise rates? One thing is they raise the risk of bringing about a smash in the marketplace. Markets love cheap money and this market is being force fed cheap cash. They will start to handicap business by forcing it to pay a higher rate for funds, and the government will have to pay a higher rate for it’s borrowed funds. Given the current size and continuing growth of the debt bubble, I don’t believe they can raise rates for long before they experience a severe downturn. DT
I really don’t think we need to worry DT. Certainly not by a half point initial rise anyway. Nor should we feel the need to buckle up for a rise that was as much as a full percentage point. That, by the way, has NOT been ruled out so we won’t assume anything where the Fed is concerned.
Most of the popular notions about interest rate increases are just noise anyway. The changes are seen at the margin and it is not as if the entire economy will plummet into default with such small adjustments or that the Federal debt will instantly implode and destroy life in America as we know it.
That’s mostly blog chatter as I am sure you are aware.
For example, we might have concluded that the beginnings of a rate normalization process would stall the housing sector and plunge us instantly into the death grip of another real estate bust, if we were to take heed of the Pop Pundits warnings.
What they never get though is that interest rates are linked to inflation; the point being that a devaluative effect is seen in the net indebtedness even as the cost of servicing the debt rises. Think about that for a second. Borrowers live for inflation. It is what makes that 300,000 thousand dollar home feel like it cost merely 50,000 after the passage of a few decades.
So this is a trade off in some respects. There are two sides to the entry….a Yin and a Yang if you will and not just a one sided entry where there is only a cost punishment for society at large and the governments that are in power.
Closer to the truth is that rate rises actually stimulate borrowing.
This is probably the key point in the puzzle as to why rate normalization will actually promote a return to target inflation numbers (or higher). The effect works because borrowers are induced to take loans today at good rates when there is a belief they will be higher tomorrow.
This does not just apply to consumer lending either. We will see the effect at work across the economy from Municipal and State governments, to business both small and large. The outcome is that the borrowed capital gets put back to work and an expansion ensues which ultimately drives inflation rates even higher.
As I said, interest and inflation are closely linked in the modern era. So when the Fed warns it is going to raise rates it is almost by definition telling us that economic activity will pick up and inflation is coming. This should be quite obvious to those who read their charts but for some mysterious reason I cannot fathom it is entirely overlooked by virtually everyone!
Not everyone gets it of course. Most don’t to be honest.
Instead we will continue to hear the plaintiff sirens of impending disaster from all corners of the blogoshpere where agendas against public institutions still rule the airwaves. You sure cannot invest based on what most of those pre-programmed goofballs are saying though. They just keep singing the same damned song like Gospel Hymns and in the process become part of the problem as they keep enlightenment dwelling within a cave.
I will give you an example of where the room to grow will come though. We all know that most every asset class is inflated right now. From antiques and property to stocks and bonds. But do you know what is cheap at this time and probably near its bottom?
Industrial machinery and commercial / industrial space.
What does that tell us? Other than the fact that what is now at the bottom is set to eventually rise and what is at its peak is set to fall. This basic idea is incontestable in the world of charts where we know factually that nothing falls forever and also that nothing rises without end.
So we have therefore got the seeds for the next period of expansion even though almost nobody wants to see it and fewer still would believe it. In short I am saying now is the time for a shift in thinking and a move away from financial assets where inflation rages in valuations and back into productive enterprise and capital acquisitions. This is actually an ideal time to contemplate the beginnings a new enterprise.
So while we are awash in excess capacity today and a manufacturer finds selling equipment is akin to pulling hens teeth we will also see an abrupt turnaround as economic activity rises and inflation makes its return. Those are like seasons. I do in fact expect that in the coming years we will see productivity rise in many of the developed Western nations and that is essential for there to be balance and promote relative income growth. The shift should already be getting underway.
Not that anyone on this site gives two bits though. This post like most others in the same vein won’t get any traction because nobody here really cares or wants to know. They seem to really prefer the drama of daily insults. So if I call Jerry a Monkey or tell HH he should be blocked I will get a hundred negative responses but if i talk rate setting everyone’s eyes glaze over!
Why do I bother.
I have a chart for you Richard that demonstrates what I am talking about. It is 20 year long bond rates versus the rate of inflation. Take a look at it carefully and you will make some great observations about the functions of rates versus inflation during the second half of that 115 year chart.
That is to say you will need to divide the chart into two halfs. The first half beginning in 1900 and ending in the mid Fifties is quite different from the second leading up to today. You will immediately notice there is a tighter correlation between the two factors in more recent times and I suspect this is where Central Banking and more particularly the Federal Reserve have done their best work.
What it tells us in my view is that inflation is being flattened and managed via rate setting so there are indeed control levers at work that make our lives easier. The first half of the chart is actually pretty disturbing where the swings in inflation were quite volatile and regular while the mismatch or gap between the two rose to extremes on both ends of the cycle.
Which half of the graph would we all prefer to reside on? That’s an easy question to answer I think.
INTEREST RATES & INFLATION: 1900 – 2014 — Two charts in PDF format courtesy of Crestmont Research.
http://www.crestmontresearch.com/docs/i-rate-relationship.pdf
Birdman, I want to reply to your comment that no one cares about your input. The regular contributors on this sight seem to have more time than I do to research on a daily basis. It helps me to refine my research and opens my eyes to differing views on a world wide basis. I always find your comments very interesting. Thank you for contributing to my education on finance and world events.
OK, thanks MCWW. Some days I just feel I am posting to the dead letter box and I wonder if anybody bothers to read. About the only thing that gets the troops here fired up anymore is the word “gold” and other miscellaneous petty arguments about pretty much nothing at all. It’s why i keep asserting the place has been taken over by Trolls who just misdirect and create conflict. They obviously did not read any of my posts this morning though!
Anyway, glad to hear some of this helps. If even one person takes away something valuable I am happy.
Here is another chart to ponder, DT. It is the 10 year Treasury note spread over inflation. Notice that as the spread declined beginning in 1970 that it eventually led to one of the highest rates of inflation of any decade prior to the 1910 to 1929 period.
So we are again seeing the spread dip down to the zero-line and I happen to think that is warning of what is to come should it repeat what was seen in the 1970’s. We must be on guard and assume nothing.
In the meantime, an objective approach to real world observable facts is preferred over the ramblings of the arm-chair economists who do nothing but confuse the hell out of everyone with their constant harping of gloom. I happen to believe that rate hikes are both inevitable and perhaps even overdue.
We WILL get rate hikes this year. Whether the Cubs don’t win the world series or not! 🙂
TREASURY NOTE SPREAD OVER INFLATION (CPI) 1960 – 2014 — Crestmont Research
http://www.crestmontresearch.com/docs/i-rate-10-yr-yield.pdf
Here is the chart of inflation by decades I referred to above. We have got to get this right DT. As I mentioned above, when the Fed tells us rates are going to rise it is implicit in that language and communication that inflation is coming. Lets not forget how much liquidity kindling has been created over the past years of QE that is sitting idle and awaiting a match. We need to begin to prepare for that now and not be deluded that higher rates are necessarily a negative for the economy. At least not from an investment perspective. There will be consequences no doubt but on this site our concern is that we understand the risks and seek advantages or avoidance techniques before they factually arrive.
Decade inflation Chart 1913 to 2013 – by Inflationdata.com
http://inflationdata.com/articles/charts/decade-inflation-chart/
Chris, Richard,
Very interesting discussion.
My sense is that IF normal/basic goods go up (quite further) in price while growth stays low…assuming the slack in the labor force is still there, then higher taxes are almost a given and discontent will grow.
And then… slowly but surely, CONFIDENCE from the public in the government, institutions will start to erode at a faster pace.
Put a bit of reduced military omnipotence, and all bets are off for the fabric of the country – ie when most people that the “self narrative” which defines the country is just an illusion or something from the past.
Quite frankly, I have no time frame for such things to occur, but my sense is that history does not behave in a linear fashion… and when confidence loss reach some levels, “consequential” events can occur with an exponential frequency.
My 2 cts.
GL to all investing/trading.
LPG
I agree LPG. This was an interesting discussing Doc and Mr. T.
Doc’s line that the Fed felt they needed to “Get Kenesian on us” was funny and true.
Chris, you have been discussing Stagflation for a while and have been dead on.
LPG your comments on the potential for higher taxes seems likely and disappointing simultaneously. The erosion in Confidence will likely start midway through Q2 and Q3 and by the end of 2015 and 2016 the illusion will start dissolving.
Good thoughts everyone!
Just noticed one word was missing in my post above. One of the sentence should read:
” […] ie when most people REALIZE that the “self narrative” which defines the country is just an illusion or something from the past. […] ”
Apologies for the confusion caused.
Best to all,
LPG
LPG,
Nice post! One of my favorite lines that has always stuck with me is “When you you lose everything and there is nothing left to lose, you lose it”. This can be applied to 3rd world countries where a father needs to go out and get food at all cost. I don’t know when but it’s in the books and it will happen to america at some level. It is already happening in isolated areas.
I’ll put in my order now for one of those wheelbarrows.
I want the one that matches my tinfoil hat.
Ha! Funny John K.
Chris Temple – Also very funny comments about the new designer wheelbarrow line you’ll be releasing down the road : – )
I want a carbon fiber one with a five-spoke AMG wheel and a good low profile Michelin tire. 😉
I want with with a built in stereo and hydraulics. That way I can pimp my ride when I wheelbarrow around funny money.
lol !
Nice one Michael !
Best,
LPG
Damn, who knows?? Maybe Yellen will throw out the first pitch for Game 1 at Wrigley.
Temple… turn up yr audio man… cannot hear you
thanks
Sorry, Agatha…was a bit too far from the mike, I think
No issue with audio level from my side at all Chris, fwiw.
Best,
LPG
It seemed clear to me, but I had the show at a high volume to soak up the wisdom.
Our rulers have created the greatest debt bubble in the history of the world.
Until the debt is resolved we will have stagnation if not economic collapse.
I don’t foresee a healthy economy in my lifetime.
Agreed Ebolan.
A note to Lawrence about the Shanghai SSE Composite: Yesterday we were talking about that market and you mentioned in some words you felt it could go higher because it has not yet come close to the past peaks.
I agreed with you and said I thought this was not a bad time to be invested there if you felt you could time the top and get out before it corrects. But I had some other comments that may interest you a lot more.
In a nutshell I believe the SSE will see its old highs again. But not before a healthy correction which could come at any time in the next few months. If you look at the SSE chart you can see that we are in what is most likely a third wave move.
And that chart is going to therefore be a proxy for the Dow, Nasdaq and S&P.
Let me explain…..reading US equity index charts is now almost impossible if one was trying to divine where the top is finally going to be. Everyone tries and almost everyone misses. So we need to look elsewhere for answers and clues.
On the basis that liquidity injections are a global affair we can surmise that the Shanghai might also be experiencing excess valuations that mimin US stock markets. Indeed that is the case now and has been for the past 9 months.
But what is interesting is that because the SSE was late to the party and has subsequently seen very large moves, its chart pattern is actually easier to read and offer hints about the topping process elsewhere.
Digging in a little deeper, you probably know that major stock market corrections are a global event. That is a time when we see equities across the globe decline together. Often enough the first cracks actually appear in Asia these days and so that is what we monitor to know when the S&P will finally take its plunge.
So watch for signs of impending stress in the Chinese markets if you want a heads up to get short the S&P. If this is indeed a wave three up it also offers good clues about how high US stock markets will ultimately run as the Shanghai eventually recovers and moves into its final parabolic stage at a later date.
Thoughts anyone?
If past if prologue and assuming they ease more, I would expect some serious weakness around April 30 for gold/silver:
http://www.reuters.com/article/2015/04/01/us-japan-economy-boj-idUSKBN0MS36S20150401
GL to all investing/trading
LPG
PS: will likely re-post this link under podcasts of April 2.
Must read, IMHO
http://www.financialsense.com/contributors/chris-puplava/financial-stress-rising-time-worry
Best to all,
LPG
Take note…we are posting inside reversals on gold silver, platinum and crude WTI at this early hour near the opening. The days is not over but this is something to keep in mind for market open Monday if those hold…..we are open Easter Monday right?….off to check….
The following is pretty interesting when you examine the EM charts posted.
A Closer Look: Emerging Markets – Short Side of Long
http://shortsideoflong.com/2015/04/a-closer-look-emerging-markets/
Larry Edelsons take on where the market is going. Hint…take cover. I thought it was interesting.
The Slaughterhouse Gates are Starting to Open
http://www.swingtradingdaily.com/2015/04/01/the-slaughterhouse-gates-are-starting-to-open/
By the way, the above two articles mirror each other which is why I posted both of them. Larry talks about low cash balances of the major funds (fund managers mutual fund cash-to-asset ratio) and why this level of bullishness is a big risk going forward whereas The Short Side talks about high cash balances and why the EM’s could break out of their triangle formations.
WINDY TAKE A BREAK.
Voices of the condemned. As those who will repeat the mistakes of the past because they cannot learn from history.
No condemnation here…..just fact.
Windy! https://ca.images.search.yahoo.com/search/images;_ylt=A0LEV2MwBx5VpNsA.QbrFAx.;_ylu=X3oDMTB1ZzN1NTI4BHNlYwNzYwRjb2xvA2JmMQR2dGlkA1ZJUENBMTBfMQ–?_adv_prop=image&fr=yfp-t-715-s&va=the+penguin+batman
Has anyone watched Martin Armstrong online presentation this week-end and his debt to equity swap proposal ?
Just curious…
Best,
LPG