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Credit deflation and the reflation cycle to come.


DurhamBorn

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Castlevania
5 minutes ago, sancho panza said:

At my work (NHS),all the youngsters are qualifying and getting alease car that sucks in at least a few grand a year if not more.Never mind the student debt.All the older cars in the car park belong to the older crowd and those of the youngsters that mechanic their own cars.

 

Quite how they're going to buy a hosue at ten times salary I don't know.

I’m not surprised. When young most people are awful with money. I definitely was. Not many people grow out of that though.

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sancho panza

Fed still shrinking it's balance sheet and shortening duration on Treasuries

https://wolfstreet.com/2019/06/06/fed-balance-sheet-drops-by-42-billion-in-may-sheds-mbs-at-fastest-pace-starts-the-reverse-of-operation-twist/

May was the first month of the Fed’s new plan of slowing QT and altering it in other ways. And suddenly, everything is in flux: It shed Treasury securities at a slowing pace, as announced, but for the first time – and not part of the pre-announced plan for May – the Fed replaced some longer-term Treasuries with short-term Treasury bills, thus doing the opposite of its QE-era “Operation Twist.” And it shed the most Mortgage Backed Securities since the QE unwind started.

Total assets fell by $42 billion in May, as of the balance sheet for the week ended June 5, released this afternoon. This was the balance-sheet week that included May 31, the date when Treasuries rolled off. This drop reduced the assets to $3,848 billion, the lowest since October 2013. Since the beginning of the “balance sheet normalization” process, the Fed has shed $613 billion. Since peak-QE in January 2015, the Fed has shed $669 billion:

US-Fed-Balance-sheet-2019-06-06-.png

In May, the balance of MBS fell by $20 billion to $1,555 billion. Under the new regime through September, the runoff of MBS is set to continue as before, with a cap of “up to” $20 billion a month. Until May, the cap of $20 billion was never reached. In April, the MBS runoff topped out at $17 billion. The MBS runoff in May, at $20 billion, was the largest so far:

US-Fed-Balance-sheet-2019-06-06-MBS.png

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sancho panza

Another great Wolf St piece.Why would the Fed cut when GDP is growing at 3% plus,unemployment is at record lows and stock markets are near record highs?

https://wolfstreet.com/2019/06/06/if-the-fed-does-not-cut-rates-3-or-4-times-by-december/

Here’s My Prediction: If the Fed Doesn’t Cut Rates 3 or 4 Times by Dec 11, Markets Are Going to Crap

But here is the thing: The stock market is near its highs and is predicting boom times forevermore. During a downturn of the type that would induce the Fed to cut rates, corporate earnings collapse, revenues fall, PE ratios go to heck, and over-leveraged companies begin to default on their debts, which tends to wipe out shareholders. Economic downturns can be terrible for stocks that have been inflated like this and priced way beyond perfection. But there are no signs yet that the stock market, which is supposed to be forward-looking, is pricing in any of these risks. It’s gallivanting around in la-la-land.

The corporate credit market is sanguine. Junk bonds too are once again in la-la land. Junk-bond yields are low, given the risks. And yield spreads – the difference between junk bonds and Treasury securities – are still narrow though they have started to widen a tiny bit, showing that the corporate bond markets, like the stock market, is seeing an endless boom. Junk bonds get hammered in a big way when the economy turns south because in a downturn these over-leveraged cashflow-negative companies are suddenly grappling with existential problems. But that’s not happening yet.

In terms of the economy, first quarter GDP grew at a rate of 3.1%, the best Q1 since 2015. Over the past 13 years, there were only three years with higher first-quarter GDP growth rates (2012, 2013, and 2015). But there were four years when GDP declined in Q1 (2008, 2009, 2011, and 2014). So Q1 2019 was pretty good. Not a lot of data has come in for Q2 yet. So far, it looks a little weaker than Q1, but OK-ish.

Unemployment claims are bouncing along multi-decade lows. The labor market is a heck of a lot better than it was and is the strongest in years. Manufacturing is still growing, if barely, and growth is slowing and might turn negative, but it’s only a small part of the US economy. Services, which dominate the US economy – finance and insurance, healthcare, professional services, information services, etc. – are growing at a decent clip.

Consumers are making more money and are spending more at a decent clip. Consumer confidence is high. Government spending is growing in leaps and bounds, which stimulates the economy too.

So neither stocks nor riskier bonds are seeing a recession. And yet a different end of the market – the one that bets on Treasury securities, Fed Fund futures, and the like, is betting on three or four rate cuts over the next six months.

I’m not sure how this circus will turn out, but if those three or four rate cuts that are now increasingly being priced in and taken for granted in some parts of the market don’t materialize by December 11, 2019, and if the Fed can’t figure out in a New York minute how to walk markets back “gradually” from those expectations, you might want to fasten your seat belt.

So neither stocks nor riskier bonds are seeing a recession. And yet a different end of the market – the one that bets on Treasury securities, Fed Fund futures, and the like, is betting on three or four rate cuts over the next six months.

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sancho panza

https://moneymaven.io/mishtalk/economics/brace-for-impact-italy-poised-to-launch-euro-parallel-currency-jfYIUXnEmUe-yeo0-uVZrg/

Italy faces an "Excessive Deficit" ruling, the first in EU history. Italy's response is a parallel currency proposal.

A euro crisis has been brewing for years.

Eurozone officials and the ECB have long held the upper hand vs individual countries like Greece and Portugal.

However, Italy now has the upper hand, if it chooses to wage war.

Let's backup and start from the beginning to tie this story together.

Excessive Debt

Please consider EU Could Slap 3 Billion Euro Fine on Italy for Excessive Debt.

The European Commission could impose a 3 billion euro fine on Italy for breaking EU rules due to its rising debt and structural deficit levels, the country’s Deputy Prime Minister Matteo Salvini said on Tuesday.

Salvini, whose far-right League party triumphed in European elections on Sunday, said he would use “all my energies” to fight what he said were outdated and unfair European fiscal rules.

“Let’s see if we get this letter where they give us a fine for debt accumulated over the past and tell us to pay 3 billion euros,” Salvini said in an interview with RTL radio.

What About France?

 

 

While everyone is talking about Italy and its budget deficit, France has not had a balanced budget since the late 70s

France vs Italy Key Points

  • The current debate is over excessive debt, not deficits.
  • Italy is in defiance of debt, not deficit rules, but its proposed budget will violate both.
  • France violates both sets of numbers already, but not by as much.
  • In essence, there is one set of rules for France and Germany and another set of rules for everyone else.

Parallel Currency Proposal

Please consider Italy to Activate its 'Parallel Currency' in Defiant Riposte to EU Ultimatum.

“I don’t govern a country on its knees,” said Matteo Salvini after sweeping the European elections even more emphatically than the Brexit party. Note the majestic ‘I’. He is already master of Rome.

The Lega strongman can no longer be contained, even by Italy’s ever-ingenious mandarin class. His party commands 40pc of the country together with eurosceptic confederates from the Brothers of Italy. It has erupted like a volcano in the Bourbon territories of the Mezzogiorno, now on the front line of migrant flows and left to fend for itself by Europe. Salvini can force a snap-election at any time.

By some maniacal reflex the dying Commission of Jean-Claude Juncker has chosen this moment to draw up the first indictment letter of the revamped debt and deficits regime. Italy faces €3.5bn of fines for failure to tighten its belt. It has 48 hours to respond.

“We’re not Greece,” said Claudio Borghi, Lega chairman of Italy’s house budget committee. “We are net contributors to the EU budget. We have a trade surplus and primary budget surplus. We don’t need anything from anybody. And we are in better shape than France.”

“I am not going to hang myself for some silly rule,” said Salvini. “Until unemployment falls to 5pc we have a right to invest. We have regions where youth unemployment is 50pc. We need a Trump cure, a positive fiscal shock to reboot the country.” His plan is a €30bn boost led by a flat tax of 15pc.

Concerns Over "Euro Default Risk" Mount

The concerns over Italy have hit mainstream media in the EU, but not the US. For example, please consider German Bundesbank Comes Clean on Euro Default Risks After Italy's 'Parallel Currency' Decree

The German Bundesbank has warned that it could face heavy losses if a major country leaves the euro and defaults on debts to the European Central Bank system, but warned that any attempt to prepare for such a crisis could backfire by triggering a speculative attack.

The analysis is highly sensitive coming just days after the insurgent Lega-Five Star government in Italy passed a decree in the Italian parliament authorizing the creation of a parallel payments system known as ‘minibots’, a scheme decried by critics as a threat to the integrity of the euro and potentially a ‘lira-in-waiting’.

While the Bundesbank text sticks to the standard line that a euro break-up is hypothetical it nevertheless admits - after years of obfuscation - that the ECB’s internal Target2 settlement system entails inescapable costs for Germany and other EMU member states should it ever happen. It also gives the impression that the monetary authorities have no clear strategy for handling such a crisis.

Professor Philip Turner, a former monetary official at the Bank for International Settlements, said the politics of Target2 are poisonous. “This is lending on a huge scale that no government has approved. It is covering fundamental imbalances at the heart of the eurozone system, and it can’t go on indefinitely,” he said.

The International Monetary Fund says it would be hard to prevent a sovereign debt crisis in Italy engulfing Spain and Portugal. The ECB could therefore face a Target2 crisis approaching €1 trillion if Italy’s rebel government sets off a chain reaction with its ‘minibot’ notes - which it claims are needed to cover €52bn of state arrears to Italian contractors and households.

The Bundesbank’s text states that if a country leaves EMU and its central bank defaults on Target2 liabilities, the ECB will have to eat through a series of buffers: first its own capital - dramatic enough - and then by drawing in money from the remaining central banks on a ‘capital key’ basis.\

Not Shocking

There is not a single thing shocking in the preceding analysis other than the discussion is finally taking place at top levels.

I have been discussing Target2 imbalances for years.

  1. Eight Reasons a Financial Crisis is Coming
  2. "One Size Fits Germany" Math Impossibility, Get Your Money Out of Italy Now!
  3. Eurointelligence Displays Stunning Ignorance Regarding Target2
  4. Another Rebuttal to the Idea that Target2 Claims are "Fictional"

Masters in Circumventing Rules

About one year ago, I commented a Reader From Italy Chimes in on the "Minibot" Parallel Currency Idea.

Hello Mish

Regardless of anything else: Italians are masters in finding smart ways to circumvent rules. There is even an adage in Italy regarding this.

On that basis, I would not be surprised if at one point in time, someone in Brussels or Frankfurt will realize too late precisely what is happening. .....

This was my reply to reader "AC":

Germany gets to decide between debt mutualization or a breakup of the Eurozone and Italian default on Target2 imbalances. The only other possibility that comes to mind is the ECB prints enough to backstop Target2.

Target2 Imbalances April 2019

 

https%3A%2F%2Fs3-us-west-2.amazonaws.com
 

Italy, Spain, Germany

  • Italy owes creditors, primarily Germany, €481 billion.
  • Spain owes creditors, primarily Germany, €403 billion.
  • Germany needs to collate €919 billion from debtors.

The above numbers have not changed that much in the past year.

What Has Recently Changed?

The answer is amusing.

To prevent Beppe Grillo and his 5-Star movement from coming into power, Italy changed its election rules to give coalitions more power than parties.

The result is Salvini might win so much support in the next election that he may have a super-majority in Parliament so as to not need a referendum to launch the mini-bot parallel currency.

And so, here we are.

Italy owes creditors close to half a trillion euros. If Italy defaults, the rest of the countries have to pick up the tab based on GDP percentage weights.

Default Percentages

 

https%3A%2F%2Fs3-us-west-2.amazonaws.com
 

Curiously, via ESM Rules, if Italy were to default, Italy would be responsible for 17.91% of the tab.

Germany would be liable for 27.14% of the tab.

Spain, which already has a Target2 liability of €403 billion would be responsible, in theory, for picking up 11.9% of €481 billion, but that doers not count the 17.9% that Italy would of course not pay.

Upper Hand?

With Greece and Portugal, the ECB had the upper hand.

Who has the upper hand here?

I suggest Italy and I hope Italy uses it.

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4 hours ago, sancho panza said:

........

Might be this one.I have no idea whether it's tradeable in sterling but would be interested to know

https://uk.investing.com/etfs/market-vectors-gold-miners-uk

Pretty sure that's listed in USD, requiring a FOREX transaction to buy and sell, maybe even if your broker gives you a multi currency account feature.  I think at least some of the other LSE ones are in GBP. 

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4 hours ago, sancho panza said:

Quite how they're going to buy a hosue at ten times salary I don't know.

Per Japan in the 1980s, it gets to a point where people's spending  patterns go "odd" as they can't buy a house.  The Japanese youngsters in such a situation once used to buy gold dust and sprinkle it on their food!

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MiceliumMan

Hi,

First post here although I used to follow the corresponding thread on HPC.  Excellent thread still.

 

I want to as the advice of the members on here regarding in 'investing' in different shares.  I'm not talking about day trading but purchasing 'shares' in companies from reading their charts....breakouts etc.  I was thinking of spread-betting but I'm not sure if this is the way to go.  What would your advice be?  Thanks.

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Currently listening to this podcast episode. Probably of interest to anyone on here who's bored on a Sunday evening (e.g. me)

 

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sancho panza
12 hours ago, 0x80 said:

Currently listening to this podcast episode. Probably of interest to anyone on here who's bored on a Sunday evening (e.g. me)

 

Some really good stuff on there.Bit of BS from the interviewer for the first ten but Fleckenstein is super knowledgeable.

1) talking Kyle bass who said once you go down the road of QE and Zirp you can't get out of it.Which is very true.Starting a policy you can't exit is insanity.

2) none of us ever dreamed they'd sustain QE etc this long,what will change things is when inflation kicks in and they have to stop QE/Zirp.

3) talks about the vagaries of ignoring HPI in inflation figures by using rental equivalence measures

4) non enforcement of Sarbanes oxley - media running non GAAP numbers to pump stocks

5) Q4 was the forerunner of a decent drop in stocks

6) Lot of people in the market have never known a downturn

 

 

That  point on inflation is something I've considered as a real risk to current monetary policy.When inflation kicks in,velocity will start to run and then the genie will be out of the bottle.

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45 minutes ago, sancho panza said:

Some really good stuff on there.Bit of BS from the interviewer for the first ten but Fleckenstein is super knowledgeable.

1) talking Kyle bass who said once you go down the road of QE and Zirp you can't get out of it.Which is very true.Starting a policy you can't exit is insanity.

2) none of us ever dreamed they'd sustain QE etc this long,what will change things is when inflation kicks in and they have to stop QE/Zirp.

3) talks about the vagaries of ignoring HPI in inflation figures by using rental equivalence measures

4) non enforcement of Sarbanes oxley - media running non GAAP numbers to pump stocks

5) Q4 was the forerunner of a decent drop in stocks

6) Lot of people in the market have never known a downturn

 

 

That  point on inflation is something I've considered as a real risk to current monetary policy.When inflation kicks in,velocity will start to run and then the genie will be out of the bottle.

QE/ZIRP was only a short term solution - 12/24 months. And only when the CB have total control over bank lending.

Beyond 24months and QE/ZIRP becomes a bigger problem than the one it set out to fix.

 

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Hi, excuse this longish question, but I have been avid follower of this blog since it begun and am in the last stages of rebalancing my portfolio for the coming reflation cycle/and also guarding against the expected turmoil in the US/EuroZone markets. I would very much welcome feedback and views from the blog members.

I have 300k (with 100k of this currently held in cash) in my pensions and isa’s. I’ve divested away from US/Europe and bought into reflation type investments including some shares discussed here, infrastructure funds, commodities, gold/silver. I also hold what I consider value type funds - mostly Asia/EM region and biased toward small/med. caps. My plan is to buy into battered down reflation stocks and world/regional etf’s after stock market corrections.   

I realise that the portfolio ratios for the above investments is also relevant but thought it wise not to overcomplicate my question by providing too much detail.

 

My first question is relating to my Asia/EM funds in regard to the coming bear market correction - which I believe will be contained mostly within US/Europe - is it wise/unwise to hold any Asia/EM funds? My thinking is that Asia/EM will be mostly not affected?

Secondly (more complicated question), where can i ‘park’ my 100k cash for say next 12 months (or even longer perhaps; as realise economic forecasting is an art not science) – reason is because for me this amount of funds is burning a serious whole. In terms of risk I am not brave/silly enough to allocate entire amount into one thing, but was hoping that someone here may already have invested their cash funds, rather than keeping those funds in cash, and if so it would be great if they could share their strategy. I know there is advantage in being able to deploy cash after markets are eventually battered down… but perhaps some here have ideas for a ‘minimum downside type investment’ that offers potential growth during the coming expected market shake down - e.g. perhaps bonds/commodities(gdx)/reflation stocks (under valued, inflation protected, high liquidity, unfashionable) - yes, I suppose I do want the moon on a stick (or in modern parlance a unicorn)! But seriously, are there any ideas from people who perhaps like me are not keen to remain in cash?       

 

All feedback received is greatly appreciated, but obviously as per the understood terms of this forum I will not interpret any responses as financial advice.

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8 hours ago, sancho panza said:

1) talking Kyle bass who said once you go down the road of QE and Zirp you can't get out of it.

This is just basic Austrian School economics.

There is no escape. They either abandon the current economic system voluntarily or everything will be destroyed.

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1 hour ago, JMD said:

Secondly (more complicated question), where can i ‘park’ my 100k cash for say next 12 months (or even longer perhaps; as realise economic forecasting is an art not science) – reason is because for me this amount of funds is burning a serious whole.

For the loss you'll suffer in returns in cash you may as well put 50K in Premium Bonds each for you and partner (if you have one). That's what I have done, and I'm averaging the expected 1.4% tax free return. I know that is a loss after inflation but it's pretty miniscule.

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Bobthebuilder
1 hour ago, JMD said:

Hi, excuse this longish question, but I have been avid follower of this blog since it begun and am in the last stages of rebalancing my portfolio for the coming reflation cycle/and also guarding against the expected turmoil in the US/EuroZone markets. I would very much welcome feedback and views from the blog members.

I have 300k (with 100k of this currently held in cash) in my pensions and isa’s. I’ve divested away from US/Europe and bought into reflation type investments including some shares discussed here, infrastructure funds, commodities, gold/silver. I also hold what I consider value type funds - mostly Asia/EM region and biased toward small/med. caps. My plan is to buy into battered down reflation stocks and world/regional etf’s after stock market corrections.   

 

I realise that the portfolio ratios for the above investments is also relevant but thought it wise not to overcomplicate my question by providing too much detail.

 

 

My first question is relating to my Asia/EM funds in regard to the coming bear market correction - which I believe will be contained mostly within US/Europe - is it wise/unwise to hold any Asia/EM funds? My thinking is that Asia/EM will be mostly not affected?

 

Secondly (more complicated question), where can i ‘park’ my 100k cash for say next 12 months (or even longer perhaps; as realise economic forecasting is an art not science) – reason is because for me this amount of funds is burning a serious whole. In terms of risk I am not brave/silly enough to allocate entire amount into one thing, but was hoping that someone here may already have invested their cash funds, rather than keeping those funds in cash, and if so it would be great if they could share their strategy. I know there is advantage in being able to deploy cash after markets are eventually battered down… but perhaps some here have ideas for a ‘minimum downside type investment’ that offers potential growth during the coming expected market shake down - e.g. perhaps bonds/commodities(gdx)/reflation stocks (under valued, inflation protected, high liquidity, unfashionable) - yes, I suppose I do want the moon on a stick (or in modern parlance a unicorn)! But seriously, are there any ideas from people who perhaps like me are not keen to remain in cash?       

 

 

 

All feedback received is greatly appreciated, but obviously as per the understood terms of this forum I will not interpret any responses as financial advice.

Cash is always a hard bit to do.

I park funds in 1Yr fixes spread across 4 quaters so i am having to find the best deal every 4 months.

Premium bonds are ok and pretty liquid.

Clear any debt, etc, i could go on but you know what im talking about.

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ashestoashes

any views on the future for Centrica ? some say 85p target others uninvestable, I'm thinking to stay invested for the long term, but there seems to be a lot of unhappy investors and employees.

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ninjaborrower
19 hours ago, spygirl said:

QE/ZIRP was only a short term solution - 12/24 months. And only when the CB have total control over bank lending.

Beyond 24months and QE/ZIRP becomes a bigger problem than the one it set out to fix.

 

If QE and ZIRP are praticed on a global scale by everyone and not just a rogue state like germany in the 20s they can keep things going for decades ?

 And with the push for a cashless society the effects of these policies can go unnoticed by the population as a whole ? 

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10 hours ago, ashestoashes said:

any views on the future for Centrica ? some say 85p target others uninvestable, I'm thinking to stay invested for the long term, but there seems to be a lot of unhappy investors and employees.

Iv got it at 3.5% of my portfolio and happy to hold.If it went down so be it.They have legacy issues and need to off load the nuclear power stake for a starter.However they are also world leaders in distributed energy and the software that goes with it.There is a good chance block chain will play a huge role in electric vehicle charging etc.They have been slowly tidying up the balance sheet,but havent had any credit for that.I remember buying a couple of companies back when Clinton was president.All the brokers said they were uninvestable,BAT Tobacco at about £5 and Imperial at around £3.30.They paid my house off + a lot extra.I invested £14k and re-invested the divis.The main thing is surviving the end of this cycle and making it to the next.We can know who might not make it,so need to keep diversified.

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Democorruptcy
50 minutes ago, DurhamBorn said:

Iv got it at 3.5% of my portfolio and happy to hold.If it went down so be it.They have legacy issues and need to off load the nuclear power stake for a starter.However they are also world leaders in distributed energy and the software that goes with it.There is a good chance block chain will play a huge role in electric vehicle charging etc.They have been slowly tidying up the balance sheet,but havent had any credit for that.I remember buying a couple of companies back when Clinton was president.All the brokers said they were uninvestable,BAT Tobacco at about £5 and Imperial at around £3.30.They paid my house off + a lot extra.I invested £14k and re-invested the divis.The main thing is surviving the end of this cycle and making it to the next.We can know who might not make it,so need to keep diversified.

What do you think of this for asset allocation?

 

assetallocation.jpg

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Read this an thought of this thread

https://www.economist.com/finance-and-economics/2019/06/06/the-long-term-decline-in-bond-yields-enters-a-new-phase

At the end of 1989, an American in London received a call from a friend back home. The caller had watched the fall of the Berlin Wall and the toppling of Nicolae Ceausescu in Romania with growing dismay. He was at the end of a four-year course in Russian Studies at an elite university with hefty tuition fees. He had learned all the Kremlinology a would-be cold warrior could need—but not that the cold war might suddenly end. “I just took a $60,000 bath,” he said.

This story comes to mind not so much because of fears of a new cold war, this time with China, but because of the bond market’s recent response to such fears. Long-term interest rates have tumbled almost as swiftly as communism fell in Europe. The yield on a ten-year Treasury bond has plunged from 2.5% to 2.1% in the past month. Ten-year Bund yields have turned negative again and have reached a new all-time low.

What happens to long-term interest rates in large part reflects what is expected to happen to short-term rates. The bond market’s Kremlinologists expect the Federal Reserve to cut them soon. Other central banks will seek to keep money easy. One consequence is that the secular decline in real interest rates is unlikely to reverse soon (see chart). The implications are far-reaching: the whole edifice of asset prices is founded on a low-rate regime. But what if that regime were to come to an abrupt eventual end?

It is hard to be truly confident about the future path of real interest rates. The reasons for their decades-long decline are not well understood or agreed upon. One school stresses an increased desire for saving. Demographic change is part of this story. As a large chunk of the rich world’s population approaches the end of their working lives, they seek to set aside more of their income for retirement. The integration of high-saving China into the world economy is another factor. In this view, long-term interest rates had to fall simply to clear the saturated global market for savings.

Another school says that low bond yields are a distortion caused by the policies pursued by central banks in the rich world. They have kept short-term interest rates close to (or in some cases below) zero for much of the past decade. They have also spent trillions of dollars buying government bonds with the explicit goal of driving down long-term interest rates. In their defence, central bankers say they set interest rates to keep the economy purring. If they had pressed down too hard on the monetary pedal, the result ought to be a burst of rising prices.

In the absence of rising inflation it seems reasonable to expect that the era of low interest rates will last. If yields on the safest government bonds remain low, the expected returns on other assets—the earnings yield on equities, say, or the rental yield on property—should stay in line. The result would be that all assets will continue to look expensive relative to their long-run averages.

As logical as this seems, it is nevertheless disquieting. At some stage the influences that have pushed down yields will attenuate, even if this is not soon. Long-term interest rates will surely rise again. It is reasonable to believe that this will not be sudden. Demographic change happens slowly. So perhaps asset prices will adjust slowly to the new reality, whenever it dawns. But it is quite hard to imagine a world in which real interest rates grind upwards and asset-holders avoid taking a capital loss, says Shamik Dhar of bnyMellon, a fund-management group. The uncertainty about the timing of even a gradual adjustment creates headaches, for instance for someone hoping to own a home. Buy at the wrong time, and you end up with a house that slowly loses value.

And what if real interest rates rise a lot more quickly than they fell? Well, they might. China is already a spent force in the global savings glut: its current-account surplus has dwindled to next to nothing. Baby-boomers moving into retirement might step up their spending. If rich countries turn once again to fiscal policy as a tool for ginning up their economies, there are plenty of asset-heavy projects (airports, roads, fibre-optic networks) to soak up savings.

Kremlinologists look for signs of shifting authority, for who’s up and who’s down. But when everyone is focused on who will be the next boss, they may all miss signs that the regime itself is cracking. For now, financial-market Kremlinologists are preoccupied with which assets to hold and which to avoid. But at some point capital will become scarcer. Somebody may find that they have taken an expensive bath.

I can give you my version - big lump of boomers moving from borrowing (mortgage) to saving (pension), combined with China entering the world economy, where you have both the CCP trying to keep its currency down by washing most of it export profits in dollar bonds. and Mrs Chen saving money like a loon, trying to get out as much as possible away from China.

Combine that with idiot economist/CB blowing  massive credit bubble post 9/11, then blowing up the banks, then QE/ZIRP..

Last 20 years the West esp, UK, where finance sector is about 5x the size of the US, has not had normal market signals/pricing.

Now we are the end.

QE/ZIRP cannot be seen as anything but a failure by anyone whos not a CB.

Boomers have reached retirement, so theres big switch from saving to looking to earn return - good look with that money market at sub 0.5% real interests.

Cbina is switching to consuming/v revolution as they lsb what the cash in their savings.

My recommendations - bullet proof assets/strong currency - which stuff like gold n silver and miner provide a proxy for.

Keep you debt low and fixed as much as you can.

Dont buy a new car. Ever.

Tell anyone looking to HTB andor mortgage for 30 years not to.

Only have one house; limit you exposure to real estate.

 

 

 

 

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51 minutes ago, spygirl said:

Read this an thought of this thread

https://www.economist.com/finance-and-economics/2019/06/06/the-long-term-decline-in-bond-yields-enters-a-new-phase

At the end of 1989, an American in London received a call from a friend back home. The caller had watched the fall of the Berlin Wall and the toppling of Nicolae Ceausescu in Romania with growing dismay. He was at the end of a four-year course in Russian Studies at an elite university with hefty tuition fees. He had learned all the Kremlinology a would-be cold warrior could need—but not that the cold war might suddenly end. “I just took a $60,000 bath,” he said.

This story comes to mind not so much because of fears of a new cold war, this time with China, but because of the bond market’s recent response to such fears. Long-term interest rates have tumbled almost as swiftly as communism fell in Europe. The yield on a ten-year Treasury bond has plunged from 2.5% to 2.1% in the past month. Ten-year Bund yields have turned negative again and have reached a new all-time low.

What happens to long-term interest rates in large part reflects what is expected to happen to short-term rates. The bond market’s Kremlinologists expect the Federal Reserve to cut them soon. Other central banks will seek to keep money easy. One consequence is that the secular decline in real interest rates is unlikely to reverse soon (see chart). The implications are far-reaching: the whole edifice of asset prices is founded on a low-rate regime. But what if that regime were to come to an abrupt eventual end?

It is hard to be truly confident about the future path of real interest rates. The reasons for their decades-long decline are not well understood or agreed upon. One school stresses an increased desire for saving. Demographic change is part of this story. As a large chunk of the rich world’s population approaches the end of their working lives, they seek to set aside more of their income for retirement. The integration of high-saving China into the world economy is another factor. In this view, long-term interest rates had to fall simply to clear the saturated global market for savings.

Another school says that low bond yields are a distortion caused by the policies pursued by central banks in the rich world. They have kept short-term interest rates close to (or in some cases below) zero for much of the past decade. They have also spent trillions of dollars buying government bonds with the explicit goal of driving down long-term interest rates. In their defence, central bankers say they set interest rates to keep the economy purring. If they had pressed down too hard on the monetary pedal, the result ought to be a burst of rising prices.

In the absence of rising inflation it seems reasonable to expect that the era of low interest rates will last. If yields on the safest government bonds remain low, the expected returns on other assets—the earnings yield on equities, say, or the rental yield on property—should stay in line. The result would be that all assets will continue to look expensive relative to their long-run averages.

As logical as this seems, it is nevertheless disquieting. At some stage the influences that have pushed down yields will attenuate, even if this is not soon. Long-term interest rates will surely rise again. It is reasonable to believe that this will not be sudden. Demographic change happens slowly. So perhaps asset prices will adjust slowly to the new reality, whenever it dawns. But it is quite hard to imagine a world in which real interest rates grind upwards and asset-holders avoid taking a capital loss, says Shamik Dhar of bnyMellon, a fund-management group. The uncertainty about the timing of even a gradual adjustment creates headaches, for instance for someone hoping to own a home. Buy at the wrong time, and you end up with a house that slowly loses value.

And what if real interest rates rise a lot more quickly than they fell? Well, they might. China is already a spent force in the global savings glut: its current-account surplus has dwindled to next to nothing. Baby-boomers moving into retirement might step up their spending. If rich countries turn once again to fiscal policy as a tool for ginning up their economies, there are plenty of asset-heavy projects (airports, roads, fibre-optic networks) to soak up savings.

Kremlinologists look for signs of shifting authority, for who’s up and who’s down. But when everyone is focused on who will be the next boss, they may all miss signs that the regime itself is cracking. For now, financial-market Kremlinologists are preoccupied with which assets to hold and which to avoid. But at some point capital will become scarcer. Somebody may find that they have taken an expensive bath.

I can give you my version - big lump of boomers moving from borrowing (mortgage) to saving (pension), combined with China entering the world economy, where you have both the CCP trying to keep its currency down by washing most of it export profits in dollar bonds. and Mrs Chen saving money like a loon, trying to get out as much as possible away from China.

Combine that with idiot economist/CB blowing  massive credit bubble post 9/11, then blowing up the banks, then QE/ZIRP..

Last 20 years the West esp, UK, where finance sector is about 5x the size of the US, has not had normal market signals/pricing.

Now we are the end.

QE/ZIRP cannot be seen as anything but a failure by anyone whos not a CB.

Boomers have reached retirement, so theres big switch from saving to looking to earn return - good look with that money market at sub 0.5% real interests.

Cbina is switching to consuming/v revolution as they lsb what the cash in their savings.

My recommendations - bullet proof assets/strong currency - which stuff like gold n silver and miner provide a proxy for.

Keep you debt low and fixed as much as you can.

Dont buy a new car. Ever.

Tell anyone looking to HTB andor mortgage for 30 years not to.

Only have one house; limit you exposure to real estate.

As someone looking to buy my first home in the next 2 years or so, a sobering read but I agree. I'll be buying outside of the SE bubble and keeping my expectations modest, 10 year fix essential.

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