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DurhamBorn

Credit deflation and the reflation cycle to come.

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14 minutes ago, spygirl said:

Nope.

The private reantal sector is small, even with the soon to be bust IO BTL idiots.

As the UK housign stands at the mo, about 10 years of supply are to be dumped onto the market.

There has been large structureal shifts in employment and wages paid, this will reduce the mortgage someone can sduport.

Changes like MMR are massive, huge.

Nope. The UK Housing market will go like Scarborohghs - large number of probates with no one to buy. Local prices are everywhere - there's limited price diferntial between small and large houses.

Raise IRs just a bit - say 3%, and with the current mortgage spread on mortgages - 3% - thats 6%.

 

 

I think we're each refracting the national market through our local markets.

I see no indication of a stall let alone a crash in Cornwall; any property not stupidly priced just sells.

And to be clear I do not regard that or the current high level of house prices as a good thing.

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5 hours ago, Frank Hovis said:

I agree with the long term but why do you think that there will necessarily be this massive debt liquidation event?

Yes the Fed is into uncharted ground with both interest rate rises and unwinding QE and could get it wrong but we have seen ten years of countries' racing to devalue their currencies.  Central banks, sorry ha ha independent central banks, are always loooking for any excuse to cut rates and print money and at the first danger signs they'll do this and let the inlfation this causes erode the big debt bubbles whilst continuing to boost asset values in nominal terms.

Morally I like the idea of the feckless borrower getting their fingers burnt but will it happen on a grand scale?  I can't see it being allowed; governments will bend and break the rules again.

The one big weapon they have is that they can let money slowly devalue so that everyone feels richer and old debts become easier to service.  I don't see why they wouldn't do this.

However I am merely disagreeing without positing my own view to be shot down which is that the current round of interest rate rises will be shortlived and even through it real interest rates - Base Rate - RPI - will still be mostly negative.  As soon as problems arise from this toghtening there will be gross over-reaction from the banks and inflation will be deliberately stoked to lessen the personal / corporate debt burden.

So my primary requirement from any investment remains that it will increase in value with inflation rather than being eroded by it.  So equities, index linked, and yes gold if you must.

I don't see houses having that quality as they have already risen so far in advance of inflation that I think they have considerbaly overshot and they are due a long period of nominal stagnation or minor falls and real terms major falls.

 

The debt deflation could happen slowly,or,as we think with severe financial dislocation and panic.The reason mainly is liquidity and the calls on it.The scale of the debt worldwide means that a fall in liquidity make it certain people start to default.We also see massive risks in second line derivatives.Nothing is ever certain,but the risks now are severe.Rates from 20% to 0.5% with asset prices following have taken this cycle to extreme lengths.The reaction you see from governments is exactly what we think is coming.A reflation,but we dont think they can get there until the debt is deflated through defaults.We will just have to see how it plays out.

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54 minutes ago, Frank Hovis said:

I think we're each refracting the national market through our local markets.

I see no indication of a stall let alone a crash in Cornwall; any property not stupidly priced just sells.

And to be clear I do not regard that or the current high level of house prices as a good thing.

You wont in Cornwall .. until its way too late.

 

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6 hours ago, TheCountOfNowhere said:

Cheers DB, that's good to know.

I was just wondering if you were inventing friends like the rest of us :)

This thread and the one of ToS is pretty much asks the most important question of our time.

Are we going to see a massive inflation event that will wipe out productive work/savings/support the rich men's asset prices ( not values ) or will we see a massive asset price deflation ( stocks, shares, guitars, classic cars, etc ) followed by more money printing/inflation.

1st one is probably best for the rich and the 2nd one for the poor, so I know which one I expect !!!

The interesting thing for me was the US starting to raise rates, this was surely not a unilateral decision and the ECB/BoE will have a plan in place to come into line, Term Funding ending was more a signal of this than anything.  Even a small raise by the BoE would send house prices tumbling further.  Then there's the pretend BrExit the establishment is trying to get away with and the rise of the far right British parties who will stop the immigration ( most likely by concentrating them in small holding camps whole they work out where to send them ).

God knows what's coming down the line, but either way it's not good.

All I wanted was a decent family home at a fair price...what I've got is Armageddon.

P.S How did you find us ?  Did someone give you a tip of, or did you wonder where everyone had gone ?

Ha no he is very real.He actually always tells me the Fed means well,but that they sometimes lose control due to many reasons,often political,or economic shocks and often good old policy errors (he thinks tightening now is the policy error).He actually knew G Miller, who he always said was like an arsonist with a box of matches and a tank of gas.Most interesting person i ever met.His macro work is incredible,but over the years we have added a contrarian side to it as well.We still exchange emails and thoughts on a regular basis though his wife has been unwell so it tends to be more brief at the moment.

House prices will be smoked in the UK.Its just when now and the BOE is going to have real big problems if sterling goes down to $1.10.However in lots of ways the UK is in a better position than most.The pain here will mostly be in over leveraged house owners.A lot depends on us getting out of the EU in time.Its crucial we are 100% out as soon as possible.They are in a terrible situation and its very possible they get the most pain of anyone.

I was given a tip off where you all where)

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Posted (edited)
1 hour ago, Frank Hovis said:

I think we're each refracting the national market through our local markets.

I see no indication of a stall let alone a crash in Cornwall; any property not stupidly priced just sells.

And to be clear I do not regard that or the current high level of house prices as a good thing.

I`m seeing the same but the volume on the market is tiny ,it`s seems the main part of the market is people swapping equity 

The bottom end is falling slowly even with tiny volumes with the best of the bottom achieving close to asking anything else is being reduced 

Edit to add there is alot just sat there for months if the price is not right and loads going sstc to avalible

Edited by Long time lurking

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I can't see what the trigger will be to raise interest rates. They are going to be permanently at zero. They can't be raised. Even endless QE and spending and inflation won't raise rates. The bankers would rather there assets rose in value.

As I said before the only trigger I can see is a war.

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12 hours ago, Cosmic Apple said:

Have your posting 'privileges' been revoked over on ToS then?

Pmed you over there CA didn't realise you were already here

11 hours ago, DurhamBorn said:

A friend Count who is probably one of,or the best macro guys in the US,i met him when i worked for Glaxosmithkline when they hired him for a few months for the pension scheme to consult on some big changes in the 90s..He is retired now (70s) and only works for a few select institutions and a couple of charity accounts close to his heart.The work he did and evolved in the 70s saw him call the deflation cycle in the early 80s and he positioned the pension funds he ran into bonds and consumer staples.His pension funds were top  1 percentile over the full term he ran them.We became friends when i offered him to join our table and then a day out to the horse racing of all things.(he always was sat on his own in the staff canteen).He knew i came from a very working class town and left school at 16,but saw i had the 3rd highest maths score among Glaxo employees who had taken the tests (around 4000 people) and gave me some figures ,graphs etc and asked me to tell him what i saw.We have been close ever since.

Most trading houses dont even use macro work now like his.They used to forward to the trading teams and they would stock pick on how he saw the cycle working out.Now they pretty much just momentum trade.He sees massive dangers ahead.

 

Nice story.

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Hi DB,

I've been following your thread on TOS (I've been lurking on there for 10 years just never posted).

Your knowledge on this subject is phenomenal - I have learnt loads!

It's all looks to be slowly panning out  exactly as you have predicted. 

 

 

 

 

 

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Well @DurhamBornI can’t imagine why TOS would moderate your posts but I’m glad to see you posting here.

Personally I have no investments to worry about but I’m doing ok in life in my circumstances and I’m very very interested in your views about the worldwide economic situation. I’ve read your similar thread (and others) on TOS avidly but nothing to say personally about any of it.

My hunch though is, and has been for over ten years, that the plates can’t spin forever!

Looking forward to reading more of your views on here. Welcome!

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https://www.icis.com/blogs/chemicals-and-the-economy/2018/06/financial-markets-party-as-global-trade-wars-begin/

'More people left poverty in the past 70 years than in the whole of history, thanks to the BabyBoomer-led economic SuperCycle.  World Bank and OECD data show that less than 10% of the world’s population now live below the extreme poverty line of $1.90/day, compared to 55% in 1950.

Globalisation has been a key element in enabling this progress, as countries and regions began to trade with each other.  But now global trade is starting to decline, as the chart from the authoritative Dutch World Trade Monitor shows:

  • After a good start to 2018, February saw trade fall 0.7% in February and 1.2% in March
  • The major slowdown was in Asia, particularly China, as its lending began to slow

And then on Friday, President Trump confirmed the opening of his long-planned trade wars:

  • He imposed 25% import tariffs on steel and 10% on aluminium from Canada, Mexico and the European Union
  • Similar tariffs were already in place on imports from China, Russia and other countries
  • America’s longest standing allies have since imposed their own sanctions in retaliation
  • The stage is now set for a developing global trade war as more countries join in

PRESIDENT TRUMP IS IMPLEMENTING THE POLICIES ON WHICH HE WAS ELECTED
Gettysburg.png

None of this should have been a surprise, as it simply follows the agenda that President Trump set out in his Gettysburg speech just before the election.  His policy proposals then, which I featured here in depth in January 2017, were crystal clear about his objectives, as the slide shows:

  • Those policies marked in red are now being introduced
  • Only 2 of them – around China being a currency manipulator, and infrastructure – are still to be delivered
  • Yet companies, commentators and analysts have preferred to ignore the obvious

It was clear then, and is even clearer today, that Trump intends to abandon the policies followed by all post-War Republican and Democratic presidents including Eisenhower, Reagan and Clinton, and summarised in President Kennedy’s 1961 Inauguration Speech:

“To those old allies whose cultural and spiritual origins we share, we pledge the loyalty of faithful friends. United there is little we cannot do in a host of cooperative ventures. Divided there is little we can do–for we dare not meet a powerful challenge at odds and split asunder.”

As I noted after Trump’s own Inauguration Speech in January last year, he broke very explicitly with these policies:

“We assembled here today are issuing a new decree to be heard in every city in every foreign capital and in every hall of power. From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first. Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families.”

BAD NEWS HAS ALWAYS LED TO MORE STIMULUS IN THE PAST
Shillera.png

Unsurprisingly, financial markets have chosen to ignore this rise in protectionism.  For them, bad news is always good news, as they expect the central banks to provide more stimulus via their money-printing policies.  As the left-hand chart shows of Prof Robert Shiller’s CAPE Index (Cyclically Adjusted Price/Earnings ratio) since 1881:

  • When Trump took office, the ratio was already at 28.5 – above the 1901 and 1966 peaks
  • Since then it has peaked at 33.3, above the 1929 peak
  • Only 2000 was higher at 44, when the end of the SuperCycle coincided with the Fed’s first liquidity programme to prevent any problems with the Y2K issue

The right-hand chart confirms the bubble nature of the rally:

  • It compares S&P 500 developments with the level of margin debt in the New York Stock Exchange
  • Until 1985, the Fed operated on the principle of “taking away the punchbowl as the party gets going
  • Since then, it has increasingly believed, as then Fed Chairman Ben Bernanke said in November 2010

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

As a result, the S&P 500 has risen along with margin debt, which peaked at $659bn in January ($2018).

FINANCIAL MARKETS HAVE AN UNPLEASANT “SURPRISE” AHEAD AS CHINA SLOWS
It is therefore no great surprise that financial markets have continued to ignore developments in the real world.

Yet a decline in world trade, and the rise in protectionism, will inevitably produce Winners and Losers.  This will be quite different from the SuperCycle, when the rise of globalisation created “win-win opportunities” for countries and regions:

  • Essentially the deal was that consumers in richer countries got cheaper, well-made, products
  • People in poorer countries gained paid employment for the first time in history by making these products

History also suggests President Trump will be proved wrong with his March suggestion that:  “Trade wars are good and easy to win”.  Like all wars, they are easy to start and increasingly difficult to end.

So far, financial markets have ignored these uncomfortable facts.  They still believe that any bad news will lead to even more central bank stimulus, and a further rise in margin debt.

But as I noted last week, China – not the Fed – was in fact the major source of stimulus lending.  Now its lending bubble is history, the party in financial markets is inevitably entering its end-game.'

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18 hours ago, spygirl said:


Nope. The UK Housing market will go like Scarborohghs - large number of probates with no one to buy. Local prices are everywhere - there's limited price diferntial between small and large houses.

 

 

This is something I regularly notice, shitty little 1.5 bedroom terraced slave boxes with no drive or garden can cost £300k round here, yet £400k will get you a large 5 bedroom Victorian detached. What the fuck is going on?

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14 minutes ago, gibbon said:

This is something I regularly notice, shitty little 1.5 bedroom terraced slave boxes with no drive or garden can cost £300k round here, yet £400k will get you a large 5 bedroom Victorian detached. What the fuck is going on?

The disconnect between house prices and local wages means that people are really struggling just to buy a house and anything affordable gets snapped up so this raises the price of the low end as they pretty much sell whatever the price.

People generally stretch their finances so much to do this that it may take them two decades before they can even consider moving up.

So house prices have ceased to be about either intrinsic or relative value and now just follow the level of mortgage availability and ability to service that mortgage would be my guess.

When you have near-broken yourself financially to get to £300k the additional £100k looks entirely unachievable.

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1 hour ago, gibbon said:

This is something I regularly notice, shitty little 1.5 bedroom terraced slave boxes with no drive or garden can cost £300k round here, yet £400k will get you a large 5 bedroom Victorian detached. What the fuck is going on?

House sizes to prices has always been non-linear.  Essentially, that price dynamic says 'lots of people can afford £300k.  Not many people can afford £400k'

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39 minutes ago, Frank Hovis said:

The disconnect between house prices and local wages means that people are really struggling just to buy a house and anything affordable gets snapped up so this raises the price of the low end as they pretty much sell whatever the price.

People generally stretch their finances so much to do this that it may take them two decades before they can even consider moving up.

So house prices have ceased to be about either intrinsic or relative value and now just follow the level of mortgage availability and ability to service that mortgage would be my guess.

When you have near-broken yourself financially to get to £300k the additional £100k looks entirely unachievable.

Thanks makes sense. Explains why the rest of the economy, especially companies which service the middle classes, are slowly being strangled as those who are lucky enough to get on the housing ladder divert all their previously disposable earnings to their mortgage payments for the next 30 years.

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3 minutes ago, gibbon said:

Thanks makes sense. Explains why the rest of the economy, especially companies which service the middle classes, are slowly being strangled as those who are lucky enough to get on the housing ladder divert all their previously disposable earnings to their mortgage payments for the next 30 years.

It's my guess, contrast it to the previous era of affordability where couples bought a small house then moved to a bigger one when they had children, usually only a few years later.

So that first level of home was repeatedly freed up and seen then as genuinely being just a first step on a property ladder.

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1 hour ago, gibbon said:

This is something I regularly notice, shitty little 1.5 bedroom terraced slave boxes with no drive or garden can cost £300k round here, yet £400k will get you a large 5 bedroom Victorian detached. What the fuck is going on?

Whereabout are you?

 

I've noticed that in Leicestershire.Lot of higher end stuff hitting the market lately

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1 hour ago, Frank Hovis said:

The disconnect between house prices and local wages means that people are really struggling just to buy a house and anything affordable gets snapped up so this raises the price of the low end as they pretty much sell whatever the price.

People generally stretch their finances so much to do this that it may take them two decades before they can even consider moving up.

So house prices have ceased to be about either intrinsic or relative value and now just follow the level of mortgage availability and ability to service that mortgage would be my guess.

When you have near-broken yourself financially to get to £300k the additional £100k looks entirely unachievable.

Even in Leicester(it's a bit of a hole,but I can say that as I live there),local average salary £20k,average house prices are £180k-£200k.

49 minutes ago, Frank Hovis said:

It's my guess, contrast it to the previous era of affordability where couples bought a small house then moved to a bigger one when they had children, usually only a few years later.

So that first level of home was repeatedly freed up and seen then as genuinely being just a first step on a property ladder.

That explains nicely the utter lack of liquidity in many ,particualrly the more expensive ones.

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to back up my point,strangely the figures aren't far from Leicester average

http://www.propertyindustryeye.com/data-suggests-first-time-buyers-have-as-much-chance-of-owning-a-home-as-england-do-winning-the-world-cup/

Any major sporting, political or cultural event inevitably finds itself hooked by public relations firms for a snappy release, and the World Cup is no different.

Online mortgage broker Trussle has put out research showing that UK house prices are now 106 times higher than they were when England won their only World Cup in 1966.

The firm has charted how the typical wage of footballers, the average UK salary and house prices have changed each year since 1966, and it’s pretty depressing reading.

Using Land Registry figures, the brokers says that since 1966 the average UK house price has risen from £2,006 to £211,000. At the same time, wages have risen at around a third of the rate, moving from £798 to £26,500 a year.

Ishaan Malhi, chief executive of Trussle, said this means it is effectively three times harder to get on the property ladder than it was in the summer of 1966.

This may trouble most first-time buyers but isn’t something that will affect the top-flight footballers going to the World Cup, with the average wage of the current England squad at just below £80,000 per week.

Looking at how the current England squad compares to the heroes of 1966, right back Kyle Walker earns £130,000 per week at Manchester City, while the legendary George Cohen was earning £80 a week at Fulham in the 1960s.

Ishaan Malhi, CEO and founder of Trussle, said: “A lot of has changed since England won the World Cup. We’ve put a man on the moon, invented the internet, and we’ve seen technology transform almost every aspect of our lives.

“We’ve also seen the UK housing market change dramatically.

“Prices have soared in the last 52 years, wages have struggled to keep pace, and for young people, the chances of getting on the property ladder today will feel a lot slimmer than they did in 1966.”

  Average annual footballer salary Average UK house price Average UK annual salary
1966 £2,288 £2,006 £798
1970 £3,640 £4,163 £1,080
1974 £5,304 £9,139 £1,809
1978 £17,160 £14,236 £3,269
1982 £39,000 £22,685 £5,613
1986 £57,200 £34,931 £7,551
1990 £78,000 £57,901 £10,601
1994 £142,376 £55,925 £12,900
1998 £371,072 £72,469 £15,098
2002 £858,988 £124,747 £17,576
2006 £955,084 £176,819 £20,696
2010 £1,615,744 £168,703 £22,724
2014 £2,300,000 £191,669 £24,232
2018 £2,600,000 £211,000 £26,500

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https://wolfstreet.com/2018/06/05/what-props-up-the-stock-market/

 

Huge New Prop under the Stock Market is a One-Time Affair

by Wolf Richter • Jun 5, 2018 • 39 Comments

Crash insurance with an expiration date. But its working while it lasts.

In May, with great and perfectly orchestrated fanfare, US corporations announced plans to buy back $173.6 billion of their own shares sometime in the future. It was the largest monthly buyback announcement ever. And some of the announcements were expertly timed to overcome operational debacles.

This report was released when the digital ink was still drying on my musings about the FANGMAN stocks – Facebook, Amazon, Netflix, Google’s parent Alphabet, Microsoft, Apple, and Nvidia – that are so immensely overvalued that Goldman Sachs considered it necessary to come out with a note explaining that, based on fundamentals, they’re actually not in a bubble, which I had some fun pooh-pooing.

Some of the FANGMAN stocks are massive share buyback queens, such as Apple and Microsoft. Others are bottomless cash-sinkholes, such as junk-rated Netflix, which has to constantly raise new money, either by selling more shares or selling debt, so that it has more fuel to burn through, and it doesn’t have a dime to buy back its own shares.

That $173.6 billion in share repurchase plans includes the record-braking mega-announcement from Apple that it would buy back $100 billion of its own shares. Here are the top five that account for $134.3 billion, or 77% of the total:

  • Apple: $100 billion
  • Micron: $10 billion
  • Qualcomm: $8.8 billion
  • Adobe: $8.0 billion
  • T-Mobile: $7.5 billion

To put that May total of $173.6 billion – these are just announcements of planned repurchases sometime in the future that may never fully transpire – into perspective: In Q1, total actual share buybacks reported by the S&P 500 companies amounted to $178 billion, an all-time record. That averages out to “only” $59.3 billion a month on average, compared to the announcements in May of $173.6 billion.

The note TrimTabs provided as to why these share buybacks are suddenly blowing off the charts is key: The corporate tax law has changed concerning the “repatriation” of “overseas cash” that represents many years of untaxed profits invested mostly in US Treasuries and corporate bonds. This “repatriation” is a one-time affair. Once this limited “overseas cash” has been “repatriated” and spent on share buybacks, dividends, and executive bonuses, it’s gone. And then what?

These immensely overvalued shares will then have to find real buyers.

But for now, companies are selling their Treasuries and corporate bonds, which have taken a beating recently, and are using the proceeds, while they last, to buy back their own shares at historically overvalued prices. This gives the market, that has been struggling since January 26, some crash insurance, but with an expiration date.

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15 hours ago, Mr Fabulous said:

Hi DB,

I've been following your thread on TOS (I've been lurking on there for 10 years just never posted).

Your knowledge on this subject is phenomenal - I have learnt loads!

It's all looks to be slowly panning out  exactly as you have predicted. 

 

 

 

 

 

Thankyou Mr Fabulous,great to hear from you and look forward to your thoughts going forward.Everyones opinions are very welcome and very important.Like most things in life i learned from somebody else.Everything so far does seem to be going the way we saw.A reflation is certain,its just how we get there.

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15 hours ago, Economic Exile said:

Well @DurhamBornI can’t imagine why TOS would moderate your posts but I’m glad to see you posting here.

Personally I have no investments to worry about but I’m doing ok in life in my circumstances and I’m very very interested in your views about the worldwide economic situation. I’ve read your similar thread (and others) on TOS avidly but nothing to say personally about any of it.

My hunch though is, and has been for over ten years, that the plates can’t spin forever!

Looking forward to reading more of your views on here. Welcome!

Good to hear and thankyou,if we are right about whats ahead then even small investments in the right areas will provide outstanding returns.The next cycle is going to be a shock to almost everyone as 10% inflation and rates not far behind seems like science fiction to people.The highly leveraged are going to be toast when they find out its very real.

Fed meeting in a week or so will be interesting.PMs should run higher once its out the way as they are behind the curve,or bringing forward recession.

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18 hours ago, Green Devil said:

I can't see what the trigger will be to raise interest rates. They are going to be permanently at zero. They can't be raised. Even endless QE and spending and inflation won't raise rates. The bankers would rather there assets rose in value.

As I said before the only trigger I can see is a war.

You are thinking of the overnight rate,thats all central banks set.Long rates are set by the market.The Fed has done massive amounts around the short end,but nothing around the long end.They can do funding for lending like in the UK of course,but in the scheme of things they are tiny.Rates are low because velocity is low and we are at the end of a deflation cycle.Once we move to an industrial cycle velocity will start to move,and inflation and rates will be following with a lag.I think rates will be minimum 6% by 2025,likely 9%,or maybe 15%.This is why gold and PMs should move higher after the Fed increase (if they do) in June.The Fed moving the short end means they are behind the curve,or too far ahead of it.

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30 minutes ago, DurhamBorn said:

You are thinking of the overnight rate,thats all central banks set.Long rates are set by the market.The Fed has done massive amounts around the short end,but nothing around the long end.They can do funding for lending like in the UK of course,but in the scheme of things they are tiny.Rates are low because velocity is low and we are at the end of a deflation cycle.Once we move to an industrial cycle velocity will start to move,and inflation and rates will be following with a lag.I think rates will be minimum 6% by 2025,likely 9%,or maybe 15%.This is why gold and PMs should move higher after the Fed increase (if they do) in June.The Fed moving the short end means they are behind the curve,or too far ahead of it.

This remains the key thing for me.I see inflation as a function mainaly of increasing velocity,driven either by people spending before it becomes worthless or spending more frequently because interest rates and incomes are moving higher.

 

Either way,there'll be minimal increases in velocity until the gubbermint stop allowing banks to lend to people who will never pay it back.That merely drives asset bubbles not real economic growth.

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