CME Fedwatch places a 99.6% possibility of a quarter point rate hike on June 14.
There is an additional possibility of 0.4% the Fed hikes by half a point.
Then what?
November Odds
December Odds
December is interesting because the odds of no additional hike this year topped 50% mid-day Friday. The odds settled at 45.5%. The market now expects a December hike.
The Fed managed to get in two hikes so far this year. I expected at most one. The third hike is now supposedly odds on.
Fed Hike Cycle Over?
I doubt the Fed hikes three times this year. In fact, I now think the Fed hike cycle ends in June. The next move, after June, will be a cut or a long delay.
However, if the Fed wants to hike, and can convince the market it will hike, then another hike is coming. Both requirements have to be met.
Economic data has been miserable. Judging from data alone, there is no reason for the Fed to hike (putting myself in their traditional talk-point shoes).
Yet, clearly, the Fed has blown economic bubbles. The Fed could have and should have hiked much more, much sooner.
Of course, that assumes there is a Fed, but there shouldn’t be.
I don’t know where rates should be, and neither do they. At least I know what I don’t know.
The Fed has now blown three massive bubbles in succession. This one will bust too. And instead of working with interest rates at 4.0% when the recession hits, the Fed will start with interest rates at or near 1.0%.
Second Quarter Reality
- Wholesale Trade Report Worse Than Expected: 2nd Quarter Recovery Thesis Nearly Dead
- Factory Orders a 2nd Quarter Disappointment: “High-Flying” Regional Nonsense
- Payrolls “Unexpectedly” Weak, Negative Revisions, Earning Poor: What Happened?
- Trade Deficit Widens: Cascade of Bad News Accelerates, Trump Will Howl
- Construction Spedding: Construction Spending Falls Sharply, March Revised Higher: Construction Spending Mysteries
- Motor Vehicle Sales: Motor Vehicle Sales Flat, Hope Turns to Second Half: What About Fleet Sales? Incentives?
- April Durable Goods shipments down 0.3%, new orders down 0.7%: April Durable Goods: Yet Another Weak Second-Quarter Report
- Wholesale Inventories: Down 0.3% in April. March revised lower from 0.2% to 0.1%.Retail Inventories: Down 0.3% in April. March revised lower from 0.5% to 0.3%. For details, please see Fed Eyes Second Quarter Recovery, Expects Trump Fiscal Policy Will Expand Economy
- Trade deficit in April widens by 3.8% with exports down and imports up: Trade Deficit Widens, Exports Weak: Economists Miss the Mark
- Tax Receipts: Federal Tax Receipts Running Below Expectations
- April New Home Sales: New Home Sales Contract 11.4%: Sales Barely Up Year-Over-Year
- April Existing Home Sales: New Home Sales Contract 11.4%: Sales Barely Up Year-Over-Year
- April Existing Home Sales: Spring Housing Flop: Existing Home Sales Decline 2.3 Percent, Inventory Issues Persist
- April Housing Starts: About that Strong April Recovery: Housing Starts and Permits Flop, March Revised Lower
- April Empire State Manufacturing Survey: Empire State Manufacturing Survey Turns Negative: Welcome News?
- April Retail Sales: Sales were at least positive (+0.4%), but they were well under economists projections: Retail Sales Disappoint Again: Department Stores Clobbered in 2017
Mike “Mish” Shedlock
It seems to me the FED will be very unpopular if the stock market continues to climb while the real economy fails. What did Bernanke call his book “the courage to act?” Perhaps we can have a real discussion on shutting them down.
Do you really think they care if they are popular? This is about winners and losers. Guess which side we are on??
The big lie has been that they would boost the markets to create a “wealth effect” that would supposedly benefit us all. Not so much, huh. Just another theft through monetary policy. There is no doubt that many have prospered from this market run up, but I will contend that it is a small percentage.
Probably our best tact as this point would be to run out and buy as much cheap Chinese imports as our credit line will allow while we still have a job that provides a decent credit rating. It’s not like anyone is expected to actually repay their debt, are they? If our sovereign debt and our money is only backed by the full faith and credit of our government and our government is actually us, (you and me) then we should be able to enjoy they same policies as our government and be able to simply roll our debt over while accruing even more, with never any promise or intention of paying it back. The miracle of fractional banking and infinite debt should apply to all of us.
“It’s not like anyone is expected to actually repay their debt, are they?…The miracle of fractional banking and infinite debt should apply to all of us.”
USA.gov and the Deep State will likely always enjoy debt-reneging options (e.g. purposeful inflation) that indebted students, foreclosed property owners and the rest of us will never enjoy. Equality in the Obamacare state exists only in the form written about by George Orwell in his novel, Animal Farm. Different rules for different animals despite slogans of equality for all. That will only change when I can legally print fiat currency on my inkjet printer to eliminate all my debt. Might as well get on the two thousand year waiting list for the second coming.
“The Courage to Act” should have been named, “The Courage to Act like I Know What I’m Doing When I Don’t” with the subtitle, “And the Wisdom to Retire Before the SHTF, Just Like Greenspan”.
Even with another .25%, bankers will still be confiscating goods from the majority, for redistribution to the financial sector.
The massive debt in Ameica can not be reconciled. Default is the only option. No amount of “rate manipulation” can save the economy when those chickens come home to roost.
The goals now, of bankers, is to exploit as much as possible and reap what they can now, for upper management, before the bubbles pop.
Success is measured by how long you can maintain an illusion. The play is for public “confidence” which will be pursued regardless of how big the lie….and it will always be excused as a sacrifice needed. What is the line again? “sometimes when it is bad you have to lie”?
We all know the score but as with any ponzi scheme, it’s never enough to simply recognize the fraud, as inherently we always KNOW it’s a fraud. We are simply waiting for OUR moment to get out.
JUST
LIKE
THE
STOCK
MARKET
Inflation (currency devaluation) is the only acceptable default. Hence, “Inflate or die” is the FED mantra. If hiking rates can help spur a recession, then the QE floodgates can open in support of “inflate or die.” Though the harder the FED tries to inflate prices, the more the price deflation. Mystifies me why the FED and economists cannot accept the natural economy and go from there, versus having to manipulate everything from money supply, to minimum wages, interest rates, etc.
I figure four (4) rate hikes so the FED can maintain its credibility, and have room to cut again, with a recession being a bonus allowing the QE floodgates to open. According to the FED the economy is doing great. Even if that is a big lie and pure propaganda, they will act as if it is reality until such time as pretending or denial becomes impossible. The FED still has running room. Smoke and mirrors, whatever is necessary to make the federal debt dischargeable in devalued currency, is the ultimate goal on behalf of USA.gov with its ever-expanding and unsustainable promises (liabilities).
” Though the harder the FED tries to inflate prices, the more the price deflation.”
…
Exactly.
From Day 1 I’ve said ZIRP/NIRP/QE* is disinflationary … and ultimately deflationary when asset bubbles burst.
*QE is NOT “printing”
I think people are much too sloppy with their use of the terms “inflation” and “deflation.”
Too me, monetary “inflation” means getting less for one’s money. Examples of that are everywhere in the US today. A “quart” of ice cream in the grocery now contains only 14 ounces or less. Gasoline is diluted with ethanol, which has less energy per gallon, is cheaper, and causes damage to certain fuel systems, especially small engines. College tuition is can easily be as much at $60K/yr, and it appears graduates are more poorly educated than they used to be. Medical care is stupefyingly expensive relative to the actual service being delivered. I could go on. To say that all of this is “deflation” is poppycock.
The only thing “deflating” is the purchasing power of the average person’s salary, and I think that is why aggregate prices are not going up faster. Affordability is a big factor in pushing through price increases.
Dishearteningly, lackeys for the central banks in the press now argue that officially stealing half of the dollar’s purchase power every 35 years (2% inflation) is not enough. To “fix” things, they need to officially steal half of the purchasing power every 24 years (3% inflation).
Here is a recent example: http://www.businessinsider.com/raising-the-fed-inflation-target-2017-6
Personally, I believe the real rate of monetary inflation is already substantially higher.
The only difference between QE and printing that I can see is that with QE the central bank has the option not to roll over the credit they previously issued for asset purchases. So, unlike with printing, they could theoretically suck that credit back out of the system. I doubt they will ever do that because to do so would cause a massive collapse in asset prices; and since asset prices are the basis of bank solvency, fugetaboutit. The most I can see them doing is choking monetary growth just enough to keep people from totally rejecting the US Dollar.
“The only thing “deflating” is the purchasing power of the average person’s salary, and I think that is why aggregate prices are not going up faster. Affordability is a big factor in pushing through price increases.”
Good point!
“The only thing “deflating” is the purchasing power of the average person’s salary, and I think that is why aggregate prices are not going up faster”
…
Precisely. Disinflationary. (over) supply meet (weak) demand. Fully expect to see a year over year drop in CPI in the coming bust. After that? Policy decisions to be made will determine our course.
…
“The only difference between QE and printing that I can see is that with QE the central bank has the option not to roll over the credit they previously issued for asset purchases. So, unlike with printing, they could theoretically suck that credit back out of the system.”
…
That is a huge distinction … not a throwaway difference. The ability to “suck that credit back out of the system” is exactly what will be needed to control inflation if it were to show. The federal reserve has a balance sheet. Asset is the security (debt) held. The liability is the $$s (FRNs) “out there”. In outright printing there is no way to bring those FRNs back to the federal reserve (no assets to sell to bring FRNs back on board.
@Tony Bennett —
Regarding the difference between QE and printing: (1) I will give you that, compared to cash, credit is more inclined to find its way into assets than to be disposed of on such ephemeral things as consumption, therefore QE is more likely to inflate asset prices and less likely to increase the cost of daily purchases, and (2) In *theory* QE credit could be sucked out of the system. In *practice* I do not think it can be withdrawn without causing great harm to the banks. It is a Sword of Damocles that is securely riveted and glued to the wall above, most likely never to be freed.
Regarding managing inflation if it makes an appearance: (1) Except for certain cases such as wages, the inflation train seems to be rolling along at a good clip already. Most things I see are either notably more expensive, more cheaply made, or both compared to 10 years ago. It is hard for me to see how that trend reverses. (2) I believe the Fed would like to keep inflating asset prices as they have for the benefit of the banks and the US Treasury. However, since they have passed the point of free credit and have started taking from savers in earnest via significantly negative real rates, I think their policy now functions much like a direct tax on capital. I have to believe the Fed sees this and is weighing its options. What will they decide? Heck if I know.
Meant to say a “pint” of ice cream, not quart.
This has a design, and it’s not designed for our success.
http://www.zerohedge.com/news/2017-06-09/meet-22-economists-want-kill-your-purchasing-power
The hostile Fed uses contrived economic data and rate hikes to sabotage President Trump. When President Trump returns the favor he will win and the Fed will lose dearly.
The signs are out that the economy is perched for a slide.They have to bump the rates up as much as possible before it craps so they can claim some “ammunition” and cut rates again in the pretense that they can actually do something (besides screw us even worse). It takes at least two months of negative growth to officially claim a recession. That should be plenty of time.
And just when my money market account was breaking .25%. There goes my retirement!
“The hostile Fed uses contrived economic data and rate hikes to sabotage President Trump.”
They’ve ALWAYS used contrived data, it just so happens that the inevitable collapse or downturn may be on Trump’s watch. Just as the failure of what is now Trumpcare WILL be blamed on him by Dems and their lapdog mainstream media, the collapse or downturn WILL also be blamed on him and, based upon the popular vote in the last election, there are more than enough totally clueless people to buy into all of that.
“When President Trump returns the favor he will win and the Fed will lose dearly.”
Trump is being obstructed from doing most of what he’s trying to do as it is, things which he has every right to do as prez. If you think he will be able to do anything that affects the Fed negatively or reveals their BS in a way that can penetrate through the propaganda and educate a mostly economically ignorant public, I think you are sorely mistaken.
Reality: a majority of willfully ignorant voters (6 out of 10 of whom only read headlines) + a statist lapdog mainstream media = what we have now and even worse in the future.
“Despite the favorable opinions of undergraduates and alumni, a closer look at the record…shows that colleges and universities, for all the benefits they bring, accomplish far less for their students than they should… Many cannot reason clearly or perform competently in analyzing complex, non-technical problems, even though faculties rank critical thinking as the primary goal of a college education… Most have never taken a course in quantitative reasoning or acquired the knowledge needed to be a reasonably informed citizen in a democracy.” – Derek Bok, former 20 year president of Harvard University in his book “Our Underachieving Colleges”
If the 20 year prez of HARVARD can say that even most university/college graduates “have never taken a course in quantitative reasoning or acquired the knowledge needed to be a reasonably informed citizen in a democracy”, what does that say about the average person on the street?
People too often incorrectly base what they perceive as the intelligence/information/reasoning level of the public mind as that of the friends they CHOOSE to associate with or people in forums in which they participate and that is a serious error. Discuss any of the many vital and complex topics required to make an intelligent vote with your average person and you will be met with blank stares, a reach for the iToy, or completely illogical responses.
I have listed to many conversations Stefan Molyneux on YouTube has had with seemingly intelligent, literate, well above average callers where he has completely and EASILY obliterated their position with reason and FACTS and yet they refuse to concede they were wrong, going back to what has already been obliterated from different angles and apparently not realizing it. It’s really amazing.
“…if a nation expects to be ignorant & free, in a state of civilisation, it expects what never was and never will be.” – extract from a Jan 6, 1816 letter from Thomas Jefferson to Charles Yancey
If we begin a recession with a Fed funds rate at, or near one percent, I fully expect to see negative interest rates for the first time in the history of American central banking…prepare accordingly…
You get a gold star.
Bonds … Treasury Bonds
In my lifetime I don’t think I’ll ever see what were considered normal interest rates in the 20th Century – unless they rise involuntarily in the midst of an economic crisis. I guess that’s a possibility. But the Fed has no choice but to keep them chronically low.
The ramifications of even a mediocre 6% interest rate in this era of debt bubbles would be risky business.
They’ve painted us into a corner. The so-called “free hand” is no longer even in the picture. Today everything is manipulated.
The laws of math can only be gamed for so long. Sooner or later something has to give. God help us when it blows.
I’d ordinarily be in the “no more rate hikes” camp. But this time around, inflation isn’t likely to be truncated by an economic slowdown. Car manufacturers, for instance, won’t produce products at a loss. The oil and gas sector won’t drill new wells at a loss. Day-to-day consumption is not being propped up with credit this time around, so unfortunately, lowering the cost of credit won’t accomplish much of anything.
Now Canada is a completely different story however, and with their RE collapse unfolding, the Bank of Canada will have to cut to zero and enter into some pretty strong stimulus/QE, if not go into negative rates.
Hey Mark. I wasn’t aware that Canada’s Real Estate market was collapsing. Or is this the same collapse that “experts” have been predicting since 2008? I am presently in Shanghai and apartment units are going for more than $2000/sq ft. Is Canada close to that?
By the way, I agree with Mish that the June rate hike will be the last this year.
The Fed will continue to hike slowly. The Fed believes that inflation is strongly effected by wages (it often is), and wages are strongly effected by unemployment rates (they’re not except at extremes). Labor is not a market like oil, but most economists don’t understand that.
The only way the Fed stops hiking is if unemployment starts moving up in big jumps. That is unlikely to happen unless we have a big recession. And in a global economy with massive over-capacity we are unlikely to have a big recession. In fact, we’re still in the last one.
The end of the obama ZIRP free money bailout train is coming to an end.
——
NYT: Trump Makes Two Conservative Picks for Fed
Friday, 02 Jun 2017
U.S. President Donald Trump’s picks for two open spots on the Federal Reserve’s Board of Governors may push for tighter monetary policy if they receive the Senate confirmation needed to join the Fed’s rate-setting panel, their records suggest.
Trump will nominate Carnegie Mellon University professor Marvin Goodfriend and former Treasury Department staffer Randal Quarles to fill two of the three open seats on the Federal Reserve’s Board of Governors, the New York Times said on Friday, citing unnamed people with direct knowledge of the decision.
Goodfriend in particular has been skeptical of the Fed’s bond-buying programs, saying that it is too close to fiscal policy.
That view has support among many congressional Republicans, though Yellen has strongly opposed their proposed legislation on grounds that it would tie the Fed to make mechanical decisions that would harm the economy. The rule at the center of that legislation suggests the Fed should be raising rates more aggressively than the three annual rate hikes policymakers currently expect for both 2017 and 2018.
“The Fed should choose a rule for shrinking the balance sheet so that, as it sold off its assets, it was pre-committed and markets could anticipate sales and prepare for them,” he said. Despite differences of opinion with Yellen…
“Many market participants have been barking up the wrong tree, arguing that Trump is an easy money guy because he borrowed a lot when he was a real-estate tycoon,” said Stephen Stanley, Amherst Pierpont’s chief economist, who worked for Goodfriend when he was at the Richmond Fed. “If these two nominees are eventually confirmed, the tone of the Fed Board will instantly swing to a far more hawkish tenor.”
Carry on doing what they do until something breaks, then wind back down hoping they don’t need to go throw zero.
All the talking heads ignore the primary driver for stocks, as they rationalize new highs in the face of an anemic world economy and black, white, and purple swans lurking. Linear and US-centric thinking causes people to miss the fact that it is global capital flows seeking relative safety that is causing stocks and other dollar-based assets to rise. The same legacy thinking is causing people to ignore the big driver for the Fed.
The Fed always follows, and they will follow market-driven rates that will rise along with the soveriegn debt crisis, that is heating up as capital and people flee desperately oppressive govt’s. Domestically, you can use IL as a recent example. IL and other broke/socialist govt’s will see borrowing cost rise with their rising credit risk, as pensions rise and productive people flee draconian taxes, fees, and civil asset forfeitures, as well as high crime that results from failing Collectivist policies.
The Fed will raise rates to try to save pensions and other funds forced to hold treasuries, and to fight rising stocks that will continue to rise due to capital fleeing Europe and other regions that are in worse shape than the US. The one thing the Fed does care about is their reputation as a serial bubble blower. They will impotently fight a rising stock market, as a rising dollar will accentuate the debt problems of all the foreign entities holding massive amounts of dollar-based debts, which smart money anticipates and flees.
Those considering Fed mandates, domestic economics, and fundamentals will be wrong on rates and stocks. The environment we face has not been experienced in our lifetime, yet people continue using legacy metrics. When was the last time govt bonds were not the safe haven? When the govt bond bubble pops, what market is deep enough to absorb the global capital flows and is backed by real assets? Why do you keep ignoring the obvious?
“When the govt bond bubble pops, what market is deep enough to absorb the global capital flows and is backed by real assets? Why do you keep ignoring the obvious?”
Aren’t bank buildings real assets? Yet a bank in Spain sold for 1 dollar. The shareholders apparently wiped out.
Under Obama, what happened to the bond holders in GM? If legacy metrics don’t matter any more, as you suggest, what market is deep enough for anything?
Not to mention, a nuclear war could wipe out a lot of real assets in this country.
Assets that are marked to mythical models are the same as govt promises that have a long history of defaults. Govt’s and their unsecured debt default all the time, leaving investors with nothing, except paper for hanging. Corporations rarely if ever default. In the rare case of defaults investors get a payout after liquidation.
Assets like stocks, gold, and commodities will rise against whatever is money. Gold is for the individual, but the BIG money will never go to gold, as it can’t store it, plus it pays no income. The dollar is on life support as the reserve currency, but the euro has no machines to keep it alive once the soveriegn debt dominos start falling.
Nuclear war or a Mad Max event will render everything worthless (including gold), except food. Hopefully, we can vote out every incumbent every election to render the career politician extinct before they destroy everything.
Dark Ages occur when the banking system is destroyed, along with periods of severe climate cooling that destroys food supplies. With a mini ice age scheduled in 10-15 years with another Maunder Minimum, everything is on the table. Even though solar activity is dropping at historic rates, the establishment continuous to selfishly sell gloBull warming, instead of preparing like Josef warned the Pharoh.
Thanks to 10+ years of debt-fueled acquisitions, share buybacks, special dividends and other financial engineering schemes, large US corporations now have the highest debt/equity ratios EVER.
Anyone that thinks that the equity of these highly-indebted firms will serve as a “safe haven” during the next recession is delusional, at best. There will be bankruptcies galore, even in so-called “blue chip” companies.
You’re missing a couple of things. It is govt/socialism that is collapsing. When the govt bubble pops, capital runs to the private sector, not to defaulting govt debt. We are moving rapidly into capital preservation mode, which will be clear in 2018. Yes, big money can park in real estate outside of war zones, but it’s not liquid, and rising rates & property taxes, along with declining household formations will keep a lid on RE. We are transitioning from public trust to private, where stocks outperform and survive the coming crash and burn, that is the direct result of govt’s that refuse to reform themselves and their banksters.
This ridiculous cult of personality toward the Fed is bordering on insanity.
The Fed was very powerful (but never omnipotent) back when the US economy was growing “organically” (Main Street was growing, and financial intermediaries had stuff to intermediate). Now that everything is debt based, the Fed doesn’t matter.
Every industry already has surplus capacity, and only a mental patient would borrow to build yet another factory we don’t need.
There is no interest rate that makes it prudent to build capacity when you already have too much capacity and too much taxes.
This isn’t a monetary problem, so the Fed cannot fix it. All the Fed has done was to make an underfunded retirement situation a lot worse — without anything to show for it.
American industrial wealth made the Fed powerful, and lack of industrial wealth / too much debt made the Bank of Zimbabwe irrelevant. Now that the Fed governs over less industrial wealth and a LOT LOT LOT more debt… the Federal Reserve of Zimbabwe thinks they are going to devine an optimal Fed funds rate?
Insanity. The Fed made itself irrelevant.
Kinda cool to have a job where you pretend what you do matters and then get to take credit and say you are responsible for everyone’s hard work and productivity.
I always liked that as a small child, sitting in the passenger seat of the car, with my Fischer Price steering wheel in hand, pretending I was driving.
If Interest Rates are suppose to represent the value of a dollar in the future and the risk of credit/debt (the two are inseparable), then the rise in interest rates represents multiple ideals. The first is the reward of savings or the foregoing of consumption. Of course that return on capital in the form of interest must come from somewhere. No bank of financier takes paid in savings/capital and rewards the owners of such out of the goodness of his heart. Hence, the interest rate represents to cost of investment of such capital. It reflects the risk/reward (the two are inseparable) of capital so used in investments. Normally, this would be all well and good, but our central bank, The Federal Reserve System has been dealing in money whose value is relative to the wind, so to speak. We do not have a currency backed by anything but the good wishes of our government. Further, one may argue that the money supply has been grossly expanded by the issuance of credit. Yes, credit is not currency but it is money in the sense that it represents a store of value. Take out that credit card and see what it can buy without resort to cash. So if the FED has been in the business of expanding credit through the issuance of money almost without cost, meaning little interest, then the risk to borrowers has been minimal. We have expanded the use of credit in buying asset classes and increasing their relative value (demand fueled by speculation) to the point where such asset classes have meaningless worth. If I buy a corporate bond issued at par ($1000), and use my credit which only costs me a quarter percent, the that bond may appear cheap it the coupon rate is 1.25%. There being no absolute standard of value such as gold bullion to dollar conversion, the relative value remains dubious. Even if my interest costs rise, I can use more credit to speculate in whatever asset class I choose. Why? because now either coupon rates must rise or price must decline. Raising interest rates in a free wheeling fiat based economy where credit is so easily converted to assets tends to have little effect. As long as the supply of credit can expand, interest rates will not reign in demand for asset classes. Fiat money allows the chasing of yield through uninterrupted credit.
To a point. All assets have their credible limits, and then some. In fact new asset bubbles form that are guaranteed to maintain just a part of the believed wealth, i.e. with known losses, where others lose more.
I wonder if this is the real game, not coming out ahead, but ahead of others… and therefore ahead.
I came across this good graphic for the sort of result expected as those who don’t stay ahead get “processed’.
https://www.ecestaticos.com/file/7d248c187deca842b5d6df959fecf100/1496839761-20170607fusionbancos-01-01.svg
I have only had one account in the country, at one bank , a simple debit account, started last century. So you know which bank is left with some integrity if you ever choose to bank there.
Missing something though… borrowing to buy assets is a “zero expected value transaction” at initiation because the market prices forward assets at present value + discount rate, making money and expected forward value of assets equal. If not you have a huge arbitrage.
The discount rate is partly a mathematical function that is set arbitrarily ( as in not purely per individual transaction) by policy decision and legislative accomodation ( such as government spending/fiscal policy). That leverage may be small (or not) , but it is enough to influence the price of money to a degree that forms large asset bubbles ( Spanish realty boom was caused by lack of national rate control after euro combined with the removal of x-rate arbitration re. the rest of Europe – in this case ECB imposed wholesale rates) and then consumes them by condensing the competition into many fewer consolidated entities, in this case by state legislative support of bad assets. To me that looks like managing winners (and losers) , even yhe current bailin route that has appeared is arbitrary in time ( why not 2008) and subject to both regional legislation and ECB policy.
“set arbitrarily…by policy decision and legislative accomodation(sic)” – I thought it was set on the trading exchange with trillions of dollars of transactions.
So the FED or ECB don’t set rates, ‘they only follow’, right?
Because the rates are set for all, it has the same effect on all, right?
I could start listing the opportunity that is introduced in the current framework and be here all day doing so.
The point is that the market is not ‘free’, it is managed, for good or for bad.
I truly believe the fed follows (with exception of 2008-2016). The base the rate prices off of moves for all simultaneously and is visible in the bond market. You and I can both transact there and take advantage of those prices. It is the basis added to that trade that is what is different for everyone, and those spreads can get pretty erratic – see Greece. That is why I would never have worked for a company with lower than near perfect credit rating.
you have my blessings, go arb the market, show those bastards at GS and MGS what they are missing.
My point remains the same, at 10% rates todays gold assuming price were 1000 today would be priced at 1,100 a year from now. If rates are 0, gold prices for a year from now would have to be identical to todays price. No expected value transaction!
(example excludes compounding and things like storage and insurance)
Even following creates lending expectations where a bubble is expected to be followed by low rates. The managers are way ahead of the curve, they partly own it.
Why use a variable unit to guess the price tomorrow???
You can’t guess price tomorrow. It will be a 50% chance higher and a 50% chance lower, but to transact at future price you have to set Future Value at equilibrium with Present Value and formula for that was described above. Since all pieces are transactable today for forward delivery and you can’t allow arbitrage.
Sure, but future value is variable – rates tomorrow, and hence value of currency tomorrow, are variable.
Yes, everything is variable. Nonetheless, today people have definable expectations as to what that will be – even though “they know” that is not what it will be. The second part of that sentence is called expected volatility around forward expected value. Regardless, there is still a forward expected value that has to be the same for all assets! That is the simple and unyielding point. You say you want to know what “buddies” are thinking. I promise you that anyone disagreeing with me does not get allowed to play at the “buddies” table.
An expected value is not a point, it is a guess that is conformed to as next best thing to having the value completely fixed. Even if you fixed a value, say by obvious price setting for everything, the expected value of the currency would still not be a point, even under global dominion, because society would change its behaviour and the sum economy that the currency represented would change.
It does not matter that we disagree, and I am more concerned at being forced to sit at the table, than being rejected from it.
nothing to disagree about. It is what it is, it is either understood or it is not.
William suggested a specific transaction and I said it will not work. It is priced out of the transaction at the very rate he wishes to borrow at. You may see this as some existential argument and not about profit but it is. It is a transaction. A specific one. It will not work and therefore it does not incentive what he suggests incentives, it can not because no one would do it because the people in control of the money to do it knows it is an expected value transaction of 0.
This is not some existential argument, this is not about opinions, this is about how markets price forward assets.
And yes expected value is a point. It is the print you see on the exchange when you look at the contract. You are confusing volatility from time 0 to expiration as there being no “current” expected value at time 0.
wrld- Always interesting to read your comments. So if I understand correctly. You are stating that A0 to A1 will be different by the amount of the market interest rate over time from A0 to A1. That this will hold true as well with B0 to B1 as well as C0 to C1 and therefore a forward relationship holds that if not held will allow an arbitrage between A0 and A1 (your gold example) as well as any discrepancy between B1, A1, and C1. Therefore all forward assets have the same expected value determined by rates (and I clearly hear you saying that expected is not really “expected” but the best available instantaneous expectation).
Is that correct?
Anon. Yes. In reality A0 to A1 will consist of a few more components but you understood correctly. Basic math – basic arb.
Watching first round France parliamentary elections, giving Macron @ 400/577 seats with 32% of vote. LREM was podged together with candidates over the last month. Odd total.
http://www.france24.com/en/20170611-live-liveblog-france-follow-first-round-legislative-elections
…I was really addressing william. your comment does not change that expected fwd value of assets must be priced to the rate and therefore money for assets must remain a zero expected forward value transaction.
..desculpas, meu erro. I beg to differ.
Because expectation and future values are in the hands of buddies
no – they are transacted on exchanges and otc. go trade futures on futures.
it’s simple. if they are colluding and manipulating price. find the side that has the mispricing-advantage and trade it!!! You will be king. Shit, I know if i could see what you see, i wouldn’t be typing shit, i’d be churning trades.
Silly me thinking that things price towards no arbitrage opportunity.
That is where we differ – you are interested in balancing trade , I am more interested in understanding who or what is driving the world around me without subjecting myself to profit bias.
the conversation William started involved a transaction to take advantage of pricing opportunities, nothing existential here.
And anyways, that is a form of removing arbitrage – not being subject to it from others , and having a strong independent position if you are.
Taking advantage of pricing opportunity is for one’s existence.
“Taking advantage of pricing opportunity is for one’s existence.”
No! Irrelevant. That concept sets the core basis of pricing theory, that neither side have advantage. Pricing is determined where one can not statistically have an advantage. Making money by people being unaware of this and taking advantage of that is superfluous.
So then it is not ‘Taking advantage of pricing opportunity’.
You spent to long around lawyers probably.
meh… lots of my friends are lawyers, but day to day – professionally not too much beyond the crossing of paths on certain contract issues.
Interest rates are going to get normalized, whether the Fed (or Mish) likes it or not.
Inflation and “real interest” are not the same thing, and while CPI version of inflation is supposedly ~2% (bullsheet but that is big brother’s version). Meanwhile “real interest” is still negative 1.25%… WHO THE F$CK IS GOING TO “INVEST” TO GET A NEGATIVE REAL RETURN???? This is so simple and obvious even a Princeton econ professor should be able to get it.
The “emergency” of 2008 is LONG past. Almost a decade. There is no sane reason for real rates to be negative, and whatever the academic models might suggest — it OBVIOUSLY is not working in real life. Thirty years of negative real rates in Japan has solved nothing, but made retirement a lot lot lot worse.
Keynesian monetary policy has been thoroughly discredited, and its now about Yellen desperately trying to save face before she gets shown the door next January.
yep, it’s kinda f’d up.
Its more than F’d up, the Fed is preventing a recovery. I don’t know whether a recovery would “automatically” occur if real rates normalized, but an economic recovery is definitely not going to happen when real rates are negative.
Yet Mish (and many others that think the same way) still cling to academic models that are obviously and completely wrong. Yes, the economy stinks. But no, zero nominal interest rates in perpetuity will not fix a thing — they will make things a lot worse.
And I was being rather charitable going with CPI “inflation” — Obamacare premiums climbing 30%, college tuition (which is worth less and less) costs 10% yoy more, wholesale food prices down but retail prices up to pay labor and taxes … anyone fixated on CPI (or PCE) is a dinosaur. True inflation is more like 5-6%, which means real interest rates are more like -5%…
No one is going to invest in a business to lose 5% every year. Its just stupid. With all their models and alleged intellect, the idiots in academia can’t grasp something obvious to a child.
But they do. Look at negative German yields, indirectly funded by the ECB and hence all owners of Euros. People vote for spending, they vote for the security of sovereign debt above other assets… ‘ someone else pays’.
The business is plunder by entitlement.
First rule of plundering: you must plunder from persons with wealth. Plundering from a bankrupt tax base is what Detroit and Illinois and Venezuela try to do.
Yep, if a 2-3% rise in interest rates collapses the economy, then the economy was already collapsed – it’s just that the 2-3% artificial drop was a kind of artificial life support. We all know the actual problems in the economy not only have not been addressed, the interest rate manipulation actually allowed government to create additional problems.
There was a “mock-umentary” on history channel last week about the Myan culture — mock because the “expert” historians aren’t really sure where the civilization went, just that they aren’t here anymore.
The story is about the Myans, but it might as well be about the G7 and keynesian central banking…
The high priest / witch doctor (lets call him Draghi or Bernanke or Yellen or…) announces to the Myans that the famine of last year is just getting worse, and now there is some sort of plague (medical outbreak?) to add to the suffering.
High priest Koruda Bernanke Draghi announces that there will be weekly sacrifices of virgins from the temple pyramid to appease the gods…. and no surprise to modern viewers: murdering innocent girls doesn’t solve the famine or whatever disease outbreak.
So Bernanke Yellen announce there will be virgin sacrifices every morning, and they will also take prisoners from neighboring civilizations and sacrifice them every afternoon… still the gods are not appeased.
Then witch doctor Draghi comes on the stage and decrees that he will do whatever it takes. Virgin sacrifices every hour on the half hour. The famine continues. Disease continues. The gods are not appeased.
Now the voodoo priests of Keynesian witchcraft are frustrated. They try reducing the virgin sacrifices to one per day. They try sacrificing virgins only in the morning or only after lunch. The famine continues.
Koruda and Draghi announce they will stop at nothing. Virgin sacrifices will occur every five minutes, 24/7, and they will borrow virgins from China and the middle east to make the central banker’s quota.
No matter how futile, no matter how counter-productive the virgin sacrifices turn out to be, the ridiculous priests have no solutions and killing other people’s children doesn’t harm the priests or their families.
This keynesian bullsh!t — whether negative real rates or QE — its just as stupid as sacrificing virgins to get GDP growing
Central bankers and career politicians want to pretend they are God’s, and can suspend the business and climate cycles. History has the answers, if we would simply listen and learn. Joseph warned the Pharaoh to save for the coming seven years of famine. Instead of preparing for the big economic reset and coming mini ice age, the establishment is blocking the exits as they burn down the house, and continue to sell the gloBull warming tax scheme.
When the general public learns these self-serving sociopaths are impotent against the cycles of the universe, their power evaporates. The collapse of public confidence in govt accelerates next year, first in the periphery, and then it will move to the core (US). The gloBull warming hoax will evaporate as temps decline over the next decade. Solar outputs are already dropping like a rock – https://www.armstrongeconomics.com/world-news/climate/propaganda-about-global-warming/.