This page has been archived and commenting is disabled.
Pimco's McCulley Discusses 10-Years, The Yield Curve, The Shadow Economy, Minsky Journeys And The Deflation Beast
Some interesting observations from Pimco's Paul McCulley, who seems hell bent on destroying the premise of financial prudence, and instead joins the Fed in its "All In" endorsement to speculators and savers.
I cringe when I hear men like Kansas City Fed President Tom Hoenig muse that the Fed will ultimately need to get the Fed funds rate back up to a 3.5-4.5% zone. I deeply respect Mr. Hoenig, both as an economist and as a man, but I just don't see why the Taylor Rule of the Forward Minsky Journey should apply to the Reverse Minsky Journey.
Simply put, the 2% real Fed funds rate constant in the Taylor Rule should, in my view, be considered toast. In a world of deleveraging and hoarding cash it makes absolutely no sense to reward holders of cash with an after-tax real rate of return.
Too bad the baby boomers are coming: remember: this will be the first year that that baby boom generation starts retiring after hitting 65 (explains why Social Security is now officially net outflowing). After 2008, most of the boomers got destroyed and lost a major portion of their net wealth by holding stocks. Good luck expecting that they will rush right back into equities.
McCulley on 10-Year interest rate and curve shape expectations:
And for 10-year Treasuries? Six years ago, I assumed potential real GDP growth be 3-3.5%. In a world facing a prolonged, even if a less nefarious Reverse Minsky Journey, I think 2-2.5% is a more plausible estimate, which should be the anchor for private 10 year yields, defined as the real swap rate. In turn, assuming swap spreads hold near flat [they are currently negative, as are 7 Year swap spreads today], as at present, this implies a 4-4.5% fair value range for both nominal 10-year swaps and Treasuries. But this will only be the case when the market can credibly discount that the Fed will have the economic justification of an at-target (2%) inflation rate and an at-NAIRU (5%) unemployment to lift the nominal Fed funds rate to its 2.5% "neutral" nominal level.
Would such a curve, flatter than at present, but still reasonably steep, beget speculative excess via leverage, as was the case in the mid-2000's? I don't think so because policymakers have learned that regulation of leverage is not an evil, but a missing virtue that now becomes an imperative. The shadow banking system will, I believe strongly, be a small shadow of itself for a long, long time. This, while I am sure I will be wrong about many things in the years ahead, I have few fears that unbridled, unregulated leverage will again be the dog that bites me.
Is that so? Where in current financial reform is there a curb on exploding shadow leverage? Where in the Dodd bill is more prudence cast to the same banking stupidity that blew up the system the last time around when the curve was so flat that bankers had to leverage 50x to make money on it? While we are confident Mr. McCulley is simply talking his, and Pimco's $1 trillion bond book, for which aggressive rate increases would be devastating, we find lots of faults with his blind hope in the suppression of banker greed, which ultimately, using various financially-innovative mechanisms, is the reason why we had a systemic implosion of unprecedented proportions. Alas, we are confident in one thing: Paul is right in that the Fed will keep rates at zero for a long time. And when the flattening begins, the same stupidity that caused the $600 trillion shadow banking system to develop, will reappear. Where will we stop this time? One quadrillion? Quintillion? Coupled with a vastly higher hyperinflationary threat, the result of that final Forward Minsky Journey, in the parlance of the Pimco executive, will be not only very aptly named, but promptly achieved. Only this time it will not be the "debt deflation monster" of the private sector that forces the destruction of the system, but the public one. We are already seeing its wondrous impact on the Eurozone. We eagerly await as its full force is felt, soon, on US soil.
»
- 8526 reads
- Printer-friendly version
- Send to friend
- advertisements -
"And when the flattening begins, the same stupidity that caused the $600 trillion shadow banking system to develop, will reappear"
But who will step up to be the other side of the shadow banking system? The baby boomers would have retired and pension ponzi scam would have been exposed and government would have to bail out the pension funds for pennies on the dollar. In fact, if it weren't for the yield chasing pension funds the sub-prime mortgage boom would not have occured in the first place.
Outstanding commentary
"Mark it zero, dude"
I used to listen to McCulley.
Now I think he is just another giant douchebag.
So people who hold cash aren't worthy of a reward, only people who hold government bonds (and other rentier products deemed favorable by PIMCO)?
This is, of course, his objective opinion, since PIMCO could not possibly benefit from lower rates.
We just have to get those *%$*% cash hoarders! Traitors! Get your pitchforks! Grab a torch!
Scapegoating is an old and sacred tradition, that we people hold very fondly. Now hang 'em.
Now it’s the women and children and elderly couples trying to live on their devaluing savings and earnings that are the Simon Legrees in this corrupt, Fed-run Ponzi scheme. Gad, I despise these people who neither toil nor spin but live off "risk" guaranteed safe by other people's money. Well, this bozzo gets his wish--there is no "after-tax real rate of return" for these unfortunate hoarders of cash.
This statement concerning so-called sound money pretty much disqualifies McCulley and any other PIMCO contributor who declines to disavow that statement from a being a legitimate economic analyst.
Helicopter Ben has "purchased" an upward sloping yield curve by instructing the treasury to buy short term bills (with money he is printing) and by purchasing virtually unlimited mortgages he is holding down long term rates. How will he get out of this without bringing back an inverted yield curve? He wants the money market accounts to buy the short end but he will have to let go of long term rates or we double dip and we try to refinance again from a much weaker position. What a mess all this intervention has caused.
Hell with these guys. I'll keep all my money in canned food and gold just so they can't make money off me.
I normally do not write this but this guy is a f%@#$%-ing moron.
Rewarding the act of saving, ie foregoing consumption is the only way to regenerate genuine capital. Counter intuitively am willing to bet that raising rates on the short end will actually encourage spending by consumers. I am well aware of the initial side effects but I do not think they will be as bad as some expect. I also believe that a higher rate on savings will reduce the savings rate and encourage risk taking.
Only by also rewarding prudence can one price risk. Savings and chequing account balances are based on financial necessity but also on morality. Punishing prudence is not the answer because it VINDICATES prudence. This leads to more prudent behaviour and distrust. This in turn leads to gold and dollar hoarding.
Exactly. Its what most of these giant turds forget - Animal Spirits.
If only more economists had studied behavioural finance instead of Ponzi_101 we would stand a chance at liquidating the system and starting over. The longer these morons are in control the longer/deeper/ more painful the reconstruction shall be.
He's obviously getting comfortable in the pimpin' game.
The LAST thing we should do is reward saving. NO we need to reward MORE LEVERAGE, with credit "made by banks" and loaned to us at interest. Yes yes yes, that will work just dandy -- if you're a banker!
McCulley is and has always been a progressive Keynesian. The stupidity of his remarks of keeping interest rate at zero is to look at Japan. If in fact rates need to be at zero with a probability of under 5% that that will do anything to re-ignite demand is to admit the country is doomed to the Japan defaltionary spiral. I will be you money that in fact if we keep rates at zero and keep spending money we don't have to the tune of trillions of dollars we will most certaintly end up like Japan until the ultimate default happens. Unlike Japan the US will default as we have no internal funding source (no one will even lend us the ink for the printers) and the US population is not quite as passive as the Japanese.
We are already seeing its wondrous impact on the Eurozone. We eagerly await as its full force is felt, soon, on US soil.
The saops hook in plain view.
If this isn't the end, there is a more "spectacular" bubble ahead!
My favorite part from page 8:
I advocated that most major countries should join the Fed in aggressive QE, effectively generating a Competitive QE game, in which all fiat currencies were devalued against things, with gold being a proxy for things.
Damn there it is right there!
And more than gold, tangibles in relation to as a means of assessing value.
"Pimpin' ain't easy, but it's necessary..."
Money market mutual fund fee: 10 bp, currently waived
Muni mutual fund fee: 35bp-40bp
Bond mutual fund fee: 50bp-65bp
Ergo, McCulley will not be recommending anything that encourages holding cash ever again. And the Authorities are going to squeeze the genitalia of all savers until we are willing to piss away our cash hoard on Greek bonds or California munis.
Never trust a man with a mustache.
It is not just an after tax return, it is after tax and inflation.
Run faster producers and laborers, run faster, you have interest to pay the financial industry. You don't expect us to work, do you? And while you run this marathon with the FIRE industry on your back (finance, insurance, real estate) make sure you pay in for everyone that doesn't feel like running to sit on a sofa and eat bon-bons while watching american idol.
Remember, all human rights flow from individual property rights, without it you have no ownership or stake to anything. This mustached collie molester sounds like he doesn't believe your money is really yours, and he wants a management fee from it. Of course he is talking his book, for those not in the know interest rates and bond yields are inverse so a large increase in interest rates would kill current bond holders unless they held to maturity - then they would only lose relative to missed opportunity costs.
Because there is no return, money is fleeing from banks and into mattresses - this doesn't help the money velocity. Move your money dot com also isn't helping the big fat too big to fail pigs. Zero interest could collapse the system for everyone except the fucking industry that gave the most campaign contributions to Obama - they just paid out RECORD bonuses while anyone not connected with a printing press collapses (this includes the states). It is too ludicrous for words, only take a loook at Warren Buffett squeeling with delight like a school girl when discussing how wonderful Wells Fargo is and how he wished he could have invested more in a bank over the years.
Because good money is fleeing, BB stated, perhaps we don't really need deposits for banks! Oh really, then under what authority or reserve basis does "a chosen one" actually initiate loans? If that is the only thing producing wealth, then give every man, woman, and child a printing press - the people are less corrupt and we could then inflate. Is it a good trade off to put a gun to the head of every american just to ensure that a big bank doesn't fail? I'd rather let the big bank fail and let the more conservative banks take over - that's actually a law on the books, but they didn't follow the receivership law.
That's just it, we hoarders are not getting "rewarded" in our return. We get 0.0% in the money market, so have a negative real return.
I'm debating over which is more secure, 0.0% in a bank MM fund or 0.0% in my mattress. I risk theft and fire with cash, but at least have liquidity (and I'm not feeding the beast).
In a world of deleveraging and hoarding cash it makes absolutely no sense to reward holders of cash with an after-tax real rate of return.
-Politely go fk yourself MCculley and read some Hayek whilst youre at it.
Turd.
Double down I think you have really got it. The intervention has killed the function. Respect.
ucvhost is a leading web site hosting service provider that is known to provide reliable and affordable hosting packages to customers. The company believes in providing absolute and superior control to the customer as well as complete security and flexibility through its many packages. cheap vps Moreover, the company provides technical support as well as customer service 24x7, in order to enable its customers to easily upgrade their software, install it or even solve their problems. ucvhost offers the following different packages to its customers