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In The Year 3000: Predicting The Liability Side Of The Fed's Balance Sheet
- 30 Year Mortgage
- 30 Year Mortgage
- Agency Purchases
- Asset-Backed Securities
- Ben Bernanke
- Blackrock
- Central Banks
- Dennis Lockhart
- Excess Reserves
- Federal Reserve
- Financial Accounting Standards Board
- fixed
- Housing Market
- Hyperinflation
- Monetary Base
- Morgan Stanley
- Mutual Assured Destruction
- New Zealand
- Nomura
- None
- Norway
- Reverse Repo
- Rude Awakening
- Yen
When it comes to the asset side of the Federal Reserve's balance sheet, there are no secrets: with the winddown of the bulk of the Fed's emergency liquidity programs by February 1, the majority of the Fed's current $2.2 trillion in assets will continue being outright-held securities. And even as the emergency programs sunset, the quasi-permanent, QE remnants will be here to stay. What we know for certain is that the current $1.8 trillion in Treasuries and MBS will rise to at least $2.2 trillion, as the balance of QE round 1 is exhausted. Will this purchasing of outright securities end there? Hardly. As the Fed is the only market for MBS, and as the MBS market can not allow a dramatic rise in 30 year mortgage rates, which is precisely what will happen if the buyer of first resort disappears, we fully expect some form of QE to show up and grab the baton where QE 1.0 ends. In fact just today, Fed economist Wayne Passmore, under the aegis of Atlanta Fed president Dennis Lockhart, stated during the annual American Economic Association meeting that GSE ABS should have an outright explicit guarantee by the Federal Reserve. Forget about QE then - this would be an onboarding of over $6 trillion in various assets of dubious worth, which currently exist in the limbo of semi-Fed guaranteed securities, yet which have an implicit guarantee. Of course, should the broader Fed listen to young master Passmore, look for John Williams' expectation of hyperinflation as soon as 2010 to be very promptly met. The danger of the Fed's next unpredictable step is so great that it is even causing insomnia for none other than BlackRock big man Larry Fink, who asks rhetorically "Are they going to kill the housing market?" Well Larry, unless the Wall Street lobby hustles, and the Fed isn't forced to print another cool trillion under the guise of Mutual Assured Destruction, they very well might.
So now that we (don't) know about the assets, what about that much less discussed topic: the Fed's liabilities?
As it stands now, and as we have often pointed out, the liabilities of the Federal Reserve are rather straightforward: the major items are currency in circulation (about a $800 billion, and excess reserves of roughly $1.2 trillion of overnight deposits/excess reserves. The balance is a nominal amount of reverse repos and everything else. With the velocity of money collapsing, one thing is certain: the currency (FRN) number will remain flat for a long time, unless US consumers finally start borrowing, and circulate reserves. Alas, that is not happening: as Bloomberg points out today, loans and leases of commercial banks have declined from $7.2 trillion a year ago to $6.8 trillion in November. So no, reserves aren't going down any time soon, and neither is the consumer levering up for the foreseeable future. And somehow the Fed is expected to raise rates while excess reserves are over a trillion? Hmm, empirically that probably has worked before... in Norway and New Zealand. And our monetary system and economy shares so much with both of those countries. We hope economists are already writing the textbook on this one.
Ok, fine. So excess reserves going ever higher is one option, even if they earn a minuscule 0.25% of taxpayer money (hell, the banks are doing such a bang up job just by staying alive - we sure as hell should be paying them: after all, can you imagine the eulogy that Walt Whitman (were he alive today) would write for Goldman's funeral?). Alas, 0.25% on $1.2 trillion is not nearly enough for banks to repeat the stellar year they had in 2009, so those long-term fin puts are looking ever so juicier. And yet, with all the posturing lately about reverse repos and term deposits, we are confident that very soon, probably within 2-3 months, reverse repos and TDs will start becoming an ever more dominant part of the Fed's liabilities. However, even assuming that the Fed finally manages to pull off more than a test reverse repo, for more than $200 million, with something just a "tad" riskier than Treasuries, would it really make a big difference for the money printers? We doubt it, and observations in a recent report by Nomura seem to agree with this.
The Fed is also likely to change the composition of its liabilities in 2010, but from the perspective of the broader economy we judge this is not particularly important. The Fed’s authority to pay interest on reserves allows it to influence short-term interest rates even if reserves remain well above minimum required levels. Hiking interest rates while excess reserves remain high would be unusual, but other central banks (e.g., in Norway and New Zealand) have operated under this type of system for some time. Changing the composition of the Fed’s liabilities is also unlikely to constrain credit creation. Instead of holding overnight deposits with the Fed, banks will own repurchase agreements (repos), Treasury Supplementary Financing Program (SFP) bills, and/or term deposits. Substituting one short-term, low-yielding, risk-free asset on banks’ balance sheets for another should not make banks any less willing to lend, or customers less willing to borrow. The Fed’s reserve draining operation could help control the spread between the fed funds rate and the excess reserves rate, but would accomplish little more, in our view.
And a conservative projection of the Fed's balance sheet from Nomura:
So even while the Fed struggles to convert excess reserves to reverse repos, the broader composition of the Fed's liabilities will likely not be too relevant, except to point out that currency in circulation will be flat. This should be a big warning sign to inflationists, as two thirds of the monetary base will never see US consumers, and with wages and hours worked continuing to fall, a major driver of inflationary pressures is just not there.
So back to the assets. As mentioned previously, one thing we know for sure is that the assets will likely grow at least by another $3-400 billion. What happens then is still anyone's guess (even Goldman does not have the answer, or at least hasn't decided what outcome will benefit the prop desk the most yet). So here is our take. As we pointed out a few days ago the Freddie 30 year fixed has started to rumble, and hit a 4 month high of 5.14%. Of course, actual end-consumer rates are markedly higher. Why is this dangerous? While a topic of a future post, interest rates are the biggest household net worth killer, much more so than the stock market. For instance, the lifetime payments of a $100,000 30 year fixed mortgage (with standard terms) comes down to $193k at a 5% rate... and $316k at 10%! Netting out, this implies a nearly 40% loss in the worth of the home to compensate merely for the greater interest outflows, all else equal. (the same lifetime payments for a $100k mortgage at 5% are about equal to a $60k mortgage at 10%). Of course, this analysis is simplistic and avoids discounting, but optically this is precisely what the biggest threat from higher interest rates is to the household balance sheet. And as the bulk of American net worth is not in the stock market, but merely in their home, the adverse impact from a rise in interest rates by 5, 4 or even just 3% will undo all the hard fought 2009 stock market gains (not to mention what an additional 40% loss in home values will do to bank balance sheets).
So is a 8% 30 year mortgage inconceivable? Not if you believe Morgan Stanley. And what will a roughly 3% rate increase do to house value? Not much: just take another 16% or so off current prices. Enough to finally and terminally blow up the GSEs and who knows how many banks (at this point reading bank balance sheets is utterly pointless: the FASB has made any attempt at gleaning what the true state of a bank'a capitalization is a fool's errand, which is why we love reading the opinions of permabulls who think they have some sense of just how banks are doing: they tend to be very amusing).
What does this all mean for the Fed? In our opinion, at least another $1 trillion of MBS/agency purchases, to resume shortly after QE 1.0 ends, mortgages skyrocket and Bernanke gets a rude awakening in the form of some unpleasant phone calls from certain Administration/Wall Street officials. This means that the asset side of the Fed balance sheet will likely reach $3.5 trillion by the end of 2010. And at that point, with the dollar, euro and yen in a true race for the bottom, who really cares about a few hundred billion in reverse repos between friends. Alas, we (and in this case, not the editorial version) will have much, much bigger things to worry about at that point.
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One french word we heard a lot in 2009 was tranche.
Another one I think we will hear in 2010 is triage.
In this case, the housing industry might just be the gangrenous limb that needs to be hacked off with the blade red hot from the fire.
If we had a cool MarketWatch comment system I could just + you. But here it is anyway: +1
What do you think, Marla and Ty? Then we could rescue Chums from 'junk hell' with the power of democracy.
Mr. Passmore????
Wayne Passmore. This guy: Fed economist calls for government MBS guarantees
really!
who is making up the names here?
I thought the limit had been reached when the Freddie spokes (person??) was named Crew Cutts.
I think the EU draws the line but the Pound Sterling and USD are toast. That is a nice analysis Tyler, thank you. You're right, Nomura is conservative.
Well, one thing that's pretty easy to predict for 2010 is that GS and JPM are gonna start it the same way they ran it for the past 9+ months - gunning futures. Dow, S&P and Naz overnight futures jacked up right at the open and Dow futures are now up 40 points. Jamie and Lloyd are throwing down the gauntlet right out of the gate... don't fuck with our rally. I must say, these are two major control freaks who seem terrified to let any selling come into this market.. you can almost hear them screaming at traders when there's a short sell-off - wonder what they're so scared of?
Yep, we might as well close our eyes and gear up for Feb. opex as January results have already been determined.
Juicing futures has been the govt's tool of choice since the Rubin Treasury; it allows them to throw the first punch and get the mo mo funds chasing.
Long bonds and oil we still be a problem however. TD should do an article on the price of oil and O's falling approval rating since he took office. It's probably a fairly good inverse correlation.
my third eye said that the media would be different in 2010 (time for glasses)
from Bloomberg (Happy New Year)
Job Losses in U.S. May Have Almost Ended in December as Economy Picked Up
and not one word about the bogus Chicago PMI numbers from just before New Years, which had the Chicago employment index initially >51 on Wednesday only to re-issue the number (along with most of their numbers) on Thursday at the 47 level.
http://www.reuters.com/article/idUSN3124784720091231?type=usMktRpt
Your analysis on real estate is way off. In the long run, real estate is the best investment in the world! Inflation has gone up 2,085% since 1913 when the Fed came to existence. Real estate is a hedge against the hyper inflation that is bound to hit us soon. Even with interest rates at 10%, if inflation is at 9%, people will be better off owning a house with a fixed rate mortgage because their house (which is leveraged) will appreciate with inflation while over time the mortgage payments are made with inflated, worthless dollars. (Rents will simply go up with inflation.) Many fortunes were made in real estate but the past 10 years were an anomaly for the many reasons we all know.
This isn't the 1970's. We're sitting on the mother of all credit bubbles right now. Real interest rates (spread between nominal interest rates and inflation) must eventually go much higher because they have been manipulated artifiacially low for decades. When that happens, "real" house prices (real = percent of average income) will plunge much further.
here's a chart of nominal and real housing prices. i think real estate did pretty good, especially when you consider you only put up 20% of the price.
http://mysite.verizon.net/vzeqrguz/housingbubble/
You might want to check what happened with RE in Japan from 1970 to date, that is closer to what we can expect.
Rents going up will render a lot of housing unaffordable.
Most SFH rentals of recent vintage are cashflow negative.
There is no way a rise in the pricing level of RE can be sustained against this income backdrop. None.
There's already a glut of housing and if the trend is to see more multiple occupancies because incomes fall in real terms vs. rents, this will do nothing to work off the inventory glut.
Housing is not an investment nor does it hold real value. Productive land, yes, real assets, yes, a house? No.
Housing like we have is the ultimate dead asset. Given what may be coming in terms of tax increases, it may end up being a huge liability. Our inflation was made out of credit growth; that has stopped. If/when the Fed switches to outright helicopter methods, then, perhaps, but without a manifestation of inflation in incomes, there are inadequate earnings to support a rise in the nominal price of RE.
8% ????
That will be cheap....
Why not 15% ?????
Again.....WHO is going to buy funny money debt ????
That's right....
MORE FUNNY MONEY.....
Careless Whisper, hyperinflation didn't push house prices up in Weimar Germany, because people were spending so much of their income on the necessities of life that they had no excess income available to push up real estate prices.
"hyperinflation didn't push house prices up in Weimar Germany" Did you just make that up out of thin air? Post a reference.
I thought the line was "in the year 3535..."
http://www.youtube.com/watch?v=izQB2-Kmiic
i love that song but not on a cold windy january night in ny. this is a little more fun;
http://www.youtube.com/watch?v=9HmJQyS8QVw
5%, 10%, 8%. The Fed can just pick a number...
Thought experiment: if the Fed were to stop printing money today, what would be the natural free market interest rate for a 30 year fixed mortgage? Where the lender prices in default risk and opportunity cost of capital?
Gives you some idea for how distorted this enslaved (not free) market economy has become.
well then you have to let the big banks fail and then see how the market with the credit unions deal with increasing their mortgage lending per their leverage
I think since they would ignore the bad apples trying to get loans, the increase in interest rates would only be nominal and still under 10% at the worst
the big banks are in such a mess they can't function in a free market at all at this point
The housing market is so fluffed up still by subsidies and supply-side credit growth/stimulus that we are nowhere near what real values can be supported by incomes.
Our valuations are so historically out of whack that it is not funny.
In Wonderful Life, the borrower paid 50% of income for 5 years at 5% and owned the home outright. Our situation now is 30% of income for 30 years at 5%. People are literally debt slaves for most of their working life to the banks just to have a house.
This works so long as credit inflation runs in the forward direction with economic growth in the future to pay off today's debts. We hit an inflection point and housing cannot be expected to continue to be fluffed up...the real income simply ISN'T there to support the rising interest load of the increase in credit/prices.
Nevermind the overhead supply glut in REOs and overcapacity. The trend now is towards downsizing and multiple occupancies just to support rents. That makes a supply overhang nearly permanent.
Excellent analysis, but Nomura is basing the liability side of the Fed balance sheet based upon their recent statements - which when the cold bite of reality hits in the form of rising long term interest rates, the Fed will back off its reverse repo plan quite fast. Well actually, I don't believe that the repo plan may ever get past about $50 billion before the Fed triggers a bond market implosion.
Since effectively the Treasury is now in charge of financing the GSEs - and all their losses - since Chrsitmas eve, the new QE2 may actually launch before QE1 gets to finish on March 31. There are a lot of variables here, such as when the repo plan gets going and how high interest rates go in the first quarter, and it's also possible there will be a dead zone after March 31 when Wall Street will be in the dark until QE2 gets going.
The Fed just has to maintain the Goldilocks uncertainty.
If the conventional wisdom decides inflation is on the way, the short end of the curve will jump killing the bond market.
If the conventional wisdom decides lost-decade deflation is on the way, the long end of the curve plummets, killing the banks that are 'growing their way' back to solvency.
As long as the Fed keeps everyone guessing about the fate of the money supply, the plates can keep spinning.
This article brings up a point that I've been saying to goldbugs all along.
If currency doesn't make it into circulation, does it create inflation?
NO!
That's the part of the stimulus and its distribution that all the hyper-inflationists seem to be missing again and again.
The $1 trillion + in new money did enter the economy, mostly as new fiat money from the Fed to buy mortgage pools, mortgages that new home buyers used to buy homes. So that's $1 trillion that entered the economy, although it is not necessarily counted in the money supply.
So how can you say that money doesn't get into circulation in one way or another?
Besides even if you were right about the quantity of money, the quality of money continues to go down. Where have you been this last 15 months when the Fed bought all kinds of garbage at face value?
Excellent point. However, I don't think the fact that a couple of Americans are able to get cheap mortgages is going to out weigh what TD wrote. But the extra tril is definitely still a factor.
Wrong. that would only happen in a closed system. the system is open. therefore currency destruction can lead to inflation without money supply entering the system.m
I hate to be insulting, but you're a fool.
if money never enters circulation but is used to buy assets
the price of the assets rises and that causes inflation
this faulty argument has been spouted around and it's moronic.
Borrowed money/credit is the same as moeny entering circulation. purchase of asset prices via credit is the same as money in circulation rise of asset prices is the same as inflation. No money in circulation and inflation.
moron, moron, moron.
the rise of housing prices was inflation. they just decided not to include cost of housing as a maeasure of inflation.
therefore over the time when we were having no inflation
there was actually a huge amount of inflation as housing costs ate up a huge proportion of income.
It's all in the Bs measures you decide how to measure it.
Using this argument the zero interest rate policy should not make the market rise, the market rises, oil goes up, commodities go up as people use leverage, inflation happens. no money added into circulation.
My advic to you is avoid posting until you have actually thought things through, because clearly you haven't.
If wages drop, but costs don't rise, I call that inlfation
the point is that spending power decreases, that's in;l
inflation. It's relative, not absolute!!!
Moron
anyone that calls out moron that much is a moron - the point of the post you are attacking is that if the majority of the people do not see the extra currency since lending and job creation is dead, and the banks are busy back filling their old debt with the printed money, you still have a deflationary effect in the short term. What you have to see, moron, is that the rate of printing is not going to exceed the amount of insane leverage that was going on the past decade.. so in that regard it IS deflation in total sum
DPOS,
You misunderstood. Anon signed his name as "Moron" at the end of the post. Now apologize...
Even more dumbness
Cheap federal dollars cause assets prices to rise above fundemantal meansurements of value. that's inflation too.
My dollar buys less stock because someone can borrow risk free at zero. My money busy less of something becaus eof fed policy, that's inflation.
Moron, Moron, moron
You have never needed transmission of money into circulation to equal inflation. scecuitization by expanding credit caused inflation (asset price increases) without money into circulation.
Morn, Moron, Moron
You're picking and choosing your measure of inflation
and that's the faulty assumption. the cheap federa
fuds go somewhere if they are borrowed. the fed purchases of assets to somewhere. Just because htye only go into specific areas doesn't mean we don't get inflation
it means we get a bubble in one area. I hate to tell you this but a bubble is just one specific manaifestation of inflation directed into one resource.
Moron, moron, moron.
I cracked on you up there not because I agree with inflation or deflation but because of your delivery. You are obviously upset, I know you type better than the above, you did it fast and furious.
Point being, I may agree with you, but the delivery is so irrational that it makes it hard for me to back your play as a team mate. You may want to consider taking your own advice and think before you type.
I too have gone off on innocent posters and regret it. Folks here remember I did it, I am accountable for it. But doing it as an anon poster is, honestly, a ball less sort of thing to do.
And Moron, Moron, Moron has no style, no flair. If you are going to insult someone, make it pithy, poetic, or at least punny. Make us laugh man.
For instance, I caught you signing your post "Moron" above. Gotta admit, if I want to insult you using your own words, it is at least mildly cute.
Oh well, you probably don't care, do you?
Let's settle on major point here once and for all, ok?
Only a stupid goldbug is buying gold in order to try to "profit" from inflation or hyperinflation. There is no such thing. Gold does not "rise" in value; it stays fairly level over time.
If you wanted to profit from inflation, you should be buying levered bets on gold, such as stocks.
Gold bugs of today are looking at a landscape of inarguable fiscal insolvency by most sovereigns and placing their bet on something that will preserve wealth across what could be a cascading sequence of functional sovereign default.
...or buying other hard assets or means of production now with what will be comparatively cheap dollars later, and paying off the leverage with sale of physical gold later. Otherwise you're just trading paper for more paper. Great in the short term as stock prices inflate their way up, but then the tipping point is reached, I suspect there will be more available buyers for physical metals than paper stocks.
Heck, even Warren is buying trains. :-)
"This should be a big warning sign to inflationists, as two thirds of the monetary base will never see US consumers, and with wages and hours worked continuing to fall, a major driver of inflationary pressures is just not there."
All things being equal, that might be true. A stable currency would have to be one of those equal things, though, and we're a little lacking in that department lately. A currency crisis erases many of the article's suppositions.
Excellent analysis.
Nomura appears to be accepting the Fed’s statements at face value for the liability side of the balance sheet, which appears to be assuming an effective and major launch of the reverse repo program. Frankly I don’t think that the reverse repos will ever get past $50 billion or so, and even then if this occurs after March 31, the consequences to the markets will be devastating .
Also given the Christmas eve plan of unlimited financing by the Treasury of GSE debt and GSE losses, QE2 may be launched before QE1 ends. I don’t see the Treasury issuing tons of new GSE related debt on top of its regular financing without the Fed’s help. But if I am wrong, 8% long bond rates, here we come.
Given the end of year shenanigans initiated by the US Treasury and Bwany Fwank, they have established the foundation that virtually all Agency Debt is guaranteed.
Not only is that the case, but our own Ben Bernanke is working on the assumption of an explicit guarantee on the mortgages that supports the derivative MBS. This was stated in his reponses to Senator Benning this past month.
The Fed doesn't really need the explicit guarantee of MBS itself, as suggested by Wayne Passmore... except that a direct guarantee perhaps makes the securities more "marketable".
I'm not sure the outright purchase of another round of MBS is in the cards for the Fed after March, but I think it's academic if the US Treasury guarantees all agency obligations. Investors will buy the MBS for the extra yield, if indeed, princial and interest are guranteed.
It appears to me that is the big setup, as F/F gets to expand their portfolios and $4 trillion or so is earmarked to absorb more losses. Obviously, it beats the hell out of me how Eraserhead is going to finance even more of these absorbed losses.
is it time we subsidized the home builders like we do with the farmers to NOT build anymore houses for a while?
The opposite is occuring...with tax incentives and all the other BS, we're incentivizing them TO build houses.
No builder would be able to build a house right now at a profit without the support of the .gov to make the situation even worse.
For this growth ponzi to continue, we need even more people buying even more houses that they don't live in to flip to even more people. It's obvious that this is a total clusterfuck but TPTB cannot let the situation work itself out.
There were too many levered vehicles in the credit pipeline, synthetic debt instruments and pyramided CDO leverage. If they let prices normalize, they vaporize nearly all of the credit growth over the past 5 years or even longer perhaps.
The analysis would have much more validity and would be easier to understand if it was phrased as what can the fed do to maximize income to wall street and never mind about the economy. when you actually through in the economy and how it performs you put in a monkey wrench to analysis. Ignore the wealth of the people, figure out what willl give the most money to wall street regardless of the overall health of the conomy and then give me your analysis. then I can trade on it. The confounding variable you always add is to imply that the fed considers the wealth of the people or the economy as impt. when I do this I fail to predict fed actions. assume the fed is a wall street bank that controls money supply. Ask what will we do to max our gains and then give analysis of likley response. Because your analysis assumes the fed will act in the best interst of the people it lacks predictive rigor. Stop assuming the fed is a rational actor. It isn't. we will see QE 2, more fed laibilities, et. they do not care if our government collapses or the dollar is destroyed as long as blankfien gets his money,
Use this paradigm to predict futire fed policy and I have use for yoru analysis, but at this time you come across s disjointed and lackig focus because you haven't determined what fed goals are.
they will destroy the country to ensure that wall street makes the big bucks. Using this as the goal tell me what the fed will do to max wall strret profits and avoid declaring losses. Ignore federal debt, and dollar destruction. then I will have a predictive model.
Just tell me what is best for the banks, then I know what the fed will do!!!
This is killer. A very decent idea. But guess what? ZH is not here to give you trading advice.
See their disclaimer:
Zero Hedge is a financial news and information site, not an investment advisor. Making investment decisions based on information published on Zero Hedge, or any internet site for that matter, is more than unwise, it is folly.
see more at http://www.zerohedge.com/node/11120
Zero - you guys had tremendous foresight to blow off Google back a few months ago
(I hope you are offshore like you have implied)
Google’s evil policy on shutting down blogshttp://blogs.reuters.com/felix-salmon/2010/01/03/googles-evil-policy-on-...
holy f*cking sh*t, Ben Shalom has reached terminal insanity.........
"Bernanke Says Low Rates Didn’t Cause Housing Bubble "
http://www.bloomberg.com/apps/news?pid=20601087&sid=auCLZh_HZf9E&pos=1
I saw that too. I think I sort of understand the true context in which Bernanke is speaking, but---he is still dead fucking wrong.
Fantastic analysis, TD.
Great read.
jim willie called this one in the middle of 2009 - ie. qe is the gift which keeps on paying and paying and paying...it cannot stop....
passmore is evil - he will be richly rewarded for his crock of shit recommendation which is part of the continuing planned economic destruction of the usa...
Article noted:
"...and with wages and hours worked continuing to fall, a major driver of inflationary pressures is just not there..."
Hasn't the past 2 quarters shown that the "consensus view": that limited household spending power would also limit inflation; been proven wrong?
Raw material prices are working their way through the system to finished goods prices, regardless of the limitations on household spending power.
Not that one would give much credence to CPI, but from July 2009 to Nov 2009, it went from a 1.9% rate of deflation to a 1.9% rate of inflation. And lately, is showing about a 3.5% - 4% annualised rate of inflation.
Assuming that "wages & hours worked" are "a major driver of inflationary pressures" is not backed by the observations from the last 2 quarters. If these factors were a driver, then how come prices from the wholesale & the finished goods levels have risen in that timeframe?
The stupid "output gap" nonsense has got to stop. It is useless under the current situation.
Yes, the deflationary pressures have not gone away, however, looking at "wages & hours worked" and pointing a finger at it & saying that we will have no inflationary pressures is also nonsense.
Can anybody say, "STAG-FLATION"?
I had this same gd'd argument over and over and over again on TF a few months ago.
Look, I counsel everyone to like, you know, travel or something.
Go to a 3rd world nation and SEE HOW incomes do not grow with inflation. In Brazil, automobiles cost fantastic multiples of average income. Inflation can and does happen without wage push, simple as that. In fact, for it to happen without wage spiral is the NORM, not the exception.
A simple devaluation of the currency is all that need occur. Could VW or Honda sell way more cars in Brazil if the Civic were not R$ 60,000 and an Accord R$90,000??? Of course. But it wouldn't be profitable to do so. Real costs are higher compared to incomes and they sell less product.
Wage push is never a prerequisite for cost climb.
It takes private sector credit growth to have inflation. We are in the midst of deflation. Why is the obvious so hard for some to see?
I think it's wrong to suggest that inflation will be kept at bay. We all know that the Fed is monetizing debt by purchasing roughly 3X the amount they publicly claim (Sprott). In addition, they have likely injected about $1T into the stock market rally (Biderman). Therefore, real inflation of the currency in circulation has and will be increased inevitably as government spends more and more and the stock market churns ever higher (each sell-off has been followed by strong dip buying by dubious sources). Already, prices are on the rise at the producer and consumer level according to the latest PPI and CPI numbers - statistics which are designed to discount the real effect of the inflation they are creating.
But all this pales in comparison to the dollars held by foreigners who will eventually wise up to the never-ending shenanigans of the Fed and Treasury, lose confidence, and seek a final exit from the dollar. When all those dollars come home to roost, that's when you will see prices increase (symptom of inflation) parabolically. Of course our "leaders" will address the problem by printing more and more which will lead to hyperinflation. The American way of life will be over forever.
The Fed is doing everything it can to inflate our way out of this mess and I have no doubt they will succeed beyond their wildest dreams. These people are insane and we are forced to live in their asylum (as another ZH commentator so eloquently said). Prepare now while you still can - the genie is already out of the bottle!
Great post by Hussman here: http://www.hussmanfunds.com/wmc/wmc100104.htm
Does anyone know if the Fed's Balance Sheet data includes the short term book? If not, the Fed's asset holdings don't tell the whole story, as the Fed could be doing massive amounts of Repos, rolling them over, and creating a situation in which those securities are, for all intents, on the Fed's Balance Sheet.
Zeh Favorite Zong ov Goldman Sachs:
Rammstein - Du HAST
-MobBarley
Without real estate falling back to some type of affordability, your kids or grand-kids could never afford a house (3 times income) and since income in most of the private sector is stagnant, we still have a way to fall.
Someone mentioned how real estate has been a great investment over time. They forget that most real estate comes with a huge assortment of added costs (taxes being a good place to start).
We've been going at the inflation / deflation issue for some time. A year ago, we asked everyone to bring in their actual "cost of living" (the invoices) - the invoices keep going up. We may be in a period of deflation coupled with rising prices - especially anything to do with government's (taxes, fees etc).
Nothing on a dollar bill says this is guaranteed to buy the same amount of crap a year from now as today. All of you know that when the shit hits the fan people run to the USD. It's still seen as a safety valve. Gold, we're not for against but are concerned that unless you have actual possession of said gold - you may have a worthless piece of paper (fractional or FIAT gold).
So for 2010 - it will again be "don't fight the FED" - they'll print their way through at least one more implosion and then maybe world events (too many nuclear weapons in irrational hands) will Black Swan the entire thing. Although we don't think there are many unseen swans - more like "Murphy's law".
Yeah, they just raised the toll on the road I drive on.
I'm sure there is less traffic because of the joblessness situation and the massive layoffs.
I also see oil at $80/bbl and gasoline just south of $3/gal.
I don't know what the hell deflationists are on.
This shit happens ALL OVER THE WORLD, where prices are VERY HIGH for real things in terms of real income.
JFC, the toll road from Cancun to Chichen Itza is unaffordable for the vast majority of Mexicans, as are CARS. It is the same throughout Latin America...low wages, and high prices.
Does everyone think that our consumption rate is an entitlement? That companies cannot live without it?
Prices will reflect true cost. If we had significant deflation over the past year or two, would fkin gasoline be stuck north of $2.50?? We're seeing a revaluation of our incomes LOWER. That is what inflation DOES and is SUPPOSED to do.
It does no goddamned good to weaken your currency if you have to pay your employees more at the ratio of the devaluation. I guess deflationists haven't figured that out, how a weaker currency helps exports. It does by pricing labor cheaper because wages never keep up.
Dark Pool of Soros wrote:
"is it time we subsidized the home builders like
we do with the farmers to NOT
build anymore houses for a while?"
Isn't that what extended benefit unemployment
insurance is? "There no need to move to the tent
we still have income"
Surely you didn't mean Bail Out the Home Building
Sector!