This Is What Paul Tudor Jones Does When He Wakes Up At 3am Every Morning

Traditionally one of lowest-profile hedge fund managers, this morning legendary trader Paul Tudor Jones allowed CNBC to interview him from his trading floor in a broad discussion covering everything from North Korea, to Fed policy, to what keeps him up at night and what he is investing in, to the risks facing the current economy, to socially responsible investing and ETFs.

Among the numerous topics covered, several stood out. The first was what PTJ would do if he were Fed chair. The answer: an overnight hike of interest rates by 150bps: "it’s where they should be" because "we’ve got 3.8% unemployment and negative real rates. And we have a 5% on the way to a 7% budget deficit. The last time that we had the unemployment rate where it is now was 2000. And we are running a budget surplus at that time of 2.5%. We were talking about bond scarcity at that time." The result is the cause for the stock bubble that Jones has complained about in the past:

"we’ve got fiscal policy that literally came from another galaxy and we have monetary laxity. And that brew is what has got the stock market so jacked up."

And while the Fed continues to raise rates on the short-end, the one it can control, the real question is what happens to the long-end: flattening or steepening. Here PTJ is adamant: fireworks are coming:

I think we’ll see rates move significantly higher beginning some time late third quarter, early fourth quarter.  And I think it will interesting because I think the stock market also has the ability to go a lot higher at the end of the year.

At this point Becky Quick asks why a spike in long-term rates would lead to a surge in stocks, and understandably so. PTJ's answer: thanks to the Fed and fiscal policy, the market is now "roided out of its brains" just like Arnold Schwarzenegger, and while it's not sustainable, there will be another last minute melt up across the market, to wit:

So Arnold, right, the guy just looked flipping amazing in it, but he was roided out of his brains. Right? And so that’s not sustainable. So here we’ve got negative real rates. We’ve got interest rates that again look unlike anything that we’ve seen in the stock market top before and we’ve got a 6% budget deficit during peace time with 3.8% unemployment. So yes I think this is going to end with a lot higher prices and forcing the Fed to shut it off. And we’ll probably go through the same thing. It’s an old story. We’ll probably play it again.

In other words, markets surge until the Fed has no choice but to crash the party at which point it crashes down.

Here Andrew Ross Sorkin had an interesting question, asking Jones "when you wake up at about 3:00 in the morning and check the London markets every morning, what are you thinking about over the past couple of weeks? What’s been the issues that have consumed you at that hour?"

The answer:

At that hour, I think the first thing I’d do is I had this running debate whether I’m going to look at the prices first or I’m going to look at my P&L first, because I’m always expecting. So I’m just thinking “oh lord, just please let the be a slow transition. Nothing dramatic -- that while I’ve been sleeping something really bad has happened.” so sometimes I look at the prices and sometimes I go look straight at my P&L. So that’s the first thing I do.

What I’m thinking at that point in time is has there been any significant change that I was anticipating when I went to sleep? And it’s a good day when there’s no – when there’s nothing significant. If it -- another time, another thing that you’re always doing is -- particularly if you’ve got global positions is what economic releases have come out that are going to be impacting your prices? So I’m always thinking about that.

And according to Jones, his nights are about to get much more nervous because he expects a volatility explosion to hit shortly. Asked by Sorkin what is his single best (and worst) investment right now, the hedge fund legend responds that "I’m literally as light as I’ve been. I can’t remember how many years it’s been since I’ve been this light" meaning "I don’t have a lot of macro positions on right now because I think the reward risk in a variety of things has diminished at this point in time. I like to have significant leverage positions when I think there’s an imminent price move directly ahead."

What exactly is PTJ waiting for?

His answer: "there’s a lot I’m waiting for. I think the third and fourth quarter are going to be phenomenal trading times. I have a feeling we’re getting ready to go into a summer lull."

Of course, by phenomenal trading times, one usually suggests a surge of volatility, which tends to have a negative impact on risk assets; here Jones - best known for timing the 1987 crash - predicts that a crash may come, but not immediately. In fact, when asked what he thinks will happens in Q3 and Q4, Jones answer nothing short of a repeat of 1987, only instead of a drop in stocks, he expects a melt up first in both stocks and yields... which will then be followed by a crash once the Fed ends the party:

I think you’ll see rates go up and stocks go up in tandem at the end of the year. If you ask me to kind of think of some analogy, I would pick 1987 in the U.S., not necessarily saying we’re going to have a crash but a time when you had a budget deficit, and you had stocks and rates going up for a period of time. 1999 in the U.S., that one also jumped to my mind when things got crazy the end of the year. 1989 in Japan. Again, they had strong fiscal monetary pulses that worked their way through the stock market. So I could see things getting crazy particularly at year end after the midterm elections. I could see them get crazy to the upside.

Finally, here is what Paul Tudor Jones believes will end the party:

We’ve got buybacks right now that are kind of, speaking of Arnold Schwarzenegger – they’re like the Terminator, they don’t stop. And we’re retiring equity as a percentage of total market cap and at unprecedented rate this year. Rates have got to go up enough to either shut the economy down and overwhelm from real money selling like we had ’07 – those buybacks -- or to make it economically less compelling for companies to issue debt and buyback stock. This is real simple.

Indeed it is, and is precisely what we said in February in "Day Of Reckoning" Nears As Goldman Projects A Record $650BN In Stock Buybacks."  The question is what interest rate will finally kill the Terminator unit known as Buyback 1 Trillion (2018 edition). But ultimately it really depends on just one thing:

"I think this is going to end with a lot higher prices and forcing the Fed to shut it off."

* * *

Paul Tudor Jones' key CNBC interview excerpts below:

Jones on key market drivers:

Sorkin: let’s look more broadly just for a moment just as a macro trader in terms of the way you look around the world, the way you look at growth around the United States. You’ve talked about a potential bubble emerging. Are you still in the same place?

Tudor Jones: I think that there’s three things that are kind of driving the world today, and they all start and end here in the United States. The rest of the world -- I can’t remember a time when things are as kind of boring as they are. Right? Western Europe somewhat static policy there, even though we’re going to talk about the end of QE. Japan’s been relatively unimaginative in what they’re doing in the economic situations. Same thing with China. You have some idiosyncratic stories in emerging markets, Brazil and Mexico and Turkey. But where the action is is here in the United States and that’s ‘cause you’ve got three things that are kind of pushing the prices and all the asset classes. And that’s first fiscal policy. And really fiscal profligacy. Monetary policy. And then, of course we have -- and I would call it more of a trade irritant than a real trade problem. Even though you have to monitor that one closely because it can escalate.

On the threat of trade war

Sorkin: are you worried about a trade war?

Tudor Jones: you know – again, you have to put it in perspective, right? If we just look at our four biggest trading partners, we have a simple way to average a tariff of about 6%. We have one of 3.5% - or 3.5%. So there’s a 2.5% gap in unfairness, right? If what the president was trying to do was just to normalize the tariffs, it’d be 2.5% on we have a trillion and a half dollars of exports -- it’s a $40 or $50 billion problem in an $87 trillion world economy. The danger would be that he’s just not trying to equalize the playing field and equalize the tariff discrepancy. The danger is that he’s trying to do away with the bilateral trade deficits country by country. And there’s a problem with that. Because we’re running a structural budget deficit. If you just balance the accounts that -- typically the way that balances is you run a trade deficit to do that. So on the one hand we had this massive budget deficit that the administration and congress has engineered. On the other hand, he’s trying to do away with bilateral trade deficits and the accounts don’t balance. So it could be dangerous if he’s focusing not just on trying to get free and fair trade but to actually do away with that bilateral trade deficit. Because it’s actually jamming a square peg in a round hole.

On the Fed far behind the curve:

Sorkin: The Fed is expected to raise interest rates later this week. If you were running the fed right now, what would you do?

Tudor Jones: I think rates would be 150 basis points higher right now. And that’s – it’s where they should be. We’ve got 3.8% unemployment and negative real rates. And we have a 5% on the way to a 7% budget deficit. The last time that we had the unemployment rate where it is now was 2000. And we are running a budget surplus at that time of 2.5%. We were talking about bond scarcity at that time. And now we have the exact opposite/ so we’ve got fiscal policy that literally came from another galaxy and we have monetary laxity. And that brew is what has got the stock market so jacked up.

On what he fears when he wakes up.

Sorkin: when you wake up, you wake up at about 3:00 in the morning and check the london markets every morning. What are you thinking about over the past couple of weeks? What’s been the issues that have consumed you at that hour?

Tudor Jones: At that hour. I think the first thing I’d do is I had this running debate whether I’m going to look at the prices first or I’m going to look at my P&L first, because I’m always expecting. So I’m just thinking “oh lord, just please let the be a slow transition. Nothing dramatic -- that while I’ve been sleeping something really bad has happened.” so sometimes I look at the prices and sometimes I go look straight at my p&l. So that’s the first thing I do. What I’m thinking at that point in time is has there been any significant change that I was anticipating when I went to sleep? And it’s a good day when there’s no – when there’s nothing significant. If it -- another time, another thing that you’re always doing is -- particularly if you’ve got global positions is what economic releases have come out that are going to be impacting your prices? So I’m always thinking about that.

On his best/worst investment and how he is timing the next move:

Sorkin: Which single best investment that’s working for you right now? And single investment that maybe hasn’t worked for you the way you thought?

Tudor Jones: probably right now, in my position, I’m literally as light as I’ve been. I can’t remember how many years it’s been since I’ve been this light.

Sorkin: meaning you’re most in cash?

Tudor Jones: meaning I don’t have a lot of macro positions on right now cecause I think the reward/risk in a variety of things has diminished at this point in time. I like to have significant leverage positions when I think there’s an imminent price move directly ahead. I don’t like having positions and is probably a fault of mine at times just because I think ultimately interest rates are going up or I think ultimately the dollars going to go higher. I’d much prefer to be leveraged right at that point when they move the most so I’m not subject to unexpected events  overnight or over the course of weeks or months.

Sorkin: is there something you’re waiting for?

Tudor jones: There’s a lot I’m waiting for. I think the third and fourth quarter are going to be phenomenal trading times. I have a feeling we’re getting ready to go into a summer lull.

Sorkin: summer lull? And what do you think is gonna happen in the third and fourth quarter, though?

Tudor Jones: oh, I think we’ll see -- I think we’ll see rates move significantly higher beginning some time late third quarter, early fourth quarter.  And I think it will interesting because I think the stock market also has the ability to go a lot higher at the end of the year.

Why he sees a spike in yields and stocks, and why the US economy reminds him of 1987:

Becky Quick: You made a couple of comments about the broad market earlier. You said you think we may be headed into a summer lull right now but that you do think in the third and fourth quarter it will get more interesting and interest rates, you think are going to go much higher. You also said you thought stock prices have the potential to go much higher at the end of the year too. And I just wondered if you could tell us why. Because normally when people say interest rates are going to go up sharply, that that could act as gravity on stock prices. Why do you think they both go up?

Tudor Jones: Let’s just put things in perspective where interest rates are. We have negative rates. If you go look at what has shut off the stock market historically, it’s been real rates on the something in the neighborhood of like 200 basis points. We’re negative right now. So when you’ve got a lot of tech companies growing at 20% per year, who cares about a hundred basis points? Who cares, right? So I think you’ll see rates go up and stocks go up in tandem at the end of the year. If you had to -- if you ask me to kind of think of some analogy -- I would pick 1987 in the U.S., not necessarily saying we’re going to have a crash but a time when you had a budget deficit, and you had stocks and rates going up for a period of time. 99 in the U.S., that one also jumped to my mind when things got crazy the end of the year. 1989 in Japan. Again, they had strong fiscal monetary pulses that worked their way through the stock market. So I could see things getting crazy particularly at year end after the midterm elections. I could see them get crazy to the upside.

The market as Arnold Schwarzenegger: "all roided up":

Sorkin: crazy to the upside. But you’ve been talking about a bubble in the equity markets as well on the downside.

Tudor jones: All right. You’re too young because you’ve never seen this movie "Pumping iron"...

Sorkin: This is the Arnold Schwarzenegger movie. I know the movie.

Tudor Jones: So Arnold, right, the guy just looked flipping amazing in it, but he was roided out of his brains. Right? And so that’s not sustainable. So here we’ve got negative real rates. We’ve got interest rates that again look unlike anything that we’ve seen in the stock market top before and we’ve got a 6% budget deficit during peace time with 3.8% unemployment. So yes I think this is going to end with a lot higher prices and forcing the fed to shut it off. And yes, the reason I picked a couple of those years is if you look at the stock market relative to gdp, we’re at levels that historically in some other countries led to a blowoff and some type of economic contraction. And we’ll probably go through the same thing. It’s an old story. We’ll probably play it again.

Sorkin: but what are you looking for as the top then? Or the tipping point?

Tudor jones: We’ve got buybacks right now that are kind of, speaking of Arnold Schwarzenegger – they’re like the terminator, they don’t stop. So -- and we’re retiring equity as a percentage of total market cap and at unprecedented rate this year. Rates have got to go up enough to either shut the economy down and overwhelm from real money selling like we had ’07 – those buybacks -- or to make it economically less compelling for companies to issue debt and buyback stock. This is real simple.

* * *

Full interview below:

Watch CNBC's full interview with Paul Tudor Jones from CNBC.

Comments

Life of Illusion Cryptopithicus Homme Tue, 06/12/2018 - 14:52 Permalink

Indeed it is, and is precisely what we said in February in "Day Of Reckoning" Nears As Goldman Projects A Record $650BN In Stock Buybacks."  The question is what interest rate will finally kill the Terminator unit known as Buyback 1 Trillion (2018 edition). But ultimately it really depends on just one thing:

"I think this is going to end with a lot higher prices and forcing the Fed to shut it off."

 

So Buybacks start dumping taking tax break advantage?

 

In reply to by Cryptopithicus Homme

janus SQRT 69 Tue, 06/12/2018 - 18:08 Permalink

have long been and remain a huge fan of PTJ.  only Gundlach is in his class.

i have only one contention with PTJ's comments:

"square peg in a round hole."

to extend the metaphor, what if POTUS is -- instead of pursuing the macro trade re-balancing approach (round peg) -- whittling off the sharp edges of the square peg...testing with each shave how far it is from fitting?  additionally, this tactic gives us policy leverage.  if we have a policy that affords America the opportunity to favor certain sectors and certain nations in a very specific way, it give the US the ability to bargain effectively -- whereby we can shape the global arrangement in a way that both puts America first and favors her friends.  

by the bye, good life advice here.  janus needs to start waking at 3 instead of retiring at that time.

In reply to by SQRT 69

ravolla NemesisteM Tue, 06/12/2018 - 15:12 Permalink

HELLO SPAM-LOVERS!!!   BIG UP from the SPAMMER BUNKHOUSE here in the Methfilled Valley Trailer Park in Methfilled Valley, PA.  Good to see my men Leakanthrophy and Wadalt and  PrivetHedge  and our newbies  ll951983  and  gzcekkyret  out from under the couch sucking their own dicks and back on the threads SPAMMING like a Grease Fire!!!! 

Biblicism     AND    TodaysFox ("I made $7000 sucking cock on the Internet")  IT's ALL THE SAME SPAMMER!

THIS is an important week here in the SPAMMER's BUNKHOUSE (the leaking moldy single-wide in the trailer park).  This week I (we?) are celebrating SEVEN YEARS here on ZH, obsessively SPAMMING every thread we can with off-topic comments.  You see, there are dozens of "personalities" living in this one single sad SPAMMER's sick little mind, which he calls "Spammer's Bunkhouse."  How sick is that? 

Each of "us" (these innumerable fake log-on's) is represented by an ACTION FIGURE that Master Spammer ("DARWIN" is his name -- can you believe that?)  lines up on his kitchen counter and TALKS TO!!  WHACK JOB!!!

 

SAD BUT TRUE!!  I (we?) have wasted my (our) youth (or at least the last seven years) with at least one hand in my pants and the other hand SPAMMING ZH.  Yes, indeed.  DOZENS and DOZENS (maybe hundreds) of log-on's banned -- 
>>  "I made $7500 last week on the Internet sucking cock!": that's me.
>>  Biblicism: that's me.
>>  All the porn at Celebrity-leaks: that's me.
>>  Daily Westerner: that's me.

>>  "In the news....SPAMMER broomsticked by furious readers" -- registered in Nigeria) :: that's me TOO!! 

That's our life (all of us living in Master Spammer's Mind): mopping the floor at the Porn Cinema at 2am, working the French Frier at SONIC (demoted from the drive-thru window 'cuz my ZIT-covered face scared the customers), sucking cock on the Internet, and spamming ZH with an enormous Excel spreadsheet of the log-on's of dozens of "digital friends" who upvote one another and virtually suck my little micro penis..

MEET my current imaginary friends.  We all live in one SPAMMER's HEAD (and as ACTION FIGURES on his kitchen counter) but as for me, I have gone off the reservation.  These other "personalities" are pretty troubled.

ll951983  <<< NEWBIE  sucks cock on the Internet!
Wadalt
Leakanthrophy
PrivetHedge
bobcatz
Jumanji1959
Annunaki
Powow
  <<<  NEWBIE
Cheoll   <<<  NEWBIE

Mr Hankey  [R.I.P]   <<<  total utter WHACK JOB  -- joined "The Fallen"
gzcekkyret     <<<  NEWBIE

You know SPAMMERS never die on ZH -- here's just a sampling of the banned log-on's ("The Fallen Spammers") ---

 beepbop, pier, lloll, loebster, ergatz, armada, Mtnrunnr, Anonymous, luky luke, Cjgipper, winged, moimeme, macki mack, tchubby, sincerely_yours, HillaryOdor, winged, lexxus, kavlar, lhomme, letsit, tazs, techies-r-us, stizazz, lock-stock, beauticelli, Mano-A-Mano, mofio, santafe, Aristotle of Greece, Gargoyle, bleu, oops, lance-a-lot, Loftie, toro, Yippee Kiyay, lonnng, Nekoti, SumTing Wong, King Tut, evoila, rp2016, alt right dude, altright-girl, alt-right girl, Blufin, Schlomo Scheklestein, BraveForce, Mr Hankey, sandraloopz0, enf83

In reply to by NemesisteM

Okienomics NemesisteM Tue, 06/12/2018 - 15:22 Permalink

Ad hominem attacks aside, investing is not a religion.  Count me among those with positions in metals, crypto, stocks and cash, with the first and last on that list sadly lost in a boating accident.  The most hated among them is doing the best, and the most beloved here on ZH is doing the worst, at least, for the last several years.  All-in is fine for the young and dumb who have time and lack of responsibilities on their side.  For the adults in the room, diversity remains a core investing principal.  Steady as she goes.

In reply to by NemesisteM

Yippie21 Cryptopithicus Homme Tue, 06/12/2018 - 14:53 Permalink

was going to say same.  In 1987 , the market hadn't gone through 8 years of monetary asshattery.... zero Fed fund rates and massive Fed pumping the stock market AND the Fed buying tons of bad paper.

 

Nah, there are no stock market parallels anymore.  You have pre Greenspan... pre Berneke... but since 2000, the stock market is a different thing.  Plus with algos trading and fractional trading... there absolutely is no parallels to 1987.  .... cept for scare porn.

In reply to by Cryptopithicus Homme

Endgame Napoleon Cryptopithicus Homme Tue, 06/12/2018 - 19:08 Permalink

The clock actually says 3:00 am, but the unemployment figures do not actually say 3.9% unless you call 78 million contract-gig workers “employed,” unless you ignore 95 million working-age citizens who are out of the workforce and unless 42 million citizens and noncitizens, with income so low from intentionally working part time to stay under the income limits for welfare are accepted as “employed,” even though they cannot finance groceries in their state of “employment.” Not to mention other forms of welfare they consume, like free rent, monthly cash assistance and refundable child tax credits that max out at $6,431, all of which should disqualify people from being defined as “employed.” To he regarded as employed, your job should yield wages sufficient to cover basic bills. Otherwise, you are employed in the same way that a teenage babysitter is employed, making extra pocket money to supplement her unearned income streams.

In reply to by Cryptopithicus Homme

shizzledizzle HRH of Aquitaine 2.0 Tue, 06/12/2018 - 22:32 Permalink

Yes, I can imagine... It would imediatly devour the folks with paper assets and Mark everything to a real fair market value.  I know I am bat shit crazy but I have taken on as much debt as I feel comfortable with because rates are going up. 

I'm also one of those silly bastards that has cash in the wings. A lot of realestate won't get financed and that is where the deals are. 

I'm not exposed but making hay while the sun shines is specific markets. I want my money tied up in real assets.

You don't get ahead by following the crowd. Best of luck!

In reply to by HRH of Aquitaine 2.0

wisehiney Tue, 06/12/2018 - 14:46 Permalink

Phony mutha fucka says that a spike in rates would not hurt the "market".

He may get a little taste this week when fed jacks short rates and long rates fall.

TLT

Salmo trutta Tue, 06/12/2018 - 14:55 Permalink

I am the Alpha and the Omega.  I am the best market timer (not in the world), but in all of history baring no one.

I should be awarded the Nobel Prize in Economics.  My grade school model is worth trillions of economic $s.

Tudor is dead wrong.  Stocks to the moon.  It is SuperNova time.  Stocks will blast off after the 4rth seasonal inflection point on 6/20/18.

1987 was the litmus test for Central Bank stupidity (no Nassim Nicholas Taleb black swan).

Monetary flows (volume X’s velocity), fell from 16 in AUG, to 4 in NOV (See G.6 release – debit and demand deposit turnover). [ Δ, not Δ Δ ] Note, money flows, bank debits (money actually exchanging counter-parties), turned negative during the S&L crisis.

Conterminously (3 months prior to the crash), the rate-of-change in RRs (the proxy for R-gDp), was surgically sharp, decelerating faster than in any prior period since the series was first published in January 1918. The proxy declined from 11 in JUL to (-)4 in OCT. [ Δ, not Δ Δ ]

Accompanying this sharp deceleration in the RoC for M*Vt (proxy for all transactions in American Yale Professor Irving Fisher’s truistic: “equation of exchange”, the monetary authority mis-judged macro-economic strength (like the last half of 2008), and on Sept. 4 the FOMC raised (1) the discount rate, which was not yet a penalty rate, 1/2 percent to 6%, & (2) the policy FFR 1/2 percent to 7.25% (up from 5.875% in Jan).

Black Monday began when the target FFR was increased to 6.5% on 9/4/1987. The effective FFR began to trade above the policy rate c. 9/22/1987 (constrained by reserve demand). The effective FFR spiked on Thursday (the very first day of the reserve maintenance period).

On Sept. 30 the effective FFR spiked at 8.38%; fell to 7.30% by Oct. 7; then rose to back to 7.61% Oct 19 (Black Monday). Thus, the effective FFR spiked 36 basis points higher than the FOMC’s official target, it’s policy rate on “Black Monday”.

The shortfall in the quantity of legal reserves supplied by the FRB-NY’s trading desk (which had already dropped at a rate not exceeded at any time since the Great Depression) bottomed with the bi-weekly period ending 10/21/87. This  trigger. However, the Fed covers: The Nattering Naybob’s “Elephant Tracks”. So you can't run a regression against the historical time series.

At the same time, the 30 year conventional mortgage yielded 11.26%, up from 8.49% in Jan. 87, & Moody’s 30 year AAA corporate bonds yielded 11.06% on 10/19/87, up from 9.37% in Jan. 87.

The preceding tight monetary policy (monetary policy blunder), i.e., the sharp reduction in legal reserves (mirroring the absolute decline in our means-of-payment money), had effectively forced all rates up along the yield curve in the short-run (when inflation and R-gDp were already markedly subsiding). I.e., interest is the price of loan funds, the price of money is the reciprocal of the price level.

Note: interest rates may either rise or fall during the short-run, in response to the FOMC tightening policy, depending upon the “arrow of time”, and the monetary fulcrum (the thrust of inflation).

On 10/19/87 the CBs had to scramble for reserves (too stringently supplied relative to demand) at the end of their maintenance period (bank squaring day), to support their loans-deposits (it is noteworthy that contemporaneous reserve requirements were then in effect exacerbating the shortfall & response time).

A significant number of banks, with large reserve deficiencies, tried to settle their legal reserve maintenance contractual obligations at the last moment. But the FRB-NY’s “trading desk” failed to accommodate the liquidity needs in the money market – until it was already way too late (i.e., ignored their perversely coveted interest rate transmission mechanism).

I.e., it was a major monetary policy blunder by the Maestro, Chairman Alan Greenspan. And economists don’t talk about what the ABA doesn’t want them to. See - Sent: Thu 11/16/06 9:55 AM “Spencer, this in an interesting idea. Since no one in the Fed tracks reserves (because the ABA and stupid economists want to eliminate them)…” and “Today, with bank reserves largely driven by bank payments (debits), your views on bank debits and legal reserves sound right!” – Dr. Richard G. Anderson

Oh wait, wasn’t the crash blamed on programmed trading (reflecting academic censorship and fake news).

Salmo trutta Tue, 06/12/2018 - 15:00 Permalink

There are 6 seasonal, endogenous, economic inflection points each year. These seasonal factors are pre-determined by the FRB-NY’s "trading desk" operations, executing the FOMC's monetary policy directives (in the present case just reserve "smoothing" and “draining” operations, the oscillating inflows and outflows, the making and or receiving of interbank and correspondent bank payments by and large using their “free" excess reserve balances).

Each and every year, the seasonal factor's map (economic time series’ cyclical trend), or scientific proof, is demonstrated by the product of money flows, our means-of-payment money X’s its transaction’s velocity of circulation (the scientific method).

Monetary flows (volume X’s velocity) measures money flow’s impact on production, prices, and the economy (as flows are driven by payments: “bank debits”). It is an economic indicator (not necessarily an equity barometer). Rates-of-change Δ, in M*Vt = RoC’s Δ in AD, aggregate monetary purchasing power.

Thus M*Vt serves as a “guide post” for N-gDp trajectories.

N-gDp is determined by the volume of goods & services coming on the market relative to the actual, transactions, flow of money. RoC's in R-gDp serves as a close proxy to RoC's in total physical transactions, T, that finance both goods and services. Then RoC's in P, represents the price level, or various RoC's in a group of prices and indices.

Monetary flows’ propagation, are a mathematically robust sequence of numbers (sigma Σ), neither neutral nor opaque, which pre-determine macro-economic momentum (the → “arrow of time” or "directionally sensitive time-frequency de-compositions").

For short-term money flows, the proxy for real-output, R-gDp, it's the rate of accumulation, a posteriori, that adds incrementally and immediately to its running total.

Its economic impact is defined by its rate-of-change, Δ "change in". The RoC, is the pace at which a variable changes, Δ, over that specific lag's established periodicity.

And Alfred Marshall's cash-balances approach (viz., a schedule of the amounts of money that will be offered at given levels of "P"), viz., where at times "K" is the reciprocal of Vt, or “K” has the dimension of a “storage period” and "bridges the gaps of transition periods" in Yale Professor Irving Fisher’s model.

As Nobel Laureate Dr. Ken Arrow says: “all analysis is a model”.

Salmo trutta Tue, 06/12/2018 - 15:04 Permalink

The Distributed Lag Effect: {M*Vt}

May 31, 2018 10:50 AM ET

 

Summary

Go inquire, and so will I, where the money is - The Merchant of Venice.

Money along sets all the world in motion - Publilius Syrus (c. 42 B.C.).

If money go before, all ways do lie open - The Merry Wives of Windsor.

Rates-of-change in monetary flows, volume X's velocity = RoC's in P*T in American Yale Professor Irving Fisher's truistic: "equation of exchange" [where R-gDp, inflation, and N-gDp are subsets or proxies]. Whereas, the Fed’s monetary transmission mechanism, as epitomized by Keynes' "Liquidity Preference Curve" [demand-for-money], is a False Doctrine.

Interest is the price of loan-funds [the free market’s deterministic clearing rate]. The price of money is the reciprocal of the generalized price-level [the FRB_NY’s “trading desks” bailiwick].

The Fed’s dismal record: what cost one dollar bill in 1913, today costs $25.57.

Inflation, accompanied by term premiums, is the most destructive force capitalism encounters. Responsible monetary policy can never be achievable when our money stock is managed by attempts, incongruous stair-stepping and cascading pegs, i.e., a price mechanism, to control the cost of credit.

Using R * as the Fed’s monetary transmission channel is thus non sequitur. It defiles and desecrates the tenets of monetarism. The Ph.Ds. on the Fed’s research staff, as Chicago School’s Jacob Viner famously exclaimed: "don't belong in this economic class".

Professor Irving Fisher's transaction's concept of money velocity is an algebraic way of stating a truism; that the product of the unit prices, and quantities of goods and services exchanged: P*T, is equal, for the *same time period*, to the product of the volume, and transactions velocity of circulation or M*Vt.

It is self-evident from the equation that an increase in the volume, and/or velocity of money, will cause a rise in unit prices, if the volume of transactions increases less, and vice versa.

The "transactions" velocity (a statistical stepchild), is the rate of speed at which money is being spent, i.e., real money balances actually exchanging counter-parties. E.g., a dollar bill which turns over 5 times can do the same "work" as one five dollar bill that turns over only once.

In contradistinction, the mainstream Keynesian-economic variant, income velocity or Vi, which is a contrived figure, is calculated by dividing N-gDp for a given period, by the average volume of the money stock (M1, M2, & MZM), for the same period (viz., make believe / contrived). A decline in the income velocity of money (like during the Great-Recession), is supposed to suggest that the Fed initiate an expansive, or less contractive, monetary policy.

This signal could be right - by sheer accident. I.e., the historical trend of Vt vs. Vi, at various intervals, moved in absolutely divergent paths - giving the income velocity economists false signposts.

The theoretical bias and confusion is compounded, as Nobel Laureates Dr. Milton Friedman’s and Dr. Anna J. Schwartz’s: “A Monetary History of the United States", 1867–1960, claimed that money has long and variable leads and lags. Not so, the distributed lag effects for monetary flows have been mathematical constants > 100 years, therefore the equation of exchange’s *time periods* become accurately demarcated and conterminously, positively synchronized.

Economists’ quest for answers, linking flows to output, as personified in the maestro Alan Greenspan’s “The Map and the Territory; Risk, Human Nature, and the Future of Forecasting”:

(1) “But leading up to the almost universally unanticipated crisis of September 2008, macro-modeling unequivocally failed when it was needed most, much to the chagrin of the economics profession. The Federal Reserve Board’s highly sophisticated forecasting system did not foresee a recession until the crisis hit. Nor did the model developed by the prestigious International Monetary Fund…”

(2) “JPMorgan, arguably America’s premier financial institution projected on September 12, 2008 –three days before the crisis hit—that the U.S. GDP growth rate would be accelerating into the first half of 2009.”

The Maestro chalked up these errors to Keynes’ quirky “Animal Spirits”.

As I boasted in July 2007: “I need no disclaimer”.

The rate-of-change in the proxy for real-gDp (monetary flows: M*Vt) peaks in July. The rate of change in the proxy for inflation (monetary flows: M*Vt) peaks in July. Therefore it should be obvious: interest rates peak in July.

Because interest rates top in July, the exchange value of the dollar should resume its decline. A very good time to buy gold!

The “Holy Grail” has no disclaimer.

Posted by flow5 at 7:50 AM on 06/29/07

-----------------

No, we even knew the "Minsky Moment":

POSTED: Dec 13 2007 06:55 PM |

The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006, & up a huge 6.3% from Nov 2006.

10/1/2007,,,,,,,-0.47.….. -0.22 * temporary bottom
11/1/2007,,,,,,, 0.14,,,,,,, -0.18
12/1/2007,,,,,,, 0.44,,,,,,,-0.23
01/1/2008,,,,,,, 0.59,,,,,,, 0.06
02/1/2008,,,,,,, 0.45,,,,,,, 0.10
03/1/2008,,,,,,, 0.06,,,,,,, 0.04
04/1/2008,,,,,,, 0.04,,,,,,, 0.02
05/1/2008,,,,,,, 0.09,,,,,,, 0.04
06/1/2008,,,,,,, 0.20,,,,,,, 0.05
07/1/2008,,,,,,, 0.32,,,,,,, 0.10
08/1/2008,,,,,,, 0.15,,,,,,, 0.05
09/1/2008,,,,,,, 0.00,,,,,,, 0.13
10/1/2008,,,,,,, -0.20,,,,,,, 0.10 * possible recession
11/1/2008,,,,,,, -0.10,,,,,,, 0.00 * possible recession
12/1/2008,,,,,,, 0.10,,,,,,, -0.06 * possible recession
Trajectory as predicted.

Debating knuckleheads is tiresome.

The Maestro:

(3) “What constitutes money, or more exactly, a universal transaction balance, has been far more elusive”…”I tested a number of choices for money supply and even a number of debt instruments as a substitute for money.”…”The closeness of fit of unit M2 and price over the decades is impressive.”…”But starting in the late 1980’s, unit M2 seemed to have lost its closeness of fit to the price level”…”The breakdown of M2 spawned a flurry of analyses”.

(4) ”Money supply, of course, does not directly translate into price.”...“The ratio of price to unit money supply is the virtual algebraic equivalent of what economists call money velocity, the ratio of nominal GDP to M2”…”The greater the degree of inflationary pressure, the more likely people will be to accelerate their turnover of transaction balances; the higher the interest rate or rate of return on equity, the more likely people are to hold income-earning assets in lieu of cash, thereby reducing M2 and raising money velocity."

(5) "Combining these determinants of money turnover with money itself portrays an even closer historical fit to the general price level. Thus, in summary, money supply is by far the dominant determinant of price over the long run but in the short run, other variables are important as well.”

Recognizing the difficulty in explaining income velocity, the Maestro calculates his own proprietary velocity metric, pg. 342 (not necessarily clarifying). Relative to other forecasters, I will give the Maestro high marks for his rigorous empirical approach.

------------

While GDP is calculated on final products, or different dimensions, and is tabulated in quarters, or different intervals, and is Seasonally mal-adjusted, and also subject to disparate measurement slippages, there is nonetheless a recognizable fit or symmetry in Fisher's equation: M*Vt = P*T [ i.e., when the pundits are expecting disparity ]

Using a rate-of-change, in the flow of funds, for real variables:

1/1/2017

,,,,,

0.13

2/1/2017

,,,,,

0.08

3/1/2017

,,,,,

0.06

4/1/2017

,,,,,

0.08

5/1/2017

,,,,,

0.09

6/1/2017

,,,,,

0.08

7/1/2017

,,,,,

0.11

8/1/2017

,,,,,

0.09

9/1/2017

,,,,,

0.08

10/1/2017

,,,,,

0.03

11/1/2017

,,,,,

0.08

12/1/2017

,,,,,

0.12

1/1/2018

,,,,,

0.09

2/1/2018

,,,,,

0.07

3/1/2018

,,,,,

0.02

4/1/2018

,,,,,

0.04

5/1/2018

,,,,,

0.05

6/1/2018

,,,,,

0.05

7/1/2018

,,,,,

0.06

The deceleration (-) in 1stqtr. of 2017 is matched by a deceleration in money flows.

The acceleration (+) in 2ndqtr. of 2017 is matched by an acceleration in money flows.

The acceleration (+) in 3rdqtr. of 2017 is matched by an acceleration in money flows.

The deceleration (-) in 4thqtr. of 2017 is matched by a deceleration in money flows.

The deceleration (-) in 1stqtr. of 2018 is matched by a deceleration in money flows.

----------------

Therefore the economy reversed in April of 2018. But in this case, it doesn’t prove there will be an increase in gDp over the 1st qtr. during the 2nd qtr. of 2018, only that there was a correction in the economic downswing.

Q1 2018: 2.2 (-)

Q4 2017: 2.9 (-)

Q3 2017: 3.2 (+)

Q2 2017: 3.1 (+)

Q1 2017: 1.2 (-)

As the archetype of the Renaissance man, Leonardo Da Vinci, said:

“Before you make a general rule of this case, test it two or three times and observe whether the tests produce the same effects”.

Knowing monetary flows trajectory permits us to trade the trend. Whereas Vt began accelerating in 2016, Vi didn’t reverse until the 2nd qtr. of 2017.

Short-term money flows peak in July 2018. Ergo:

{A} Stocks could peak by the end of the month

{B} Rates should fall by the end of the month

Then long-term money flows peaked in May 2018:

{C} This should prevent rates from rising and support stocks

{D} It should support the U.S. $

{E} It should reduce inflation

And by improving the statistic’s “conforming” properties, the Federal Reserve can steer our ship.

Data dependency depends upon accurate definitions. William Barnett (Divisia Monetary Aggregates) is right, in that the Fed should establish a “Bureau of Financial Statistics”.

The figures used for determining economic flows are non-conforming, as determined by the limitations on all analyses based upon broad statistical aggregates, namely, data is not currently being compiled accurately, or in a manner which conforms to rigid theoretical concepts.

Of course, this is just the "unified thread" of algebra, estranged from "general field theory" of macro-economic modeling, where the chorus is: "All analysis is a model" – Nobel Laureate in Economics Dr. Ken Arrow.

It is the triumph of good theory over inadequate facts.