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Old 02-11-2016, 10:24 AM   #21
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It has to be part of the job description. I also read somewhere that advanced monotone is part of the PhD program for economists.
Yeah - they all put me to sleep.
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Old 02-11-2016, 10:42 AM   #22
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I hope we don't go there.

From a piece by the former head of the St Louis Fed.
It's a gated article so I can't respond to it in it's entirety but I can respond to the three parts you posted:

Quote:
. . . .But it is impossible for every country in the world to depreciate its currency relative to others.
This is always true. It's more of an argument against monetary policy in general than an argument against policy at a specific point in time. I'm not sure why this argument has any more relevance now than it would if the Fed Funds rate were 4%.

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The interest rate on a 10-year T-bond is a bit below 2%. Can any informed person believe that the cost of borrowing is holding back capital formation in the United States?
It's a little awkward to respond to this because the Fed's last action was to raise rates, not cut them. So to make an argument for easing with 2% 10-year treasury rates we'd have to imagine different economic conditions than the ones we currently have.

But is it impossible to imagine a U.S. economy where rates even lower than 2% were needed to restore economic growth? Absolutely not.

What if 10-year inflation expectations were negative 2% rather than positive 1%? With 2% annual expected deflation a 2% nominal treasury bond yields a real 4%.

So I'll turn the question back to Mr. Poole: "Can any informed person believe" that risk-free real rates of 4% wouldn't hold back capital formation in the U.S.?

That's obviously not the condition we have, but it shows the flaw in arguing that some level of nominal interest rate is obviously too low, or even low enough.

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Honest central bankers know that policy gimmicks will not deliver growth, but admitting as much is politically verboten.
What's gimicky about the Central Bank cutting rates? And why are interest rate reductions seen as gimicky when used at one interest rate level but not another?
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Old 02-11-2016, 10:45 AM   #23
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I'm with you on all this.

I'm not sure why you think the "lower rates" the market clearly wants are the problem rather than the solution, though.
The market does not clearly want it, governments clearly want it as huge budget shortfalls are easily financed and it defers the bad economic outcomes of prior bad decisions. The path for this was set when Central Banks were not willing to let bad assets fail in the financial crisis and embarked on QE sending rates too low and pulling forward economic activity that has led to overproduction of commodities, too much investment in China and the use of borrowing to buy shares of stocks back with cheap debt greatly increasing corporate indebtedness.

When the Central banks of Switzerland went negative to stop their currency from rising because they were financially strong and Europe then ignored laws to allow QE in Europe. interest rates have plunged and central banks continue to play this game. There are no free "markets" in interest rates when Central Banks around the world are buying trillions upon trillions in debt everywhere. But we are at the end game here, we shall see but this is looking very ugly.

How is a bank to utilize a negative interest rate on a house? Buy a house for 100K interest rate is negative 3 percent pay $181.67 per month or $65,400 over the term of the loan and the bank will make this up by charging depositers an ever higher negative rate on money in the bank? Economic activity will come to a crawl........
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Old 02-11-2016, 10:46 AM   #24
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Deflation causes people to defer purchases and slow economic activity which in the new world would mean even lower interest rates and lower economic activity which leads to lower rates and lower economic activity. This is why bankers in Europe are warning of a death spiral

Im with you Runningman, but I am a bit self serving. If GoneforGood can get me a negative rate mortgage, I am switching sides!


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Old 02-11-2016, 10:48 AM   #25
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Yet the cost of services (paying anybody to do anything) continues to rise. What gives?
In any average of changing levels some items rise while others fall or rise more slowly.

When it comes to CPI there's a natural tendency for people to disregard the average by pointing out only the items that are rising fastest. The argument used to be "but hey, have you seen the price of gasoline recently?" Now no one cares about gasoline inflation anymore. What gives?
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Old 02-11-2016, 10:49 AM   #26
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Im with you Runningman, but I am a bit self serving. If GoneforGood can get me a negative rate mortgage, I am switching sides!
Be careful what you wish for.
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Old 02-11-2016, 11:01 AM   #27
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As a practical matter, I expect stock prices to rise if US interest rates go negative (because demand for equities will increase if people must effectively pay a fee to leave their money in debt instruments). If that happens, I will take advantage of the one-time windfall in equity prices and draw down my stock holdings >significantly< while awaiting the eventual collapse. The question is--what to do with the money? At that point, preserving its buying power will be a lot more important than seeking real gains.
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Old 02-11-2016, 11:04 AM   #28
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No-one has (yet) mentioned companies paying negative dividends and/or negative dividend reinvestment plans (where the longer you hold a position the smaller it gets).
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Old 02-11-2016, 11:06 AM   #29
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The market does not clearly want it, governments clearly want . . .
There's too much in your comment to respond to point by point. I'll just note that when the Fed stopped buying bonds treasury rates did not spike the way everyone making your argument thought they would.

The evidence is pretty clear. Fed bond buying did not "artificially" lower long rates.

Currently 10-year treasury rates are about 125bp lower today than they were when the Fed began "tapering" its last QE purchases in late 2013 and they're about 60 bp lower than when the Fed bought their last bond in October 2014.

So the markets have spoken. And they really do want lower rates.
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Old 02-11-2016, 11:10 AM   #30
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How is a bank to utilize a negative interest rate on a house? ...
The same way they do at any other time. They borrow money at a lower rate than they lend at. What's the problem?
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Old 02-11-2016, 11:13 AM   #31
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Yet the cost of services (paying anybody to do anything) continues to rise. What gives?
There is a shortage of people willing to do any work. Therefore, prices go up.
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Old 02-11-2016, 11:48 AM   #32
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The same way they do at any other time. They borrow money at a lower rate than they lend at. What's the problem?
if you have a loan with a negative interest rate, then the lender pays you interest on the principal

if the bank has negative interest bearing accounts, you pay them interest

so I think it's extremely doubtful that lenders will issue loans at negative interest rates...banks charging for holding cash - that's been going on for a while now
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Old 02-11-2016, 01:30 PM   #33
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The idea that Central Bank purchases of bonds is not creating the zero interest rates and instead is a free market desire while ---- Europe buys 60Billion Euros a month of bonds, India, Sweden, Japan and China all continue to buy.
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Old 02-11-2016, 01:51 PM   #34
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The idea that Central Bank purchases of bonds is not creating the zero interest rates and instead is a free market desire while ---- Europe buys 60Billion Euros a month of bonds, India, Sweden, Japan and China all continue to buy.
Um, yeah, but the Fed stopped buying treasuries (as per your chart) and treasury rates declined.

Moreover, treasury rates are significantly lower now than they were during QE1, QE2 AND QE3 when the Fed was an active buyer.

China has been a net seller of treasury bonds lately as has Japan. The ECB buys Euro debt, not treasuries.

And yet treasury bond rates go down.

Sorry, don't buy your argument that low long-term rates are due to central bank purchases.

Edit to add: Taking a closer look at your chart, the only Central Bank adding to its holding on your chart is the BOJ. The Fed has been on hold since 2014 and the BOE holdings have actually declined. So what's your point again?
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Old 02-11-2016, 02:00 PM   #35
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interesting if we have a negative yield curve... that would explode corporate pension liabilities
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Old 02-11-2016, 02:15 PM   #36
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interesting if we have a negative yield curve... that would explode corporate pension liabilities
And state/local pensions too. 8% assumed return in this environment? LOL
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Old 02-11-2016, 02:43 PM   #37
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The evidence is pretty clear. Fed bond buying did not "artificially" lower long rates.

Currently 10-year treasury rates are about 125bp lower today than they were when the Fed began "tapering" its last QE purchases in late 2013 and they're about 60 bp lower than when the Fed bought their last bond in October 2014.


While incorrect, your point is understandable but is missing an important element: The Fed has NOT bought their last bond. The 'end' of QE meant that they aren't buying bonds to further expand their balance sheet. But with a $4T balance sheet the Fed is still, every day, buying MASSIVE amounts of Treasuries and Agency mortgages propping up their prices. According to my former trading desk colleagues (not everyone can FIRE!) the Fed is still the single largest player in the enormous Treasury and
mortgage bond markets.
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Old 02-11-2016, 03:13 PM   #38
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I am under the belief that while the Fed stopped QE, it continues to roll over it's treasuries as they mature.

To the point of the thread. The Fed announced a while back what it will do under three different stress test scenario's. As things are moving quickly towards their most dire model, I think NIRP is already baked in the cake.
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Old 02-11-2016, 03:19 PM   #39
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I am under the belief that while the Fed stopped QE, it continues to roll over it's treasuries as they mature.



To the point of the thread. The Fed announced a while back what it will do under three different stress test scenario's. As things are moving quickly towards their most dire model, I think NIRP is already baked in the cake.

That is what I heard her say yesterday, before her monotone voice got the best of me.


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Old 02-11-2016, 03:24 PM   #40
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I am under the belief that while the Fed stopped QE, it continues to roll over it's treasuries as they mature.

To the point of the thread. The Fed announced a while back what it will do under three different stress test scenario's. As things are moving quickly towards their most dire model, I think NIRP is already baked in the cake.

Yes, the Fed is 'rolling over' their maturities but it's not quite that simple. As they have a very active book of Treasuries and Agency mortgage maturities they use these maturities tactically each day depending on how the yield curve looks while simultaneously attempting to keep their duration neutral. The Fed is constantly reaching out to large trading desks, the largest fixed income managers (think of one rhyming with 'RIMCO'), and other large institutional investors so as to stay out of the way of other large trades or to amplify these trades if it suits them. How do I know this? Was part of my old j*b!
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