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Old 06-25-2013, 10:48 PM   #21
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I agree.
Prior to the lost decades the Yen was start to supplement the $ as a reserve currency. e.g. oil contract specified in Yen.

Ejman
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And where exactly is the alternative investment that they would put their bets into?
..
China?....Massive bubbles in just about everything...
I am certainly no China expert, but it seems to be that China has been building real stuff, factories, power plants, high rises, commercial business,and has a rapidly improving infrastructure (like bullet trains) to support the growth. They still have hundreds of millions of peasant who very unproductive rely on century old farming techniques. A modest injection of capital and know how in the Chinese agricultural sector, could easily fuel another decade of 10%+ growth. If China grows at 10% and the use limps along at 2% China economy will be larger than ours. So that is where the money will go.
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Old 06-26-2013, 05:32 PM   #22
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Originally Posted by haha View Post
A big question now, will the Federal Reserve actually cut back on its QE operation? The market seems to have accepted Bernanke's statement at face value, and produced an enormous selloff across a wide range of fixed income instruments, the 10 year as an example is trading at ~2.60% today, and was a bit higher several days ago. Similarly, agency and non agency RMBS have hit the fan.

I certainly have no answer, but I sure have a few questions. How robust is this recovery? If this is stopped, or even meaningfully slowed, what will happen to mortgage rates? What effect will this have on home sales, and perhaps even more important from some points of view, on home building, which has been a bright spot in the economy lately.

True that QE has pretty well allowed the banks to clean up their balance sheets, but is that all that counts?

My wild guess is that the taper doesn't happen, or happens in a very mild way, and the 10 year treasury interest rate is close to its peak for 2013.

Your ideas or opinions?

Ha
In answer to the questions
1) By statistics, this is one of the weakest recoveries on record. But still positive overall.
2) Mortgage rates are already lower than anyone would reasonably extend to 3rd parties for 30 years. I don't think anyone here would like their retirement to rest on the return from lending to purchasers of homes at 3.5 -4.0 percent for 30 years, anyone planning on this as a retirement plan here would be called crazy I think. This has probably led to an allocation of resources to the purchasing of homes and houses, both for rentals and for owner occupied and is the reason there is a min-boom in housing. Increases in mortgage rates will slow the increase in prices, which might be what the fed is actually trying to do, without damaging the economy. The supply of housing is probably still far too high which has been hidden by low interest rates.
3) Yes that was the entire purpose of QE, to avoid deflation and failed banks. Anything else was merely justification of the process.
4) Interest rates are very difficult to predict, however the Fed does not have the power it did before it starting buying 85 billion per month. Being the biggest trader in a market eventually stops making you be feared and eventually become a slow moving predictable target to be taken advantage of.

Individually, before many I think believed the QE would go on for a very long time, but once the Fed made people realize they might stop, all the strategies to paddle with the Fed are not as attractive as they were before. Gold seems to be predictiing higher interest rates, that has been the mark of this market for months now, and with today's spike down, gold traders seem to be fearing higher not lower interest rates.

The 10 year rate I think is most important is actually the Japanese 10 year rate, Japan is everything the US is only 20 years longer in the making, the pressure that will occur if Japanese 10 year bonds rise to 3 percent interest is so huge it will make everyone suspect of every bond. Japans budget for this year calls for 50% tax revenue and 50% borrowthing to fund their govenment, while at the same time the age of their population is turning to the spending not saving side. It takes 22% of the tax revenues to pay the interest on Japanese govenment debt
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Old 06-26-2013, 05:56 PM   #23
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And where exactly is the alternative investment that they would put their bets into?

Gold?.... 25%+ drop

Europe?.... Euro, Greece, Italy, Spain and so on....

China?....Massive bubbles in just about everything...

Russia, Brazil? - get serious...

Which country or region on this good earth could handle the truly massive amounts of money involved?

I'am afraid the good ol' USA is going to be it for a long while.
This is my thought. People keep projecting the dollar will fail, but no one knows when or what's going to take its place. The Euro was IT a few years ago. Some other currency is going to have to demonstrate strength for quite some time (and there's nothing out there remotely close), and the US is going to have to fall off significantly before it happens. It's going to happen eventually, and all those prognosticators will say they saw it coming, but the fact is the US is it and probably well into my retirement starting 10-15 years down the road.
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Old 06-26-2013, 07:34 PM   #24
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I agree.


Ejman

I am certainly no China expert, but it seems to be that China has been building real stuff, factories, power plants, high rises, commercial business,and has a rapidly improving infrastructure (like bullet trains) to support the growth. They still have hundreds of millions of peasant who very unproductive rely on century old farming techniques. A modest injection of capital and know how in the Chinese agricultural sector, could easily fuel another decade of 10%+ growth. If China grows at 10% and the use limps along at 2% China economy will be larger than ours. So that is where the money will go.
Dunno, the China argument reminds me of the early 80's Japan is taking over the world argument. I think we have seen how that turned out.

Although it's certainly possible that China will be able to somehow hold things together and continue its 10% annual economic growth far into the future I think there are several factors to consider:

1) It's much easier to have high growth rates from a low base than from a high base

2) The stability of the political system in China is predicated on the ability to deliver high growth rates - Unknown what would happen if the growth rate falters.

3) Much of the growth has been predicated on low cost low tech manufacturing. It seems that high tech is making some of that manufacturing move away from China. (Even back to the US)

4) The political system there and their exercise of regional power does not seem to impart confidence in their ability to create wide alignments. I don't see any evidence of a Chinese "block" developing in the world - even where they have been spending tons of money as in Africa.

5) China's growth to a significant extent has been dependent on their exporting to the rest of the world. It's questionable if that export orientation can be maintained if China takes a much more aggressive and antagonistic stance towards its trading partners.

6) A single party totally controlling political force is inherently unstable.

Maybe I'll think of some more....
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Old 06-26-2013, 08:22 PM   #25
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Hard not to look back at this.........

Lost Decade (Japan)

http://en.wikipedia.org/wiki/Lost_Decade_(Japan)
More like lost quarter century. Nikkei peaked Dec 28, 1989 at 38,957, and I can vividly remember pundits claiming you had to be in Japan as it was poised to become world's dominant equity market for the future. It then proceeded to decline inexorably to as low as 7500's in Feb 2009. It's back up near 13,000 now, but still down roughly 2/3rds after 24 yrs

Don't bet your future on one roll of the dice.
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Old 06-26-2013, 11:15 PM   #26
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Agree.

For a real thrill lay the Nikkei over the S&P 500 from 1984 to 2013.


Try it!
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Old 06-27-2013, 07:15 PM   #27
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My thoughts are along this line. Payroll receipts were moving along at around +4% annual increase through December, which is barely above stagnant. PCE increases have come from decreased savings, and most of that is the result of a 50 year low in household debt servicing levels. Neither US households nor the US government can service their debts and maintain spending if rates rise above their current levels, and employment is not growing nearly fast enough to change that anytime soon. I see rising rates as strongly recessionary.
Agree with this MichaelB.

I think everyone overreacted to Bernake's comments. I believe we still have some headwinds and possible fault lines. To quote the WSJ it will take 9 years due to population growth to reach pre financial crisis employment levels if we add only the 175K - 200K new jobs they have been reporting. Seems people are counting on the housing market and consumer spending and both are still suspect in my opinion. U.S. college graduate employment is 60% to quote my financial guy. Europe is in a recession. Europe is China's biggest exporter. China is set to have a real estate crisis of it's own....at some point. Emerging markets tanking. The U.S. at federal, state and local levels is taxing it's consumers harder than ever before. Massive fraud in every system run by our various governments.
But....logic doesn't always seem to be the best predictor either....
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Old 06-27-2013, 10:40 PM   #28
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While some don't like Bill Gross and Pimco, I like to read his comments. Some of his latest thoughts are here: PIMCO | Investment Outlook - The Tipping Point

Some selected quotes:
Quote:
1) The Fed’s forecast of the economy which prompted tapering panic is far too optimistic
...

2) Inflation, according to the Fed’s own statistics is running close to a 1% pace

3) Yields have adjusted by too much.
...
In any case, if frontend curves are up to 50 basis points cheap, then intermediate curves – the 10-year Treasury – may be as much as 35 basis points too cheap. They belong in our opinion at 2.20% instead of 2.55%.
This last quote seems to go along with Ha's original suggestion above:
Quote:
My wild guess is that the taper doesn't happen, or happens in a very mild way, and the 10 year treasury interest rate is close to its peak for 2013.
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Old 06-28-2013, 09:30 AM   #29
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If I understand Bernanke, the "taper" is tightly bound to the economy. Predicting how fast the Fed will unwind QE amounts to predicting how fast the economy will improve.

The "recovery" has been extremely slow. The bright spots recently are autos and houses, and they are both very dependent on interest rates.

There's always the possibility that businesses will start buying and building in the US, but I don't see what's going to cause that.

So I'd guess (very slow recovery) => (very slow taper).
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Old 06-28-2013, 10:17 AM   #30
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If I understand Bernanke, the "taper" is tightly bound to the economy. Predicting how fast the Fed will unwind QE amounts to predicting how fast the economy will improve.

The "recovery" has been extremely slow. The bright spots recently are autos and houses, and they are both very dependent on interest rates.

There's always the possibility that businesses will start buying and building in the US, but I don't see what's going to cause that.

So I'd guess (very slow recovery) => (very slow taper).
It was my understanding that he has set a definitive timeline on the exit. Within the next year. There is a point where treasuries are actually a decent investment. If inflation is 1% and the ten year is 2.5, then you are getting a 1.5 real return for a very safe investment. So, I see treasuries being bought up by investors which should keep the pace slow but upwardly moving as the economy improves. Whatever asset or price decline this causes is the amount of appreciation or stability that was caused by the unnatural rates in the first place. However, I do agree that it is likely that the Bankers failed to consider eventual rate hikes in their investments which could lead to some ugly unwinding.
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Old 06-28-2013, 11:00 AM   #31
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It was my understanding that he has set a definitive timeline on the exit. Within the next year. There is a point where treasuries are actually a decent investment. If inflation is 1% and the ten year is 2.5, then you are getting a 1.5 real return for a very safe investment. So, I see treasuries being bought up by investors which should keep the pace slow but upwardly moving as the economy improves. Whatever asset or price decline this causes is the amount of appreciation or stability that was caused by the unnatural rates in the first place. However, I do agree that it is likely that the Bankers failed to consider eventual rate hikes in their investments which could lead to some ugly unwinding.
But the market is not saying 1% inflation for 10 years. It is saying (roughly):
inflation = 10yr Treasury - 10yr TIPS = 2.5 - 0.5 = 2%

And 2% is what the Fed would like. They would even tolerate 3% for a while IMO. We did have 3% inflation in 2011. It got as high as 3.9%.

P.S. I'm not saying I know where this is all headed. Just an observer with some numbers to share.
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Old 06-28-2013, 01:00 PM   #32
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It was my understanding that he has set a definitive timeline on the exit. Within the next year.
I still don't see how anyone got his from what he actually said.

FOMC statement

Federal Reserve Statement

The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.

Taper Tipoff? Bernanke Hints Easing End Is Nearing | Nightly Business Report

“If you draw the conclusion that I’ve just said that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,”
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Old 06-28-2013, 01:22 PM   #33
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I still don't see how anyone got his from what he actually said.

FOMC statement

Federal Reserve Statement

The Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability.

Taper Tipoff? Bernanke Hints Easing End Is Nearing | Nightly Business Report

“If you draw the conclusion that I’ve just said that our purchases will end in the middle of next year, you’ve drawn the wrong conclusion, because our purchases are tied to what happens in the economy,”
http://www.moneynews.com/StreetTalk/...6/19/id/510804

I'm going off of the statement in this article.
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Old 06-29-2013, 09:17 AM   #34
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When it comes to reading the tea leaves of Fed statements, it's probably best to look at the statements themselves.

AFAIK, the "one year" time frame came from the press conference. The Fed releases an official transcript. This is what I saw (I added the bold)
Quote:
Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year.
That is, changes in the purchase rate will happen IF the actual economy matches the current Fed forecast.

http://www.federalreserve.gov/mediac...nf20130619.pdf
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Old 06-29-2013, 11:23 AM   #35
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Check out this video on YouTube:




Sent from my iPhone

Another non-statement in this video. Um, Errrr, Ugh, Um, Errr...
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Old 06-29-2013, 01:27 PM   #36
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All the fed has is interest rates. Up or down.
Thats how they control free markets.
Now they can print money out of thin air. Thats new.
Those are the 2 things they can do.
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Old 07-02-2013, 08:59 AM   #37
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http://m.usatoday.com/article/money/2481807

It's time to end this silliness. Economic picture brightens/ stocks tumble. Economic picture darkens/ stocks take off.
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Old 07-02-2013, 09:07 AM   #38
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USA TODAY

It's time to end this silliness. Economic picture brightens/ stocks tumble. Economic picture darkens/ stocks take off.
How about a summary or snippet so members need not click on an unknown link?
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Old 07-02-2013, 09:29 AM   #39
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How about a summary or snippet so members need not click on an unknown link?
Got it. Thanks.
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