I find the soothing talk a little scary

[kevin4u2]

the Q2 GDP was propped up due to inventory build and the payback from that could lead to a low Q3 or Q4 GDP print. I agree that we are manufacturing $1 of growth by borrowing more than $1. The deleveraging which was supposed to happen after 2009 has not really happened and the debt level now is >trillion dollars higher. Due to all this I believe that the worldwide rates could stay low for much longer (till the market loses confidence in the central bankers, however that is not a near term risk imho). And I think that the financial repression that comes due to low rates would continue to force investors into seeking higher risks leading to inflated equity prices.

 

What is wrong with owning good businesses such as INTC, GM, LVLT, GILD, Malone's, etc.

I don't see much of your point here about debt and deleveraging? You say of debt has gone up by >1 Tn! No deleveraging! Ok which debt? How much has GDP moved during that time? Debt has definitely gone up since 1920s too. Are we more leveraged now than then? You may want to pay closer attention to these things.

 

Btw, household debt to gdp has gone down from 98% in 2009 to 80% now. Sure looks like deleveraging to me. I'm not gonna spend time now pulling the corporate debt numbers but those have gone down too. So how exactly is deleveraging not happening?

 

Regarding financial repression as you put it, I see no shortage of sophisticated private investors lining up to buy US treasuries.

 

I don't think you have a clue as to what original mungerville is talking about.  Since the bursting of the so called credit bubble, global debt has continued to rocket ahead by 57 trillion dollars (through Q2 2014).  That means the total global debt to GDP is now close to 300% while back during the last crisis it was 269%.  There has been no bursting of the debt bubble, no deleveraging. 

 

Debt is the problem, it is driving the growth.  Without ever increasing debt, developed economies are screwed.  You are correct that households in the USA have deleveraged as a % but they have not in Canada and many other developed economies.  You relying on one of very few data points that have deleveraged since the last financial crisis.  I would pull the corporate data if I were you and especially the government.  US government debt is up almost 10% annually since the last credit crisis.  That more than offsets any deleveraging among households. 

 

Meanwhile in China, debt to GDP has increased from 158% to 282% (through Q2 2014).  No big deal.  Total debt in China has grown from $USD 7.4 trillion to 28.2 trillion since the last crisis.  Keep in mind that China's GDP is $10 trillion per year.  Stop and think about that for a second, its almost unbelievable.         

 

How big is the credit bubble going to get?

 

rb, there you go. If you want to read up further, here it is:

 

http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging

 

You were correct, US government debt growth was not 10%, I was referring to global government debt.  My apologies. 

 

That said, the basic argument is still remains.  If the so called credit crisis was because of excessive leverage, all that has happened since is adding more leverage relative to output (however measured).  If the last crisis was bad, the next one will be worse.  Why do you think otherwise?  The US already has deflation almost universally except housing.  How big is the credit bubble going to get?   

[rb]

Kevin,

 

Don't take this the wrong way but your posts are a bit all over the place on some very complex issues. It's global debt, it's China, the US... which are we talking about? Then you bring up leverage and mix stocks of debt and rates of change while ignoring economic growth.

 

I'm glad to engage with you and talk about these things but please focus the issues you want to talk about. You are shooting off a 3 line generic post that would take a doctoral dissertation to reply to. That will be a huge time investment and I'm not sure that many other people here would be so interested in it.

 

The points you bring up are definitely important, but again let's distill them a bit.

[maverick]

With bad news being good news again, with the Fed expected to hold off on increasing rates, and with the chatter of further easing (quantitative easing, negative interest rates, nominal GDP targeting) increasing - do the esteemed value investors believe that the worst is behind us for the time being. Or do you think that the recent rally should be used to set up index shorts to either express a macro outlook or as a hedge for ones portfolio holdings.

[rukawa]

I should also say that with enough QE and ever-increasing amounts of money printing, one would think confidence in paper currency would decrease exponentially at some point. This just seems logical and the value of Gold is one divided by the value of paper currency.

 

All QE is, is bond buying. That's it. In theory it could be inflationary, if banks were to use their increased reserves (cash) to make more loans. BUT they are not doing that. Anyways the constraint banks face is NOT reserves. Banks are constrained by regulations like Basel which require them to hold a certain amount of equity. The amount of equity they hold is determined by the risk-weights applied to bank assets. Government bonds have a zero risk weight. Right now banks are in fact cutting back on many activities due to stiffer regulation. So you aren't getting any inflation from an increased credit supply. The real effect of QE is not inflation of good/services....its asset inflation.

 

And the most over inflated asset is treasury bonds. The effect of regulation is very interesting here! Banks are being incentivized to hold more government debt. But market-making has in fact been discouraged. So the liquidity for treasury bond is reduced. Its an asset many institutional investors own but its they will have a lot of trouble exiting the trade. The greatest havoc will be in the treasury market.

[rb]

I should also say that with enough QE and ever-increasing amounts of money printing, one would think confidence in paper currency would decrease exponentially at some point. This just seems logical and the value of Gold is one divided by the value of paper currency.

 

All QE is, is bond buying. That's it. In theory it could be inflationary, if banks were to use their increased reserves (cash) to make more loans. BUT they are not doing that. Anyways the constraint banks face is NOT reserves. Banks are constrained by regulations like Basel which require them to hold a certain amount of equity. The amount of equity they hold is determined by the risk-weights applied to bank assets. Government bonds have a zero risk weight. Right now banks are in fact cutting back on many activities due to stiffer regulation. So you aren't getting any inflation from an increased credit supply. The real effect of QE is not inflation of good/services....its asset inflation.

 

And the most over inflated asset is treasury bonds. The effect of regulation is very interesting here! Banks are being incentivized to hold more government debt. But market-making has in fact been discouraged. So the liquidity for treasury bond is reduced. Its an asset many institutional investors own but its they will have a lot of trouble exiting the trade. The greatest havoc will be in the treasury market.

Sir, I have no idea what you are talking about but you make no sense. How exactly is QE about holding government bonds if QE takes them off your hands? How is QE about buying government bonds since a lot of QE was focused on buying back long tern mortgage bonds? How is QE not effective if it was able to lower the long term mortgage rate? How will participants in the treasury market have a problem to exit their positions when it's the most liquid market in the world and according to your position extra liquidity is provided by the fed? How exactly is market making restricted by regulation? And how exactly are lending operations for the banks restricted?

 

Do you have any facts or data backing you positions or did you just feel like firing off a rant?

[TwoCitiesCapital]

I should also say that with enough QE and ever-increasing amounts of money printing, one would think confidence in paper currency would decrease exponentially at some point. This just seems logical and the value of Gold is one divided by the value of paper currency.

 

All QE is, is bond buying. That's it. In theory it could be inflationary, if banks were to use their increased reserves (cash) to make more loans. BUT they are not doing that. Anyways the constraint banks face is NOT reserves. Banks are constrained by regulations like Basel which require them to hold a certain amount of equity. The amount of equity they hold is determined by the risk-weights applied to bank assets. Government bonds have a zero risk weight. Right now banks are in fact cutting back on many activities due to stiffer regulation. So you aren't getting any inflation from an increased credit supply. The real effect of QE is not inflation of good/services....its asset inflation.

 

And the most over inflated asset is treasury bonds. The effect of regulation is very interesting here! Banks are being incentivized to hold more government debt. But market-making has in fact been discouraged. So the liquidity for treasury bond is reduced. Its an asset many institutional investors own but its they will have a lot of trouble exiting the trade. The greatest havoc will be in the treasury market.

Sir, I have no idea what you are talking about but you make no sense. How exactly is QE about holding government bonds if QE takes them off your hands?

He's talking about QE & the new banking regulations. Together. You have to view what he's saying in that light.

 

How is QE about buying government bonds since a lot of QE was focused on buying back long tern mortgage bonds?

QE did purchase a lot of Treasuries and mortgages. Right now, it's mainly focused on mortgages but will still affect the Treasury markets because investments in rates are relative. Nobody buys a mortgage yielding less than a Treasury, so the lower mortgage rates go, the lower Treasury rates go.

 

How is QE not effective if it was able to lower the long term mortgage rate?

Are mortgage rates lower today? Yes. Is that a direct result of QE? Who knows. One thing I know for certain is that during periods of actual bond purchases, rates were flat to up. They only went down after the subsequent announcement that each round would be ending. So to me, it seems like what drove rates down was the fear of QE being over, not the actual purchases themselves, but we'll never really know.

 

How will participants in the treasury market have a problem to exit their positions when it's the most liquid market in the world and according to your position extra liquidity is provided by the fed?

It may be the most liquid market in the world, but it's a lot less liquid than it used to be. You can't say it's the most liquid market in the world and then suddenly just stop thinking because what impacts liquidity is two main factors: the depth of the market and the size of the position you need to sell/buy. Treasuries may be the most liquid market in the world, but they also happen to be a market where massive block sizes are purchased and having a less liquid market than a few years ago affects that. Especially when you consider that the Federal Reserve was buying 50% of all new issuances, you don't think that squeezes some people out from buying and then eventually selling (because of fewer buyers regularly participating?)

 

How exactly is market making restricted by regulation? And how exactly are lending operations for the banks restricted?

Banks aren't allowed to hold nearly the amount of inventory to facilitate trading that they used to given the restrictions on proprietary trading. With smaller inventories, you get less market making and less liquid markets. This doesn't really apply to their lending operations though. Banks are just hesitant to lend.

 

 

 

[maverick]

Uneasy calm awaiting lift-off

https://www.bis.org/publ/qtrpdf/r_qt1512a.htm

 

Is the world in a better place since August? Is any one else afraid of the markets here? With the Fed hell bent to increase rates starting in December, how are the esteemed value investors positioning themselves.

[rpadebet]

Uneasy calm awaiting lift-off

https://www.bis.org/publ/qtrpdf/r_qt1512a.htm

 

Is the world in a better place since August? Is any one else afraid of the markets here? With the Fed hell bent to increase rates starting in December, how are the esteemed value investors positioning themselves.

 

I am investing in stocks