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Fed can't keep the rates low


muscleman
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It is mind blowing that the 10 yr T-Bill rates spiked again this morning, AFTER fed promised to keep rates low yesterday for a few more years. If fed can't stop it, then I wonder if the rates will spike really hard.

 

They can probably stop it. Will just take more than jawboning to do it.

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It is mind blowing that the 10 yr T-Bill rates spiked again this morning, AFTER fed promised to keep rates low yesterday for a few more years. If fed can't stop it, then I wonder if the rates will spike really hard.

 

Worth remembering that the constraint on Fed's ability to control rates is inflation. All the jawboning in the world will not be able to prevent the market radically repricing the Fed's path if inflation starts showing up. M4 up ~30% YoY + economy is just about to open up + have some more stimulus coming down the pipe; a scenario that looks pretty inflationary to me.

 

Buckle up.

 

Source on M4: http://www.centerforfinancialstability.org/amfm_data.php

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I very rarely stumble into the macro land as I find ways to lose money in micro land, but the Fed seems to be doing a fine job keeping short term rates low.

 

do they really mind if the 10Y goes to 2% and 30y to 2.5/3.0%? any problems with steep curve?

 

I'm going on 8 years removed from being a bond trader so I don't pay attention to what the Fed wants the shape of the curve to be.

 

the 3 yr yields 23 bps and 3m bills yield 3 bps, repo rates are 0, 3mL is 19 bps. 12mL is 28 bps.

 

[this is fine dog meme]

 

 

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Burry has been sounding the alarm on Twitter big time.

 

Wasn't Burry also forecasting big time inflation....in 2009? 

 

wabuffo

 

I don't remember reading that. Do you think they'll keep low rates and we'll have low inflation? I do think your understanding of the mechanics behind all of this stuff is better than the vast majority of people.

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Do you think we'll keep low rates and low inflation

 

yes.

 

long rates are going back to where they were before the pandemic.  Nature is healing. 

 

If hyperinflation was truly here or on its way,  stocks would go down, gold would go up. The opposite is happening.  If you are reading anything about inflation coming and the author is quoting M2, velocity of money, Fed 'printing money', etc.. -- ignore them, they've given away that they don't know what they are talking about.

 

Could we go too far?  I guess anything is possible.

 

wabuffo

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Guest cherzeca

fed controls short term rates. long term rates are not subject to fed's control unless it starts buying more treasuries.  buy banks as the yield curve steepens

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Do you think we'll keep low rates and low inflation

 

yes.

 

long rates are going back to where they were before the pandemic.  Nature is healing. 

 

If hyperinflation was truly here or on its way,  stocks would go down, gold would go up.  The opposite is happening.  If you are reading anything about inflation coming and the author is quoting M2, velocity of money, Fed 'printing money', etc.. -- ignore them, they've given away that they don't know what they are talking about.

 

Could we go too far?  I guess anything is possible.

 

wabuffo

 

I don't think there will be hyperinflation (which is what seems like Burry is referring to) but I do think we'll have higher rates. I'm not sure how well corporate America will handle higher rates if they go much past what they were a year ago. I mean, the market tanked pretty quickly in q4 of 2018 on the thoughts of higher rates.

 

I might be looking like an idiot here but if they keep the fed funds rate low but say the 10 year still goes back to the level of a year ago, isn't that a warning sign that things are not well?

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Do you think we'll keep low rates and low inflation

 

yes.

 

long rates are going back to where they were before the pandemic.  Nature is healing. 

 

If hyperinflation was truly here or on its way,  stocks would go down, gold would go up. The opposite is happening.  If you are reading anything about inflation coming and the author is quoting M2, velocity of money, Fed 'printing money', etc.. -- ignore them, they've given away that they don't know what they are talking about.

 

Could we go too far?  I guess anything is possible.

 

wabuffo

 

What indicators should one pay attention to instead?

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if they keep the fed funds rate low but say the 10 year still goes back to the level of a year ago, isn't that a warning sign that things are not well?

 

Why - isn't that a normal yield curve shape?

 

wabuffo

 

haha Yeah, I suppose so.

 

For the record, I just looked to see how the fed funds rate reacted when it was at a similar level a few years ago and it bounced around getting almost to 3% even though we were at the same levels as today.

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What indicators should one pay attention to instead?

 

real-time indicator:                  gold price in USD

longer-term indicator:              US Treasury net cash deficit (per US Tsy Daily Statements)/US GDP.

 

That's because US Treasury cash spending creates new financial assets and the gold price (due to gold's stability in annual production/above ground inventory) is very sensitive to the demand/supply characteristics of the US dollar.  (note its not just supply of dollars, its also the demand for dollars - which is high right now due to the recovery forecasts for the US economy).

 

Just my 2-cents.

 

wabuffo

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Do you think we'll keep low rates and low inflation

 

yes.

 

long rates are going back to where they were before the pandemic.  Nature is healing. 

 

If hyperinflation was truly here or on its way,  stocks would go down, gold would go up. The opposite is happening.  If you are reading anything about inflation coming and the author is quoting M2, velocity of money, Fed 'printing money', etc.. -- ignore them, they've given away that they don't know what they are talking about.

 

Could we go too far?  I guess anything is possible.

 

wabuffo

 

I'm going to take the counter position here on  your hyperinflation indicators.

 

This research paper claims https://www.businessinsider.com/heres-what-happened-to-stocks-during-the-german-hyperinflation-2011-11in the Weimar Republic Hyperinflation started with a huge runup in stocks and increase in speculation:

 

And Gold itself is on an amazing tear this year, it's called BTC now.

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I very rarely stumble into the macro land as I find ways to lose money in micro land, but the Fed seems to be doing a fine job keeping short term rates low.

do they really mind if the 10Y goes to 2% and 30y to 2.5/3.0%? any problems with steep curve?

I'm going on 8 years removed from being a bond trader so I don't pay attention to what the Fed wants the shape of the curve to be.

the 3 yr yields 23 bps and 3m bills yield 3 bps, repo rates are 0, 3mL is 19 bps. 12mL is 28 bps.

[this is fine dog meme]

Your approach is likely the right one and since the last time we briefly exchanged on general corporate debt levels, events showed that you were right and there was further room for growth:

faed67e30c5bae26d0c123e96a979c2c.png

Mr. Druckenmiller (not exactly a microinvestor) recently said that he was puzzled by what happened to corporate debt in 2020. It's even better than a permanently elevated plateau.

Anyways, from a bird's eye (noob) view, the total debt (public, corporate and households) to GDP in the US is about 400% so an incremental 100 basis points rise in yields would result in an about incremental 4% of GDP debt servicing.

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This research paper claims in the Weimar Republic Hyperinflation started with a huge runup in stocks and increase in speculation.

 

Might I recommend more reading about the end of World War I....

 

This is a good read:

https://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586489941/ref=sr_1_1?crid=27Q49J0PE9LSP&dchild=1&keywords=when+money+dies&qid=1614199756&sprefix=When+money+dies%2Caps%2C176&sr=8-1

 

In my view, there are three reasons why hyperinflation might happen:

1) losing monetary sovereignty (ie, central govt must float debt in foreign currency that it cannot issue by fiat)

2) war - or - a government overthrow

3) the collapse of domestic industrial production.

 

After WWI, Weimar Germany suffered all three.  Next - do the United States Federal government....

 

I don't know anything about Bitcoin, so I can't comment - though I fail to understand why a supposed monetary polaris would be so unstable in value.

 

wabuffo

 

 

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This research paper claims in the Weimar Republic Hyperinflation started with a huge runup in stocks and increase in speculation.

 

Might I recommend more reading about the end of World War I....

 

This is a good read:

https://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586489941/ref=sr_1_1?crid=27Q49J0PE9LSP&dchild=1&keywords=when+money+dies&qid=1614199756&sprefix=When+money+dies%2Caps%2C176&sr=8-1

 

I don't know anything about Bitcoin, so I can't comment - though I fail to understand why a supposed monetary polaris would be so unstable in value.

 

wabuffo

 

Sorry, I forgot the link. https://www.businessinsider.com/heres-what-happened-to-stocks-during-the-german-hyperinflation-2011-11

 

Thanks for the book recommendation, I’m sure that it has more detail than the report. I’ll add it to the pile of things I’m working to read.

 

And my point about Bitcoin was partly tongue in cheek, but also a little serious. I’m wondering if the inflows that would have driven gold to the moon have been (temporarily?) diverted to Cryptocurrencies in their current bubble. There is a lot of similarities, both have no fixed value. Gold is valuable  for jewelry and electronics, but that utility doesn’t constrain it from being $100 an ounce or $4,000 ounce.

 

Bitcoin has utility if you can’t trust your government (Venezuela), or won’t trust your government (criminals, tax cheats) or are just getting divorced. But again that utility doesn’t constraint it to any range narrower that a few thousand dollars to $58,000 apparently.

 

 

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(public, corporate and households).

 

you can't mix corporate/household debt with federal debt -- its mixing apples and rutabagas.  US Federal govt debt (ie, Treasuries) is a reserve maintenance mechanism.  It soaks up the reserves created by the deficit spending that has already been deposited it in the US banking system.  Otherwise - all rates would go to zero and the private sector would be short zero credit risk collateral for borrrowing.

 

...and if you're going to talk about corporate debt - its bad form to present it without a comparison to corporate equity.  Yep - like I thought - touching all-time lows in corporate debt to equity!  Cue ominous macro bear music! 

 

debt-to-equity.png

 

I'm afraid Druckenmiller is a trader.  He is very good at it - but because he is good at one field doesn't make him an expert in another.

 

wabuffo

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gold to the moon have been (temporarily?)

 

I doubt it - gold trades in one day the entire value of Bitcoin (last I checked - perhaps it two days now at the current price of bitcoin)

 

wabuffo

 

Thanks for the clarification. Good to know I won't be moving the market once I decide to start my inflation hedge;)

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if you want to worry about something macro negatively affecting stock prices, I'd worry about what kind of investment taxes are coming down the pike in both the US and Canada in late 2021, early 2022....

 

wabuffo

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if you want to worry about something macro negatively affecting stock prices, I'd worry about what kind of investment taxes are coming down the pike in both the US and Canada in late 2021, early 2022....

 

wabuffo

 

I'm not a Bitcoin believer at these prices, so I'd have to structure my tax fraud some other way;)

 

More seriously most of my money is in an IRA, so not too worried about investment taxes, though a couple double ups and I will!

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This research paper claims in the Weimar Republic Hyperinflation started with a huge runup in stocks and increase in speculation.

 

Might I recommend more reading about the end of World War I....

 

This is a good read:

https://www.amazon.com/When-Money-Dies-Devaluation-Hyperinflation/dp/1586489941/ref=sr_1_1?crid=27Q49J0PE9LSP&dchild=1&keywords=when+money+dies&qid=1614199756&sprefix=When+money+dies%2Caps%2C176&sr=8-1

 

In my view, there are three reasons why hyperinflation might happen:

1) losing monetary sovereignty (ie, central govt must float debt in foreign currency that it cannot issue by fiat)

2) war - or - a government overthrow

3) the collapse of domestic industrial production.

 

After WWI, Weimar Germany suffered all three.  Next - do the United States Federal government....

 

I don't know anything about Bitcoin, so I can't comment - though I fail to understand why a supposed monetary polaris would be so unstable in value.

 

wabuffo

 

I am currently reading the book Studies in Hyperinflation and Stabilization http://www.centerforfinancialstability.org/hyperinflation.php which is a collection of oldish papers examining different hyperinflations which have happened through time. The first lesson they state (page xxii) is that "We, like others, have identified the cause of hyperinflation as the substitution of [money creation] for the tax financing of government expenditures" (i.e. when instead of raising taxes to finance government spending the central bank just prints).

 

Now not wanting to dive into politics too much, but I think its safe to say in the US/Canada at this point there is very little appetite for the type of tax increases that would be necessary to fund the type of deficits of the past year, and are expected for the coming years. As well, the politically easy type of taxes that may be implemented (i.e. wealth taxes, tax on high income earners) will not end up generating that much revenue. With this in mind it is very easy to imagine a high inflation scenario (maybe not hyperinflation, but higher than most of us would have experienced in our lifetimes) over the next decade or so, the government keeps printing because it is the easy thing to do.

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