Comments on: Have we already enjoyed the Year End Rally?

By: zentrader

zentrader — Sun, 03 Dec 2006 18:37:59 +0000

All Doom and Gloom all the time over here. No wonder it is the most popular economics blog. It gives the bearish herd all the pessimistic psychological reinforcement that they crave.

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BR: Its all-reality-all-the-time. If you want Happy-talk or Cheerleading, you can find plenty of that everywhere else.

By: Bearabull

Bearabull — Tue, 28 Nov 2006 17:52:49 +0000

Anyone have thoughts on the reaction to today’s figures (durable goods, housing)? I liked how the headlines focused on the tiny increase in October home resales (over the adjusted September figure) and not the record 3.5% decrease in median prices. The fact that the rate of price (and home equity) erosion is increasing should be alarming.

Market volatility is pretty wild today.

By: Insurance Guy

Insurance Guy — Tue, 28 Nov 2006 14:52:45 +0000

V L,

I don’t disagree that their is too much liquidity. I don’t disagree that liquidity has caused massive investment in alternative investments and asset bubbles. I just think its because rates are set too low, not because the Treasury is “injecting money”.

Trivial difference, but I want the blame to be placed where I think it deserves to be placed.

By: V L

V L — Tue, 28 Nov 2006 13:35:11 +0000

“The Fed can increase money supply by lending funds at low rates to banks who then turn around and lend to consumers and businesses.”

Insurance Guy,

JPY/USD carry trade was only one example. You are missing one major fact that all those JPY need to be converted into USD and all USD come for US Treasury. (Unless you think that a guy in North Korea prints USD)

You are assuming that these funds end up with consumers and businesses and I am saying that a part of these funds also end up with Wall Street speculators and hedge funds, and eventually in asset bubbles.

By: my1

my1 — Tue, 28 Nov 2006 13:03:05 +0000

“The Fed can increase money supply by lending funds at low rates to banks who then turn around and lend to consumers and businesses.”

All thanks to Fractional-Reserve Banking of course, but we all know where that ends. It’s all in the excess credit supply. It seems we don’t even have to have our money backed by paper anymore!!!

By: Insurance Guy

Insurance Guy — Tue, 28 Nov 2006 11:23:50 +0000

V L,

You’re right. The demand for USD increases as the interest rate rises – because people want to invest at new USD (higher) rates. That said, the demand to borrow in USD is reduced when the interest rate rises.

The money supply increases through lending activities, not because of investor demand for USD. The Fed can increase money supply by lending funds at low rates to banks who then turn around and lend to consumers and businesses.

Increasing the interest rate does increase the attractiveness of the JPY/USD carry trade, but that trade doesn’t explain the increase in M3 Barry has written about. It would no doubt increase worldwide liquidity and specifically the supply of Yen – but that can hardly be attributed to the Treasury.

By: Si

Si — Tue, 28 Nov 2006 04:56:13 +0000

Nice one my1, similar to what I have been saying for ages.
The problem we have is that a non cyclical universe seems to have appeared within the fed offices. In this place it is seems, you can just get rid of any downside cycle action by flopping interest rates around.

By: my1

my1 — Tue, 28 Nov 2006 03:32:40 +0000

Here’s the way I see it. Markets work in cycles. Nothing to do with “Macro”, it has much more to do with reality. What goes up must come down. The ONLY reason why housing MUST come down substantially is BECAUSE it has gone far higher than it should have been allowed (blame ‘Too Low’ Interest Rates or whatever have you).

So too does this apply to markets, it doesn’t matter in the slightest “who” is pumping up the markets. They WILL trend lower at some unknown point because they MUST trend lower (this week or next year? who knows?).

They MUST, because there is no way you can only hold back an impending Bear without holding back the Bull that preceded it.

Once again not referring to bulls/bears in cycle but in “what goes up must come down”. You can’t only cap the bottom and expect things to go up forever.

By: V L

V L — Tue, 28 Nov 2006 03:25:26 +0000

“I think crediting Hank Paulson’s darker ambitions for recent increased repo activity by the Treasury may be a little far fetched.”

I am sure Hank Paulson believes that he is doing good to everybody – similar as Bush believed when he ordered to invade Iraq.
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“The demand just exists at the given short term interest rate.”

Mish is missing other aspects of the demand. He is assuming that the demand for US dollars is only internal but there are other external components.

For example, how do you explain that higher interest rates actually increase the demand for USD from international currency speculators? What about JPY/USD carry trades (borrowing JPY at near zero, converting JPY into USD and collecting 5.25% interest); making the interest higher makes this kind of trades more attractive; thus increases the demand for USD. (You can only imagine what will happen when suddenly all these trades get converted back from USD into JPY).

By: Philippe RAFAT

Philippe RAFAT — Tue, 28 Nov 2006 02:51:54 +0000

Time changes ?
This money printing frenzy is not only the characteristic of the US central bank, the ECB had made comitments that money supply M3 will not exceed 5% within its corridor and it is now standing at 8%! and the ECB is said to look at M3 as a guide for its monetary policy ie Money supply matters.
It seems that the absorption effect of currencies which are international and sometimes domestic means of payment outside their boundaries provide a time lag before overflows. It was not the case for the assignat of Louis XV or the Republic of Weimar.