ZIRP as Passive Aggressive Protectionism

The U.S. has been the leader in international banking for at least 50 years. And for nearly all of that time a policy of supply side economics has been in play. This has meant continually lowering interest rates to accommodate business. The result is that the world is awash in US Dollar denominated debt. Now the Federal Reserve bank has interest rates at essentially zero, a "Zero Interest Rate Policy" (ZIRP) and the U.S. seems to be the only economy on fairly firm ground. Seems is a deception. We are interdependent with the rest of the world. The politicians and "conservative" economists in the U.S. are clamoring for a rise in interest rates by the Fed and looking for a strong dollar. This would in essence bankrupt many of the companies and countries in the emerging parts of the world, as we would be raising interest rates around the globe and demanding repayment of debts in a more valuable currency. Ours. The effect of a move like this is to cause inflation in those countries whose currency values decline, thus making food and energy more expensive to the people who live in these places. We, the U.S., should fall on our sword this time by letting the U.S. Dollar go. If we do not, and demand repayment, we will have what amounts to a global insurrection. We are seeing this in the middle east already with the results of the Arab Spring uprisings of a few years ago that were caused by economic downturns in these countries and rising prices of food. An interest rate rise will cause the same in Latin and South America. And we will have plenty of food to export but no one will be able to afford it.

The U.S. Federal Reserve is managing the primary currency of the world and must manage it with an eye to long term stability. And that means long term world stability. Even at the expense of the long term supremacy of the U.S. dollar. A weak dollar will also put Americans to work again. It is the importers who object. We must assist China in a transition to domestic consumption, and do it without protectionism. Keeping interest rates at these levels will put the world on notice.

FXY

The Yen looks set to rise.

Gold has a rough correlation to Yen. Intraday is often pronounced.

I am still in the weak US$ camp.

The Fed is on a weak dollar course, and Japan seems to be striking out on the Three Arrows.

Control risk,
gh

Real Estate Warming Up

There seems to  be a bottoming forming in the real estate sector. Most notably is the outperformance of DR Horton.
I feature Zillow (Z) here because of what appears to be substantial accumulation of the shares, and a chart formation that is often very bullish.

For some time I have felt that we are at the beginnings of a long decline in the value of the U.S. Dollar even as interest rates grudgingly rise, lagging the economy due to political influences. Recent wage increases and political pressure to raise them is contributory. Any rise in interest rates may stimulate some to "buy now!" before further rises even as it will make saving for a down payment easier. The next housing bubble is surely many years away, but the trend may be starting now.

As always, control your risk. Know when you are wrong. For me it is if I am losing money....

gh

They Are Gonna Reflate

The worries of you and me cause us to despair once in a while. And see a path of decline and loss of wealth. These worries are not lost on the U.S. Federal Reserve Bank. It is just that they see these things as part of a much broader and slowly changing event. But the same things are seen. And as long as these things are seen, however defined, they represent a loss of wealth. And it seems to this observer that the Central Banks of the World are sure that they can control the wealth creation of the world, and that they will not accept defeat. It is a game of macro-politico-economists now. The world is interconnected and the Central Banks are interconnected, and as long as nationalist politics prevails they will try to outdo each other to win the game for the home team.

This causes me to doubt the wisdom of protectionist sentiment. However patriotic it may be. If we are a free economic zone (the world) we will destroy ourselves with economic war if we compete as nations. But if we abandon our nationalism we seem to be at a disadvantage in the world. At least in the short term, and if all participants play fair....

just thinkin'
gh

How I Channel the US Dollar

I see a 15 year cycle in this short series.

Timing can take years.....

control risk,
gh

Weak Dollar Policy Choices

Now that the Fed is in charge of currency values in the U.S. and a weak dollar seems to be the policy.

I covered this stock not too long ago,

gh

Don't Fight the Fed

There is an old saw in investing that says, "don't fight the Fed", meaning if the U.S. Federal Reserve Board is easing interest rates then "go with the flow" and buy bonds or stocks. It also implies that the Fed's "got your back" and they will keep trying to influence markets until they get their way.

Today, Sept. 17, 2015, a much awaited Fed decision day and the Fed left rates unchanged, at essentially zero.


The U.S. economy is by most accounts getting stronger and is probably the strongest economy in the world at present.

Todays decision is a nod to the other troubles in the world. The Fed usually has a mandate to optimize growth in the U.S. economy and to control inflation in the U.S. economy. Now it may be that the U.S. Federal Reserve is acknowledging their role as the "central bank of the world". This may be a recognition by the Federal Reserve that the bank that controls the major reserve currency of the world controls inflation and growth around the world.

I do not think they will get ahead of inflation until LATE in the game. Any rises of rates will always lag inflation.

DON'T FIGHT THE FED.

US Dollar reserve currency/JPMorgan


Control risk,
gh

Tidal Flows

The game of macro-economic speculation is all about determining the magnitude and direction of money flows. As regards the possibility of China cashing in their U.S. Treasury bonds and using the cash to stimulate their economy, we must remember that these are the savings of the Chinese nation that they are withdrawing from our bank, and spending. Our bank, in this case is our government. The money was loaned to U.S. and now is being repaid. The way I see this is that US dollars will be transferred to the China account where, presumably, they will be exchanged for other currencies and spent. Those US dollars will now be in the world economy. It is an open question if the magnitude of this event will be large enough to move the needle on US Dollar strength or weakness. But the end effect should be for dollar weakness as these "new" dollars compete with existing dollars in the world market.

With that said, I was thinking of Laffers curve of diminishing returns to governments regarding taxes, whether too high or too low. Taxes returned to the US govt. have been inadequate to offset spending for many years. US Treasury bonds were sold to finance the difference. The money was spent. Now for the US govt. to repay the bonds money must flow out of Treasury and back into the world economy. This at a time when the U.S. economy is the strongest, at present, in the world. The US Dollar is still the dominant currency in the world. More of this dominant currency present in the markets must be stimulatory or inflationary. I do not see the U.S. government spending less so the offset will be minimal to these outflows. Any flow of these dollars back to this country will be stimulus and will generate taxes and the circle will be complete and perhaps the long period of diminished velocity of money will reverse as well.
Velocity of money has been that long gone elixir of vitality.
Do you remember those days. When govt. debt was financed by pure depreciation of the currency, and not the savings of savers. The long bond bull may be over and it may be a good thing. For awhile. The debt must be eased.

Laffer's curve site

Laffer may have been more influenced by the contemporary velocity of money than he knew.

Just thinking,
gh

China Exports Inflation?

 Over in China more weak economic numbers tonight. Our S&P futures down sharply. And the US $ down.

 So this ain't about the Fed raising interest rates. If the Fed was raising the dollar would strengthen. And if this is about China exporting DEFLATION the US$ would be strengthening.

 The news reporters are reporting that hard times in China will make them work for less and thus sell to us for less, equaling deflation. But, 10yr US treasury yields are rising, the dollar is declining. What if things are SO bad in China that their means of production comes to a standstill? (ie, financial crisis) That will export INFLATION. Who will be making the stuff they sell us and that we demand?

 And another reason for a decline in the US $ and inflation is that the Chinese govt. is selling US treasuries and then cashing in the dollars for their own currency to prop up their economy. This releases those dollars into the world economy. As those US dollars look for a home they will compete for good and services with the US dollars that you and I already have. Inflation. As Milton Freidman, a famous economist said, "Inflation is always and everywhere a monetary phenomenon." So beware. Things could go either way.


Disclaimer from a trader:

"It is hard to make predictions, especially about the future".
Yogi Berra
The above quote, often attributed to Mr. Berra, is an accurate assessment of the difficulty of predicting the future.
...

Those who know me know of my passion for economics and financial markets. My perspective is from the traders view of markets and other goings on. I often make what may seem to be intelligent prognostications about markets or economies or other macro-economic events, real or imagined.
The point of this post is to remind myself as well as the reader of my poor record of forecasting. I do not know what will happen in the future.
As a trader my goal is to adequately manage my affairs as the future unfolds. As a trader I constantly try to intuit what is going on under the surface of markets by what I see and hear. But there is only ONE outcome. And we don't know what that ONE outcome is until after the fact. Sometimes well after the fact.
There are, however, many things that do not happen that MAY have had a chance to happen, or not. In order to limit my risks I try to arrange my bets to match what seems to be happening while thinking of as many things as I can that could also happen and make me wrong. And often, in my excitement of new discovery, I will write what I think.
Do not use anything I say as a definite prediction. Anything I say MAY happen, but chances, thus probabilities, are that it won't happen. Put simply, I try to manage probabilities by imagining possibilities. Only one thing happens out of an infinite number of possibilities.

Manage your risk,
gh