Gyroscopic Investing

moda0306 wrote: I have to disagree with Murphy's judgement on the fed, but there is something about the fed buying financial products of the private sector that seems fundamentally screwed up.  The fed buying treasuries is one thing, but when the fed starts buying private sector assets, it's actually picking winners and losers.

Technically, the Fed is engaging in fiscal policy which is unconstitutional, but honestly do you think any of the modern-day politicians have any clue other than Ron Paul?  The Fed has been evolving from a simple banking insurance scheme like FDIC or SIPC since inception.  It originally was only able to buy AAA corporate bonds which directly stimulated the economy, then the politicians got "smart" and changed it so the Fed could only (and had to) buy Treasuries and monetize their endless war and social spending.

MMR makes you tolerate a lot of things, even extra-legal actions.

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buddtholomew wrote: I, for one, was not too amused by the drop in LTT's today. Am I missing something? Are we predicting lower yields given the approaching "congressional fiasco". It appears as though the market expects higher inflation and yields are rising to compensate.

Amazing - Bernanke wants to drop long term yields even further to juice the housing market even more, and yet his announced action has the opposite effect on the bond market and drives yields up.  Personally I don't care much either way, but it is interesting to see how nothing plays out the way you expect.

Storm wrote:

buddtholomew wrote: I, for one, was not too amused by the drop in LTT's today. Am I missing something? Are we predicting lower yields given the approaching "congressional fiasco". It appears as though the market expects higher inflation and yields are rising to compensate.

Amazing - Bernanke wants to drop long term yields even further to juice the housing market even more, and yet his announced action has the opposite effect on the bond market and drives yields up.  Personally I don't care much either way, but it is interesting to see how nothing plays out the way you expect.

My understanding was that Bernanke wanted to drive mortgage bond yields (and mortgage rates) even lower in order to juice the economy and if Treasury bond yields rose, fell, or stayed flat that was a somewhat secondary concern. The 30-yr mortgage to 10-year Treasury spread is at a pretty high level and I suspect that he wanted to do something about that too.

WIll it work? Maybe, but probably not....at least not too well. Even if mortgage rates fall to 2% it won't do underwater homeowners any good because they can't refinance to begin with. You can't solve a balance sheet recession purely with monetary policy (well, there are two ways I could think of but both would be so unorthodox as to make Quantitaive Easing seem like ordinary everyday open market liquidity ops and might risk serious inflation as well if not handled very carefully) and any fiscal policy help does not appear to be forthcoming. Congress and the President could do a lot as regards the underwater homeowner issue but they won't.....hell, they can't (at least at the moment) even seem to get their acts together enough to fix the fiscal cliff that's less than four months away and that they had years to know was coming.

A somewhat jaded commentary from Warren Mosler...

(emphasis is mine)

Warren Mosler wrote:QE in the US has again done what it’s always done- frighten investors and portfolio managers ‘out of the dollar’ and into the likes of gold and other commodities.

And because sufficient market participants believe it works to increase aggregate demand, it’s also boosted stocks and caused bonds to sell off, as markets discount a higher probability of higher growth, lower unemployment, and therefore fed rate hikes down the road.

But, of course, QE in fact does nothing for the economy apart from removing more interest income from the economy, particularly as the Fed adds relatively high yielding agency mortgages to its portfolio.

As ever, QE is a ‘crop failure’ for the dollar. It works to strengthen the dollar and weaken demand, reversing the initial knee jerk reactions described above.

But the QE myth runs deep, and in the past had taken a while for the initial responses to reverse, taking many months the first time, as fears ran as deep as headline news in China causing individuals to take action, and China itself reportedly letting its entire US T bill run off.

But with each successive QE initiative, the initial ‘sugar high’ is likely to wear off sooner. How soon this time, I can’t say.

Global austerity continues to restrict global aggregate demand, particularly in Europe where funding continues to be conditional on tight fiscal. Yes, their deficits are probably high enough for stability- if they’d leave them alone- but that’s about all.

And as the US continues towards the fiscal cliff the automatic spending cuts are already cutting corporate order books.

And oil prices are rising, and are now at the point cutting into aggregate demand in a meaningful way.

Yes, the US housing market is looking a tad better, and, if left alone, probably on a cyclical upturn. And modest top line growth, high unemployment keeping wages in check, and low discounts rates remains good for stocks, and bad for people working for a living.

Too many cross currents today for me to make any bets- maybe next week…
Source: http://moslereconomics.com/2012/09/14/qe/

Interesting. Too many "cross currents" indeed.

As Mosler points out, it is worth considering that the Fed buying up MBS actually removes a good deal of interest income from the private sector.

buddtholomew wrote:

Pointedstick wrote:

dualstow wrote: You and I are either very wise or very foolhardy. Or perhaps we're just disciplined.

I did it too. So we'll all float or sink together...

The PP is a strange beast. I awoke to find my EDV position down 4% and I was overjoyed. What the heck is wrong with me??

I, for one, was not too amused by the drop in LTT's today. Am I missing something? Are we predicting lower yields given the approaching "congressional fiasco". It appears as though the market expects higher inflation and yields are rising to compensate.

I imagine bond yields will rise to 4.3% or so and then start drifting back down, which is what we've been doing since early 2008.

The PP was up big yesterday.  It was down today.

For the year it's up 7% or so.

I wouldn't watch the individual PP assets too closely.  Just enjoy the results.

Gumby

As Mosler points out, it is worth considering that the Fed buying up MBS actually removes a good deal of interest income from the private sector.

No one has to sell the MBS though do they? Presumably those selling them believe they are selling them for more than they are worth. I guess Mosler thinks that the sellers mistakenly believe inflation will be higher than it is really going to be. I guess mortgage default rates are the be all and end all of what MBS are worth. 

stone wrote: No one has to sell the MBS though do they? Presumably those selling them believe they are selling them for more than they are worth. I guess Mosler thinks that the sellers mistakenly believe inflation will be higher than it is really going to be. I guess mortgage default rates are the be all and end all of what MBS are worth. 

No one is selling MBS for more they are worth because mark to market accounting got suspended to mask how insolvent all the banks truly are.  The banks and foreigners just want to get the crap off their balance sheets as quickly as possible.

MachineGhost wrote:

stone wrote: No one has to sell the MBS though do they? Presumably those selling them believe they are selling them for more than they are worth. I guess Mosler thinks that the sellers mistakenly believe inflation will be higher than it is really going to be. I guess mortgage default rates are the be all and end all of what MBS are worth. 

No one is selling MBS for more they are worth because mark to market accounting got suspended to mask how insolvent all the banks truly are.  The banks and foreigners just want to get the crap off their balance sheets as quickly as possible.

That sounds to me like the Fed is buying MBS for more than anyone in the private sector thinks they are worth.

Gumby

As Mosler points out, it is worth considering that the Fed buying up MBS actually removes a good deal of interest income from the private sector.

Mosler seems to lump "the private sector" all together when IMO a lot of the problem is intractable creditor/debtor stalemates within the private sector. Ray Dallio in the link from the other thread clearly recognises that. Interest going to a bank won't free up people who have lost their jobs and have an underwater mortgage to pay off.
http://www.cfr.org/united-states/ceo-sp ... lio/p29012

DALIO: Yeah -- so the Fed can continue -- again, it's very important to track the transactions. So when the Fed makes a purchase and prints money, it can expand its balance sheet, and it makes a purchase. The key is, are you getting the money in the hands of the -- that person who's going to use it the way you want it to be used? So now if you go buy a mortgage-backed security or you go buy a Treasury bond and so on, it's not -- probably not going to good enough because it puts -- it now gives somebody, the owner of that Treasury bond -- they're going to want to buy something that's like a Treasury bond because that's what they had before, or something like a mortgage. And that particular problem means, how do you get that into spending. It's a long way between that person who's holding that financial asset and the guy who's going to buy a car or a house.

buddtholomew wrote:

Pointedstick wrote: I did it too. So we'll all float or sink together...

The PP is a strange beast. I awoke to find my EDV position down 4% and I was overjoyed. What the heck is wrong with me??

I, for one, was not too amused by the drop in LTT's today. Am I missing something? Are we predicting lower yields given the approaching "congressional fiasco". It appears as though the market expects higher inflation and yields are rising to compensate.

My purchase of bonds was not due to a prediction but rather a need to rebalance. I didn't exactly hit 35% in stocks, but my vP is so stock-heavy that unloading some stock shares on an Up Day is an excuse to make the pp a larger part of my total holdings. At the same time, buying a bit of TLT the other day brought bonds back to a 1/4 share of the pp.

Dualstow,

I am quite sure that rising rates on LTT's lately have not been as a result of predictions of congressional stalemate.... I highly doubt that the stock market would be up so much in the face of that.

I think the market seems to have forgotten about another debt ceiling battle, or maybe this time it just doesn't care.