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livinincali.
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January 14, 2015 at 5:28 PM #782001January 15, 2015 at 12:58 AM #781969
CA renter
Participant[quote=Myriad]There’s really no evidence that deflation is going to help workers improve their lives. Spain is a good example. Not sure 50% unemployment for people under 30 is really that great. Nothing like a lost generation of youth to screw a few score of speculators.
Europe’s benefits looks ok at the moment, but wait another 10-20 years. Their issues with entitlements looks way worse than the US.
For the balance to shift back to workers, what’s needed is higher labor cost growth outside the US, increased employment, and more middle-tiered skills jobs in the US. At the end of the day, it’s supply and demand.
[quote=spdrun]Overly rapid industrialization of third-world pestholes, impacting the global environment.[/quote]
Why wouldn’t other countries try to get to the same quality of life as 1st world countries?[/quote]
Perhaps I should restate that a bit: asset price/cost deflation is necessary in order to balance the power/wealth of labor and capital. As it stands, money is being pushed toward the capitalists/speculative class (not including entrepreneurs in this definition).
We need to overhaul our tax and trade policies. The wealthy have rewritten all the laws so that they will benefit at the expense of those who work for a living. It cannot continue this way — history shows over and over again what happens if we remain on this trajectory.
I would also add that the Mediterranean countries are very different from the U.S. In those countries, you don’t just have deflation, but also a culture where tax evasion is a national pastime. You cannot have a strong social safety net AND tax evasion at the same time. I would also argue that the work ethic of many in the Mediterranean region is different from that found in the northern European countries and the U.S., among other nations and cultures. Though we do have our share of slackers, to be sure.
The corruption of government is also a big problem over there. We’re definitely becoming more corrupt, as well. Our leaders used to try to hide/deny it, but everyone is pretty brazen about it these days as it becomes more and more the norm. It’s a very big problem.
January 15, 2015 at 1:37 AM #782006Participant[quote=Leorocky][quote=livinincali][quote=Leorocky]Can anybody show me evidence of “massive asset price bubbles” and show me how the Fed (I’m assuming via QE) caused it.[/quote]
QE is a relatively new monetary policy it’s effects are yet to be seen. As for the Fed helping to create and encourage bubbles just look at internet bubble of 2000 or the housing bubble of 2004-2007. [/quote]
The dotcom bubble started a few years prior to 2000 and I don’t think the Fed had much to do with it
[quote=livinincali]In 1999-2000 the fed increased the money supply because of worries about y2K and bank runs. The banks took that money and invested it temporarily which helped fuel the tail end of the internet bubble. When the fed decided to pull that liquidity after the y2K scare was done we had the huge collapse. [/quote]
First I’ve heard of this theory. We had a minor recession in 2001. The market starting correcting big time in April 2000 IIRC. I’m not sure there was any huge collapse caused by the Fed.
[quote=livinincali]In the housing bubble the fed keep interest rates low for way too long which helped fuel the housing bubble. They felt they could keep rates low because there wasn’t much inflation in the CPI but CPI didn’t measure the excessive speculation in housing prices. Just like CPI is low now but it doesn’t account for the excessive speculation in shale oil, junk bonds, and stocks. The fed can make money cheap to borrow but it can’t determine what that money is used for. If it’s used for financial engineering and speculation rather than productive investment when the rates go up all that speculation has to be unwound because it no longer is profitable. [/quote]
I suggest you research what exactly is included in the CPI. Can you provide evidence that there has been some appreciable increase in “speculative” lending because of the Fed’s recent actions?
[quote=livinincali]If I borrow $100K at 2% and invest it in VZ stock to get a 3.5% dividend I’m making a small percentage but if my borrow rate goes up to 3 or 4% I’m immediately going to sell my stock because it’s no longer profitable to have that arbitrage play on.[/quote]
Do you really think lot’s of people do this?[/quote]
I’d say (intuitively, with nothing to back it up at this point) that the Fed’s interest rate policy can be even more destructive than QE, at least the size/type that we’ve seen.
Let’s consider the fact that many investors are either required or expected to earn a yield above a certain percentage. If the Fed forces interest rates below this level — especially if they are held there for a long period of time — these investors will begin to move further out on the risk curve, and many of them will begin to use more leverage in order to boost returns. If the Fed is manipulating things, then risk is mispriced. This forces up the prices of things that can be bought with speculative money and leverage.
This makes the prices of things more vulnerable to any kind of shock — financial or otherwise. When leverage is drawn down, this alone can cause the collapse; but there are often other factors — often related to the assets that are being purchased with this speculative money — that usually cause the leverage to be wound down (highly-priced internet stocks of companies that will never make money…or a lack of owner-occupied homebuyers because everyone who can afford to buy, even with gimmicky mortgages, is “all in”…or new oil supplies/reduced demand for oil, etc.). Once these investors begin to sense the risk and decide to exit, the selling can become intense because few can cover their positions when prices fall because they are so leveraged. Everything collapses.
Unfortunately, too many people think of the collapse (correction) as being the the cause of the damage. In truth, it’s the inflation that sets everything up for a collapse that is the problem, not the correction.
Yes, a LOT of people are doing this, especially the ones with all the money.
January 15, 2015 at 2:20 AM #782007ParticipantHere are some really great charts with explanations (and this is just one segment of leveraged speculation):
http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php
See the correlations between margin debt and stock market bubbles?
When central bank manipulations are allowed to go on for as long as they’ve been, the greater the risks that investors will take, and the greater the leverage that will be used to take these risks. The longer it’s allowed to continue, the greater the correction that will follow.
One ignores liabilities at his/her own expense.
Here’s an article about the “everything” boom/bubble…
January 15, 2015 at 3:52 AM #782008ParticipantAnd this…
“Recent LBO Loans Push Leverage To Levels Not Seen Since 2008”
Junk Bonds…
[From this past July] “In my 20 years of managing high yield bond investments, I’ve never seen so many signals that scream caution. Desperate to find yield, investors have poured billions into high yield bond funds and ETFs driving the yield on the Barclays High Yield Bond Index to just 5.54% — the lowest level in history. Investors are positioning in a risk they may not fully understand.”
http://www.forbes.com/sites/greatspeculations/2014/07/25/code-red-in-high-yield/
Oil speculation…
Housing — 43% of the sales in Q1 2014 going to “all cash” buyers (though not using traditional mortgages, they can still be highly leveraged). The fact that so many are buying “all cash” says to me that speculators are heavily in the market, even though some of the institutional speculators have been pulling out.
http://www.marketwatch.com/story/43-of-2014-home-buyers-paid-all-cash-2014-05-08
If you research it, you’ll find that almost all asset prices have been affected by this (usually leveraged) speculation. It is a direct effect of the central banks’ policies and the concentration of wealth around the globe (ratio of money used for speculation vs money used as a medium of exchange/labor/productive investment is higher than it’s been in the past, IMHO…not sure if this is officially tracked, but I can look for it if you’re interested).
January 15, 2015 at 6:26 AM #782009livinincali
Participant[quote=harvey]BTW, where can I borrow $100K at 2% ?[/quote]
You can’t, but big hedge funds buying into the stock market bubble can.
January 15, 2015 at 6:41 AM #782010Anonymous
Guest[quote=livinincali][quote=harvey]BTW, where can I borrow $100K at 2% ?[/quote]
You can’t, but big hedge funds buying into the stock market bubble can.[/quote]
Really? Who’s doing the lending?
January 15, 2015 at 6:53 AM #782012Leorocky
Participant[quote=livinincali][quote=harvey]BTW, where can I borrow $100K at 2% ?[/quote]
You can’t, but big hedge funds buying into the stock market bubble can.[/quote]
What drives stock prices in your opinion? Sure, there can be many factors, but what would be the one primary factor in your opinion?
January 15, 2015 at 10:58 AM #782016exsdgal
Participant[quote=CA renter]
Housing — 43% of the sales in Q1 2014 going to “all cash” buyers (though not using traditional mortgages, they can still be highly leveraged). The fact that so many are buying “all cash” says to me that speculators are heavily in the market, even though some of the institutional speculators have been pulling out.
[/quote]From where do these buyers get their cash? I do not see banks giving out any of the easy loans. Just curious….
January 15, 2015 at 11:03 AM #782017Participant“many investors are either required or expected to earn a yield above a certain percentage”
Are you implying that interest rates should be set at that % or that those investors should have any expectation of such? Rates are a function of the demand for money and fluctuate.
Yes – one reason the Fed might lower rates is to spur investment if everyone is just sitting on cash. This isn’t a manipulation. It’s the Fed’s job.
And again, you’re using the term inflation incorrectly.
“See the correlations between margin debt and stock market bubbles?”
Bubbles, as in plural? The stock market isn’t a bubble right now nor was it in ~2007. Dot com – sure. Investor sentiment will cause margin debt to increase and decrease and there appears to be a reasonable correlation between stock prices. That doesn’t mean everytime margin debt gets high and there’s a correction it was a bubble.
LBO – not a bubble, article clearly states “back to 2008 levels” which was the middle of a recession.
The Forbes article on junk bonds is from a “contributor”, i.e. some guy with an opinion. If you agree with it fine but it’s not fact. Sites like Seeking Alpha, the Oracle one you posted elsewhere and increasingly more mainstream media are allowing the contributor posts or are designed as community sites. They are akin to the Opinion pages in a newspaper.
Meanwhile, bonds continue to rally, mostly due to geopolitical events.
(BTW – it’s odd you’d use Forbes as a reference due to the political “lean” of Steve Forbes. I believe in other threads you’ve attacked “rightwingers” and such)
Yes – “speculators” may have suspected an oil price drop based on increased supply and bet accordingly, so what? Good for them. The same people will look at the history of oil prices and at some point bet that prices will go back up and they will very likely be right.
Buying houses with cash is not indicative of a bubble or speculation. The article is clear that the trend is declining as housing prices have gone up and it’s less of a value play. The fact that the rate of home price growth is declining shows the real estate market is normalizing after a large drop off and then a robust recovery (in certain areas).
Simlar to oil, making an investment based on fundamentals is not speculation. No matter who does it or how large the investment is or where the money came from.
“Yes, a LOT of people are doing this, especially the ones with all the money.”
And if we are to believe the narrative less and less people have any money these days and it’s a small group at the top “with all the money”.
So, no, a lot of people aren’t doing that.
January 15, 2015 at 11:10 AM #782018Myriad
ParticipantThe issue regarding speculation and leverage isn’t so much about interest rates as capital requirements for institutions to lend money. If the capital requirements are tighter, then there will be less opportunities for leverage as those institutions would have to hold more in reserve.
Of course, that doesn’t really help the Fed as they are also concerned about the money supply and velocity also.Another consequence to savers of deflation is negative interest rates. The Swiss are now asking for -1.25% for 3 month Libors.
January 16, 2015 at 2:42 AM #782041Participant[quote=exsdgal][quote=CA renter]
Housing — 43% of the sales in Q1 2014 going to “all cash” buyers (though not using traditional mortgages, they can still be highly leveraged). The fact that so many are buying “all cash” says to me that speculators are heavily in the market, even though some of the institutional speculators have been pulling out.
[/quote]From where do these buyers get their cash? I do not see banks giving out any of the easy loans. Just curious….[/quote]
Some are foreign investors who think the dollar is safer than their own currency and/or want to move money out of their own country for various reasons. Others are investors/managers/funds who are managing pooled investments from a variety of people and/or institutions. There are a lot of mega-millionaires and billionaires out there on a global level. That money goes wherever it’s perceived to be the safest and where it’s likely to yield the best returns. Whether it’s true or not, many people seem to think that the United States — and the USD — will give them the best return for the lowest possible risk.
I’ve mentioned a deep-pocketed investor who was looking for large blocks of REOs, but who was not well-connected here. That was all Chinese money, and they had ~$2 billion at their disposal. I’ve heard that there are Russians doing the same thing, especially on the east coast. And there are a fair number of investors from Latin America, too. Of course, we have our own wealthy folks who are desperately looking for a place to earn a yield, too.
January 16, 2015 at 3:11 AM #782042Participant[quote=Leorocky]“many investors are either required or expected to earn a yield above a certain percentage”
Are you implying that interest rates should be set at that % or that those investors should have any expectation of such? Rates are a function of the demand for money and fluctuate.
Yes – one reason the Fed might lower rates is to spur investment if everyone is just sitting on cash. This isn’t a manipulation. It’s the Fed’s job.
And again, you’re using the term inflation incorrectly.
“See the correlations between margin debt and stock market bubbles?”
Bubbles, as in plural? The stock market isn’t a bubble right now nor was it in ~2007. Dot com – sure. Investor sentiment will cause margin debt to increase and decrease and there appears to be a reasonable correlation between stock prices. That doesn’t mean everytime margin debt gets high and there’s a correction it was a bubble.
LBO – not a bubble, article clearly states “back to 2008 levels” which was the middle of a recession.
The Forbes article on junk bonds is from a “contributor”, i.e. some guy with an opinion. If you agree with it fine but it’s not fact. Sites like Seeking Alpha, the Oracle one you posted elsewhere and increasingly more mainstream media are allowing the contributor posts or are designed as community sites. They are akin to the Opinion pages in a newspaper.
Meanwhile, bonds continue to rally, mostly due to geopolitical events.
(BTW – it’s odd you’d use Forbes as a reference due to the political “lean” of Steve Forbes. I believe in other threads you’ve attacked “rightwingers” and such)
Yes – “speculators” may have suspected an oil price drop based on increased supply and bet accordingly, so what? Good for them. The same people will look at the history of oil prices and at some point bet that prices will go back up and they will very likely be right.
Buying houses with cash is not indicative of a bubble or speculation. The article is clear that the trend is declining as housing prices have gone up and it’s less of a value play. The fact that the rate of home price growth is declining shows the real estate market is normalizing after a large drop off and then a robust recovery (in certain areas).
Simlar to oil, making an investment based on fundamentals is not speculation. No matter who does it or how large the investment is or where the money came from.
“Yes, a LOT of people are doing this, especially the ones with all the money.”
And if we are to believe the narrative less and less people have any money these days and it’s a small group at the top “with all the money”.
So, no, a lot of people aren’t doing that.[/quote]
First, I want to address the issue of my sources. Unlike many other posters around here, I look to the sources most likely to contain actual facts. I’ve long cited sources that range from the extreme left to the extreme right, and everything in between. Living in an echo chamber ensures that you will be wrong a significant amount of the time, IMO. Best to know the arguments from of the greatest possible number of sources and perspectives, and then debate the merits of each to see which ones are left standing at the end.
While you might only consider CPI in your definition of inflation and whether or not it exists, I take a broader view. I most certainly believe that money supply (and velocity) affects prices; this is the very essence of inflation. I focus more on the cause than the effect, because the cause is what leads. That’s how I see inflation and why I’ve always been able to spot bubbles (both in the late 90s and mid-2000s…and now) when others have been busy trying to convince themselves and the world that bubbles don’t exist because “it’s different this time.”
Regarding LBOs, 2008 was the PEAK in many markets…right before they CRASHED. That’s how bubbles work.
The Federal Reserve is largely responsible for these bubbles and busts because their policies encourage irresponsible risk taking. It’s unbelievable that after the credit bubble and the resulting financial crisis that they not only continued with the same policies that created that mess, they’ve amped it up!
As for the rest of your post…
1.) How do YOU define a bubble? (Personally, I would disagree strongly with your assertion that stocks weren’t in a bubble in 2007-2008…and that they aren’t in a bubble now).
2.) You state that interest rates should not be set, but then argue that the Fed is “doing their job” when they manipulate rates. How is that not setting rates? If you believe in a free market, why do you think the Fed should be spurring people to invest more? Don’t you think that investors might be sitting on cash for a reason? Wouldn’t forcing them out of those positions, or into other positions, be manipulation?
3.) If leveraging up and buying (or selling) assets based on the supposition that prices are going to go up (or down) in the near term isn’t speculation, then I certainly don’t know what speculation is. How would you define it?
4.) Do you believe that having speculators enter a market in anticipation of price increases/declines will have an effect on market prices? If so, do you believe that this can cause higher volatility and the greater likelihood of bubbles and busts?
5.) Yes, the money “at the top” is largely responsible for what happens in the market. While they might be a small percentage of the world’s population, there are still a fairly large number of people doing this. In addition to the wealthiest people, there are those just below them who are speculating as well, and many of them are pooling their money, too.
January 16, 2015 at 6:28 AM #782043moneymaker
ParticipantI think a better question than “are savers doomed?” is “are 401K’s doomed?”. As with government there are 3 basic checks and balances, stocks,bonds,commodities. Problem with 401k’s is you can only invest in stocks or bonds, so when the market in over valued and interest rates start climbing you are screwed as an investor with no where to turn. The rich can invest in gold/silver but the little guy will get squeezed as the proverbial turnip.
January 16, 2015 at 7:06 AM #782044Guest[quote=CA renter]Living in an echo chamber ensures that you will be wrong a significant amount of the time, IMO.[/quote]
Especially when the echo chamber is built around one’s personal, self-contradictory definition for everything.
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