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Started By
Message
re: Kessler in WSJ: Watch out when interest rates rise.
Posted on 3/27/13 at 5:15 pm to BennyAndTheInkJets
Posted on 3/27/13 at 5:15 pm to BennyAndTheInkJets
Bump for Fenton because this is fun.
0
Posted on 3/29/13 at 2:38 pm to BennyAndTheInkJets
quote:
did you mean the Fed make up the difference? If so, I mean if we cut taxes we're already there.
No. I mean something totally different, but it's sort of a wild topic best left for another thread.
quote:
I disagree that we haven't seen economic traction, we're in a better place than '09-'12.
Well it depends on what you mean. If you mean that the health of corporate and individuals' balance sheets (besides young individuals with college debt) are better, then yes, in that sense the current situation is better now.
The balance sheets of federal and state governments are worse now though. The regulatory environment is worse now. The employment situation is worse now. The amount of welfare dependency is worse now. It's basically all worse except for the deleveraging process that was going to occur naturally anyway.
I'd say, on balance, looking forward for the next 3 or 4 decades, things look to be in much worse shape now than they were at the beginning of 2010.
quote:
the unemployment issue is structural due to our current education system.
I completely disagree. What the data is telling us now is related to demographics, welfare, and business regulation, not education.
There are huge, gigantic, enormous problems with our current education system, but I think it has very little to do with measuring relative levels of employment over the past 30 years or so.
Posted on 3/29/13 at 2:38 pm to BennyAndTheInkJets
quote:
there is one idea I'd like you to think of: What is the escape velocity for inflation.
But that's already all I think of, bro.
The Japan situation is worrying to me for the very reason that it is a ZIRP scenario where the government can't seem to ever reach the necessary escape velocity.
I see ZIRP in the U.S. causing a sharp rise in stock and home prices, and I see that this is not accompanied with consumer price inflation.
I wonder why it wouldn't be preferable--if you're not going to get your escape velocity for inflation in either case--to raise rates and reduce those asset rises.
I look and see a macroeconomic economic environment that is so extraordinarily bad that it should be immune from deflationary price spirals--especially given the steady consumption of unemployed persons, which isn't going to stop any time soon no matter what.
This is not a situation like 2008 & 2009 where we had to worry about a vicious deflationary trap as corporations around the world shed millions of jobs and shut down production. We no longer have to worry about a residential real estate sector getting flooded with an oversupply of homes on the market. Supply is historically low right now.
So I just don't see the plight of managers as a pressing concern right now. If there is no consumer price bubble that is about to be popped, then I really don't care if rate hikes "at these tight levels it would make '94 seem like a rosy day in the park for managers." Tough break.
Now this stuff...
quote:
The Fed knows this, which is why their communication has been more hawkish recently (another stint of Open Mouth Operations) which has worked in terms of raising rates.
quote:
the Fed will start tapering off their purchases early next year and possibly hike rates in an intermediate future past that as inflation will likely start picking up next year
... gives me hope, but I wonder how much of this new hawkish attitude is based on the recent ebullience of asset prices.
If rate hikes cause these prices to drop 10%, is the Fed just going to go running back to the training wheels of ZIRP? If so, will it then be capable of engineering a monetary policy that will in fact produce the requisite escape velocity for consumer price inflation? Or, once asset prices inevitably cool, will the Fed then use low inflation as an excuse to stay in ZIRP indefinitely?
I hope not. Deflation is only something to fear when you are experiencing the bursting of a credit-induced bubble off peak highs. See 2007-09.
Near-zero inflation/deflation is survivable and really not that big of deal. Near-zero interest rates, however, are structurally damaging to the functioning of the economy, and thus are a big deal.
Posted on 3/29/13 at 7:03 pm to LSURussian
quote:OTOH, Fed officials did just take up the "wealth gap" mantra. Certain members lament that the 1% seem somehow to benefit from climbing markets more than the 47% do. Geaux figure! Apparently the concept that re-inflating stocks thru monetary policy could contribute to an "uneven recovery" comes as something of a epiphany to those members.
There is nothing in the OP story which predicts an imminent rate increase.
In any case, if Chairman Bernanke is to be believed there won't be any significant rate increase until unemployment drops to 6.5%.
Hard to believe the Fed would alter direction based on that, but the fact it's even in the conversation is interesting.
quote:
The gap between the wealthy and the rest of America is a hot-button issue in Washington-especially in the White House and Congress. And especially during battles over taxes.
But recently, the Federal Reserve has also taken a greater interest in the topic. And some analysts are asking whether financial inequality in the U.S. might soon become part of the Fed's decision-making process.
LINK
Posted on 4/3/13 at 2:38 pm to Doc Fenton
quote:
Well it depends on what you mean
The housing market is incredibly better, as you mentioned corporate and consumer balance sheets, corporate profits, and animal spirits are all better than in '09.
What is not better is, as you mentioned the federal government and as an aggregate I can agree on municipals due to unfunded pension obligations. It'll be very ugly whenever their assumed rate of return is actually benchmarked to current rates.
quote:
I'd say, on balance, looking forward for the next 3 or 4 decades, things look to be in much worse shape now than they were at the beginning of 2010.
Three or four decades is a long time, we could have several crisis' and recoveries in theat time. I'd say the profitability of financial firms will definitely decrease over the next decade or two and the sovereign situation really depends on political will, which unfortunately depends on a market crisis (see TARP). Corporations and consumer balance sheets really depend on the business cycle as well as structural changes to education (more color below). The thing is that technology has a fantastic way of camouflaging these so called "worse" situations because the living conditions still continue to be better than previously. The only thing I can say that will be "worse" with absolute certainty in the next three or four decades is that living conditions will converge between developed and developing countries, but I wouldn't necessarily call that "worse".
quote:
I completely disagree. What the data is telling us now is related to demographics, welfare, and business regulation, not education.
What the data is telling us now is related to demographics, welfare, and business regulation, not education.
I think you misunderstand what I mean by structural problems in the educations system. I've never agreed with Bill Gross more than his points in this paper. Cliff notes: The the average American worker is not competitive in the global environment due to high costs, and the current university system is a business that does not set workers up to compete in the global environment. I'll go farther to say that even at the non-university level our vocational schools do not provide valuable enough skills to justify our wages. Its kind of the American problem in a societal sense, the media teaches you that you're a rockstar millionaire or you're a nobody. We are still the most productive workers statistically, but we are overpaid relative to our skill sets against the global environment. German welders, etc. have higher salaries than the US but they also have the best skill set for their positions in the world. We need to revamp not only university level education but vocational education. I'm not even going to touch the high school issues right now. The other portion of unemployment that has just as big of an effect is technology. Since 2007, 387k management jobs have been created while 2M clerical jobs have been destroyed due technology. These jobs include data entry, typists, etc.. These jobs are not coming back, they are structurally gone unless Snake Pliskin erases technology like in Escape from Los Angeles. Education and technology are the primary reasons that unemployment will be very sticky going forward, the reasons you labeled are on the margin (outside of demographics which will come into play very soon).
This post was edited on 4/3/13 at 3:13 pm
Posted on 4/3/13 at 3:05 pm to Doc Fenton
quote:
The Japan situation is worrying to me for the very reason that it is a ZIRP scenario where the government can't seem to ever reach the necessary escape velocity
I like your example of ICU for ZIRP, but I'd like to expand even further. ZIRP is ICU, you put a patient into anesthesia. QE is the surgery you do on the patient. The problem with Japan was they put the patient under but never stopped the hemorrhaging effectively due to political reasons for not doing enough QE. This was the heart of Bernanke's paper on Japan and why he will make sure we do the proper surgery. Of course you can do too much surgery and dismember the bodies' natural process. This is I think the heart of our disagreement, I think the surgeon is masterful and you think he cut too much to sew back up.
quote:
I see ZIRP in the U.S. causing a sharp rise in stock and home prices, and I see that this is not accompanied with consumer price inflation.
In what has already happened, sort of for stocks. Home prices I'd argue are much more of a fundamental correction after the sell-off, you don't have the same sort of speculative buying you used to. QE more caused the asset bouyancy, longer rates aren't controlled by the Fed near as much as inflation or market buying (and the market is the Fed, I know I'm just talking about ZIRP rather than QE). Going forward I expect stocks to have a little bit more upside but not much while inflation picks up next year.
quote:
--if you're not going to get your escape velocity for inflation in either case--to raise rates and reduce those asset rises.
If you're not going to get escape velocity then our economy has some serious problems, very serious. If that's the case you have to choose for QEternity to continually support prices or withdraw, have an enormous collapse in asset prices and try to scrap together a recovery several years down the road. QE/ZIRP should be taken off the table because things are getting better, not to hit the reset button.
quote:
I look and see a macroeconomic economic environment that is so extraordinarily bad that it should be immune from deflationary price spirals
Can you elaborate? Seems like this isn't what you meant to say.
quote:
This is not a situation like 2008 & 2009 where we had to worry about a vicious deflationary trap as corporations around the world shed millions of jobs and shut down production. We no longer have to worry about a residential real estate sector getting flooded with an oversupply of homes on the market. Supply is historically low right now.
Agreed. Which is why I the housing price recovery is much more fundamental.
quote:
So I just don't see the plight of managers as a pressing concern right now. If there is no consumer price bubble that is about to be popped, then I really don't care if rate hikes "at these tight levels it would make '94 seem like a rosy day in the park for managers." Tough break.
I'm not talking about the plight of managers for their sake, I'm talking about whose money they manage, which is the retirements of everybody. If I'm talking in a "betterment of everybody" fashion than frick me but if asset managers go under it would be the single greatest loss of wealth in human history and would almost entirely be on the average American.
quote:
gives me hope, but I wonder how much of this new hawkish attitude is based on the recent ebullience of asset prices.
They're controlling it beautifully. They don't want an '94 scenario where firms go under, they are using Open Mouth Operations in the Fed minutes to control where rates are. It's pretty fun to watch.
quote:
If rate hikes cause these prices to drop 10%, is the Fed just going to go running back to the training wheels of ZIRP?
The Fed will taper QE before they hike rates, you can't pull a patient out of ICU before surgery is done. Taking QE off the table will lower asset prices but if you control and communicate it will slowly price in.
quote:
If so, will it then be capable of engineering a monetary policy that will in fact produce the requisite escape velocity for consumer price inflation?
If its controlled then yes.
quote:
Or, once asset prices inevitably cool, will the Fed then use low inflation as an excuse to stay in ZIRP indefinitely?
They don't like ZIRP just as much as you don't. Read the most recent Fed minutes, several members communicated their concern for the costs of QE (which is what I was referring to with Open Mouth Operations). They know what they're doing.
quote:
Near-zero interest rates, however, are structurally damaging to the functioning of the economy, and thus are a big deal.
It really depends on the time horizon, economic traction, investment flows, frick it basically every other factor as well. I agree it can be damaging in some senses: Investors/lenders hate it, but borrowers love it. If you're at zero interest rates and the economy depresses even more then the mother of all 800lb gorillas in the room come to play, negative interest rates. I'm not disagreeing that ZIRP can hurt the economy, but I do disagree that we are in a situation where ZIRP is hurting the economy more than if we had say a 1.5% Fed Funds target. Its all about relative alternatives, and I do not believe that we have a better one now.
This post was edited on 4/3/13 at 3:19 pm
Posted on 4/3/13 at 3:11 pm to NC_Tigah
quote:
OTOH, Fed officials did just take up the "wealth gap" mantra. Certain members lament that the 1% seem somehow to benefit from climbing markets more than the 47% do. Geaux figure! Apparently the concept that re-inflating stocks thru monetary policy could contribute to an "uneven recovery" comes as something of a epiphany to those members.
I was very confused when I saw them mentioning it too. The fact is that the Federal Reserve really can't do anything to directly help the 47%, they don't have the tools. The only thing they can do is indirectly helping them by spurring the economy to run at a pace with less cyclical highs and lows so that businesses are confident in hiring. The counter argument I hear to that is "well they are inflating an asset bubble right now!". Focusing back to relative alternatives, that's how they have to jump start the economy, and leaving it in the post '08 dead cat bounce lull does a lot worse for the 47%. Nothing is a silver bullet, you have to choose the best tasting shite sandwich.
Posted on 4/4/13 at 11:50 am to BennyAndTheInkJets
So let me try to boil down the remaining points from where the discussion has taken us:
#1. Technology, living conditions, and unfunded liabilities over the next 3-4 decades (and implicitly, the role of monetary policy in possibly facilitating all this).
[NOTE: Interestingly, this subject sort of spilled over into the bitcoin thread the other day.]
#2. The role the education system does or does not play in causing persistently bad employment figures.
#3. What a reasonable expectation for achieving "escape velocity" from ZIRP/QE might be, in terms of how fast and sustainable that CPI velocity is, and also in terms of how long it takes to achieve it. (And on the flip side, in the absence of ZIRP/QE, how much deflation is manageable?)
To be continued...
#1. Technology, living conditions, and unfunded liabilities over the next 3-4 decades (and implicitly, the role of monetary policy in possibly facilitating all this).
[NOTE: Interestingly, this subject sort of spilled over into the bitcoin thread the other day.]
#2. The role the education system does or does not play in causing persistently bad employment figures.
#3. What a reasonable expectation for achieving "escape velocity" from ZIRP/QE might be, in terms of how fast and sustainable that CPI velocity is, and also in terms of how long it takes to achieve it. (And on the flip side, in the absence of ZIRP/QE, how much deflation is manageable?)
To be continued...
Posted on 4/8/13 at 9:08 am to Doc Fenton
Just a bump for Fenton's triumphant return.
This post was edited on 4/8/13 at 9:08 am
Posted on 4/30/13 at 12:25 pm to Doc Fenton
So with the coming holiday tomorrow, I think I have a little bit of time here to expound upon the 3 topics I listed above. Maybe I'll get into more of this tomorrow, or maybe not.
But anyway, just to outline where the gist of my point of view is coming from, I think:
#1. The coming demographic storm is going to be much worse than people think it will be. It will likely bring forth neo-fascist governments in Europe, and degraded living standards in the USA. I think the techno-progressive "look at all these cool gadgets and low crime statistics we have!" crowd is going to be in for a huge wakeup call when all the SHTF starting about 25-30 years from now.
I also don't buy the "American doesn't have the advantages and resources it used to have" argument either. If you have cheap labor, then you can grow faster, but this is relative to the rest of the world. I think U.S. standards of living were already top notch by the end of the 19th century, and yet sustaining robust growth was somehow not a problem until the rise of the entitlement era and high domestic government spending in the late 1960s. Is this simply a political impossibility because affluent electorates are inherently spoiled? I think the Swiss example would say "no."
#2. I think the public K-12 education system in America was damaged very badly in the 1970s, and hit a low point around the early 1980s. Things started to improve quite a bit in the 1990s, but there will still pockets of disaster zone school districts that were left behind. With NCLB and the charter and reform movement, things seem to be improving dramatically, and I think the momentum is clearly building for continued improvement here. The USA will have a much improved K-12 system by the end of the decade, which for a country of ~320 million, will be quite a feat given just how good many elite public schools (Thomas Jefferson in VA; Stuyvesent in NYC; etc.) already are.
Higher education is another matter entirely. I think a shitstorm is brewing here, and the U.S. advantage in university education is about to fall off remarkably. There are just so many bad trends going on here it's hard to talk about them all at once, but in many ways there IS a bubble in higher education.
BUT... I don't think this will matter all that much for economic growth potential anyway. I'm in direct opposition to people who spout the talking point so popular among business leaders that we need to do more to ensure that our education system prepares students to enter the workforce armed with the skills need to make an immediate impact. This is completely wrongheaded thinking, in my opinion, and gets everything totally backwards.
The entire system where we have elite universities acting as gatekeepers to prestigious careers is itself totally ludicrous and abominable. There needs to be a greater emphasis on standardized tests and competitions at the university level, I think, and a whole lot of bullshite needs to be cut out so that the demand for formal university education programs is dramatically decreased.
In a way, it's the business world's own fault for not having in place its own education programs. On the flip side, however, it's really not the business world's fault at all, because firms are just responding to government discrimination regulations, university subsidies, and a labor law system that requires an ungodly amount of over-investment in new hires. I say "ungodly" compared to the obviously preferable alternative of having firms hiring a lot more people on a trial basis and simply weeding most of them out at low cost. That's how things are SUPPOSED to work.
#3. The problem with all this ZIRP/QE theory spouted by Bernanke and others is that, just like with Keynesian multiplier theory supporting the 2009 stimulus, it is completely unable to be proven. You can say that about all economics, I know, but here it just gets sort of ridiculous: "Well, yes, we haven't been able to generate significant consumer price pressure since 2008, and we don't expect to be able to for another few years, but this just proves how bad things would have been otherwise!" No, it doesn't.
To me it just shows that ZIRP/QE has minimal ability to generate inflation, all while building up problem areas in the macroeconomy that will make generating inflation in the future even more difficult! It is in this sense that I claim the paradoxical result holds whereby ZIRP/QE is actually contractionary rather than expansionary. This is what the Japanese case shows us.
I support ZIRP/QE as an ICU measure to prevent a deflationary collapse, as it was used in 2008 through 2010.
I do not support ZIRP/QE as a remedy to produce inflationary pressure where it doesn't exist, which is what Japan has tried since 1996, and what Bernanke has tried since 2010.
In the order of things to be avoided, my ranking goes something like this:
#1. Asset collapse and resulting deflationary spiral
#2. Higher government spending as a % of GDP
#3. ZIRP
#4. Mild deflation
Right now, we are using #3 to prevent #4, all while promoting #2. I don't think it's going to work.
But anyway, just to outline where the gist of my point of view is coming from, I think:
#1. The coming demographic storm is going to be much worse than people think it will be. It will likely bring forth neo-fascist governments in Europe, and degraded living standards in the USA. I think the techno-progressive "look at all these cool gadgets and low crime statistics we have!" crowd is going to be in for a huge wakeup call when all the SHTF starting about 25-30 years from now.
I also don't buy the "American doesn't have the advantages and resources it used to have" argument either. If you have cheap labor, then you can grow faster, but this is relative to the rest of the world. I think U.S. standards of living were already top notch by the end of the 19th century, and yet sustaining robust growth was somehow not a problem until the rise of the entitlement era and high domestic government spending in the late 1960s. Is this simply a political impossibility because affluent electorates are inherently spoiled? I think the Swiss example would say "no."
#2. I think the public K-12 education system in America was damaged very badly in the 1970s, and hit a low point around the early 1980s. Things started to improve quite a bit in the 1990s, but there will still pockets of disaster zone school districts that were left behind. With NCLB and the charter and reform movement, things seem to be improving dramatically, and I think the momentum is clearly building for continued improvement here. The USA will have a much improved K-12 system by the end of the decade, which for a country of ~320 million, will be quite a feat given just how good many elite public schools (Thomas Jefferson in VA; Stuyvesent in NYC; etc.) already are.
Higher education is another matter entirely. I think a shitstorm is brewing here, and the U.S. advantage in university education is about to fall off remarkably. There are just so many bad trends going on here it's hard to talk about them all at once, but in many ways there IS a bubble in higher education.
BUT... I don't think this will matter all that much for economic growth potential anyway. I'm in direct opposition to people who spout the talking point so popular among business leaders that we need to do more to ensure that our education system prepares students to enter the workforce armed with the skills need to make an immediate impact. This is completely wrongheaded thinking, in my opinion, and gets everything totally backwards.
The entire system where we have elite universities acting as gatekeepers to prestigious careers is itself totally ludicrous and abominable. There needs to be a greater emphasis on standardized tests and competitions at the university level, I think, and a whole lot of bullshite needs to be cut out so that the demand for formal university education programs is dramatically decreased.
In a way, it's the business world's own fault for not having in place its own education programs. On the flip side, however, it's really not the business world's fault at all, because firms are just responding to government discrimination regulations, university subsidies, and a labor law system that requires an ungodly amount of over-investment in new hires. I say "ungodly" compared to the obviously preferable alternative of having firms hiring a lot more people on a trial basis and simply weeding most of them out at low cost. That's how things are SUPPOSED to work.
#3. The problem with all this ZIRP/QE theory spouted by Bernanke and others is that, just like with Keynesian multiplier theory supporting the 2009 stimulus, it is completely unable to be proven. You can say that about all economics, I know, but here it just gets sort of ridiculous: "Well, yes, we haven't been able to generate significant consumer price pressure since 2008, and we don't expect to be able to for another few years, but this just proves how bad things would have been otherwise!" No, it doesn't.
To me it just shows that ZIRP/QE has minimal ability to generate inflation, all while building up problem areas in the macroeconomy that will make generating inflation in the future even more difficult! It is in this sense that I claim the paradoxical result holds whereby ZIRP/QE is actually contractionary rather than expansionary. This is what the Japanese case shows us.
I support ZIRP/QE as an ICU measure to prevent a deflationary collapse, as it was used in 2008 through 2010.
I do not support ZIRP/QE as a remedy to produce inflationary pressure where it doesn't exist, which is what Japan has tried since 1996, and what Bernanke has tried since 2010.
In the order of things to be avoided, my ranking goes something like this:
#1. Asset collapse and resulting deflationary spiral
#2. Higher government spending as a % of GDP
#3. ZIRP
#4. Mild deflation
Right now, we are using #3 to prevent #4, all while promoting #2. I don't think it's going to work.
This post was edited on 4/30/13 at 1:10 pm
Posted on 4/30/13 at 12:46 pm to Doc Fenton
Welcome back. I'll respond later today. Been spending too much time on the bitcoin BS and have to do a lot of actual work now.
Posted on 4/30/13 at 1:04 pm to BennyAndTheInkJets
Nonsense. Nobody can spend too much time on bitcoins.
It is your unshakable duty to either:
(A) constantly preach the word of how revolutionary bitcoin is and how it will change EVERYTHING, or
(B) constantly preach the word of how ruinous bitcoin will be to all the moral degenerates and malcontents who don't know how to succeed in life anyway.
Take sides. You are either with them or against them.
It is your unshakable duty to either:
(A) constantly preach the word of how revolutionary bitcoin is and how it will change EVERYTHING, or
(B) constantly preach the word of how ruinous bitcoin will be to all the moral degenerates and malcontents who don't know how to succeed in life anyway.
Take sides. You are either with them or against them.
Posted on 4/30/13 at 2:04 pm to Doc Fenton
Great thread guys!
At this point, can we revisit another poster's page one question:
"When interest rates rise . . . where should one put their money?"
With rise in rates and obligatory escape velocity economic assumptions in tow, can you guys address the basis (under those circumstances) of real estate or stock market pessimism?
Is concern related to consumption affordability? Adjusted GDP contraction?
Seems like, if rate escalation was not extreme, and as fixed income money migrated, stocks ought to climb.
At this point, can we revisit another poster's page one question:
"When interest rates rise . . . where should one put their money?"
With rise in rates and obligatory escape velocity economic assumptions in tow, can you guys address the basis (under those circumstances) of real estate or stock market pessimism?
Is concern related to consumption affordability? Adjusted GDP contraction?
Seems like, if rate escalation was not extreme, and as fixed income money migrated, stocks ought to climb.
This post was edited on 4/30/13 at 2:06 pm
Posted on 4/30/13 at 2:17 pm to NC_Tigah
Oh shite, a practical investing question. Not my forte. 
I would say, however, that a lot probably depends on the real interest rate, so you would want to know a little bit about where CPI inflation was relative to nominal interest rate hikes.
Also, it would be important to separate the initial surprise (if markets do in fact get taken by surprise) versus the new reality of an environment where interest rates were actually increasing.
That would seem to make sense to me too.
My biggest worry is that we won't see rate hikes for a very long period of time, but if we have rate hikes, they are likely to be gradual and part of a healthy trend.
Perhaps the best thing to do would be to look at a historical comparison to the 1950s & 1960s, when interest rates were gradually rising. (They were rising in the 1970s too, but by that time it was because inflation was getting out of control.)
Ben Graham's 3rd edition of Security Analysis came out in 1951, so I think the classical Buffett-esque approach might work best for this type of environment.
EDIT: Also, w/r/t "real estate or stock market pessimism", I think that depends a whole lot on the timing of when rate hikes finally occur.
Right now, I don't think either residential real estate or the stock market is in "bubble" territory relative to long-term norms. So even though I think most of the recent appreciation was illusory and a product of monetary policy more than fundamentals, over the long-term, the fundamentals aren't terrible, and thus any correction probably wouldn't be too awful right now.
Five years from now, however, that might no longer be the case. We just have to wait and see.
I would say, however, that a lot probably depends on the real interest rate, so you would want to know a little bit about where CPI inflation was relative to nominal interest rate hikes.
Also, it would be important to separate the initial surprise (if markets do in fact get taken by surprise) versus the new reality of an environment where interest rates were actually increasing.
quote:
Seems like, if rate escalation was not extreme, and as fixed income money migrated, stocks ought to climb.
That would seem to make sense to me too.
My biggest worry is that we won't see rate hikes for a very long period of time, but if we have rate hikes, they are likely to be gradual and part of a healthy trend.
Perhaps the best thing to do would be to look at a historical comparison to the 1950s & 1960s, when interest rates were gradually rising. (They were rising in the 1970s too, but by that time it was because inflation was getting out of control.)
Ben Graham's 3rd edition of Security Analysis came out in 1951, so I think the classical Buffett-esque approach might work best for this type of environment.
EDIT: Also, w/r/t "real estate or stock market pessimism", I think that depends a whole lot on the timing of when rate hikes finally occur.
Right now, I don't think either residential real estate or the stock market is in "bubble" territory relative to long-term norms. So even though I think most of the recent appreciation was illusory and a product of monetary policy more than fundamentals, over the long-term, the fundamentals aren't terrible, and thus any correction probably wouldn't be too awful right now.
Five years from now, however, that might no longer be the case. We just have to wait and see.
This post was edited on 4/30/13 at 2:25 pm
Posted on 4/30/13 at 3:15 pm to Doc Fenton
The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation IMO FWIW.
Also, I really hope they hold off on tapering off on QE for at less another year. Too young to bank off 2009 and could use a good price point when I have full-time income.
Also, I really hope they hold off on tapering off on QE for at less another year. Too young to bank off 2009 and could use a good price point when I have full-time income.
Posted on 5/1/13 at 4:12 am to NC_Tigah
quote:
At this point, can we revisit another poster's page one question:
"When interest rates rise . . . where should one put their money?"
Yes, mohr answer, please.
Specifically, addressing fixed income investments in the mutual fund realm. Would a move from intermediate term funds into a TIPS fund be prudent?
Posted on 5/1/13 at 7:26 am to Coeur du Tigre
quote:
Would a move from intermediate term funds into a TIPS fund be prudent?
Well it would certainly be safe, but it would mostly be protection against high inflation, which I don't think is going to occur anytime soon.
My gut tells me that value stocks is the way to go right now.
Basic commodities might be a good play in an environment of gradually rising interest rates, but you might not want to be caught up in all that whenever the switch actually occurs, since it might cause a big initial dropoff.
Per my big "demography is destiny" theme over the last half a year, I like investments in EM equities, and perhaps EM bonds too (again, like commodities, after the switch in environment).
Don't just go anywhere though. I would try to avoid funds that invest in places like Russia and China, and look at funds that focus more specifically on certain countries like the following: Mexico, India, Brazil, Vietnam, Turkey, Morocco, Nigeria, Malaysia, Indonesia, the "-stans" (Kazakhstan, Tajikistan, Turkmenistan, Uzbekistan, & Kyrgystan), etc. I like these places going forward for the next few decades.
Finally, I would also add that we seem due for another venture capital boom cycle. It's been a long time since the dot-com wave, and something new has got to be coming over the horizon eventually ... you would think.
Posted on 5/1/13 at 8:46 am to Doc Fenton
Warning: A lot of "fricks" are given and dropped in this response.
From our posts we agree on this a lot specifically on the developed versus developing convergence. I tend to think on absolute levels it won't be as bad as you've laid out, as long as the US can still innovate we have enough resources that we can still grow above the rest of the developed world.
America still has the deepest and most liquid financial markets in the world, the most robust manufacturing capacity in the world, and an unparalleled knack for innovation. What we don't have anymore is the huge relative advantage in labor skills and education while developing market labor isn't as cheap as it used to be. That is just the natural progression of the equilibrium. I think the timing of the '60's spending on the cold war and space race was simply more of a coincidence rather than a catalyst.
I really, really hope you're right. My high school in south Arkansas was taken over partially by the state due to low test scores and is one of the schools that "Teachers For America" send Ivy League teaching students as a way to pay for their school. Now I work with almost exclusively Ivy League graduates and I really haven't seen much differnce in terms of hard mental capacity between people. The only difference I've noticed are "soft" political skills and opportunities available. Knowledge is so arbitrary that I've never been able to define it in the slightest bit, the closest I ever got to it is a quote from my old football coach: "The definition of stupidity is doing the same thing over and over and expecting a different result". I'm getting off-track here, but the revamp of the K-12 system is absolutely critical for the development of labor in the future. We have to revamp our system to not only improve on an absolute basis, but also to keep up with the relative increases across the world.
A. fricking. Men. It's a self perpetuated bubble continued over time. So many firms push the MBA route but in all honesty, we're told on a daily basis to make good investments. MBA applicants are at an all-time high, tuition continues to rise, the job market is still very rough, and their is a very real possibility that student loan interest will double from 3.4% to 6.8% in the next 3-5 years. Unless you get into one of the "10 Top 5 schools" or are set up with a job offer before you even go, then the investment is just not worth it.
Disagree here if you're talking about K-12, although I agree that we shouldn't teach kids to be cogs in machines rather than thinking individually. That is where the American innovation advantage comes from, kids being little shits but in the process of being little shits they come up with some pretty good ideas. If you're referring to higher education, then I absolutely agree which is what I get from:
Like I said I work with almost exclusively Ivy Leaguers, and the fact that general views of society and the "US Top Universities Ranking" is taken so seriously in the job process and its sickening. Ivy League undergraduates do not have a single actual finance class with application, its only economic theory. I have to teach so many interns what the frick they're doing every year when every single year there is a kid from a smaller school that absolutey crushes the interviews and actually knows what the frick he is talking about but isn't hired because another Ivy Leaguer took his slot due to that notion that "we have a relationship to maintain with these schools". frick that with a bowl of dicks. A big giant AIDS infested bowl of dicks.
Agreed here and workplace diversity is a fricking joke. We'll hire a black guy, a white girl, and an Indian girl all from Harvard and say we're diverse. You just hired the same fricking person three times that all think in the exact same fricking "Harvard case study" format. You really want diversity? Go around southern Louisiana and find the kid that can integrate anything in his head. Or the middle of Iowa and find the girl that can explain duration and convexity to a fricking wall. Don't hire the Columbia grad that had his resume done by his dad's friends at Yale admissions and whose only skills involve knowing how to navigate the coctail party scene in Cambridge.
quote:
#1. The coming demographic storm is going to be much worse than people think it will be. It will likely bring forth neo-fascist governments in Europe, and degraded living standards in the USA. I think the techno-progressive "look at all these cool gadgets and low crime statistics we have!" crowd is going to be in for a huge wakeup call when all the SHTF starting about 25-30 years from now.
From our posts we agree on this a lot specifically on the developed versus developing convergence. I tend to think on absolute levels it won't be as bad as you've laid out, as long as the US can still innovate we have enough resources that we can still grow above the rest of the developed world.
quote:
I also don't buy the "American doesn't have the advantages and resources it used to have" argument either. If you have cheap labor, then you can grow faster, but this is relative to the rest of the world. I think U.S. standards of living were already top notch by the end of the 19th century, and yet sustaining robust growth was somehow not a problem until the rise of the entitlement era and high domestic government spending in the late 1960s. Is this simply a political impossibility because affluent electorates are inherently spoiled? I think the Swiss example would say "no."
America still has the deepest and most liquid financial markets in the world, the most robust manufacturing capacity in the world, and an unparalleled knack for innovation. What we don't have anymore is the huge relative advantage in labor skills and education while developing market labor isn't as cheap as it used to be. That is just the natural progression of the equilibrium. I think the timing of the '60's spending on the cold war and space race was simply more of a coincidence rather than a catalyst.
quote:
I think the public K-12 education system in America was damaged very badly in the 1970s, and hit a low point around the early 1980s. Things started to improve quite a bit in the 1990s, but there will still pockets of disaster zone school districts that were left behind. With NCLB and the charter and reform movement, things seem to be improving dramatically, and I think the momentum is clearly building for continued improvement here. The USA will have a much improved K-12 system by the end of the decade, which for a country of ~320 million, will be quite a feat given just how good many elite public schools (Thomas Jefferson in VA; Stuyvesent in NYC; etc.) already are.
I really, really hope you're right. My high school in south Arkansas was taken over partially by the state due to low test scores and is one of the schools that "Teachers For America" send Ivy League teaching students as a way to pay for their school
. Now I work with almost exclusively Ivy League graduates and I really haven't seen much differnce in terms of hard mental capacity between people. The only difference I've noticed are "soft" political skills and opportunities available. Knowledge is so arbitrary that I've never been able to define it in the slightest bit, the closest I ever got to it is a quote from my old football coach: "The definition of stupidity is doing the same thing over and over and expecting a different result". I'm getting off-track here, but the revamp of the K-12 system is absolutely critical for the development of labor in the future. We have to revamp our system to not only improve on an absolute basis, but also to keep up with the relative increases across the world. quote:
Higher education is another matter entirely. I think a shitstorm is brewing here, and the U.S. advantage in university education is about to fall off remarkably. There are just so many bad trends going on here it's hard to talk about them all at once, but in many ways there IS a bubble in higher education.
A. fricking. Men. It's a self perpetuated bubble continued over time. So many firms push the MBA route but in all honesty, we're told on a daily basis to make good investments. MBA applicants are at an all-time high, tuition continues to rise, the job market is still very rough, and their is a very real possibility that student loan interest will double from 3.4% to 6.8% in the next 3-5 years. Unless you get into one of the "10 Top 5 schools" or are set up with a job offer before you even go, then the investment is just not worth it.
quote:
I don't think this will matter all that much for economic growth potential anyway. I'm in direct opposition to people who spout the talking point so popular among business leaders that we need to do more to ensure that our education system prepares students to enter the workforce armed with the skills need to make an immediate impact. This is completely wrongheaded thinking, in my opinion, and gets everything totally backwards.
Disagree here if you're talking about K-12, although I agree that we shouldn't teach kids to be cogs in machines rather than thinking individually. That is where the American innovation advantage comes from, kids being little shits but in the process of being little shits they come up with some pretty good ideas. If you're referring to higher education, then I absolutely agree which is what I get from:
quote:
The entire system where we have elite universities acting as gatekeepers to prestigious careers is itself totally ludicrous and abominable. There needs to be a greater emphasis on standardized tests and competitions at the university level, I think, and a whole lot of bullshite needs to be cut out so that the demand for formal university education programs is dramatically decreased.
Like I said I work with almost exclusively Ivy Leaguers, and the fact that general views of society and the "US Top Universities Ranking" is taken so seriously in the job process and its sickening. Ivy League undergraduates do not have a single actual finance class with application, its only economic theory. I have to teach so many interns what the frick they're doing every year when every single year there is a kid from a smaller school that absolutey crushes the interviews and actually knows what the frick he is talking about but isn't hired because another Ivy Leaguer took his slot due to that notion that "we have a relationship to maintain with these schools". frick that with a bowl of dicks. A big giant AIDS infested bowl of dicks.
quote:
In a way, it's the business world's own fault for not having in place its own education programs. On the flip side, however, it's really not the business world's fault at all, because firms are just responding to government discrimination regulations, university subsidies, and a labor law system that requires an ungodly amount of over-investment in new hires. I say "ungodly" compared to the obviously preferable alternative of having firms hiring a lot more people on a trial basis and simply weeding most of them out at low cost. That's how things are SUPPOSED to work.
Agreed here and workplace diversity is a fricking joke. We'll hire a black guy, a white girl, and an Indian girl all from Harvard and say we're diverse. You just hired the same fricking person three times that all think in the exact same fricking "Harvard case study" format. You really want diversity? Go around southern Louisiana and find the kid that can integrate anything in his head. Or the middle of Iowa and find the girl that can explain duration and convexity to a fricking wall. Don't hire the Columbia grad that had his resume done by his dad's friends at Yale admissions and whose only skills involve knowing how to navigate the coctail party scene in Cambridge.
Posted on 5/1/13 at 8:50 am to Doc Fenton
Now back to monetary policy:
You're right in that it doesn't prove it either way. We don't know and will never know. All people can do is act based on the lessons they've learned over time and act accordingly. Bernanke was a student of the great depression and Japan, and knows what happened when central banks did not do enough to prevent a depression or spur ourselves out of a lost time period. So he acted accordingly, and even though the underlying economics still suck I personally believe that we are in a much better spot than we would've been wihtout ZIRP/QE, which is where our disagreement lies. There are two possibilities with global montetary policy if the US didn't go down this route. Either global central banks eased while we didn't or they didn't as well. I'd argue the latter sends us into a global depression and the former puts the US behind the rest of the world.
I can't agree at all here, I understand how low levels of interest rates hinder lenders from acting but banks are starting to lend now, although interest rates have to remain contained for the most part. You can't have a huge spike because of all the mark-to-market losses and increases in borrowing costs. At the same time you can't have rates fall any further then commercial banks will hurt even more. Its very, very important to keep this controlled. The US can exit ZIRP/QE, Japan and Europe can't. Japan because of the pre-existing conditions I've laid out in this thread and Europe because...well... we already know.
Nu-uh. Nope. This is not what the Japan study tells us. The Japan study tells us that acting on the behalf of the political influence of your seniors and just kind of dipping your toes when you should be jumping completely or just not swimming does nothing. If you're going to do QE/ZIRP, you shouldn't pussy foot around to try and break through your growth slump. If you're not going to do that, then just don't do ZIRP/QE at all, just accept the recession/depression/deflation and lowered living conditions for your country and then start rebuilding, you'll get to double digit growth relatively soon (~10 years). Now put yourself in Bernanke's shoes, you have these choices in front of you. Can you honestly say you've done the best for the country by saying "frick it" and hitting the reset button or trying to do something that has never been done to the level before and you have no precedent to if it will work. He picked the stereotypical American response, saying frick it and seeing what happens.
I really can see this line of thinking and there is a lot of credence to it. Honestly, the only way to figure out which line of thinking is correct is to grab some popcorn and watch what happens for the next 3-5 years.
I disagree for the most part, I see us as using #3 to prevent #1 and #4 while #2 actually has been tapered. I'm not sure how much longer the populations in the US and especially Europe will sit back and just sit back and let the austerity pressures happen. Even though our "austerity" has been muted compared to Europe.
quote:
The problem with all this ZIRP/QE theory spouted by Bernanke and others is that, just like with Keynesian multiplier theory supporting the 2009 stimulus, it is completely unable to be proven. You can say that about all economics, I know, but here it just gets sort of ridiculous: "Well, yes, we haven't been able to generate significant consumer price pressure since 2008, and we don't expect to be able to for another few years, but this just proves how bad things would have been otherwise!" No, it doesn't.
You're right in that it doesn't prove it either way. We don't know and will never know. All people can do is act based on the lessons they've learned over time and act accordingly. Bernanke was a student of the great depression and Japan, and knows what happened when central banks did not do enough to prevent a depression or spur ourselves out of a lost time period. So he acted accordingly, and even though the underlying economics still suck I personally believe that we are in a much better spot than we would've been wihtout ZIRP/QE, which is where our disagreement lies. There are two possibilities with global montetary policy if the US didn't go down this route. Either global central banks eased while we didn't or they didn't as well. I'd argue the latter sends us into a global depression and the former puts the US behind the rest of the world.
quote:
To me it just shows that ZIRP/QE has minimal ability to generate inflation, all while building up problem areas in the macroeconomy that will make generating inflation in the future even more difficult! It is in this sense that I claim the paradoxical result holds whereby ZIRP/QE is actually contractionary rather than expansionary.
I can't agree at all here, I understand how low levels of interest rates hinder lenders from acting but banks are starting to lend now, although interest rates have to remain contained for the most part. You can't have a huge spike because of all the mark-to-market losses and increases in borrowing costs. At the same time you can't have rates fall any further then commercial banks will hurt even more. Its very, very important to keep this controlled. The US can exit ZIRP/QE, Japan and Europe can't. Japan because of the pre-existing conditions I've laid out in this thread and Europe because...well... we already know.
quote:
This is what the Japanese case shows us.
Nu-uh. Nope. This is not what the Japan study tells us. The Japan study tells us that acting on the behalf of the political influence of your seniors and just kind of dipping your toes when you should be jumping completely or just not swimming does nothing. If you're going to do QE/ZIRP, you shouldn't pussy foot around to try and break through your growth slump. If you're not going to do that, then just don't do ZIRP/QE at all, just accept the recession/depression/deflation and lowered living conditions for your country and then start rebuilding, you'll get to double digit growth relatively soon (~10 years). Now put yourself in Bernanke's shoes, you have these choices in front of you. Can you honestly say you've done the best for the country by saying "frick it" and hitting the reset button or trying to do something that has never been done to the level before and you have no precedent to if it will work. He picked the stereotypical American response, saying frick it and seeing what happens.
quote:
I support ZIRP/QE as an ICU measure to prevent a deflationary collapse, as it was used in 2008 through 2010. I do not support ZIRP/QE as a remedy to produce inflationary pressure where it doesn't exist, which is what Japan has tried since 1996, and what Bernanke has tried since 2010.
I really can see this line of thinking and there is a lot of credence to it. Honestly, the only way to figure out which line of thinking is correct is to grab some popcorn and watch what happens for the next 3-5 years.
quote:
Right now, we are using #3 to prevent #4, all while promoting #2. I don't think it's going to work.
I disagree for the most part, I see us as using #3 to prevent #1 and #4 while #2 actually has been tapered. I'm not sure how much longer the populations in the US and especially Europe will sit back and just sit back and let the austerity pressures happen. Even though our "austerity" has been muted compared to Europe.
Posted on 5/1/13 at 8:54 am to BennyAndTheInkJets
Wow! I don't think I'll have time to digest all this for a while.
Admittedly, I am sort of all over the place in my thoughts right now concerning education, but I am very interested in it and have always thought that I would like to start up some sort of a school once I get into my 50's or 60's in age.
Anyway, I am probably guilty of exaggerating some points, but I agree with you here about wanting to avoid the "cog in the machine" approach. I am very much against the idea that we should be copying Japanese & Korean school culture, piling on extra homework and school days in a year.
What I envision is a more module-based approach to learning, where schools play a stronger role in tutoring students to zoom past certain fundamantal modules at their own pace. (Then there would be a totally separate pass/fail part of the curriculum based on writing, presentations, and Western Civ, but I digress.)
I think the old K-12 system will slowly get broken down by the Internet age over time. It just has to. Then again, maybe I just need time to think over all these things some more when I have more time to concentrate on them.
quote:
Disagree here if you're talking about K-12, although I agree that we shouldn't teach kids to be cogs in machines rather than thinking individually. That is where the American innovation advantage comes from, kids being little shits but in the process of being little shits they come up with some pretty good ideas.
Admittedly, I am sort of all over the place in my thoughts right now concerning education, but I am very interested in it and have always thought that I would like to start up some sort of a school once I get into my 50's or 60's in age.
Anyway, I am probably guilty of exaggerating some points, but I agree with you here about wanting to avoid the "cog in the machine" approach. I am very much against the idea that we should be copying Japanese & Korean school culture, piling on extra homework and school days in a year.
What I envision is a more module-based approach to learning, where schools play a stronger role in tutoring students to zoom past certain fundamantal modules at their own pace. (Then there would be a totally separate pass/fail part of the curriculum based on writing, presentations, and Western Civ, but I digress.)
I think the old K-12 system will slowly get broken down by the Internet age over time. It just has to. Then again, maybe I just need time to think over all these things some more when I have more time to concentrate on them.
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