[fortysix]

Well, despite the fact that corporate earnings are extremely low, manufacturing is down, companies are fearful of taking on any debt, and the jobs report is shit (even though its good, its still all service jobs and elderly workers, so its still shit), the stock market hit a historic high yesterday and today.

Bond yields are at an all time low.

The FED has been hesitant to raise rates because it acknowledges the fundamentals of the US economy are still in the gutter.

So my question is, can the fed just never raise rates? If the fed never raises rates, and investors continue pumping cash into in the stock market due to lack of other options, could the stock market continue to grow to infinity? Why not? Maybe now is the best time ever to invest?

Why is the yield on bonds so low? Is it because everyone is buying them anyway, the treasury has no incentive to offer good rates of return?

What do you guys think?

It seems to me that we are not likely to see any rate hikes, ever. The politicians and the fed know that raising rates will destroy the economy, so theyll keep them low forever, until there is just less money to pump into the stock market, because its all already in there. At this point we will see a massive deflation, the dollar will get stronger, gold will FALL and be a BAD investment, companies will be unable to service their debt (because deflation means interest rate payments become more expensive) and the economy will come to a complete standstill in 20-30 years. At this point, the money will come out of the stock market, there will be a huge crash, and we will finally have a buying opportunity.

[WestIndianArchie]

Treasury wants the ruling class/ownership class/management class to invest and expand.

The capitalists don't see too many investments that will garner them return. Everyone is Warren Buffett now.

So the Fed only has the one button, and now they can't make a move. Can't spur investment if the people who are the best at it don't want to.

If they raise rates, they're hurting the folks who are trying to do something.

WIA

[Kid Twist]

So are we just waiting for the black swan that no one can predict to see [precisely?] how this ends?

What usually causes the currency to devalue or the economy to collapse, as Schiff says?

I happen to agree, but also always think it's a few years away from when we think it makes most sense (7-8 years out from last, which was 8 from 2001 ... should be anytime?)

[JayJuanGee]

They got themselves kind of in a pickle, and negative interest rates could be another "logical" step in their perverted thinking which they have already kind of employed variations of this, but if it gets to the consumer level (which it has in some parts of Europe), then USA folks are going to become a bit more jaded and pissed.

[Hell_Is_Like_Newark]

The Fed is just an enabler. The problem is that our federal government is borrowing about $0.40 for every dollar it spends.

[fortysix]

So, is it possible that the fed will never raise rates? If so, will this eventually lead to deflation or inflation?

[Easy_C]

Martin Armstrong has the best explanation out there but I'll try to give the (hyper-simplified) explanation. Keep in mind that I am recent career switcher from military into a capital markets related career.


Basically the Fed is in a "damned if you do, damned if you don't" situation. The low interest rate environment is devastating pension funds, insurance companies(they make their money by investing their earned premiums), those with retirement accounts, and others who depend on bond yields to make money....so they need to raise interest rates. On the other hand even a small increase in interest rates would devastate the trading value of government debt and cause a catastrophic rise in the government's cost of debt.....so they can't raise rates.

Four word answer is "We're fucked either way".


Regarding inflation vs. deflation no, it doesn't matter. Traditionally higher interest rates -> higher returns -> More investors in the US -> Deflation and vice versa. In reality the situation in other countries (most notably Europe) is driving capital to shelters in the United States so they will have deflation no matter what they do.

[JayJuanGee]

(07-13-2016 02:43 PM)Hell_Is_Like_Newark Wrote:  

The Fed is just an enabler. The problem is that our federal government is borrowing about $0.40 for every dollar it spends.

The problem is much more complicated than that, and there can be a lot of assertions regarding what is the problem, how we got here, and what is the solution.

Some will assert that part of the problem is that taxes had been cut so much over the years, too.. (whether that is the past 40 years or we look at some other time period).

Furthermore, hand outs to banks from 2008 and thereafter are certainly problematic (and with few strings attached - at least strings that were not very transparent, if they did exist).. and so it becomes a bit controversial to attempt to simplify the "problem" too much, as if it is only one part of the ledger that is the "problem."

Nonetheless, once the fed is in this situation, the solutions may have become somewhat more limited based on a kind of painting into a corner... not impossible to get out, but maybe a bit more difficult because of several of the historical actions in terms of lowering and lowering and lowering and giving away money... and in that regard, it remains difficult to lower interest rates any more than they currently are, without going negative... and then if they make little attempts at raising the interest rates, then it does not have any real positive affect so they remain kind of stuck.. for the moment.. but never say never in respects to raising them, no?

[fortysix]

(07-13-2016 03:25 PM)Easy_C Wrote:  

Martin Armstrong has the best explanation out there but I'll try to give the (hyper-simplified) explanation. Keep in mind that I am recent career switcher from military into a capital markets related career.


Basically the Fed is in a "damned if you do, damned if you don't" situation. The low interest rate environment is devastating pension funds, insurance companies(they make their money by investing their earned premiums), those with retirement accounts, and others who depend on bond yields to make money....so they need to raise interest rates. On the other hand even a small increase in interest rates would devastate the trading value of government debt and cause a catastrophic rise in the government's cost of debt.....so they can't raise rates.

Four word answer is "We're fucked either way".


Regarding inflation vs. deflation no, it doesn't matter. Traditionally higher interest rates -> higher returns -> More investors in the US -> Deflation and vice versa. In reality the situation in other countries (most notably Europe) is driving capital to shelters in the United States so they will have deflation no matter what they do.

Thanks for this reply - due to your experience, can I ask you a follow-up question? How is the bond price / yield determined? I have read that both of these items are determined via the public auction, but how exactly does the process work?

[Easy_C]

That's not an easy answer because there's multiple things people can be referring to. Some types of government debt are sold at auction at regular intervals, with the prices determining the actual yields....so that's partially correct. Yield is a function of price paid, the amount of the obligation to be repaid(book price), and the interest.

Most of the time when news types talk about "yield" they're referring to current yield for 10-year government bonds. That number comes up a lot because finance types use it as a baseline interest rate that you use to estimate something called the "Cost of Capital" that's a proxy for how much your money is worth over time.....hence changes to this number will impact almost every single calculation that investment bankers, stock analysts, corporate financial planners, etc make during their daily job. It's not an intuitive concept but there's a lot of information out there about it.

Go on investopedia and look up the different types of government securities (Treasure Notes, Bills, and Bonds), then read up yield. Make sure you completely understand the difference between "current yield" and nominal yield/yield to maturity.

Better yet Coursera has some great intro courses. You'll want either the Wharton "intro to corporate finance" course, or the one here:

https://www.coursera.org/specializations/learn-finance


The best place to understand how markets and trading work in general is to see if you can't get your hands an old Series 7 licensing manual from Ebay or any wealth advisor types you know (the guys that sell investment plans in strip malls). If you study through that you'll understand all the basic concepts.

[chakalaka]

"Bill Gross of PIMCO suggested that in the prior 15 years ending in 2007, in each instance where the fed funds rate was higher than the nominal GDPgrowth rate, assets such as stocks and/or housing fell.[23]"

https://en.wikipedia.org/wiki/Federal_funds_rate

"The reason is that whenever the cost of capital (Fed Funds) moves above the return on capital (Nominal GDP) then assets dependent on leverage (stocks, houses) suffer negative or more restrictive cash flows and are liquidated at the margin. "

Current interest rate: 0,5%
http://www.tradingeconomics.com/united-s...e/forecast

Actual GDP growth: 1,10%
http://www.tradingeconomics.com/united-s...gdp-growth

[Foolsgo1d]

Perhaps the Fed had a meeting someplace secret with the results of some long term computer models at hand on what would happen if: They raised rates or kept them as they are.

Looks like they don't want the model where rates rose.

[El Chinito loco]

Yellen has been a disaster. I just want to put that out there right in front. She's been one of the worst fed chairs in my opinion and will go down in history for inflating a massive asset bubble. In many ways her actions are responsible for wishy washy fed policy and outright trying to manipulate the market with endless fomc/fed fakeout statements by board members which the market has grown increasingly skeptical about.

(07-13-2016 12:39 PM)se7en Wrote:  

So my question is, can the fed just never raise rates? If the fed never raises rates, and investors continue pumping cash into in the stock market due to lack of other options, could the stock market continue to grow to infinity? Why not? Maybe now is the best time ever to invest?

I wouldn't say never. They just probably won't for a very long time because anytime they do the market plummets like a rock. Not long after the 2008 financial meltdown the fed started pushing through quantitative easing which they ended around 2014? or so. QE is too complex to get into but you can read about it. Low interest rate environment + QE is designed to inflate the economy. The fed is deathly afraid of a long term deflationary spiral happening in the economy and the market. If you look at Japan's economy after the late 80's that's exactly what happened. Asset prices began a long two decades long descent into the abyss.

Quote:

Why is the yield on bonds so low? Is it because everyone is buying them anyway, the treasury has no incentive to offer good rates of return?

Short answer: A lot of reasons.


The fed is essentially printing money in many ways. Low interest rates in theory is supposed to "stimulate" the economy. There's also been a flood of money from private institutions and investors who also buy bonds (as well as other defensive assets) because they are wary of the market. Bond yield is commonly used as an indicator of the overall health of the market. Extremely low yield indicates lots of money flooding into the safety of bonds and "risk off" environment. The bond index has been outperforming the stock index for awhile now.

Quote:

At this point we will see a massive deflation, the dollar will get stronger, gold will FALL and be a BAD investment, companies will be unable to service their debt (because deflation means interest rate payments become more expensive) and the economy will come to a complete standstill in 20-30 years. At this point, the money will come out of the stock market, there will be a huge crash, and we will finally have a buying opportunity.

Most traders and economists believe the dollar will strengthen but there's a worldwide push by various central banks to keep the dollar low as well as to devalue their own currencies. Yellen has been accused of meeting in secret with Europe and Japan's central bank chiefs and colluding with them to fix the market. Europe is sitting on mountains of toxic debt right now and they are all afraid of a global meltdown sparked by a European crisis. Now there is murmering in Europe and Japan about negative interest rates as well as using helicopter money to prop the market up. Germany already has negative interest rates in play in bonds. Scandinavian countries have negative interest rates in savings.

A strong dollar also means less export benefits for these countries to the U.S. who is a major importer of foreign goods. A lot of U.S. manufacturing is overseas too and is impacted in various ways by a strong dollar. It's not just China that does this but Europe, most of Asia, etc.. are in on the game too in various ways.

The fed's low interest rate policy has not really stimulated the economy but it has certainly created a massive asset bubble in equities and you could argue real estate too. When the U.S. has another recession things are going to get ugly because the fed simply won't have any real measures to deal with it anymore. They already blew their low interest wad early. When the next bear market and recession hits it could be very long and drawn out.

[El Chinito loco]

I forgot to mention it's also become trendy to disregard P/E ratios again too.



This is where we are at today. Nothing says the market can't fly up and make a new outrageous p/e ratio for a few years like in 1998-2000. In fact a global financial perfect storm is happening right now that could very well lead to a black swan event like this to happen with U.S. equities.

This becomes a huge problem for long term investors because if you have a lot of cash sitting out and nothing "safe" is giving a decent yield then it forces liquidity into a high risk market. Thus inflating asset prices higher and higher because cash has nowhere else to go.

However a reversion back to mean is always inevitable.

Corporate earnings and the current market simply does not correlate.

People stop mentioning that when the market flies up but the fundamental issues there are as plain as day.

[RBerkley]

Low interest rates = Good for borrowers, bad for savers.

Low interest rates are usually enforced when the economy is down or uncertain in order to "boost consumer spending".

High interest rates= Good for savers, bad for borrowers.

In an economic downtown, high interest rates will affect the debt class.

Peter Schiff and Gerald Celente have more expertise than I do, but as long as there is a global recession, don't expect to see +1% interest rates in the near future.

The strange thing is that real estate is in a huge bubble because of cheap debt, thus giving a distorted image of the economy in countries like Canada and Australia where house prices are extremely insane.

[The Beast1]

Whether or not they'll raise rates is moot. The markets will determine the rates on their own.

If you've been following Marty's blog, he's been calling for a massive run on the dollar in 2017 which will cause the Dow and dollar to rise to stratospheric levels most likely in response to a European political crisis. I'm betting on some form of civil war in response to the Muslim problem.

Things will be getting a lot "hotter" in Europe soon.

[Easy_C]

Possibly. I have been advised through the grapevine that "things will get much worse before Christmas".

[CJ_W]

(07-17-2016 07:29 AM)Easy_C Wrote:  

Possibly. I have been advised through the grapevine that "things will get much worse before Christmas".

probably not, what`s more likely to happen is that the fed will keep interest rates low and the borrowing will continue until it can`t anymore. . .basically printing money. . .like they've been doing for the past 9+ years. Also pretty much EVERY LARGE BANK is insolvent. A lot of the economic shenanaginas thats been happening is the reason for a lot of the B.S. going on with the migrants. The politicians in power KNOW the money is gone and are passing that burden onto the citizens. . .only the problem is the money hole is so great (many times more than global GDP)

That is everything all went tits up, There would be a `worldwide Bank Jubilee`


if you don`t know what a Bank Jubilee is, its basically where about every 60 or 70 years usually, if the bankers were as corrupt as they are now and let usury become as bad as it is now, The mobs would come in and drag the bankers out and execute them bankers in the streets. Cancelling all debt of course this happened in the ancient eras which is why usury was such a big no no back then.

Anyway the bankers/central bankers know all this so to stop this, they plan on passing the bill onto the migrants in many countries as well as using the muslim migrants to `blame` for when the government cant pay for certain things anymore AND when the government needs to enact `martial law` `seize assets` etc etc. . . .the people in charge know what they are doing, they aren`t stupid, they just figure out that the average person is too stupid to try and fight them, so they are happily stealing from everyone they can steal from, no matter the country. . .which is another reason why Russia and China has been so `belligerent` lately. . .

But talk about those two countries is a really big subject for another thread.

So basically, no the fed will never raise rates, if they do then the U.S would immediately default. Again, another discussion for another time.

-------------------------------------------------------------------------
P.S.
Now this is PROBABLY something you shouldn't talk about in your ECON class, keep your head down, get good grades and work on a plan for YOURSELF, spouting off truths like these only gets you hanged (not joking here) so keep your mouth shut about it, do tons of research and figure out solutions for YOU. The world is gonna do what its gonna do. Cant really change that, but you can change what world you`re going to experience.

[Different T]

Many of these replies indicate a lack of clarity regarding central banking, and banking in general.

First, take the case of the role of the Fed in a previous, higher rate environment. Your average bank would have little to no excess reserves (as they desire), and adequate loan demand. In this scenario, if a bank makes a loan that causes their reserves to be under the required amount, they would first explore the interbank market (try to find a bank that has excess reserves and borrow from them, AKA federal funds rate). If no interbank counterparty could be found, they would borrow directly from the Fed at its discount rate (this is the rate that the Fed directly sets).

In today’s world (mainly due to QE), the banks have huge sums of excess reserves. They are nowhere near the point of having to utilize the discount rate. The Fed is utilizing open market operations (purchasing and selling securities) to attempt to bring the federal funds rate to their prescribed target. However, note that this current low in 10 yr USG yields has taken place AFTER the fed raised their target. Also of note, the Fed has somewhat recently introduced interest on excess reserves as QE drained USG debt from the banks.

It’s usually helpful to look at the Fed’s objectives: Full employment (whatever that means), and price stability (usually meaning 1-2% inflation). As someone else mentioned, central bankers the world over are concerned about deflation (while most none-“finance” types are concerned about hyper-inflation). In simple terms, the Fed would like to see people taking out loans, buying new durable goods, investing in business expansions, etc. so they lower rates to encourage loan demand/consumption through lower financing prices. However, they are running into the fact that when a person sees little return on their assets (bank deposits, bonds, etc) and don’t see these rates going up in the future, many tend to actually save more; AKA acting pro-cyclical.

[Kid Twist]

If Trump were to "restructure" the debt, it would be the only "solution" ... and of course it would carry a cost.

Otherwise, obviously they can't raise them.

What I want to know is the nature of the black swan, even though we have no idea when precisely it's coming ...

Also, being that getting cash out of the bank will be increasingly difficult, if you aren't getting a return anyway, why not store a good amount (in a safe of course)?

Mattress time, boys (-:

[chakalaka]

It´s a dead end. Either they rise and a recession happens. Or they keep it low and more debt is accumulated leading to a bigger recession when they rise the rates. The only possible exit is if economy picks up. Or maybe inflation.

[JayJuanGee]

(07-20-2016 10:46 AM)Kid Twist Wrote:  

If Trump were to "restructure" the debt, it would be the only "solution" ... and of course it would carry a cost.

Otherwise, obviously they can't raise them.

What I want to know is the nature of the black swan, even though we have no idea when precisely it's coming ...

Also, being that getting cash out of the bank will be increasingly difficult, if you aren't getting a return anyway, why not store a good amount (in a safe of course)?

Mattress time, boys (-:

Trump really scares me, almost to death, and I think that he scares a lot of folks of a lot of political persuasions... Hilary is also scary, but in a different way..

Anyhow, regarding Trump, this building a wall idea is so fucking stupid for both it's symbolism and its economics and its lack of practicality, and it has just been incorporated into the Republican platform, and wow, if expenditure of such a wall was embarked upon, it certainly would be a short term economic stimulus... and even the employment of other silly tactics could be economic stimulus and even shake ups of the economy to restructure the whole way that we think about government and debt (if it does not kill us, it may actually cause stimulus... hahahahaha)...

By the way, such a wall, if built, is also a sign of trapping Americans "in" in a variety of ways.. rather than keeping immigrants out, but that is a whole other story.... My feeling is what a fucking mess to be trapped in America.. even though I have lived here (apparently in a kind of comfort) for more than 90% of my total life.

[thoughtgypsy]

(07-13-2016 12:39 PM)se7en Wrote:  

So my question is, can the fed just never raise rates?

In theory, no. In practice, yes.

Interest rates are being kept at zero to allow the Federal government to spend money into oblivion. Secondly, it allows financial companies (who control the government through campaign finance) to take massive profits when they sell off or rent out their massively overvalued assets.

The Fed is stuck, and will keep interest rates at 0% until we're faced with a currency crisis. Which might be sooner than later.

Quote:

If the fed never raises rates, and investors continue pumping cash into in the stock market due to lack of other options, could the stock market continue to grow to infinity? Why not? Maybe now is the best time ever to invest?

No, there's actually been an outflow of money from stocks recently on the part of retail and hedge fund investors. At a certain P/E level and when balance sheet internals point to a company being massively overvalued, no sane investor would ever put money in a stock.

It looks like the only people buying stocks anymore are companies doing buy backs (which allows them to give themselves higher bonuses), and central banks (particularly the ECB). They know we're fucked, they're just trying to make out like a bandit before the house of cards fall.

We're in the "bust out" phase of the global economy.

Quote:

Why is the yield on bonds so low?

Central bank interference.

Quote:

It seems to me that we are not likely to see any rate hikes, ever. The politicians and the fed know that raising rates will destroy the economy, so theyll keep them low forever, until there is just less money to pump into the stock market, because its all already in there. At this point we will see a massive deflation, the dollar will get stronger, gold will FALL and be a BAD investment, companies will be unable to service their debt (because deflation means interest rate payments become more expensive) and the economy will come to a complete standstill in 20-30 years. At this point, the money will come out of the stock market, there will be a huge crash, and we will finally have a buying opportunity.

What is unsustainable must end. It's a law of the universe, no matter how much the political and financial class wishes to deny it. We won't see rate hikes until there is no choice, and believe me, that day will come.

Raising rates would improve the economy long term, at the cost of an initial pain period. It will help shake out bad loans, resolve massively inflated asset prices, and allow people to start save and invest productively. But the ones who will have to eat their losses will be the major financial companies and governments, which is why they're trying to delay it as much as possible.

Deflation or Inflation is harder to call. As more non performing loans end up in default, credit will contract, causing deflation. As we move closer to full blown currency crisis, people will try spending their worthless dollars on hard assets, which will lead to inflation. However, wages have decreased in the last 10 years, and most people have no savings to their name, so they likely won't have any money to even buy hard assets.

Gold isn't an investment. It's a store of value that's finite, difficult to mine, and difficult to debase without detection.

The economy will come to a complete standstill much sooner than 20-30 years from now, in my opinion. The financial crisis of 2008 occurred due to a bubble in housing. The next crisis will involve a bubble in nearly everything, and lead to the destruction of the entire world financial system.

[RichieP]

I dont necessarily see it as a bad thing that passive investing (dumping money in stocks/bonds) has a much lower ROI and may stay that way.

Maybe it will spur more active investing (VC funding, etc) which is much more often tied to overall wealth creation, innovation and improvements in standards of living.

It does suck that pension funds and etc are getting hit. People have been mis-sold that stuff - everyone expected certain returns and now they're realising that isn't (and never was) the deal.

But fundamentally there's always growth, progress and wealth creation on earth - and thus potential for people to get a return. It just may not be in the traditional capital markets.

What does matter is stability of the financial system, investor confidence, checks on hyper inflation/deflation, etc. Central banks and governments will have to look at more innovative methods to ensure stability. They are actually doing that, but perhaps not fast enough.

[Different T]

Quote:

Interest rates are being kept at zero to allow the Federal government to spend money into oblivion. Secondly, it allows financial companies (who control the government through campaign finance) to take massive profits when they sell off or rent out their massively overvalued assets.

Why do you think the federal government, which already has trillions of debt and operates under its own sovereign fiat currency, is so concerned with the cost of borrowing?

Have you looked at operating performance of the financials? How sure are you they are taking "massive profits" in this environment?

Quote:

Raising rates would improve the economy long term, at the cost of an initial pain period.

What are you basing this on? Are you aware that the 10 year yield low took place after QE ended and after the Fed raised their target rate?

Initially, those like you said QE and ZIRP would cause massive inflation. Now, after years of being wrong, they are settling for raising rates will improve the economy?