Posts Tagged ‘Interest Rates’

Godzilla’s Bond Rally Begins: QE II as “Cash for Clunkers” update

August 8, 2011 5 comments

Remember our old “Cash for Clunkers” QE II model?  I said that everyone who wanted to sell bonds at all for the next few months would do so before QE II ended.  This would result in a natural vacuum of sellers after QE II ended.

I also said there would be the “Godzilla of all bond rallies” post QE II.  This is a chart of 30 year yields. Yields are opposite of price.  Lower yields mean higher prices.

See that huge red bar at the end?  That means a huge rally in bond prices.

Lots of people think the world is ending right now. It looks bad out there, but there should be some appreciation of the fact that the most willing sellers of U.S. Treasuries sold them during the actual time of QE II.

The actual GDP numbers – while anemic – aren’t falling at anywhere near late 2008 levels.

Question: How much of this panic is due to a completely wrong interpration of what’s happening in the oil markets?

People say that lower oil prices means that the economy is tanking, but it’s more likely that the speculative bid under oil just shifted out of oil.

Lower oil prices are great for the real economy, not bad.

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Terrifying action in the markets

August 3, 2011 2 comments

FRA - OIS Spread

Just an FYI – we’re getting terrifying action in the interest rate markets.

The 3 month FRAOIS spread – the spread between overnight bank borrowing and overnight U.S. government borrowing* – is seeing huge gains.

In other cases, gains like this have meant there is a huge, worrisome problem in the world.  Right now, Europe is on the verge of blowing out, but will this mean a run in the european shadow banking system?  I don’t know.

The european leadership has been able to calm things down over and over again, but it’s pretty clear by now that the only solution is for the European Central bank to buy huge quantities of sovereign bonds.

Of course, this is political nitroglycerin. Macro Man will probably have some good insights if he will share them  Also, we shouldn’t discount his idea that currency interventions seem to solve the problem.

*This is a massive simplification, but good enough for non-pro’s, of course.


Monetary Policy Sucks, Part IV: What do you do during a real estate crash?

August 3, 2011 8 comments

"Buy this house", say monetary policy advocates

Scott Sumner isn’t a bad guy.  He’s a good guy.  He’s smart.  He’s creative.  He’s forceful.  His ideas about NGDP aren’t all wrong.

But someone needs to tell him that monetary policy sucks even during the good times.  It sucks because it uses real estate as the primary vehicle for economic stimulation, which causes all sorts of bad outcomes for our economy.

And someone needs to tell him that right now, monetary policy is particularly bad.  While it sucks even in the good times, right now monetary policy is nearly impotent.

The U.S. real estate market is in the middle what will be a legendary bust.  Real estate prices are going down more than in the great depression.  Nobody wants to borrow money to buy real estate.

But that’s the channel that monetary policy uses.  That’s the part of the economy that monetary policy stimulates.

What monetary policy does is stimulate the economy by inducing people to borrow or not borrow money for real estate deals.  That’s why it works well at all.

So how cheap would money need to be to induce people to buy real estate that’s going down 5% per year?

We can talk about monetary vs. fiscal policy all we want, but until at least one person who is advocating monetary policy identifies the exact group of people who are going to start borrowing enough money to stimulate the economy, why should we bother to respond?

Corporations don’t need to borrow – they are sitting on a record horde of cash (they have more today).   So the only channel left for monetary policy to work is through real estate.

Tell me, advocates of monetary policy, how is this supposed to work?

And why would you want it to work?  There is a good chance real estate will drop another 20% or more in price.  Do you want to saddle more people with houses they cannot sell, and mortgages that are too big?

Update: Parts I, Part II, Part III on why MP sucks.  Note that most of these are too kind to monetary policy in that they assume it actually works!

Update on The Hyperinflation Hoax – we’re gaining ground!

May 9, 2011 4 comments

Great news!  TC is now on the first page of Google results for “shadow government statistics”!  for the post Why Shadow Government Statistics is very, very, very Wrong.  One of the major ways people reach this blog is through a variety of searches for “shadow stats”, “shadow statistics” and such.  It is great to see this on the first page of results.

We do not have hyperinflation.  People that say we do have Hyperinflation are either deluded, or not being truthful with you.   Hyperinflation in the U.S. on May 9th, 2011, is a cruel hoax.   Inflation is about 2-3% at this time.

The Hyperinflation Hoax is worse than we thought: We can’t change the price of Oil

April 26, 2011 5 comments

Another Hoax?

Remember that post about the futility of using monetary policy to impact the price of oil?  It turns out that the elasticity of oil is even lower than I thought!  The IMF – ok, no jokes – came out with a report showing the short term price elasticity is nearly irrelevant, while the long term price elasticity is freakishly tiny.  The Blog world is a-titter about this.

The IMF says that a 10% increase in the price of oil results in 0.007% less demand in the short term.

The U.S. uses about 15 million barrels a day.  A 10% increase in the price of oil results in – wait for it – a decrease of 1050 barrels of oil per day. Increasing the price of oil from $90 to $99 results in 1000 less barrels of oil demanded.  That is 1 futures contract at the CME/NYMEX.  A 1 lot.  To put this in perspective, 319,000 contracts traded yesterday.

What level of interest rates – in the standard model- could be high enough to push down oil prices 20% or so, back to$90 a barrel? The demand for oil will not change in the slightest even if rates were increased to 5% tomorrow.  People won’t say “Oh, this quarter point increase in the Fed Funds rate makes me want to use less gasoline – or at least pay a lower price for it.”   A 10% increase in the actual price impacts demand by an amount so small it is a rounding error.  Tiny movements in interest rates will have zero observable impact on the price we are willing to pay for gasoline.

Why in the world are people shouting about energy inflation?  Even smart people can make this mistake, like Kevin Drum.

A self-inflicted cure of higher rates in response to high oil prices would be far worse than the disease.   We know what it takes to get the price of oil down to $40 a barrel.  It takes a global depression. It takes losing 500,000+ jobs a month in the U.S.

This is another reason to fight the Hyperinflation Hoax.

[Update: Seems the people over at Reason do not have quite as much reason as they might have thought.]


[Update: I made a mistake in oil demand.  The actual numbers are a 10% increase in the price of oil causes a drop of .2% in demand after 20 years.

This translates to a decrease of demand of about 30,000 barrels a day.  It does take 20 years for this to happen.  So if we assume a linear drop, then it’s a drop of about 125 barrels/day a month, every month for 20 years.  This is still very small.  I wonder how this number is significantly different than zero – it seems impossible that such a small effect would have an error term that’s even smaller, considering the data used. ]

Fighting the Hyperinflation Hoax – and Winning!

April 19, 2011 2 comments

The post, “ShadowStats: Still Very, Very, Very Wrong” has been receiving consistent hits from the search “Shadowstats”. A quick investigation shows- We’ve made the front page of searches for “Shadowstats”!

That means some random people are clicking to find out that our inflation rate is only 2-3%, and are getting disabused of the 10% hyperinflation hoax.

Bonus: They get an exposure to Functional Finance and MMT.

We could probably get higher in the rankings – hint, hint, hint… 🙂

Shadow Government Statistics just does not match reality.

[Update: It turns out that a search for “shadowstats 10% inflation”, Traders Crucible is 2 and 3 in Googles search.  This “10% Inflation!” was a big story a few days ago, and gets repeated endlessly on places like zerohedge and other bond vigilante wanna-be places. Fighting the good fight here at TC.]

Shadow Stats: Still Very, Very, Very Wrong

April 13, 2011 5 comments


Shadow Stats is frackin’ wrong.  No doubt about it.  Shadow stats is wrong, even if Zero Hedge thinks they might be right.  And yet gullible John Malloy sees fit to report this crappy data on CNBC.

Once again:

1 +U.S. Treasury Rates = (1 + inflation) * ( 1 + real rates)

We know what the Treasury Rate is with a high degree of certainty for points on the Yield Curve for the next 5 years, because they are traded in a highly liquid market.  The real rate is what investors really make after you take into account inflation.

So rearrange this equation to find out how much investors are really making by investing in U.S. Debt:

(1 + U.S. Treasury rates )/ (1 + Inflation) = ( 1+ real rates)

If we use 10% inflation and plug in the latest 6 month T-Bill Rate, we can see how much investors are making.

The 6 month T-Bill rate is 0.11%  Shadow Stats says we have 10% inflation.  So using grade school math, investors in 6 month T-Bills are losing 8.99% per year due to inflation!  

Wow – those investors are really stupid or really worried!  Or maybe, just maybe, John Williams is wrong.  Which one could it possibly be?  Who can know?

Can you believe that this BS gets reported in the major media, by a guy who works for CNBC and used to work for Bloomberg?  He must be a smart guy – every Bloomberg guy I’ve ever talked too has been whipsmart, and to go on CNBC is another huge step.  So how can he not know this?

[Update: Here it is on the Front page of CNBC.  We’re getting less informed by this “news.”]

[Update 2: Google “Shadowstats is wrong”, and TC comes up #3. Slowly, we’re getting traction.]

[Update 3 4/19/2011  Getting even more traction debunking Shadow Government Statistics.  We’ve made the front page on the simple search term Shadowstats.  For a complete roundup on why Shadowstats is wrong, and who is silly enough to promote this nonsense, see here, here, and here. ]

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