[ExI] Odd Market Moves
interzone at gmail.com
Fri Mar 13 23:22:10 UTC 2020
On Fri, Mar 13, 2020 at 7:04 PM Brent Allsop via extropy-chat <
extropy-chat at lists.extropy.org> wrote:
> Hi Dylan,
> Thanks for the reply.. Sorry, my terminology probably isn't the best to
> communicate what I"m trying to describe, so thanks for asking
> for clarification.
Well, there is certainly deflation in the system based on things like
electronics, computers, and many other goods historically made overseas
more cheaply and more efficiently as more automation becomes feasible
(cheap labor doesn't hurt!). Energy has also been stable or more recently
falling off a cliff due to our global circumstances. That said, overall
measures used for inflation don't do a good job of capturing things like
rising health care and food costs, at least in the US, for example, in
terms of their impact on people's wallets especially when there is nowhere
to get safe yield at appreciable amounts.
> My understanding is that the federal reserve uses the price of a basket of
> good to measure the "inflation rate". Their goal is to create enough money
> to keep this at about a 2% inflation rate. Which means the USD is
> deflating (not inflating) in value compared to the goods.
>> Negative interest rates are strictly a creation of central banks that
>> have allowed them, and banks are forced to hold the paper under
>> regulations. The only way they'll happen in the US is if the Fed decides
>> they want to let them happen.
Yes, Europe has been negative for a long time at this point. In fact,
Warren Buffet very recently priced a corporate bond for 1,000,000,000Euro
at ZERO % interest over 5 years. It's literally free money for Berkshire.
That can't happen in the US at this point based on the Fed, although there
is nothing preventing it.
> Right. In times like this (and during the 2008 crash) the fed lowers
> interest rates, attempting to stimulate the economy. But once they get to
> zero, it is normally assumed that they can't do any more. But some central
> banks are now going negative, right? The US ended up doing "quantiative
> easing" rather than going negative.
>> When you say, they can't get the price of bonds to go up, I assume you're
>> referring to yields (interest rates).
Yes, the Fed buys US treasuries to create that money so they add to demand
driving down yields (at least on the short end of the duration curve).
They have no real control over the long end of the curve, and yes, bonds go
up in price as yields fall when trading them in the secondary market.
> My understanding is that the fed dumping more money on the market drives
> down the yield on new bonds, driving up the price of trading bonds with
> higher rates? In other words, I was thinking of the fed trying to drive
> down the yield, which should raise the price of bonds?
When markets dislocate in a big way, there may be very temporary scenarios
where even bonds are sold along with stocks as people move completely to
cash, but you can see that yields have been falling on treasuries (at least
the 10yr Note) all week outside of the stock market rally today which drove
yields higher due to people selling bonds and buying stocks:
> You are saying bonds have been going up, but I thought John was saying,
> this normally happens, but isn't happening now?
>> I don't know if anyone can say for sure why there is no inflation in
>> interest rates themselves, but if the demand for bonds exceeds the supply,
>> bond prices rise and interest rates/yields fall. This tells me that
>> despite the heavy borrowing of governments like the US which is running a
>> large deficit, there are still few places people feel safe parking their
>> money as they keep funding the US (and others) despite a lousy deal on the
>> interest. If other governments and miscellaneous parties stop buying as
>> heavily, interest rates will rise, but that hasn't happened yet.
>> If there was an actual liquidity crisis (I assume this is what you mean
>> by not enough money, but correct me if I'm not understanding), interest
>> rates would go up quickly. That's what happens whenever borrowing gets
>> hard (implying a lack of liquidity). Financial markets sieze and rates go
>> through the roof to compensate anyone willing to provide funding. With
>> everything in freefall, that's why the Fed just pumped a trillion (yes, not
>> a typo) dollars of short term liquidity into the overnight repo markets
>> (and also announced they would start buying a lot of other assets on their
Again, I'd argue that the measures of inflation in the US are flawed, but
there is certainly a lot of deflationary pressure in certain industries,
and inflationary pressure in things like healthcare that consume a large
portion of consumer's paychecks. If you're talking about interest rates
specifically, agreed, they have been in a long term downtrend since 2008
for the most part.
> Right, Is this why John is saying the price of bonds isn't going up?
> Everyone always seemed to say interest rates will go way up in the future,
> like they did in the late 70s (12% mortgage rates back then, for example)
> or else there would be inflation. But no matter how low the feed keeps the
> interest rates, they still struggle to keep the inflation rate at 2%,
> right? Has USD inflation ever been over 2%/year since the year 2000?
How are you measuring economic growth? GDP (which I'll admit is not
perfect) does not indicate exponential growth for any country. Sadly, I
also don't see evidence that we are anywhere near the singularity but I
realize that is up for debate.
> It just seems to me that if we are approaching the singularity, the
> economy is growing at least at an exponential rate. And if that is true,
> the money supply must also grow, exponentially, to math. But the fed
> bankers likely can't comprehend this kind of exponential growth, so
> constantly error on the side of not printing enough money? And could this
> be the cause of what John is talking about here?
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> extropy-chat at lists.extropy.org
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