Q&A….
I’m late getting around to this week’s Q&A session so I’ll leave this up through Monday and post answers on Tuesday. As always, feel free to fire away with anything and everything. Enjoy the weekend!
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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I want to gauge the probability of a true bank run in the PIGS States. A run is only possible if there is somewhere to run to and a real path to get there. How hard is it (in a practical sense) for an ordinary European to get their Euros out of Spain, Greece, Ireland, Portugal, or Italy? I know that in theory any EU citizen can open a bank account in any Eurozone State, and in the past that was true in reality, but The Economist said that German banks are now demanding proof of German residency to open an account. Is it possible for a non-German to open the German equivalent of a Treasury Direct account? If so, what are the operational hurdles to doing so?
Recent discussions on ‘federalism’ have reflected the traditional Hamiltonian (strong central government and a central bank; emphasizing and supporting financial/commercial growth) vs Jeffersonian (democracy with a small ‘d’; a nation of independent farmers and tradesmen) divide. I’m not sure either really foresaw the emergence of the ‘entrepreneur’ (particularly in his/her ‘start-up’ incarnation), the multinational corporation, and the dynamic between them.
What reflections would you have on this divide as it relates to economic developments? (This makes up for last week’s lob.)
Question regarding interest swaps/derivatives which reportedly make up over 90% of total derivatives.
1. Has anyone seen if these very large interest rate swaps/derivatives distort the yield spreads of treasuries(similar to how the size of JPM recent bet on HYG distorted the yield spreads)?
2. What risks do the 300 Trillion + interest rate derivatives pose – that is,
a. Is the risk only to the too big to fail banks if the interest rates move against them?
b. Are there risks to interest rates/yields if the bets move against banks and they need to unwind those positions?
I expect the Fed to support the banks if this type of event occurs by intervening to keep rate lows though I’m trying to understand what the likely risks.
This maybe related to above question but does the SPY versus JNK:TLT ratio break down raise alarm bells (chart below). It seems that SPY or TLT is over valued or JNK is undervalued?
http://stockcharts.com/h-sc/ui?s=SPY&p=D&yr=3&mn=0&dy=0&id=p98258108946
I’m certain treasuries are in demand as a risk free safe haven asset, but are treasuries yields being further distorted by derivatives?
Can you elaborate at all on your trading algorithm? Also, is there any way we can gain access to your trading approach? Updates on the site or something?
What is your prediction on the EURO a few years down the road?
MG
Mr. Roche,
I never took Econ101 and I may be presuming too much. What I don’t understand is:
If most equity investors have allocations in equities at any given time between 50% and 90%….. and many have left the market not to return. Who has been on the buying end from 2008 till now?
By looking at international markets charts that are trending down I might conclude that it was foreign investors taking up the slack. But that still doesn’t account for 08,09.
I assume that 401k buyers are generaly buy and hold. Money is created when it is loaned. Otherwise there is X amount in exsistance at any given time just sloshing back and forth.Yet hundreds of millions of shares trade hands every day and the price keeps going up.
Just can’t rap my head around it. Millions out of the market….. less new loans…..less people buying things……more people unemployed all over the world and the market keeps going up. I’m not sure this is economics…..it sounds more like magic to me. I have a migicians joke that might fit this situation but I won’t tell it because its pretty ronchy.
What are your thoughts?
Regards,
Sergio
I’d love to hear that joke, especially if it’s raunchy
Eric Janszen, from itulip.com, talks about high Treasury rates in the 1970’s, “The response I got [from MMT] is that the US government set the rates high intentionally. Well, no, at one point during the Great Inflation crisis foreign central banks of countries aligned with the US were the only buyers of US Treasury bonds. The US started to issue Treasury bonds in foreign currencies.”
“Markets force the US government to rely on the kindness of foreign central banks to buy UST in 1978. They did this buy (sic) choice? Really?”
http://www.itulip.com/forums/showthread.php/22329-Ka-Poom-Theory-Update-Two--Part-I-Bang-or-a-whimper-Eric-Janszen?p=227292#post227292
Scroll to the end of Part II for his commentary.
Janszens believes in a sudden stop of Treasury funding by investors. Would you care to comment, as he takes a very different view from your explanation of how the bond market works?
I recall the Treasury having to issue “Carter Bonds” in the seventies payable in Marks or Swiss Francs to assist bond sales while inflation was rapidly rising.
Thanks for all you’ve done.
Cullen: I believe you are an expert on inflation and I would like you to comment on the causes of the severe inflation currently in Argentina.
Cullen: Do you think that Fiscal Policy is in many ways too important to be left in the hands of the politicians? (I know that is how the constitution set it up but the pols clearly do not understand how it works.)
http://www.creditwritedowns.com/2011/09/expectations-theory-of-interest-rates.html
I’d like to hear your thoughts on Ed’s perspective of the expectations theory of interest rates. Specifically from an actionable investment premise: would you interpret it to mean that – if short term rates remain pegged towards zero by the Fed for longer than expected – there is still room for intermediate and longer bonds to move toward zero?
I ‘d like to hear your suggestions for a poor man’s bloomberg terminal. My own recommendations are:
1) bloomberg account and using ‘market monitor’.
2) http://www.euribor-ebf.eu/ for various euro interest rates.
3) http://www.investinginbondseurope.org/Pages/BondMarketsAndPrices.aspx?folder_id=326 for bond prices.
4) http://www.boerse-frankfurt.de/en/start for per ISIN price quotes.
5) http://www.dtcc.com/products/fi/gcfindex/ GCF repo rates.
Börse Stuttgart puts out real-time quotes I think, Börse Frankfurt is delayed:
https://www.boerse-stuttgart.de/
(In the top bar you can change the language to English)
I wave my wand and Angela Merkel relents and all problematic, PIIGS sovereign debt is swapped for eurobonds. Do equity markets worldwide snap back to their post-2007 highs (or higher) or do they continue to struggle because of underlying economic problems in the US and abroad?
please explain how the fed creates money out of thin air.
……and please include asset inflation, caused by the fed, in your explanation.
I haven’t had a chance to read too much detail of the new “Spanish TARP” but my take away is that this is a 100Billion Euro Loan. This everyone has said. What I can’t find anywhere is what the interest rate on this loan is to be. If it is less then 6% then shouldn’t the Irish be really and legitimately pissed off? They were forced to accept this interest rate AND austerity as part of their bank recapitalization scheme while Spain gets a mulligan.
I know this is a macro blog, but still what have been your personal thoughts / comments about the Facebook IPO? Do you see a trend?
Cullen,
Thanks for your site. Great info always.
What do you think will happen with treasuries and equities after Operation Twist ends this month? Will the Fed announce another operation? Will they wait till after the Nov. elections? Will the market move sideways with a lot of volatility?
Cullen, just curious if you have any correspondence with other market and econ writers outside the whole community.
whole MMT community*
What are the important lessons you have learned since you began your career? What did you wish you knew when you were starting out?
One more question. Given the theory of fiat money as described by MMT and MMR, how do you reconcile that central banks are net buyers of gold? Why not sea shells? (From what I gather the central bank buyers are the developing/emerging economies rather than the developed ones).
My three competing theories are that the central bankers:
1. They are being “irrational” as solvency is not a concern with fiat currency provided the country issues its own currency. That is, what drives confidence in the value of the currency is not gold reserves but the economic and perhaps military power of the country backing the fiat rather than some block of metal.
2. They are signalling “something” to investors by purchasing gold. This could be central banks have concerns of the economic/military strength and use gold to provide assurance to investors and users of currency. That is, for weaker or emerging economies they believe that large gold reserves will give more credibility to the central bank by investors.
3. And/or they are managing risk of having their foreign reserves tied to one or a variety of fiat currencies. That is, for example, in the case of China, Brazil, India etc (who have a somewhat more stable and growing economies), the move to increase gold reserves is simply smart diversification by lowering (but not eliminating dollar reserves) to spread and manage risks.
So any comments about reconciling MMR/MMT to the real actions of central banks? I’m leaning to point #3.
Also the question about why don’t central banks acquire “seashells” or large stakes in equities, also seems suggest to me something important about gold to central bankers (and perhaps totally irrational). Any comments on what they think or how they view gold on their balance sheet?
I’m thinking Pimco has got it right that QE3 will come soon and they will resume MBS purchases. First, it avoids your much-criticised like-for-like asset swap of buying gov bonds. Second, it will directly impact the largest part of consumer balance sheets (liabilities). Third, housing seems to be showing signs of life, and the Fed may think this could be the right leveraging point to spark a new mini-bubble in RE. What do you think?
Your thoughts on the Economist cover and this rejoinder by a German website
http://www.handelsblatt.com/politik/international/economist-titelblaetter-original-oder-faelschung/6735328.html
Glad to see some humor from the German side….too big an ask for a country to carry an entire continent…
A recent polifact story explained that other than the stimulus bill, Obama hasn’t been spending. Annual gov spending increase is 1.4% or lowest of the past 10 presidents. However, deficits and the debt are very high. The question…. if deficits are due to lower tax revenues rather than new spending, does it have less impact on growth/GDP vs new spending? On one hand it seems like a dollar is a dollar is a dollar, but on the other one just doesn’t take old spending out, while the other injects new spending in. So isn’t the latter more stimulative?