Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Rising Interest Rates and The End of Stimuland

Interest-Rates / Quantitative Easing Aug 20, 2014 - 10:22 AM GMT

By: Raul_I_Meijer

Interest-Rates

It’s Jackson Hole week, and we’re going to hear a lot of fairy tales and otherwise invented-from-scratch material. Since it may not always be easy to distinguish between pure mud and actual information, let’s destroy a few fantasy piñatas right here and now. So when Yellen and Draghi speak on Friday, you’ll be able to tell a few things apart. It’ll be hard enough, the speech writers and spin doctors won’t get much sleep this week.


But in the end, it’s all terribly simple. Central bank governors, finance ministers, government leaders and media have built up an image of ‘mere’ economic cycles and recovery and promises, boosted stock markets to new records, and gotten everybody’s hopes up. And now they won’t be able to deliver on those promises. Still, they can play along for a while longer. And they will.

There’s not a major central banker who can raise interest rates without risking severe damage to their economies. Simply because those economies wouldn’t look half as promising as they do today without the highly manipulative actions of ultra low rates and ultra loose credit. Without that pair, it’s going to be the crumbling walls of Jericho. In every single formerly rich nation.

There is no escape velocity – and there won’t be -, there are only stories and fantasies. Where do you think housing would be where you live if mortgage rates were 2-3 times higher – as in normal – than they are now?

At the same time, the enormous distortion of the economies caused by ultra low rates and ultra loose credit cannot last forever. Because fixed income, pensions, will be bled so dry grandmas will start thirsting for blood before they keel over because of a lack of care. And because markets need the mechanism of price discovery, lest the only companies left to invest in will be the weaker ones (since every single one will be weak).

They have to, but they can’t. They must, but they don’t dare. So much for forward guidance, it doesn’t mean a thing when central bankers are stuck in a trap of their own BS spin.

Don’t Hike Alone Is Jackson Hole Bear Warning for Central Banks

The message from [Yellen] and fellow central banking superstars is loose monetary policy still has a while to run. Yellen continues to caution that labor markets are slack enough to merit low interest rates, while European Central Bank President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda may even deploy more stimulus before the end of the year to battle low inflation. Yellen and Draghi will both address the Federal Reserve Bank of Kansas City’s conference in Jackson Hole on August 22.

Their behavior makes it tougher for others to take the initiative. A case in point: Bank of England Governor Mark Carney. After warning in June that investors may not appreciate the risk of higher rates, he said last week the U.K. won’t rush to act amid overseas threats of expansion and the weakness of wages. When the pack picks up the speed away from stimulus will therefore depend on Yellen, Draghi and Kuroda. If economic growth or inflation accelerates more than anticipated they may even push ahead faster …

Both the Fed and the Bank of England, if the forward guidance they so abundantly advertize would have actual meaning, would, given the targets they set in the past, have to raise rates. But they can’t, and this ‘having to do it in concert’ idea is a welcome distraction. There are others.

To justify not raising rates despite earlier guidance targets, Yellen uses the overloaded on part-time US jobs market, and the ‘broken record’ wages that just won’t move up no matter how great the economy is supposedly doing. Carney uses wages and an opaque story about disappointing exports. And then, obviously, they use each other as lightning rods.

They can also quite safely hide behind the ECB and the Bank of Japan, both of which oversee economies that are by most standards doing so poorly that a rate hike by either would be seen as suicidal.

Not that they’re in the same boat: the ECB, a.k.a. Berlin, hasn’t loosened credit enough over the past 7 years to achieve the short term upticks the US and UK have shown (and which both claim are not short term). Japan, on the other hand, has stimulated so much it has reached the end of the road in ‘stimuland’. Japan’s PM Shinzo Abenomics can look forward only to frightening statistics, and BOJ boss Kuroda will soon either move to Paraguay or be humbly requested to commit harakiri.

Carney’s case is a tad peculiar. Only this weekend he declared his willingness to risk a complete collapse of Britain’s economy just to show his never tried and certainly never proven theories are right:

Interest Rates Will Rise Before Real Pay Stops Falling, Says Carney

The governor of the Bank of England has warned interest rates might start to rise before workers see a sustained real-terms pick up in their pay. Signalling further pain for households, Mark Carney said it was possible that borrowing costs – on hold at 0.5% for more than five years – would increase before wage growth catches up with inflation. “We have to have the confidence that real wages are going to be growing sustainably [before rates go up]. We don’t have to wait for the fact of that turn to do so,” Carney said.

That’s at least sort of funny, because it’s exactly what Abe said about Abenomics before it started to fall apart entirely: that if only the Japanese had faith and confidence that it would work, it magically would. Looking at his mindset, you can expect him to repeat until his dying day that if only they had believed!

But that still doesn’t make Carney’s line any less crazy, of course. What he proposes is to make everyone in Britain pay more for everything, mortgages, services, you name it, without getting paid more so they can afford it. “We have to have the confidence”.

Inflation has outpaced wage growth for the vast majority of the period since 2008, bringing a prolonged period of falling real pay and living standards for UK workers. Last week the Bank’s rate-setting Monetary Policy Committee slashed its forecast for pay growth by half to 1.25% by the end of 2014, as wage rises have failed to materialise despite rapidly rising employment. With inflation expected to be just below the 2% target by the end of 2014, average real pay is expected to fall for the rest of the year, with rises not expected until 2015. Markets are forecasting a first rate rise in early 2015, and the pound has strengthened in recent weeks as investors bet that Threadneedle Street will be the first major central bank to raise rates.

Carney, no matter what he says, isn’t “comfortable being the first to move”. He just finds himself with a big sweaty – but undoubtedly well pedicured – foot in his mouth. He’s looking for a way out, and covering his donkey with lines like “as the expansion continues, rates are going to go up”, so if there’s no expansion, he’s off the hook.

But that contradicts his earlier “forward guidance”, and it head-on collides with the insane loose credit-induced housing boom he himself created and now realizes he must stop, lest three quarters of the nation end up underwater.

As for that so-called “inflation”, British CPI was announced to be 1.6% today. Way below anyone’s target. Should that make him more, or less, likely to raise rates? One could argue either way, but he could certainly make a case for not raising them on account of it, and so he will. But it’s all hot air.

Because inflation cannot be measured – just – by looking at rising prices. Inflation is the money/credit supply – which recent policies have raised to stupendous levels – multiplied by the velocity of money, better known as consumer spending. Given the rise in credit, one can only surmise, looking at low CPI numbers, that spending is dropping rapidly. Despite all that credit pumping. But then, with stagnant wages, and a nation already swamped in debt, who would expect anything else?

British MPs are on to Carney’s behind-wiggling too, but they’re seeking a political reason behind it.

Right. Independence. Only a fool would believe in that, and regardless, Carney still doesn’t need pressure from politicians to make up his mind. He has nowhere to turn, whatever he does is going to work out terribly wrong. All he’s got is the ‘official’ 3.2% GDP growth for the UK. That looks good. For now. So he might as well go for the rate hike in an ‘after me the flood’ move.

But then, there’s Jackson Hole. And all those other hugely important people who want a say.

For Interest Rates, Low Is the New Status Quo

It’s time to get used to near-zero savings-account interest rates and 10-year bond yields that don’t get much higher than 3%. Yes, the Federal Reserve is preparing to raise rates as soon as next spring. But even that won’t produce the interest-rate “normalization” that many assume to be on the way.

That overdue reversion to the mean of recent decades—pined for by retirees and other risk-averse savers, feared by holders of higher-yielding bonds—isn’t coming. Blame it on the persistent sources of fragility in the global economy: banks that remain reluctant to lend to Main Street, a looming debt crisis in China, and the alarming prospect that deflation will come to Europe’s shores and return to Japan’s. All that will keep inflation reined in and make the Fed extremely hesitant to do follow-up rate hikes after its first one breaks an almost decadelong drought.

In other words, whatever or whoever may be wrong, it’s not the central bankers. It’s global fragility , China, Europe, Japan. If not for that all that reality, theories would look just great, thank you.

Scott Mather, deputy CIO at bond fund manager Pacific Investment, says the eventual resting point for rates will be much lower and “the Fed will take a lot longer to get there than in previous cycles. And a chief reason for that is all the overhangs that we have.” The initial move, certain to be a mere quarter of a percentage point, will have only the slightest impact on money-market rates, since banks will still be borrowing short-term money at not much more than 0%.

Yet because of underlying economic weakness, even this modest credit tightening could temper growth and reflexively give the Fed pause. It isn’t hard to imagine that first increase being followed by a six-month or even yearlong hiatus. That’s a far cry from past periods of policy normalization, when signs of economic recovery would send the Fed off on a multiyear campaign of repeated interest-rate increases.

The bond market seems to know this. Even as forecasts for Fed rate increases have come forward in response to better U.S. employment data, the 10-year Treasury yield is at a 14-month low beneath 2.4%. Pimco’s Mr. Mather thinks the 10-year yield won’t get much higher than 3%. But it is very difficult for economists to abandon their old normalization models.

Translation: Bond markets don’t believe there will be a recovery, or at least not one that looks anything like what we’ve been told for 7 years is just around the corner.

That last bit is just absolutely hogwash. Actually, it all is. There is no “fragility” in the global economy, there is nothing left that could lift it out of its misery. To call that fragility is like calling a boulder that’s about to land on your head a ‘nuisance’. Economists are completely useless when it comes to understanding the economy. All they have is theories and models and graphs and ideas of how things ‘should’ go.

Today’s leading – Keynesian – ideas in economics claim that loose credit and low interest rate ‘should’ lift any economy out of any hole it’s dug itself into. It doesn’t get sillier than that. And it certainly doesn’t work, other than in in tales fabricated by media and spin doctors.

As for “the Fed will take a lot longer to get there than in previous cycles”, all I got is: Cycles? Author Mike Casey himself states that “it is very difficult for economists to abandon their old normalization models.” Well, the first thing they should get rid of is the notion of cycles – well other than 70-year Kondratieff, perhaps -.

Cycles imply a move upward at some point. There’ll be no such thing in our formerly rich economies for a long time to come.

We might have arrived at an upward turn in the cycle if debt had been allowed, and forced, to be properly restructured. As things stand, however, the debt is still all or mostly there, and it has continued to bloat, swell and fester for 7 long years as well. And that could only be achieved by increasing debts at governments and central banks.

Altogether, we’re in a much worse situation than we were 7 years ago. We’re just getting better as we go along at hiding how bad it is.

Me, personally, I can’t wait for the first central banker to raise rates. Because it will be the best opportunity we will have for price discovery, for finding out what things really look like, and are worth, behind the veil of abundant credit that fogs our mirrors.

It’ll be very ugly when those rates go up, because there is nothing to catch our fall. But the only alternative is for our children to fall even deeper than they already must because of our illusionary media-induced visions of recovery and escape velocity and American Dreams.

One thing’s for sure already: for our kids, the American Dream will be nothing but a Hollywood driven illusion or video game. They will hardly understand that once their ancestors really believed it to be true, and for a short few decades seemed to achieve that dream.

By Raul Ilargi Meijer
Website: http://theautomaticearth.com (provides unique analysis of economics, finance, politics and social dynamics in the context of Complexity Theory)

© 2014 Copyright Raul I Meijer - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
Raul Ilargi Meijer Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules