Coming economic rain

Phil_Stacker

Phil_Stacker

New Member
Not to sound alarmist but the economic conditions are not stable right now. We aren't in storm conditions but things just aren't right.

I'm no expert, so this is my take on what's going on right now.

FedEx would normally increase the rates to slow down an overheated market (reduce inflation). It can also used to stimulate an under-performing market by decreasing interest (reducing the cost of debt). Ironically, although debt is cheap (which can lead to market bubbles), reduced inflation means money flows out of the economy to locations with higher interest rates (a reason AUD was over parity in the last decade).

Quantitative Easing (printing money) would normally lead to inflation (hyper inflation for some places as recently cited on this site). Quantitative Easing has stopped - by all indications/statements. However, this seems to be the only thing "inflating" the US share market. The money HAS to be paid back in one form or another, or hyper-inflation will occur. So what happens to shares? They may now be self-sustaining, but there is no clear evidence for this (US Jobs market has consistently been below expectations).

The problem is that these are really big leavers that have multiple effects across multiple areas (i.e. macro-economic tools of fiscal and monetary policy that have multiple micro-economic impacts across all industries and markets, even internationally).

So.... increased fuel prices, due to the overnight OPEC decision will reduce market activity. This should reduce any requirement to increase inflation as a dampener is being put on the economy (everything will cost more because of by increased fuel prices). This exact reasoning has been used in Australia, the impact of fuel on the CPI leaves it in the "target" range and therefore our Reserve Bank doesn't have to do what it would normally do and increase the cost of debt (increase interest rates).

The increasing US dollar is another reason that interest rates would have a reduced reason to increase, as the investment within the currency/country/economy is increasing again (to a point), and confidence is increasing. There is also major infrastructure spending planned. Again, each of these aspects should reducing the reasoning for an inflation.

In short: The US economy is strengthening by itself, the US economy is not going to overheat due to the stabalising effect of fuel prices. It isn't doing so well that it needs to be dampened by increasing inflation. Inflation should, therefore, stay on hold.

The catch 22 here is that if interest stays on hold, confidence will be lost in the FedEx (which all but promised an increase this year) and economists who predict a 100% chance of a rise (really - someone needs to go back to school because if it hasn't happened it isn't 100%). So for an increase will happen, it will happen for non-economic reasons. Hopefully a middle ground will be found where interest rates are increased such a small amount that everyone "saves face" without causing damage to the US economy

If it increases the "expected" amount, the US economy will under-perform into mid next year, resulting in either reduced interest rate, which will cause confidence and money to leave the US economy again, or more Quantative Easing, which is already beyond any reasonable level.

The good news? We aren't talking much of a rates move, the economy is still somewhat unpredictable right now and any impact, positive or negative, isn't going to be large. That is - as far as I'm aware there aren't any clear bubbles, although there are potential "gotchas" (like the fuel sector's Renewable Identification Numbers (RINs) that are crazy, and will cause stock prices decreases and then general fuel price increases).

The better news? Australia's income is based (soon) on fuel prices. We are becoming a mega player in GAS - as in the Saudi version of GAS, and GAS (not gasoline) has a price related to oil. Therefore, the increase in oil is fantastic news for Australia. Our dollar will go up, our economy will increase.

The unknown - Silver price apparently correlates to oil. So increasing oil should mean increasing silver, but with increasing AUD and dropping USD, and probably continuing unstable world economy (France, Italy, Britain, USA, Europe), I'm beginning to wonder of the precious metal sector will be stable, let alone get to my thoughts of a 50% increase next year.

Anyway - that's the consensus of what I've been reading this week.
 
Central planners strategy.
People accumulated too much savings - didn't spend.
Central planners parasiting clubs spend (as debt) in their place (read: frontrun).
Then central planners want to get rid of that competing purchasing power money pool.
So they wanna lure People to stock markets / whatever they frontrunned (read: drove prices higher).
What signals a "done"? Maybe the amount savings of People, shrunken "enough"?
 
Phil_Stacker said:
Not to sound alarmist but the economic conditions are not stable right now.
Click to expand...
For what the SP500 is representive:
fut_chart.ashx

Now 3 years above the last couple decades' peaks. 50% above it.
Usually, stability is least at peaks.
 
A few things.....just because the U.S. dollar is going up does not mean further investment or more jobs....it simply reflects the demand for....U.S. dollar.
Capital is starting to flow out of bond markets.....this is one of the big reasons the stock markets and dollar are rising. Pension funds and the like are the big drivers of the market and they will be pushing more capital as the stock market is one of the few winning investments at the moment.
Q.E. did not flow into the economy, it simply was the purchase of debt (bonds). It did not increase the money supply and was not inflationary. It was not Q.E. in any shape or form that drove the market higher.
 
tolly_67 said:
A few things.....just because the U.S. dollar is going up does not mean further investment or more jobs....it simply reflects the demand for....U.S. dollar.
Capital is starting to flow out of bond markets.....this is one of the big reasons the stock markets and dollar are rising. Pension funds and the like are the big drivers of the market and they will be pushing more capital as the stock market is one of the few winning investments at the moment.
Q.E. did not flow into the economy, it simply was the purchase of debt (bonds). It did not increase the money supply and was not inflationary. It was not Q.E. in any shape or form that drove the market higher.
Click to expand...
"is starting"?
Stock market prices are since 5 years driven up. Even to twice previous peaks (2000 and 2005).
So it appears more logical to me that your pension funds and the like push LESS capital in it, or even more plausible (such a peak), capital OUT of it.
In finance there is a so called "golden rule": "past performance is no guarantee for future performance", and I think that at such peaks, it's more a guarantee for future loss.
 
"It did not increase the money supply and was not inflationary."


This I cannot understand. I know that increased money supply supposedly increases inflation, and I know that it has not or seems to have not. I know that inflation is more than they let on and announce, Americans tell me so!

To me, QE in fact DOES increase the money supply, even if they are lying about how much!

The US Federal budget is what it is, and is in DEFICIT! They flog US Treasury Bonds to make up the deficit as they have been doing since Adam was a lad. Up to recently those bonds were being bought by the Fed with newly printed 'money' (or key strokes).

That money is then spent by the Government on all sorts of things such as Food Stamps. Pensions, USN ships, F-35s, government wages and so on. ALL of those dollars end up in the economy and 'Money Supply' (M1).

Where am I wrong? (Are they withdrawing cash at the same rate? etc I have never heard that suggested)

OC
 
The share market is at all time highs, start-ups are valued at multiples of their fundamentals, the price of agricultural land is at all time highs, real estate in the most liveable cities is at all time highs. Aren't these a reflection of the easy credit available? Inflation hasn't necessarily translated into higher costs for the majority of consumables yet but I'd say that's because the new money didn't get far from the source.
 
Old Codger said:
"It did not increase the money supply and was not inflationary."


This I cannot understand. I know that increased money supply supposedly increases inflation, and I know that it has not or seems to have not. I know that inflation is more than they let on and announce, Americans tell me so!

To me, QE in fact DOES increase the money supply, even if they are lying about how much!

The US Federal budget is what it is, and is in DEFICIT! They flog US Treasury Bonds to make up the deficit as they have been doing since Adam was a lad. Up to recently those bonds were being bought by the Fed with newly printed 'money' (or key strokes).

That money is then spent by the Government on all sorts of things such as Food Stamps. Pensions, USN ships, F-35s, government wages and so on. ALL of those dollars end up in the economy and 'Money Supply' (M1).

Where am I wrong? (Are they withdrawing cash at the same rate? etc I have never heard that suggested)

OC
Click to expand...
It did not increase the money supply because the banks simply took that money and parked it as excess reserve with the Fed at .25% interest rates. Over 2.5 trillion dollars. That is where q.e. went.
 
Now this 2.5 trillion is down to 2 trillion.....but thanks to the repealing of the Glass Steagall act, banks can now trade with this money.....I wonder what they have done with that 500 billion dollars? They certainly didn't lend it out.
 
tolly_67 said:
Now this 2.5 trillion is down to 2 trillion.....but thanks to the repealing of the Glass Steagall act, banks can now trade with this money.....I wonder what they have done with that 500 billion dollars? They certainly didn't lend it out.
Click to expand...
Destroyed. That's what central banks (also the ECB) in recent years did and do: they create reserves, they destroy them again. The only inflationary part is that intrest that the central bank pays its member banks to NOT lend the (required and excess mostly identical %) reserves out That 0.25% you mentioned.
http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm
and
http://research.stlouisfed.org/fred2/data/IOER.txt
As one can see, this 0.25% is outdated, end 2015 the Fed increased it to 0.50 and this month further to 0.75.
This is of course just to maintain the status quo of the do not spend reserves yell to its member banks. In the end, the difference between the various rates out there matters, not their absolute value (relative to zero). Member banks chose the best rate, and if another rate is driven up, the central bank drives its reserves "donation" also up.
 
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