Author Topic: Negative interest rates take investors into surreal territory  (Read 17706 times)

JimBowerman

  • Newbie
  • *
  • Posts: 48
    • Split Rock Capital Management, LLC
Re: Negative interest rates take investors into surreal territory
« Reply #50 on: July 05, 2019, 09:04:22 AM »

Isn't it interesting that governments aren't using fiscal policy but instead focused on monetary stimulus? Clearly, at this point, monetary policy has had limited effect on driving inflation and wages higher, but may be creating risks in asset price inflation.


Don't necessarily disagree that some infrastructure spending would be beneficial, but i don't think we should hold out hope that fiscal policy will stoke growth.

There's something called the monetary offset in economics, which basically states that any increased spending on the fiscal side will be cancelled out if the monetary policy target is credible.  I like to think in extremes for though experiments: If we started running a 10% fiscal deficit, but had a 2% inflation target many would worry about upcoming inflation because of large deficits.  But the monetary authorities (in theory) could refuse to finance that deficit and stick with the 2% inflation target.  Default, etc may happen but if a central banks wants to, it can always overwhelm fiscal policy.  This is obviously a bit theoretical and in reality, politics comes into play.  But imo, the more likely real world example is that we don't default but go more the japan route where, despite a huge amount of debt, their low inflation target overwhelms any fiscal deficit/debt they've had. 

Would also note that if we want to stoke growth, imo monetary policy is less wasteful that fiscal policy (fiscal policy risks spending money on things that aren't needed) whereas monetary policy is more evenly distributed and less wasteful


RuleNumberOne

  • Full Member
  • ***
  • Posts: 192
Re: Negative interest rates take investors into surreal territory
« Reply #51 on: July 05, 2019, 09:16:13 AM »
https://www.bloomberg.com/news/articles/2019-07-05/amsterdam-housing-market-gets-some-help-from-dutch-government?srnd=premium

"Construction costs in Amsterdam have risen 25% over the last two years.

median home price in the Dutch capital soared 80% in the past four years to €448,000 ($505,000)."
« Last Edit: July 05, 2019, 09:19:33 AM by RuleNumberOne »

JimBowerman

  • Newbie
  • *
  • Posts: 48
    • Split Rock Capital Management, LLC
Re: Negative interest rates take investors into surreal territory
« Reply #52 on: July 05, 2019, 09:31:00 AM »
https://www.bloomberg.com/news/articles/2019-07-05/amsterdam-housing-market-gets-some-help-from-dutch-government?srnd=premium

"Construction costs in Amsterdam have risen 25% over the last two years.

median home price in the Dutch capital soared 80% in the past four years to €448,000 ($505,000)."

Not sure about Amsterdam, but would guess the same applies....

But in New York, SF etc, construction costs (after removing costs from extra studies, etc) are relatively minor compared to final sale price

Its possible to build 40 story apartment buildings for $300/square foot.

However apartments in NYC/SF commonly sell for over $1200/square foot.  Its the constricted supply/air rights/etc that make up much of the cost, and thats only getting worse in SF/NYC (and i presume Amsterdam)

That said, price rises in a certain industry don't imply inflation for an economy as a whole and really don't have anything to do with monetary policy (which is the only way to create long term inflation)

EU and US are very unlikely to see economy wide inflation in the near or medium term, despite rises in prices in certain sectors like housing/health care/, rising oil prices/wage pressure, etc.  The oil price rises in the 1970s, and other "cost push" inflations aren't really what causes inflation. It can put pressure on the monetary authorities to print more money so unemployment doesn't rise, but its ultimately the "printing more money" which causes inflation, not the oil price rise, or the rise in housing prices, etc.

The monetary authorities are too scared of inflation to let it get out of control.  Will likely have to wait for the next generation of central bankers who didn't grow up in the 1970s inflation

edit:  To borrow from Einhorn's analogy...imagine rising oil prices, housing costs, etc as jelly donuts. Imagine the central banks inflation target as your body weight target.  Now housing costs, rising oil prices etc will certainly put pressure on inflation just as eating only jelly donuts will also put adverse pressure on reaching your weight goal.  However it is not the jelly donuts themselves that made you miss your goal weight (Some guy a few years ago actually lost weight eating only twinkies).  Now eating only twinkies/jelly donuts isn't healthy and having rapidly spiking house prices isn't healthy for an economy either (all else being equal).  But it's credibility of "the goal weight" which is paramount. It's the credibility of the inflation target which is paramount. The other stuff (i.e. jelly donuts, oil prices, house prices, etc) is just details.
« Last Edit: July 05, 2019, 09:58:07 AM by JimBowerman »

Spekulatius

  • Hero Member
  • *****
  • Posts: 3126
Re: Negative interest rates take investors into surreal territory
« Reply #53 on: July 05, 2019, 10:26:09 AM »
This feels like a missed opportunity for massive infrastructure investment like what China did since 2008 by building a national high speed railway system.

Isn't it interesting that governments aren't using fiscal policy but instead focused on monetary stimulus? Clearly, at this point, monetary policy has had limited effect on driving inflation and wages higher, but may be creating risks in asset price inflation.

It just seems like a big investment in infrastructure (high speed rail, internet/fibre/5g, airports) is quite obvious ad it will tighten labour markets, drive wages, increase inflation and interest rates and drive long-term productivity. And the market is basically saying, it'll finance it for next to nothing..

0 high speed rail in the US vs 428km of high-speed rail in China in 2007 to 29,000km in 2017
5 of the 6 top airports in the world are in Asia..
Fastest internet: Taiwan, Singapore, Denmark, Sweden, Japan..

Yes, it seems kind of crazy in Germany to not do some infrastructure investments (housing, rail etc), because in a lot of cities, the supply hasn’t kept up with demand. Fast rising housing is not popular in Germany because the percentage of homeowners is much lower than in US. Germany had a budget surplus, record low interest rates and demand that can’t be met. I instead of bitching over the negative effect of the immigration , there should be much more focus on making use of it and do what needs to be done. Seem like a no brained to build housing for a million people in cities with job growth, rail infrastructure to meet increased demand and get some of new inhabitants to work at  He same time,  instead of playing financial stimulus that doesn’t seem to do much.

But then again, I am not an economist.
To be a realist, one has to believe in miracles.

mcliu

  • Hero Member
  • *****
  • Posts: 556
Re: Negative interest rates take investors into surreal territory
« Reply #54 on: July 05, 2019, 10:35:27 AM »

Isn't it interesting that governments aren't using fiscal policy but instead focused on monetary stimulus? Clearly, at this point, monetary policy has had limited effect on driving inflation and wages higher, but may be creating risks in asset price inflation.


Don't necessarily disagree that some infrastructure spending would be beneficial, but i don't think we should hold out hope that fiscal policy will stoke growth.

There's something called the monetary offset in economics, which basically states that any increased spending on the fiscal side will be cancelled out if the monetary policy target is credible.  I like to think in extremes for though experiments: If we started running a 10% fiscal deficit, but had a 2% inflation target many would worry about upcoming inflation because of large deficits.  But the monetary authorities (in theory) could refuse to finance that deficit and stick with the 2% inflation target.  Default, etc may happen but if a central banks wants to, it can always overwhelm fiscal policy.  This is obviously a bit theoretical and in reality, politics comes into play.  But imo, the more likely real world example is that we don't default but go more the japan route where, despite a huge amount of debt, their low inflation target overwhelms any fiscal deficit/debt they've had. 

Would also note that if we want to stoke growth, imo monetary policy is less wasteful that fiscal policy (fiscal policy risks spending money on things that aren't needed) whereas monetary policy is more evenly distributed and less wasteful

The growth isn't necessarily from the spending itself but from the productivity gains that better infrastructure will provide over the long-term.

It's clear that the private sector is more efficient than the government, but there are certain spending and projects that necessarily need government intervention/support.

In addition, markets don't always allocate resources that efficiently either.. The massive housing bubble and excessive investments in real estate is a recent example..

On monetary policy, wouldn't the implementation and transmission may also impact inflation and expectations? Is quantitative easing (buying bonds) the most effective way of printing money vs writing a cheque to everyone vs adding a 0 to everyone's bank accounts?

mcliu

  • Hero Member
  • *****
  • Posts: 556
Re: Negative interest rates take investors into surreal territory
« Reply #55 on: July 05, 2019, 10:44:13 AM »
This feels like a missed opportunity for massive infrastructure investment like what China did since 2008 by building a national high speed railway system.

Isn't it interesting that governments aren't using fiscal policy but instead focused on monetary stimulus? Clearly, at this point, monetary policy has had limited effect on driving inflation and wages higher, but may be creating risks in asset price inflation.

It just seems like a big investment in infrastructure (high speed rail, internet/fibre/5g, airports) is quite obvious ad it will tighten labour markets, drive wages, increase inflation and interest rates and drive long-term productivity. And the market is basically saying, it'll finance it for next to nothing..

0 high speed rail in the US vs 428km of high-speed rail in China in 2007 to 29,000km in 2017
5 of the 6 top airports in the world are in Asia..
Fastest internet: Taiwan, Singapore, Denmark, Sweden, Japan..

Yes, it seems kind of crazy in Germany to not do some infrastructure investments (housing, rail etc), because in a lot of cities, the supply hasn’t kept up with demand. Fast rising housing is not popular in Germany because the percentage of homeowners is much lower than in US. Germany had a budget surplus, record low interest rates and demand that can’t be met. I instead of bitching over the negative effect of the immigration , there should be much more focus on making use of it and do what needs to be done. Seem like a no brained to build housing for a million people in cities with job growth, rail infrastructure to meet increased demand and get some of new inhabitants to work at  He same time,  instead of playing financial stimulus that doesn’t seem to do much.

But then again, I am not an economist.

Yes exactly! It just seems so obvious..

All this money printing hasn't driven real productivity or real economic activity. It's just sloshing around the financial system looking for returns and driving up prices. (Not sure why though.. Maybe extreme risk-aversion, uncertainty..?)

It seems like an opportune time for governments to borrow big-time at negative rates and invest in long-term productivity projects..

JimBowerman

  • Newbie
  • *
  • Posts: 48
    • Split Rock Capital Management, LLC
Re: Negative interest rates take investors into surreal territory
« Reply #56 on: July 05, 2019, 10:44:40 AM »

It's clear that the private sector is more efficient than the government, but there are certain spending and projects that necessarily need government intervention/support.

On monetary policy, wouldn't the implementation and transmission may also impact inflation and expectations? Is quantitative easing (buying bonds) the most effective way of printing money vs writing a cheque to everyone vs adding a 0 to everyone's bank accounts?

No disagreement on the first sentence.  Simply stating that we should do infrastructure spending where its needed logistically etc, not because we hope it will stoke inflation for the economy as a whole.

Imo the transmission mechanism is much less important than the credibility of the target.  if the market doesn't believe the target then it won't stoke inflation.  As an extreme, you could hand out $50,000 to everyone tomorrow but if you promised to tax that same $50,000 out of existence in 1 years time, then imo very little, if any, inflation would result. If forced to choose, i'd stick with the current system of open market operations, it works perfectly fine when the target is clear.  Its only when the target is unclear that we get bloated central bank balance sheets, etc.  Bloated CB balance sheets are a sign of failed monetary policy - expectations have not been managed and money has been too tight.  See: US, ECB, and the most extreme - Japan...Commonly, central banks with the most tight policy have the largest balance sheets.  It's very counterintuitive.

Inflation depends mainly on the expected long term path of the monetary base.

John Hjorth

  • Hero Member
  • *****
  • Posts: 2713
Re: Negative interest rates take investors into surreal territory
« Reply #57 on: July 05, 2019, 11:24:41 AM »
Board of Governors of the Federal Reserve System [Released July 5th 2019] : Monetary Policy Report.

Please note on the front cover, top right: "For use at 11:00 a.m. EDT July 5, 2019" - Incidental, huh? [Same day as the job report - just a bit later.]

This report will be presented by Mr. Powell before the Senate Banking Committee as a testimony called "Semiannual Monetary Policy Report to the Congress" on Thursday July 11th 2019 at 10:00 AM.

Summary [p. 1] :


Quote
Economic activity increased at a solid pace in the early part of 2019, and the labor market has continued to strengthen. However, inflation has been running below the Federal Open Market Committee’s (FOMC) longerrun objective of 2 percent. At its meeting in June, the FOMC judged that current and prospective economic conditions called for maintaining the target range for the federal funds rate at 2¼ to 2½ percent. Nonetheless, in light of  increased uncertainties around the economic outlook and muted inflation pressures, the Committee indicated that it will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near the Committee’s symmetric 2 percent objective.

It's exactly the same message as it basically has been for a long time from the FED. -And no talk about rate cuts.
« Last Edit: July 05, 2019, 11:26:22 AM by John Hjorth »
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai

RuleNumberOne

  • Full Member
  • ***
  • Posts: 192
Re: Negative interest rates take investors into surreal territory
« Reply #58 on: July 05, 2019, 06:59:31 PM »
There is plenty of inflation right now. This can be proven with a simple exercise. Take the historical CPI reports of the last 10 years for the San Francisco-San Jose-Oakland metro area. In June 2017 this was 1.7%. Assuming an average of 2% for the last 10 years, it compounds to a total of 22% (I don't have the time to dig through all the 10 years of reports, but we don't need to.)

The cost of living in Silicon Valley has more than doubled in the last 10 years. Constructions wages, restaurant wages, tech wages, every kind of private sector wage has doubled or more. Construction costs used to be $150 per square foot earlier this decade, now it is at $350/sqft. Apartment rents have doubled. Home prices have more than doubled. But the inflation reported by the government for this metro area would be a cumulative 25% over the last 10 years.

Another example: If Dutch or German home prices are increasing 10%/year, and housing is 40% of the CPI basket like in the US, home prices alone would contribute 4% to the final inflation figure. Even if the rest of the CPI basket stays flat, we should be seeing 4% inflation. But these crooks use "imputed rents", and "imputed" everything wherever they can. They keep imputing 1-2% in rent inflation.

Then they set monetary policy based on these imaginary "imputed rents." They never measure the inflation in home prices or stock prices or bond prices when justifying their monetary policy. Instead they point to stuff of their imagination - such as "imputed costs", "imputed rents", "hedonic adjustments", "substitution effects" and such other nonsense used in inflation calculations.

I bring this up to help us identify inflection points. When we have misallocation of capital, and things get completely out of wack, the bubble has to pop. Identifying the dislocation before it happens can save or make a lot of money. I don't see how the home price boom can continue in Europe for long while the governments wring their hands about "inflation less than 2%" and keep rates negative. Reality becomes unmoored from the fake inflation figures.


https://www.bloomberg.com/news/articles/2019-07-05/amsterdam-housing-market-gets-some-help-from-dutch-government?srnd=premium

"Construction costs in Amsterdam have risen 25% over the last two years.

median home price in the Dutch capital soared 80% in the past four years to €448,000 ($505,000)."

Not sure about Amsterdam, but would guess the same applies....

But in New York, SF etc, construction costs (after removing costs from extra studies, etc) are relatively minor compared to final sale price

Its possible to build 40 story apartment buildings for $300/square foot.

However apartments in NYC/SF commonly sell for over $1200/square foot.  Its the constricted supply/air rights/etc that make up much of the cost, and thats only getting worse in SF/NYC (and i presume Amsterdam)

That said, price rises in a certain industry don't imply inflation for an economy as a whole and really don't have anything to do with monetary policy (which is the only way to create long term inflation)

EU and US are very unlikely to see economy wide inflation in the near or medium term, despite rises in prices in certain sectors like housing/health care/, rising oil prices/wage pressure, etc.  The oil price rises in the 1970s, and other "cost push" inflations aren't really what causes inflation. It can put pressure on the monetary authorities to print more money so unemployment doesn't rise, but its ultimately the "printing more money" which causes inflation, not the oil price rise, or the rise in housing prices, etc.

The monetary authorities are too scared of inflation to let it get out of control.  Will likely have to wait for the next generation of central bankers who didn't grow up in the 1970s inflation

edit:  To borrow from Einhorn's analogy...imagine rising oil prices, housing costs, etc as jelly donuts. Imagine the central banks inflation target as your body weight target.  Now housing costs, rising oil prices etc will certainly put pressure on inflation just as eating only jelly donuts will also put adverse pressure on reaching your weight goal.  However it is not the jelly donuts themselves that made you miss your goal weight (Some guy a few years ago actually lost weight eating only twinkies).  Now eating only twinkies/jelly donuts isn't healthy and having rapidly spiking house prices isn't healthy for an economy either (all else being equal).  But it's credibility of "the goal weight" which is paramount. It's the credibility of the inflation target which is paramount. The other stuff (i.e. jelly donuts, oil prices, house prices, etc) is just details.
« Last Edit: July 05, 2019, 07:18:57 PM by RuleNumberOne »

JimBowerman

  • Newbie
  • *
  • Posts: 48
    • Split Rock Capital Management, LLC
Re: Negative interest rates take investors into surreal territory
« Reply #59 on: July 05, 2019, 07:24:45 PM »
RuleNumberOne,

Not to deflect and I’d be happy to continue this further but the whole shadow stats conspiracy has largely been debunked imo.  Someone a while back even went back and looked at the subscription prices for shadow stats.com and found the dude hadn’t even increased subscription prices at the same rate as his implied super high inflation rate. He increased prices at the much lower rate implying inflation was lower than he guessed.

Scott sumner (who has forgotten more about economics than I’ll ever know) debunked a similar argument as yours from peter Schiff all the way back in 2013 (see video below)

Summers basic point is that if inflation is really as high as you and schiff claim then rgdp would have to be negative or very low.  Something that is very unlikely given the unemployment numbers.  You basically have to believe the government is outright lying across multiples surveys (ngdp, unemployment, etc). Even sp500 revenues do to show anywhere near the inflation your claiming

https://youtu.be/_b4_KuC1-sQ
« Last Edit: July 05, 2019, 08:58:41 PM by JimBowerman »