➊ Streetwise Revisited Analysis

Friday, December 03, 2021 3:13:54 PM

Streetwise Revisited Analysis

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The Federal Reserve on Wednesday flashed back almost 50 years to a campaign code-named "Operation Twist", as it announced the purchase of longer-dated Treasury securities to help end a deepening U. The move to purchase longer-dated U. But that is where the similarities end. In the s, in an effort to flatten the yield curve to simultaneously tackle a recession and a lingering trade deficit, the Fed bought long-term bonds and sold short-term bills.

As a result, the operation was sterilized in terms of its impact on the money supply and was not an expansion of monetary policy. This time, the intervention will not be sterilized and should help ease monetary conditions. A basis point is one one-hundredth of a percentage point. And I think it became apparent fairly quickly that the market imperfection was not as great as had been assumed. Treasuries even sold off the first day the bazooka was actually fired. But let's put this all in perspective by looking at longer time frames.

Yes they are. I guarantee it. If you want to know which way short term, I do not know, nor does anyone else. One thing I am quite certain of is that Ethan Harris' statement " We see this as equivalent to a 75 basis point cut in the fed funds rate " is complete nonsense. This is not the equivalent of interest rates at negative. Technically, the extremely pervasive "bottom in yields is in" sentiment seems a bit misguided. It's quite possible the bottom is in, but that does not mean yields are blasting sky high. Look at how long yields stayed low in Japan. It can happen here. Treasury Counterforces Seasonality is negative through May think tax season and refunds.

There are few signs of economic recovery. A downward spiral or economic collapse is not out of the question. Notice I do not even have quantitative easing on the list. Other than producing "one day wonder" candles as in the first chart above, the odds that quantitative easing works as planned are nonexistent. Here is one pertinent snip. For starters the Fed cannot force long term interest rates down without committing an unlimited amount of purchases, and perhaps not even then.

Simply put, the Fed cannot change the primary trend. If long-term interest rates are headed higher there is little the Fed can do about it. Japan proved that currency manipulation does not work, and I see little reason for open intervention in the treasury market to work either. Yes, there was a huge treasury rally on the announcement. Was this because of the news or was the market ready to rally anyway? I think the latter. It was an oversized move but treasuries have sold off three consecutive days since the announcement. Appearance vs. Reality Yields may drop. If they do it will not be because quantitative easing is working. It tells us that the deflationists have neither economic theory nor modern economic history on their side.

They are really lousy psychologists, too. However, if inflation is the expanse of money and credit, then deflation is the opposite. There are reasons that prices could be falling that have nothing to do with deflation productivity or huge harvest and there are reasons prices could be rising that have noting to do with inflation peak oil or supply disruptions or weather. The heart of the matter was a collapse of CREDIT that actually overwhelmed Japan even as the central bank tried to prevent it by injections of money. That collapse in credit caused Japan's mammoth asset bubbles to pop and housing prices to decline 18 straight years.

It also caused the stock market to fall from 40, to 7, or so in the same time. North ignores declining credit for 60 straight months even as the Bank of Japan tried to prop things up via money supply. What about prices in Japan? Ojisan on the Motley FOOL writes: I lived in Japan from , and prices of many good and services definitely fell, including food items, haircuts, movie tickets, travel, subscriptions, etc. With services, most of the time it was difficult to see deflation from the outside because the listed prices didn't change much, but discounts and "specials" became so common that getting less than the actual price was easy.

In the case of subscriptions, for example, companies started throwing in freebies, like coupons for other stuff, household goods, etc. Of course, durable goods fell in price, but that's pretty much expected, especially on the tech side. Still, yen shops dollar stores sprung up all over the place while I was there, with some pretty surprising stuff, most of it made in Korea, China, and Malaysia. Second hand shops, previously shunned by Japanese, became more popular, and more common, putting pressure on department stores, forcing constant sales. Finally, it became noticeable easier to haggle, even in the dept. When I bought a video camera, for example, they threw in all kinds of extras to close the deal.

So, technically, I paid the listed price, but not really. Ojisan Is it that unlikely that with rising unemployment in the wake of a housing crash that prices of movies, haircuts, and other services drops here too? I think not. If inflationists point out rising home prices as evidence of inflation, then they must point out home price declines as evidence of deflation if and when a housing bust happens. Inflation Monster Captured Following is a snip about deflation in Japan from Inflation Monster Captured There are many that think true deflation decrease in money supply can not happen under a fiat system.

I disagree but perhaps the point is moot. Money supply itself actually never contracted in Japan. Instead, it grew very slowly for quite some time. However, bank credit outstanding contracted for 60 months in a row. Clearly there was a credit contraction. How did money supply still manage to grow? Fiscal deficits were ramped up immensely, roads to nowhere were built, and the Bank of Japan monetized all of it. In addition, money velocity plummeted. The net effect of the credit contraction on prices was clearly what one would nowadays call "deflationary". Prices across a broad range of assets and goods and services fell.

Indeed, practically everything fell but government bonds. In addition, the Mx series fails to properly distinguish between credit and money. Current money supply Money AMS figures are much tighter than meets the eye. A glance at the yield curve suggests the same thing. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit debt expansion, or later as a final and total catastrophe of the currency system involved. That is the question.

I remain convinced that Ian Gordon's Kondratieff winter scenario will come to pass. Then we will see massive bankruptcies, enormous levels of unemployment, extremely high rates of savings and debt repudiation, and the excesses of the economic slate will be wiped clean and a new K-cycle can begin. That will be a horrible environment for commodities but not for gold and cash. The K-Cycle: Myth or Reality? Is the whole idea of the Kondratieff Cycle just a figment of some very imaginative minds?

Murray N. Rothbard writes: One of the worst things about the "business cycle" is its name. For somehow the name "cycle" caught on, with its implication that the wave-like movement of business is strictly periodic, like the cycles of astronomy or biology. An enormous amount of error would have been avoided if economists had simply used the term "business fluctuations. One of the mystical "cycles" that has been getting a lot of play from time to time is the flimsiest "cycle" of them all: the Kondratieff long cycle.

The Kondratieff is supposed to be a strictly, or at least roughly, periodic cycle of about 54 years, which allegedly underlies and dominates the genuine cycles for which we have actual data. Even though, as we shall see, this cycle is strictly a figment of its fevered adherents' imagination, there does seem to be some sort of cycle in the periods when the "Kondratieff" captures the interest of financial and economic analysts.

Most of the Kondratieffites confidently predicted that the peak would arrive in , just 54 years after the previous peak. Previous peak-to-peak stretches had been 52 from to , and 54 to So where indeed is the peak? It is now and counting. We are ten years past the confident prediction and we still have inflation. The Kondratieffites have been forecasting imminent deflation since the magic year, but still. Time is inevitably running out on the Kondratieffites.

For there will be no Big Bang, no repeat of Pointing to problems in the economy, to stagnation, to stagflation, to falling commodity prices, to secular rises in the unemployment rate, while interesting and significant is not enough. It does not demonstrate the Kondratieff. After all, there are always economic problems. The point is that there is no permanent depression, and there is not, and will not be, any deflation.

The idea that we are right now in the midst of a Kondratieff depression, but that the deflation is being masked by inflationary bank credit, cannot be the way out. For that is simply the mystic's fudge factor so that you can never prove him wrong, regardless of the evidence. No, the Kondratieff is dead, and now it is simply a question of how long it will take the Kondratieffites to lie down, to admit defeat and slip away into the night. We can only sum up the correct answer to the problem of the business cycle. We have already seen a hint of the solution: that inflation and the inflationary boom are caused by bank credit expansion generated by governments.

In fact, government's central banking system provides the key causal element for all business cycles, a cause exogenous to the market economy. Continuing government intervention sets in motion business cycles by generating inflationary booms. Because these booms distort the signals of the market place in interest rates and in relative prices they bring about grave distortions of production and prices, which must be corrected by recessions and depressions. And so we see — and this is the great insight of the "Austrian" theory of the trade cycle — that micro and macro economics are in harmony after all. The free market does tend to adjust harmoniously without boom and bust, without incurring clusters of severe business losses.

It is government intervention in the market that creates the business cycle, and unfortunately makes the corrective adjustment of recessions necessary. The cause of the boom-bust cycle is not some mystical periodic Force to which man must bend his will; the fault, dear Brutus, is not in our stars but in ourselves, that we are underlings. Objections to the K-Cycle In reading the above I believe one can summarize Rothbard's biggest objections as follows: The K-Cycle is not governed by nice neat waves at regularly spaced intervals. The K-Cycle is not a natural cycle. It is based on government intervention and other outside factors. Kondratieffites changed the meaning of the word "depression" as needed to curve fit year cycles.

Certainly there is no reason why cycles should be 54 years long or any other number either. One of the reasons Kondratieffites have been so dismissed is their insistence on cycles, super-cycles, grand-super-cycles, etc as well as bending data and definitions to get around variances in those cycles. Still, can anyone can deny that overexpansion sets the very seeds of its own demise? Indeed, there are examples going back to Caesar and beyond. Is "cycle" even the right name? Would "business fluctuation" be better? That which we call a rose by any other name would smell as sweet. Far enough removed, no one remembers the previous economic bust nor do they think there will ever be another one.

Sticking to fixed cycles of 54 years led to many premature K-Winter calls by various people, some of them being rather famous. But does that mean there will not be an upcoming bust simply because it has not happened in the prerequisite time frame? That we will have another bust as a result of the reckless over expansion of credit seems to be an Austrian given. A rise from those ashes also seems relatively assured. Let's study the following paragraph in greater detail: The point is that there is no permanent depression, and there is not, and will not be, any deflation.

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