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When will "The Fed's Folly" end? (Huge Balance Sheet)

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When will "The Fed's Folly" end? (Huge Balance Sheet)

originally:

When will "Bernanke's Folly" end?

==========================

 

There was an interesting on DrB's Wealth thread...

 

QUOTE (DrBubb @ Jun 15 2010, 01:11 PM) <{POST_SNAPBACK}>
Wealth Shift : Stocks to Property, and then to...
What happens to various asset classes...
It is important to realise when looking at these comparisons:
The Income of the average American worker (after adjustment for inflation) was lower in 2008 (let alone 2009) than it was in 1999. - Steve Rattner

(edit : updated chart - to 2012)
AA_zpsd638af3d.png

Debt fueled "investment" has investor money running around in circles, with no increase in real wealth for most people. Only on Wall Street has wealth grown, and Main Street doesn't like it. There is a risk that the "average American" will rebel and try to put an end to the Fed's manipulation of interest rates and "Wall Street's trickery." The frustration over

mulliganbubble.jpg

What caused that big US housing bubble? Low interest rates.
The Interest Rate Index (IRX), of short term rates dropped from
over 6.0% in Nov.2000, to under 1.0% in June 2003, and stayed below that level for 10 months, and was only pushed back above 3.0% in June 2005. By mid-2006, rising rates had killed off rises in house prices, and the speculative bubble began to unwind.

zzzzn.gif

===========

Greenspan's folly caused a Housing Bubble. That much is clear.
What Bubble is being caused by Bernanke's folly? Is it a Bubble in Bonds?


- this comes from same thread:

When does the Bonds Bubble burst?
Does it burst when Short Term rates tick up? Or does it require a bigger rise in short rates?
(I see that the Property Bubble did not burst straight away when short rates started rising.

Marc Faber seems to think that the Fed will keep rates below inflation for years and years.
Is this possible?

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Thanks for picking up on an interesting issue...
I think there is real power in this "holistic" way of looking at wealth.

=====

Yes. That is right.
Low rates from Greenspan created a Housing Bubble.
Low rates from Bernanke have created a Bubble in Sovereign debts.
Both Bubbles will wipe out trillions in "fictitious wealth"

When does the Bonds Bubble burst?
Does it burst when Short Term rates tick up? Or does it require a bigger rise in short rates?

(I see that the Property Bubble did not burst straight away when short rates started rising.

Marc Faber seems to think that the Fed will keep rates below inflation for years and years.
Is this possible?

 

I find it impossible to predict the timing precisely.
But it is interesting to see how the duration of Bernanke's folly is looking similar to Greenspan's folly:


If short rates follow the pattern of the Greenspan Era, they will turn up around the end of 2010,

and rise steadily to about 2.00% by the end of 2011.

And they will keep rising after that, if they stick to the historic pattern.

...more later...

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He has just covered his @$$:

 

http://www.cnsnews.com/news/article/67461

Bernanke: ‘Things Will Come Apart’ If Entitlements Are Not Reformed and Spending Controlled

...

“There are various ways you could address this – you can restructure entitlement programs [or] you can cut other things – but at some point you need to address the overall budgetary situation. If you don’t, you’ll get a picture like this one [pointing to a graph showing a steep rise in interest rates and debt] where interest rates are rising and debt outstanding is growing exponentially.

 

“At that point, things will come apart,” he said. “This [rise in debt] will stop, but it might stop in a very unpleasant way in terms of sharp cuts, a financial crisis, high interest rates that stop growth, [or] continued borrowing from abroad.”

...

“I think we need to show that within a few years we’re going to go clearly to a path where the debt-to-GDP ratio remains more or less stable, in other words that line in that picture [indicating the debt-to-GDP chart showing unsustainable growth] is flat or going down, rather than rising,” he explained.

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Right, GF.
"Bernanke: Things Will Come Apart If Entitlements Are Not Reformed and Spending Controlled
There are various ways you could address this you can restructure entitlement programs [or] you can cut other things but at some point you need to address the overall budgetary situation. If you dont, youll get a picture like this one [pointing to a graph showing a steep rise in interest rates and debt] where interest rates are rising and debt outstanding is growing exponentially."
/see: http://www.cnsnews.com/news/article/67461

He knows that those needed reforms will never be made, so he lays the blame elsewhere.

As any good Austrian economist can tell you, the problems which create the potential for a crash get "baked into the cake" long before the crash arrives, and they are normally caused by unnaturally low interest rates. This is exactly what we have seen thanks to the policies of Mr Greenspan and Mr Bernanke.

xxxf.gif

Let's see where Rates and US House prices were at these past points in time:

(Greenspan's rate-cutting folly, was to counter Dotcom-bubble problems)

==========
0 - Jan. 2000 : $120,000 : TNX-6.67% / IRX-5.53%
1 - May 2003 : $168,072: TNX-3.35% / IRX-1.09% = Long rate Low
2 - Mar. 2004 : $186,588 : TNX-3.84% / IRX-0.92%
3 - July 2006 : $247,824 : TNX-4.99% / IRX-4.94%* = HOUSE PRICE PEAK

The really amazing thing here is how lower rates trigger rising house prices, and then they took on a bizarre momentum of their own, and powered up an astonishing 32.8% over 28 months, from $186,588 in March 2004, to the $247,842 peak level in July 2006. This corresponds with the "2 year Buyer's Curse" period that Fred Harrison talks about, which comes at the end of the 14 year up-cycle in housing prices.

I think that this 28 month period included all the worst excesses of the greed-induced sub-prime debt craze. Banks pushed out massive amounts of credit then, lending to "anyone with a pulse." And home buyers were convinced that buying houses was an easy way to create wealth. The reality was that their mal-investments in property were destroying wealth.

So far, the house price erosion that the US has seen has only brought prices back to where they were in mid-2003, when Long Term rates (TNX) bottomed. What remains to be seen is whether or not rising rates (in the years to come), will push home prices down further, and unwind all the price rises since 2000, and take price back down to $120,000 or lower. That may not be too surprising since the income levels of the average American worker are now below the levels of 1998-99.

I think this really show that high asset prices that are delivered through low interest rates, heavy gearing, and speculative hype are not sustainable unless incomes rise too. And so a key measure of real wealth in an economy must be the amount of real and sustainable income that is being generated within an economy. Why do we hear so little about this?

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An update should be useful... (as of Sept. 2014)

 

It's not Bernanke's Folly anymore - It just the Fed's Folly

 

The forecast of a light bounce in Housing...

mulliganbubble.jpg

 

Was right... Based on PHM ... update

PHM-2001_zps4271ed16.png

 

But that might be finishing soon - Clif High is expecting a crash in US housing to start any day now.

 

"When does the Bonds Bubble burst?
Does it burst when Short Term rates tick up? Or does it require a bigger rise in short rates?"

 

TLT / We are still awaiting the Right shoulder (or a New high) in the T-Bond Rally ... update

TLT2_zps09120a44.gif

 

If you look closely, you will see a correlation between PHM and TLT ... update

 

PHMetc_zps67360390.png

 

This should not be surprising, since low LT rates help home prices to rise.

 

I marked with a blue box, where the two prices were in harmony with each other, and with a pink box, where they were moving in opposite directions. I nearly put a pink box in 2014, since we have seen a rise in TLT (drop in rates) without any progress in PHM. This suggests the rally in US housing is now very tired, since it is not responding to lower long rates.

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The Fed is Looking Like a Sovereign Wealth Fund - WSJ: David Malpass

 

It is planning to maintain its enormous balance sheet : $4.5 Trillion in Treasuries

 

+ While keeping rates near zero, at least into 2015

+ Have caused disruptions, slow growth, falling median incomes (ie wealth concentration)

 

Fed B/S evolving into a semi-permanent "govt-controlled" (? SIC) investment fund.

It is now one of the largest and most leveraged bond funds

 

Over the next five years, the Fed will have an opportunity to rollover $1 Trillion or more

 

Forces may nudge the portfolio away from bonds, into, say: Environmental bonds

 

Right now the Fed pays only 0.25% for the bank reserves it uses for funding.

Question: how much will it pay on those reserves in future?

 

"Instead of tackling a complex new investment mission, the Fed should establish a clear wind-down process..."

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Bernanke's absurd and unfair plan (explained at 12 mins in)

 

Silver Update 7/31/14 Wealth Effect

 

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Watching the Fed's balance sheet grow has been profitable for equity holders

 

The Stock market seems mesmerized by this relationship

 

... as was so in 2013:

20131010_fed.jpg

 

... and earlier this year

20140605_EOD11_1.png

 

... a few weeks ago

sp%2Bfd.png

 

... and is still true today

SPX_zps73828c33.gif

 

The FT has the update chart of both - and it shows the SPX pushing back towards the old high,

as the Fed Balance sheet moves towards flattening out

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