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  • #101
  • Dec 13, 2005 1:25pm Dec 13, 2005 1:25pm
damn, the US stock market is rallying! what the hell is going on? was this statement seen as dovish? i see it as way hawkish, am i missing something here?
Relax and be happy.
  • #102
  • Dec 13, 2005 1:35pm Dec 13, 2005 1:35pm
dollar looks like its snapping back here.... could the world have initially misread the statement?
Relax and be happy.
  • #103
  • Dec 13, 2005 1:49pm Dec 13, 2005 1:49pm
something just hit me....

the reason the markets are reacting this way is because the statement changed some of its language. even though the language says the same thing as the last statement, the fact that it has changed at all is a signal that the fed is changing their stance. i, for one, do not believe this language change signals a change in policy, but i think that is what the market thinks.
Relax and be happy.
  • #104
  • Dec 13, 2005 3:51pm Dec 13, 2005 3:51pm
Quoting GoatT
I was reading the narafa/merlin housing bubble from earlier before and I think narafa is pretty dead on with his scenario #2....

People are mortgaged up the wazoo nowadays which is fueling all this consumer spending...I think if the fed did have long term rates up to 7% the destruction of wealth would ruin the economy for years (decades?) to come. If rates did go that high, a great number of the adjustable rate mortgages would default (because I feel, borrowers don't understand the concept of how it works, just that they're getting a great low rate now). Aside from the huge destruction of wealth, the "respect" that the fed has gained throughout the Greenspan era would be wiped out by a long term feeling of resentment by homeowners everywhere (who control a large portion of wealth).
Well, sorry for the late reply, but I think something must be clear...In our discussion, I mean me and Merlin, I meant the benchmark interest rates, and he was refering to the long term yields, those for the 10 yr note and longer...If benchmark USD rates are at 5%, then normally, the long term yields will be at 7-7.5% as Merlin stated...Corporate bonds will have even higher rates than that...This is a hell high yield, it won't do any good to the housing market, but it won't do any harm as well except convincing people to stop the frenzy buying of houses, which I assume they are considering right now with rates at 4.25%...

You know what's the problem with American consumers...The main problem is that consumer sending in the US is mostly fueled by credit..It's not bad to spend on credit, but it's bad to always spend on credit...Let me tell you one good thing, do you think consumer spending numbers reveal real purchasing power in the economy?? Of course not, because most of this spending is actually debt and loans over credit cards..That's why I don't consider consumer spending too much in my fundamental analysis for the US market specifically, because it's mostly fake and not revealing the real purchasing power in the economy...

Look at someone who earns $5000 a month, he actually has a purchasing power of those $5000..But unfortunately, he has got 2 credit cards with $5000 limits each, so he can actually buy goods and services worth more than his actual purchasing power...This is so misleading when you consider what he actually pays above the original $5000 as consumer spending, it's not...It might be consumer spending for this month, but it will be a debt next month, and an increasing debt with interest and late charges and so on...Ever thought why the consumer spending numbers are so volatile, because it's not 100% purchasing power numbers...


Thanks,

Nader
  • #105
  • Dec 13, 2005 4:19pm Dec 13, 2005 4:19pm
Quoting merlin
damn, the US stock market is rallying! what the hell is going on? was this statement seen as dovish? i see it as way hawkish, am i missing something here?
Hey Merlin, sure the stock market should rally, it's the Christmas

The statement means nothing to stock investors except a confirmation of a strengthening economy, that's what they wanted to hear and they heard it..


Thanks,

Nader
  • #106
  • Dec 13, 2005 4:22pm Dec 13, 2005 4:22pm
Quoting merlin
dollar looks like its snapping back here.... could the world have initially misread the statement?
Don't you consider the Euro over priced at 1.2000?? I do think so..I wish I was infront of my PC, I wanted to short the Euro just below the 1.2000 area but unfortunately I was outside ..lol... It's good I didn't short, as I am still not sure if market is going to see the 1.2000 as an over priced or under priced...I am giving the 1.2000 mark a 70% over priced versus a 25% under priced and a 5% fair priced...I think we will see by the end of the week what happens...


Thanks,

Nader
  • #107
  • Dec 13, 2005 4:44pm Dec 13, 2005 4:44pm
Quoting Isotonic
looks like greenie didn't follow my lead with the MP thing. :

so what should be circled instead? is the economy strong rather than steady?

come on merlin, bob...circle an option!!!
ok, here is where i think we are (green circle).

however, some of my predictions were wrong (at this very moment, things could change tomorrow). first, bonds didnt dive, and the dollar didnt strengthen. this, i think, is because the fed changed the language. like i said before, they said pretty much the same thing, but by using different language they are signaling different action...
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Relax and be happy.
  • #108
  • Dec 13, 2005 10:03pm Dec 13, 2005 10:03pm
I just dropped a fib retracement on the monthly chart. I know you guys have probably done that already, but it loooked like a nice ABC Euro Rally to me.

Any thoughts?

Thank you,
Pip Hunter
  • #109
  • Dec 14, 2005 11:18am Dec 14, 2005 11:18am
I found this report from Danske bank. With all the recent talk about whats up for next year I found it a timely read.

Heres their main predictions:

Introduction: Sunny outlook for 2006

• As energy prices have fallen back, the global industrial cycle seems set to continue expanding through 2006. We expect the global economy to display continued strength in 2006. Growth should be stronger than in 2005.

• The USA will show resilience into 2006. Oil is unlikely to dampen growth as much in 2006 as in 2005. On the other hand, house price growth should start to slow. Still, we argue that the overall growth cocktail is likely to be one of above trend growth for the fourth year in a row. The Federal Reserve will have to engineer a slowdown by taking the fed funds rate to a “tight” level. We still expect a 5.5% fed funds rate by late 2006.

• In Asia, Japan looks set for a genuine domestic recovery. This expansion tastes different to previous failed ones. Sustained inflation is on the cards for 2006 and the BoJ will raise rates above 0% for the first time since 2000. China is likely to continue expanding as well on the back of the global cycle. The Chinese story is one of a demand twist towards consumption.

• Euroland will also improve in 2006, catching up a bit with the global growth train. Euroland will participate in the global recovery for the first time in this cycle, and the growth gap between the USA and Europe should diminish. However, at 2.2% y/y, growth is not going to be stellar. With a limited risk of second round effects, inflation is likely to move down and we do not think the ECB will have to hike rates to more than 2.50% by late 2006.

• 2007 might be a different story. Continued Fed hikes should take the US to below trend growth, indicating the risk of a global slowdown. However, the timing and extent of the slowdown will very much depend on financial market sentiment in general, and on the continuation of the “bond yield conundrum” in particular.

Get the pdf here.
  • #110
  • Dec 14, 2005 12:12pm Dec 14, 2005 12:12pm
nice link iso,

With the Fed seemingly taking its foot of the pedal, or at switching to 'manual' from 'auto-pilot', I think the risk of a hard landing in the US is much reduced, even if the housing mkt may loose steam in 06. If NZ, Australia and the UK are anything to go by, then Fed will also manage to work a miracle and ease the house price bubble without bursting it.

This tells me the yield conundrum may be down to regulatory factors such as pension fund buying at the long end, which is depressing yields. You also have oil money flowing in to US bonds (a recent BIS paper reported petrodollars are still being recycled to the US) and central bank buying all weighing in. For me, this is important because it means that if we get to an inverted yield curve (as we have in the UK, in part due to insufficient supply at the long end and again pension and insurance funds are moving away from equities in an effort to match assets to liabilities from a duration perspective), then this does not necessarily signal an impending recession, as previous US yield curve inversions have accurately forecast.

: )
"Always bet on black"
  • #111
  • Dec 18, 2005 12:32pm Dec 18, 2005 12:32pm
why do yield curves invert?

i always thought it was high supply on the long end of the curve, and low supply on the short end. for instance, if there is an over supply of 30yr bonds, then banks have to lower the interest rate in order to attract buyers. just like the price of apples will drop if there is an over supply (or under demand). and if there is low supply (high demand) on the short end, then the interest rate there would increase as banks can get away with charging higher rates.

if the supply/demand priniciple i am describing is correct, then why does everyone keep talking about the "foreign investors" buying US bonds, and contributing that to the flattening yeild curve? if foreign investors are buying a lot of US bonds, wouldnt that steepen the yeild curve?

can anyone shed some light here?
Relax and be happy.
  • #112
  • Dec 18, 2005 2:28pm Dec 18, 2005 2:28pm
Quoting merlin
why do yield curves invert?

i always thought it was high supply on the long end of the curve, and low supply on the short end. for instance, if there is an over supply of 30yr bonds, then banks have to lower the interest rate in order to attract buyers. just like the price of apples will drop if there is an over supply (or under demand). and if there is low supply (high demand) on the short end, then the interest rate there would increase as banks can get away with charging higher rates.

if the supply/demand priniciple i am describing is correct, then why does everyone keep talking about the "foreign investors" buying US bonds, and contributing that to the flattening yeild curve? if foreign investors are buying a lot of US bonds, wouldnt that steepen the yeild curve?

can anyone shed some light here?
Hi Merlin,

It can get confusing because of the yield and price aspects. We know yield moves inverse to price, so if you just think of bonds from a price perspective, things become clearer. In your example the price of the bond relates to the price of apples, the yield of the bond doesn't relate to apples as apples don't really have a yield or dividend as such. Maybe apple storage costs (a negative yield ?)...anyway, enough with the apples already....sorry.

'if there is an over supply of 30yr bonds, then banks have to lower the interest rate in order to attract buyers'

I think its the other way around dude. High or excess supply produces lower prices and therefore pushes up yields. Bond issuers would attract buyers not by lowering interest rates but by increasing them (ie they offer bonds at lower prices). This is why large government deficits are thought to have the impact of increasing yields at the long end, since gvts will be supplying more paper to the market and will have to give buyers better rates to induce them to finance their profligate spending.

This also answers your question; that is, foreign buyers buying up US paper at the long end pushes up the price and reduces the yield. If you have tightening policy pushing up the front end, you can end up with inversion.

I think this is the phenomenon we are observing; a case of both insufficient supply at the long end (pushing down yields) and strong demand (foreign central banks, pension funds, insurance funds, and recycling of petrodollars back to the US so thats more foreign buyers), which also pushes down yields.

I hope this makes sense?

Abobtrader

: )
"Always bet on black"
  • #113
  • Dec 18, 2005 7:55pm Dec 18, 2005 7:55pm
Quoting merlin
why do yield curves invert?

i always thought it was high supply on the long end of the curve, and low supply on the short end. for instance, if there is an over supply of 30yr bonds, then banks have to lower the interest rate in order to attract buyers. just like the price of apples will drop if there is an over supply (or under demand). and if there is low supply (high demand) on the short end, then the interest rate there would increase as banks can get away with charging higher rates.

if the supply/demand priniciple i am describing is correct, then why does everyone keep talking about the "foreign investors" buying US bonds, and contributing that to the flattening yeild curve? if foreign investors are buying a lot of US bonds, wouldnt that steepen the yeild curve?

can anyone shed some light here?

I haven't went deep inside the report, but here is my opinion about the supply/demand thing...

An over supply does not always indicate that prices should go down...If there is an over supply in apples, it's not essential that apple prices go down, because demand can sustain such over supply, yet it is still over supply...In the case of apples, if we have a shop that has 10 apples, each costs $1 and he sells them for $1.3 each, and the demand is only 8 apples, there is an over supply, yet if the shop reduces the price to be able to sell all 10 apples, he will still find 8 buyers, unless more buyers are attracted through the lower price...

In the first case, he is making 30% over 8 buyers...If he is sure that reducing apples prices to $1.2 each will yield only 1 new interested buyer, then the first situation, and consequently the first price is favoured, because he will make a net profit of $2.4, and on the second case, he will earn only $1.8...

So, eventually, over supply does not indicate less demand...On the other hand, short supply, almost always indicate higher demand...

If the shop has only 5 apples, and has 8 interested clients, he know for sure that even if he loses the interest of 3 potential customers, he will still be able to sell all his supply, so he raises the price of the apple to $1.4, and then to $1.5 until he sells all of them, and makes more money...Even if the situation shifts against him, and 4 customers are distracted away, he will be left with only 1 apple at the end, which won't make a big difference to his margins or total amount earned...

So it's not a must that prices decline in the case of over supply, however, they must increase in the case of lower supply...

On the demand side, over demand usually implies that prices go up, and lower demand implies that prices go down, because demand is the main driver of the price, not supply..If you can get more people to buy what you are selling, then you must be raising prices, if you got less people to buy what you are selling, then you must reduce prices....

I am not an economics student, and I never studied it in depth, but I am thinking about it from a logical point of view, please correct me if I am mistaken...


Thanks,

Nader
  • #114
  • Dec 19, 2005 5:24am Dec 19, 2005 5:24am
Hi Nader,

A bit of a primer - The economics term for how responsive demand is to price is called 'price elasticity of demand' in economics. Goods such as cigarettes, energy for the home and car fuel are all classed as relatively 'price inelastic'. By that, we mean demand is not so sensitive to changes in their prices, and its why the government can tax the hell out of fags and fuel, knowing it will boost their coffers without putting too big a dent in overall demand. However, most goods are pretty sensitive to price (ie more price elastic).

Of course, you also have elasticity of supply, which relates to the suppliers sensitivity to price. For example, in the short-term, semi-conductors and oil extractions companies are insensitive to price. Regardless of price, they can't run at more than 100%. It takes a long time to build new plant, and shift the supply curve.

Generally, if supply goes up, prices will go down, and if supply goes down, prices will go up. Its generally pretty symmetric but I like the idea that there is a skew. If the goods in question are not so sensitive to price, then supply can shift quite a bit in both directions without impacting price too greatly.

In the case of apples, short-term information asymmetries mean that you could imbalances, but generally the rules of economics should apply. The apple seller may not know how sensitive his customers are to price changes straight away, but a little bit of tinkering and he'll soon have it sorted. The apples will sell at the price that clears, the equilibrium. If the apple seller has more apples, he will sell more at a lower price. If he doesn't, something is wrong with the universe!

You have pretty much nailed it already just by thinking it through logically, but it may be worth finding a good econoimcs primers out there. I love economics because it provides an excellent framework for logical thought, so you should find it an interesting read.

: )

Abobtrader
"Always bet on black"
  • #115
  • Dec 19, 2005 1:35pm Dec 19, 2005 1:35pm
Which economics books would you recommend? I'm impressed by your knowledge dude!

Quoting abobtrader
You have pretty much nailed it already just by thinking it through logically, but it may be worth finding a good econoimcs primers out there. I love economics because it provides an excellent framework for logical thought, so you should find it an interesting read.

: )

Abobtrader
  • #116
  • Dec 19, 2005 2:20pm Dec 19, 2005 2:20pm
Quoting Isotonic
Which economics books would you recommend? I'm impressed by your knowledge dude!
I was just about to ask the same question


Thanks,

Nader
  • #117
  • Dec 19, 2005 2:43pm Dec 19, 2005 2:43pm
Hi iso and Nader dudes,

I have just checked my booklist and there isn't one economics intro book on there that I can recommend. Not good. I learned my economics mostly through schooling, but I can remember liking the following authors: Gregory Mankiw, Mishkin, and Paul Krugman.

As an introduction to economics, you can't go far wrong with 'Economics' by Samuelson and Nordhaus, which is now on its 17th edition. On their web-site you can access the chapter summaries: http://www.mhhe.com/economics/samuelson17/. I think I have the 13th edition, which does the job nicely. It assumes zero knowledge and yet is pretty comprehesive, covering both micro and macro economics.

I'd recommend reading the The Economist every week for some real world application and the research from the Morgan Stanley economics team at http://www.morganstanley.com/GEFdata...st-digest.html (ooh, I just checked and they have a Looking to 2006 special...yee hah!). Everyone must take a look !

The Economist used to print a great economics primer, but I can't find it anywhere...it would have been perfect. They now have Essential Economics (http://www.economistshop.com/asp/boo...2816&book=1733) but I think this is more of a reference book than a primer on economics.

Its hard, but when reading other economics commentary (be it from MSDW or the Economist or wherever), I always try to be critical in my thinking and avoid taking things at face value. Its hard to do this if you only go to one or two sources, which is why I like to read the reports of several banks / media, before forming my own decision ... I just want to make sure the first one or two reports aren't feeding me biased arguments. I want analysis that covers the bases. Economics rarely gives us clear 'right' answers when applied to the financial markets..its up to us to take the facts at our disposal, drop them in to our framework, and come up with a view.

Good luck

: )

Abobtrader
"Always bet on black"
  • #118
  • Dec 20, 2005 9:59am Dec 20, 2005 9:59am
nice one...that's plenty of sources. One day, once I've sorted all my bookmarks, I'll post my links on my blog thread ... prob early next year (its a big project, my bookmarks are a bit of a mess!).


: )
"Always bet on black"
  • #119
  • Dec 24, 2005 8:57pm Dec 24, 2005 8:57pm
Quoting abobtrader
Hi Merlin,

It can get confusing because of the yield and price aspects. We know yield moves inverse to price, so if you just think of bonds from a price perspective, things become clearer. In your example the price of the bond relates to the price of apples, the yield of the bond doesn't relate to apples as apples don't really have a yield or dividend as such. Maybe apple storage costs (a negative yield ?)...anyway, enough with the apples already....sorry.

'if there is an over supply of 30yr bonds, then banks have to lower the interest rate in order to attract buyers'

I think its the other way around dude. High or excess supply produces lower prices and therefore pushes up yields. Bond issuers would attract buyers not by lowering interest rates but by increasing them (ie they offer bonds at lower prices). This is why large government deficits are thought to have the impact of increasing yields at the long end, since gvts will be supplying more paper to the market and will have to give buyers better rates to induce them to finance their profligate spending.

This also answers your question; that is, foreign buyers buying up US paper at the long end pushes up the price and reduces the yield. If you have tightening policy pushing up the front end, you can end up with inversion.

I think this is the phenomenon we are observing; a case of both insufficient supply at the long end (pushing down yields) and strong demand (foreign central banks, pension funds, insurance funds, and recycling of petrodollars back to the US so thats more foreign buyers), which also pushes down yields.

I hope this makes sense?

Abobtrader

: )
thanks for the answer to my stupid ass question. after reading your reply, i realized that my question was actually flawed. the problem was that i was looking at the US government as a lender, not the lendee. DUH!!! of course, if people are lining up to lend the US money, they are going to lower the rate. DUH!!! see, in my illustration, i had the government as the lendor, as i was comparing them to a bank. the government is not the bank, the foreign investors are the bank! haha! i do that sometimes, think myself in circles.
Relax and be happy.
  • #120
  • Jan 10, 2006 5:27pm Jan 10, 2006 5:27pm
i just finished "Inflation Targeting" by ben bernanke et al. this is a great book even if this guy weren't the fed chairman.

the book focuses on, you guessed it, inflation targeting. there are also juicy bits of macro economics in the book that will help fundie traders. the first three chapters define the bernanke's thoughts on inflation targeting, and they go in depth on monetary policy. the remaining chapters are case studies of countries using inflation-targeting-like frameworks (ie German, Switz.).

like i said, its a great book even without bernanke being the fed chairman. but the fact that he IS the fed chairman makes this a MUST READ for anyone who trades based on the fundies, or wants to understand how bernenke will approach interest rate policy. it gives so much insight into bernanke's thinking that i feel like i know the guy personally. my hope is that this insight leads to $$$, as i am better able to predict how he will shift monetary policy given the circumstances. how much would you have paid to spend a few days with greenspan? well, this is even better.

i have two more bernanke books to read, i will report my findings when i finish them...
Relax and be happy.
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