I haven’t been on the board for months (life has been out of control), but I read this article and thought that surely there would be some entertaining threads (apparently no one posted anything yet though). looks like there are some post-rate-cut inflation concerns. inflation, recession, rate cuts. this is quite a pickle that we’ve got ourselves into. http://money.cnn.com/2008/02/27/news/economy/bernanke_house/index.htm?cnn=yes
2 words can solve their problem: Paul Volcker
You should read Greenspan’s book… apparently Reagan sat down with Volcker and said, “what is it you do, again?”
I read it, Reagan probably asked that question at least 4 times, having forgotten the answer each prior time. If there’s an “inflation fighting at all costs” Fed chairman it’s Volcker. Avoiding a recession shouldn’t be the Fed’s big priority if price stability is threatened - that’s only my uninformed opinion though.
AbbeFaria Wrote: ------------------------------------------------------- > I read it, Reagan probably asked that question at > least 4 times, having forgotten the answer each > prior time. If there’s an “inflation fighting at > all costs” Fed chairman it’s Volcker. Avoiding a > recession shouldn’t be the Fed’s big priority if > price stability is threatened - that’s only my > uninformed opinion though. This has less to do with a recession, it has far more to do with maintaining some modicum of liquidity and stability in the banking market. I think far too few people appreciate what a debacle the debt markets are. Liquidity is there but nobody wants to give it up. The asset backed market is still essentially frozen. The deals that are getting done are at astronomical rates. For example, a Citi 10 year AAA credit card bond priced at +6 last year and priced at +125 last week. Conduit deals that priced at 25 last year are pricing at 90 now. It has nothing to do with risk-spreads and everything to do with liquidity. At this point I think it’s more profit taking than anything. Admittedly, those prices were too narrow, a 10-year CC bond should price at ~15, while many A conduit deals, depending on industry and servicer risk, would price at 40 or so. These aren’t products which are exposed to significant credit losses, they aren’t CDO or CDO squares. For a Citi AAA bond to lose $1 of principal would require net credit losses to hit 30% within the span of of 6 months, that’s about 40% gross credit losses. When 40% of America defaults on credit cards, we’ll be facing armageddon and AAA bonds won’t matter. This market is jacked up and the Fed’s trying to pull as many levers as possible to stop a rapid deterioration in conditions. The new auction window is a decent way of delinking liquidity from interest rates, but even that isn’t working perfectly. Personally, I think that raising rates isn’t needed and it’s inevitable that we hit a high period of inflation. I would rather prevent a complete financial market freeze and have higher inflation than face the alternative.
Treasuries are too expensive… is that why you think Citi bonds look cheap? I sure as hell wouldn’t buy Citibank 10 year bonds yielding 5%. What a ripoff.
“Too many bubbles have been going on for too long … The Fed is not really in control of the situation,” the Times quoted Volcker as saying, seemingly clear criticism of both Bernanke and his predecessor Alan Greenspan.
“I would rather prevent a complete financial market freeze and have higher inflation than face the alternative.”---- looks like you are going to get your wish. Please read “Secrets of the Temple” and see how much better off we all were from 1978-84.
I think there is no choice but to go with inflation. In the past, they chose to fight inflation because there was a large workforce & less savers. Now our workforce is retiring and everybody is a saver. He’s targeting the savers, especially the lazy savers, because he has no choice. If you’re not a lazy saver then you should be ok. IF you stick your money in 10 year treasuries then just kiss your purchasing power goodbye.
Eddie Deezen Wrote: ------------------------------------------------------- > “I would rather prevent a complete financial > market freeze and have higher inflation than face > the alternative.”---- looks like you are going to > get your wish. Please read “Secrets of the > Temple” and see how much better off we all were > from 1978-84. Because the two situations are completely the same, right? Sure, lessons in history are very important to analyze. However, treating every situation in the same cookie-cutter way is not correct.
You are correct, the situations causing inflation are very different. What will be the same is a Fed that let’s inflation get away and allows inflation expectations to become permanently priced in the market.
I guess I’ve got more faith in the our economic system recovering from recession/liquidity problems. What I’ve taken away from Greenspan is that our system can survive stress more than most give it credit for (no pun intended) and will bounce back. VirginCFAHooker: what do you mean by a lot more peolple being savers? Just a result of more retirees or low consumption/high saving over the whole population?
Eddie Deezen Wrote: ------------------------------------------------------- > You are correct, the situations causing inflation > are very different. What will be the same is a > Fed that let’s inflation get away and allows > inflation expectations to become permanently > priced in the market. I don’t think anybody is letting inflation be perm. baked into the market. There’s certainly the expectation that once the liquidity issues get resolved that things will contract a bit. Personally, I think that one potential development will be that the contraction in credit will cause prices to pull back, leading to deflationary tendancies, which could offset the inflationary tendancies. Also keep in mind that a lot of the inflation is driven by exogenous variables, some of which are similar to the early 80s (oil), but others aren’t. Ethanol feeding into ag. prices, wheat skyrocketing because global shortages and cheaper dollars…etc. I also think that price support for the dollar will occur because US ag. commodities will become very attractive worldwide. This will spur further domestic ag. production, which has been high on a productivity basis, but there’s a lot of fallow land being funded by the govt. to keep price support. Additionally, manufacturing has been increasing for the remaining domestic producers. The global labor arbitrage will become increasingly unattractive, leading to a reversal of labor flow. All of those combined will significantly narrow the trade gap, with oil being one huge factor left. Personally, higher oil prices aren’t an evil thing, since it might spur us to get rid of our phallic infatuation with SUVs and V8s.
great points and you’re right, there is a lot than can offset the inflation risk and I think the Fed is hoping they will. I’m not convinced it’s going to happen (which doesn’t mean much), but if the market starts to feel that then the inflation permium does get baked in. It took over a decade to remove it last time. Bernanke is in a tough spot-- there is no road map on how to navigate through this.
Why the hell did bernanke say taht some small banks are going to face problems, he’s just creating more volatility and crazyness on the market