Dark Side of housing-price appreciation

The blog title is taken from a recent VOX column and an excerpt is noted below.  Why am I emphasising this article?  Well the IMF has raised the same point about the Canadian economy and the Bank of England seems to be taking the same tack too with the UK.   But I have also raised concerns myself about the consequences of such misallocation of capital in the past (and I am not just talking debt but also more structural footprints), so the empirical evidence is interesting:

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Could too much money in the system lead to deflation? There is a risk.

Low interest rates and quantitative easing could deter new capital investment projects. QE is no doubt helping asset prices rise, but it is also forcing down the cost of capital at a time when the return on capital should, arguably, be higher, given the risks. Returns on the different components of the cost of capital equation should justify the risk, and cash and bonds are both important components.

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As it came to pieces in my hands…

Paul Weller: “I stood as tall as a mountain; I never really thought about the drop; I trod over rocks to get there; Just so I could stand on top; Clumsy and blind I stumbled;…I didn’t stop to think about the consequences; As it came to pieces in my hands.”

The 2008 crisis told us that there was a mismatch between asset values and debt, asset values and future return, and debt and economic growth as well as some rather large structural economic imbalances.

We have tried to delay the eventuality implied by the difference in the hope that the “true” magical economic growth rate should return. Have we built up a bigger monster, and if so, how do we slay the beast?

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Is this the last kick of the can for monetarism as we know it?

I am not so sure that such a narrow focus on the monetary base as the de facto cause of current economic problems is a safe way to be conducting monetary policy.   Agreed, in a general equilibrium, and in most normal economic scenarios, increasing the monetary base is going to stimulate economic activity – give banks more deposits to lend at an acceptable margin and they are likely to do so – but I am concerned that today’s monetarists have lost the plot.

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ECRI recession update and QE

I think it is highly possible that the Fed know they have people guessing: they see the stock market moving on up and, wow, QE works.  Well, it is plausible that QE has had some marginal benefit to the economy because of this, but the regularity with which new phases of QE need to be implemented suggests quite strongly that the impact of QE has been weak, given the fundamental head winds.

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Aggressive, desperate or, by necessity, both? Is this the last throw of the dice?

I hate the phrase quantitative easing, it is a bit like calling an apple, Malus Domestica-Borkh.  But QE is no apple, it is a rigged game as far as investors are concerned, and the Fed is playing on the market’s irrationality, and its passion for the short term, to pump a little more blood into the valves. 

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Narrow money part 3- the US

As previously discussed, a rise in narrow money supply might lead to a rise in economic activity for a number of reasons: narrower money supply measures tend to be reserved for near term expenditure and a rise might suggest a move from delaying expenditure (longer term time deposits to shorter term easily accessible accounts) to spending more. 

A rise in narrow money supply may also be a sign that the money multiplier has been expanding in recent months and lending growth has fed back into the banking system (people have more money), likewise implying a) growing economic activity and b) the potential for more expenditure. 

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Global slump risk falls as world money rebounds…. Really?

In a recent article, Ambrose Evans opined that a rising narrow money supply (M1 to be exact) presaged a rise in economic activity.

Usually this might be the case as an increase in shorter duration/easier access narrow money might imply a) an increase in bank lending that creates deposits via the money multiplier (implying higher current and/or future economic expenditure), and/or b) a shift from longer duration money with the intent of spending (which implies a reallocation of money from future consumption to current consumption).  It may also very well mean just an increase in money supply occasioned by quantitative easing. Continue reading

QE is entering a dark “shadowy” mire…and perhaps that is all it is good for…

At a very basic level, all QE does is exchange “new money” for fixed interest assets (up till now high quality government bonds of varying maturities and some corporates (UK)).

QE is meant to lower bond yields through the initial demand and the reduction of supply, but this is not a necessary condition (i.e the interest rate change on high quality securities), since the real prize is the rise in the price of risky assets through portfolio adjustment of cash percentage allocations.

Reducing the supply of high quality assets and increasing the supply of money aims to increase the liquidity in the market for less liquid risky assets.

Ostensibly, since the rise in the price of risky assets is also a proxy for those loans and leases on the books of the banks, QE is also intended to increase confidence in the banking system and the banking system’s confidence in its ability to make loans.  Continue reading

Don’t worry, here comes the three horsemen of the apocalypse!

Ambrose Evans-Pritchard has neatly summed up some industry think in his latest piece, “Global banks see market rally on Greek exit”. 

But this type of industry thinking is also likely to scare away the retail investor, through rational cognitive dissonance or otherwise. 

Apparently, we are set for a big rally, once Greece leaves the Euro, as Central Banks the world over pump yet more liquidity into the financial system.  This will either be via LTRO Repo type (temporarily exchange your securities for cash) transactions or the better for the banks and sovereigns, QE (buy your duff securities for a price you would not be able to dream of otherwise). 

Here is my very quick, write it as you think it, opinion on this “play”. Continue reading

Monetary interesting

Growth in bank lending relative to the growth in broader money supply growth and bank liabilities is likely to be a more important metric than asset prices in deciding whether or not to pursue further quantitative easing.

Broader money supply growth (M2 less M1), in the US, has been strong over the last year or so, and as one would expect with a QE driven economy, at a faster rate than nominal GDP: Continue reading

“Counting on the Fed to perpetually float returns is a mug’s game”

When looking at the current health of world stock markets, it is critical that we bear in mind the structural paradigm in which we observe: the only reason the financial system remains in place and markets are “healthy” is the vast amounts of government and central bank support.   The title to this post comes from Richard Fisher President of the Federal Reserve Bank of Dallas:  He also makes the following comments: Continue reading