Thursday, August 18, 2011

It's Getting Ugly

Michael Darda sees trouble in the decline of long-term yields and attributes it to a negative velocity shock:
The U.S. 30-year “long bond” yield has collapsed below the 2010 lows, an ominous sign, in our view. Although some (mistakenly, in our opinion) associate low rates with easy money, we view the collapse in yields across the Treasury term structure as an unambiguous sign of weaker nominal growth expectations. In technical terms, it would appear that a negative velocity shock is under way...
Broad money velocity in the U.S. is collapsing at the fastest rate since the end of the 2007-2009 recession. In other words, the recent pickup in broad money in the U.S. looks like a dash for risk-free cash assets, which also occurred in 2008 and 2001 as velocity collapsed. Widening credit spreads, a collapsing term structure and flat bank credit also are consistent with low/falling velocity.
In more graphic terms, the recent spate of bad economics news coming from the U.S. and Europe is ramping up the money demand black hole as investors rush back into money and money-like assets.  Velocity is dropping fast because of this spike in money demand and, as a result, current and expected current dollar spending is falling too.  This is, in turn, is causing the economic outlook to decline and is the development to which long-term yields are responding.  Ideally, the Fed would respond to the money demand black hole in a systematic, predictable manner that would bring certainty to the market.  Unfortunately, the Fed is not doing that and continues to allow a passive tightening on monetary policy. 


14 comments:

  1. Excellent comment...Given the drop in velocity of this magnitude it is incredible that Chicago educated economists like Charles Plosser is against QE...Didn’t Milton use to fluke students who did not understand that a drop in M*V is deflationary??

    It is an utter failure that the Fed has missed the chance to formulate a clear rule on QE - all the signs of deflation are there and this time around “bank failure” can not be blamed. The fault is with the Fed – pure and simple.

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  2. Well I have to commend you for your rhetorical use of the picture of the money vortex! Deidre McCloskey would be proud (see Rhetoric in Economics, JEL 1983)

    But maybe the vortex is caused by the whirl of Bernanke's helicopter blades...did you think about that?

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  3. Of course if they try, Pres. Perry will hang Bernanke for Treason. The GOP is doing everything in its power to distroy the economy and it looks like they are succeeding.

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  4. If we're in the midst of a money demand black hole, how come the price of the international medium of exchange (the USD) has fallen over the last few weeks?

    See: http://quotes.ino.com/chart/index.html?s=NYBOT_DX&t=&a=&w=&v=d6

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  5. Because it hasn't spread global yet.

    Yes, Friedman would have flunked Bernanke for his performance, that said, the FED can't print anything. Either you get that or not ecb. You have spammed enough boards with your ignorance. The FED is nothing more a overseer for the private banking cartel that began in the 1870's.

    It can move assets(QE) and Friedman knew if you moved enough assets at one time in a distinct area of economic production, you can move the economy. The Fed does little moves to give business enough hope, but not enough for lasting effect, then deflation starts taking hold again, then a little more move, then deflation star..........you get the picture.

    FWIW, which is the point of international corporate backer Rick Perry and the more "instense" pseudo-intellectuals like Ron Paul. They want a massive wealth transfer by destroying the US economy to global creditors. Is it any little surprise Koch's(Dupont) secretly met with the Li's in China last spring?

    There is a fight among the elite if they should liquidate and confiscate all of it now("libertarian" "Duponts") or continue the small steps(Astor,Bundy). The FED can slow down the wealth transfer through QE and other mechanisms, but only to a point. Targeting NGDP like alot of monetary types want, would actually hurt the elite's plans.

    The S/P mess may be a prick however, to the conspiracy as we find out the "housing bubble" wasn't "animal spirits" afterall, but a real attempt to destroy the US economy by making the overleveraged to a point of no return. I always thought the mid-03-mid 05 runup was bizzare, now we know where the real big bunch came from domestic and foreign considering the malivestment was was quite noticeable, as they say a little too noticeable.

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  6. there truly has not been a recovery.....a weak dollar has boosted corporate revenues .....47 million on food stamps.......80 million baby boomes ready to retire.......banks cannot take back the homes because they do not want to take the losses......its a tough game out there,,,,but there is great volatility for trading....
    www.floridadaytrading.com is an interesting sight

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  7. Loved the article AND the comments, esp. from Anonymous who mirrors my views. I particularly don't think it's a GOP versus dems/liberals dialectic. It's global backroom dealing at the top of the corporatocracy. The Kochs&crew have done a wonderful job over the past ten years at deluding, dividing, conquering and creating havoc that hardly anyone could have predicted.

    Can anyone spell n-e-o-f-e-u-d-a-l-i-s-m [with plenty of liquidity for the billionaires]??

    And ain't it wonderful the role S&P played in inventing and promoting junk bonds and robodocs? It's a prick all right.

    #GFC2 - the last ploy to take it ALL. Bonds will just take a bit longer is all. The real market is unavailable to any of us to see.

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  8. David, did you see Richard Fisher (yes your bete noir again!) in the FT:
    ". There is an abundance of liquidity........I posit that nonmonetary factors, not monetary policy, are retarding the willingness and ability of job creators to put to work the liquidity that we have provided. I have spoken to this many times in public. Those with the capacity to hire American workers―small businesses as well as large, publicly traded or private―are immobilized."

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  9. ECB,

    I guess Fisher hasn't read the monthly survey from the National Federation of Independent Businesses that has repeatedly shown the number one problem they face is a lack of sales. Taxes and regulatory uncertainty matter too, but not like the lack of demand.

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  10. Maybe....but don't you think there's an unobserved data problem...you can't survey the new establishments that don't get started because of regulatory uncertainty.
    Anecdotes are not data but an acquaintance in Houston is considering selling his small business due to healthcare and other regulation.

    BTW, an interesting bunch of comments on this post. Its tax free weekend in TX so these good folks can get their tinfoil hats cheap at the outlet mall.

    Cant wait till you get awarded the Koch Chair in Monetary Theory!

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  11. ECB,

    Fair point about survivorship bias. I am along way from getting an endowed chair! Nonetheless, I would love to have more time to dedicate to research that might come with a chair.

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  12. "I guess Fisher hasn't read the monthly survey from the National Federation of Independent Businesses that has repeatedly shown the number one problem they face is a lack of sales. Taxes and regulatory uncertainty matter too, but not like the lack of demand."

    Call me dumb, but why is lack of demand a monetary and not a real/nonmonetary factor?

    Note the US dollar fell again today, never a sign of a money demand black hole.

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  13. It is quantifiably ugly...

    The Null Hypothesis and the Science of Saturation Macroeconomics

    On Monday and Tuesday, 22 August and 23 August there will be a global nonlinear equity crash of historical proportions.

    And on these two days one of the greatest hypothesis of the 21st century, 'quantitative saturation macroeconomics' will be validated.

    The debt/money/asset macroeconomic system has its own intrinsic very quantitative operating laws that represent ideal fractal time dependent self assembly of asset saturation curves and define the counterbalancing limits of the macroeconomic saturation system. An understanding of saturation macroeconomics as a science with self assembly and self organization laws equal to physics and chemistry and biology can potentially guide global economic policy, monetary policy, and banking money-creation policy, and change rules regarding speculation on leverage assets.

    These very simple laws were empirically observed in repetitive time based fractal patterns of varying time dimensions throughout the time based evolution of asset valuation curves and were defined in 2005 in the Main Page of the Economic Fractalist.

    x/2.5x/2x/1.5-1.6x . The first three fractal phases are asset saturation growth fractals and the final or fourth fractal is an asset valuation decay fractal. X is a unit of trading time whose dimension can be minutes, hours, days, weeks, months, years, or decades. The 1.5-1.6x fourth fractal can itself be composed of a decaying x/2.5x/2x/1.5-1.6x 4 phase fractal series or a y/2-2.5y/2-2.5y 3 phase decay fractal series. The third fractal is ideally 2x in length but can be extended to 2.5x in length if growth is favored by underlying money supply growth or if the preceding valuation decay is significantly great.

    On 11 August 2011 in Alpha's The Economic Fractalist Instablog a final decaying growth sequence was predicted as a 27 July 2011 3/8/6-8/5 day 4 phase fractal with a potential of a 2.5x 8 day third fractal extension.

    The 20 August 2011 actual fractal progression is currently 3/8/7/3 of 5 days with a dropping of the Wilshire composite equity valuation near the 9 August 2011 interday low.

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  14. The NASDAQ final fractal sequence leading to today's near low begins its final fractal crash journey with its first base fractal including the key reversal day 3 year high on 2 May 2011. The first base fractal of the ensuing pristinely perfect x/2.5x/2x/1.5-1.6x sequence is a 13 day fractal starting 18 April 2011 and ending on 5 May 2011 intraday low to intraday low. The preceding end of one fractal is the beginning of the next fractal; incipient growth begins in final decay. There is an elegant integration process in quantitative saturation macroeconomics where larger initiating growth time unit, for instance, an incipient growth fractal denominated in the unit of a year incorporates a decay period of the last few of the final lower order time units, for instance, one or two terminal decay months of the preceding monthly low to low fractal series may be incorporated lasting into the follow fractal that last for a 100 months.

    32 trading days later, after the first 13 day fractal end on 5 May 2011, an averaged NASDAQ low was made on 20 June 2011. The intraday low fell two trading days before but the averaged low of June 20 was equivalent to the averaged low of that day and was decidedly lower than the 20 June preceding day's trading average. Third fractal growth concluded 26 trading days later on 26 July 2011 with lower low gap between the 26 July and 27 July delineating the 4th decay fractal of an expected 26 July 2011 1.5-1.6x :: 20 to 21 trading days. 19 August was day 19 of the expected 20 to 21 day :: 1.5:1.6x fourth fractal.

    Interpolated terminal fractal sequences are everywhere:

    Starting on 14 July 2011 an interpolated fractal series : 3/8/6/5 days:: x/2.5x/2x/1.6x ending on 5 August followed by and starting on 5 August a 2/5/3 of 5 days :: y/2.5y/2.5y decay fractal.....

    Starting on 18 July 8/18 of 20 days x/2.5x .....

    Starting on 27 July for the 18 day second fractal of the 8/18 of 20 day fractal series: 3/8/7/3 of 5 days

    and finally starting on 18 April the reflexic fractal series proportionally identical to the 20/50/40 days x/2.5x/2x series that prospectively was predicted by Saturation Macroeconomics in the Huffington Post to be the Wilshire's nonminal final high on 11 October 2007, a 13/32/26 day :: x/2.5x/2x reflexic growth fractal with a (decaying) 26th day lower high followed by a delineating gap and a 26 July 2011 19 of 20-21 day 1.5-1.6x 4th fractal which on 20 August 2011 is sitting on the edge of 154 year US Composite Equity second fractal nonlinearity that began in 1858..

    The Null Hypothesis for the Science of Saturation Macroeconomics

    Technically via the Chartist and in the qualitative perspective of a collapsing Euro Union and Euro currency and a polarized, nonnationalistic, corporate owned US government now hawking austerity, the 22 and 23 August 2011 asset collapse in weeks months years retrospectively will be perceived as obvious and expected. But the null hypothesis will remain: Why did the collapse occur on the 20th and 21st day of an ideal 4 phase 13/32/26/20-21 day :: x/2.5x/2x/1.5-1.6x Lammert fractal.

    Why did it end in precisely this time course. It is the implosion of the system's supporting money supply that is causing the collapsing fractal patterns. This is how the macroeconomic system works.

    Null hypothesis: the collapse on 22 and 22 August 2011 is not related at all to the simple fractal quantum laws of saturation macroeconomics and the easily observed 18 April 2011 Lammert x/2.5x/2x/1.5-1.6x pattern of 13/32/26/20-21 days with the crash coming on days 20 and 21 of the defined fourth decay fractal is occurring by chance and chance alone.

    This null hypothesis can be applied to larger order fractals including the 34/84 of 85 Wilshire x/2-2.5x quarter (3 month) fractal beginning in 1982 and the 70-71/153 year US equity fractal beginning near the ratification of the constitution in 1788-89.

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