Comments on: Deflation trade returning?

By: Leonard

Leonard — Wed, 02 Dec 2009 04:13:51 +0000

The excess reserves that the Fed has bestowed upon the banks free up other funds which they would have had to hold as reserves without the Fed’s kindness. They are the main speculators. GS and JPM are now the main traders on the NYSE. Other banks are probably buying treasuries. How else could you have a bull market in risk assets and derisking assets at the same time, coupled with a falling dollar?

By: Graphite

Graphite — Wed, 02 Dec 2009 01:53:14 +0000

If “excess” reserves were being used to purchase assets they wouldn’t be showing up in the excess reserves accounting either.

A lot of speculators are taking out a lot of loans at 0-0.25% to place momentum trades in asset classes of all kinds. This is essentially a “selling dollars” trade and it will work until it doesn’t. Debt-financed asset markets are inherently unstable and highly susceptible to downside price shocks.

By: Mike

Mike — Wed, 02 Dec 2009 01:02:21 +0000

Matt, you have it exactly right on “liquidity.”

By: matt

matt — Wed, 02 Dec 2009 00:18:39 +0000

Leonard,
Try not to get confused by the term “liquidity”. The financial press and Fed love to use this term as the reason assets go up and down. It gives people a sense that asset prices can be controlled.
In its simplest form liquidity simply indicates your ability to transact without moving the market. Liquidity as you have used it simply refers to confidence. Take any sentence with the words “excess liquidity” and swap those words with “excess confidence” and it will still make sense. Assets were high in 06/07 because confidence was high. Then they started falling because confidence was damaged. True liquidity only briefly disappeared around Nov-Dec 08. Then confidence bounced back. If confidence turns again assets will fall regardless how much the fed will pump them up….

By: PEJ

PEJ — Tue, 01 Dec 2009 14:11:33 +0000

I’m not sure where your getting your statements/assumptions from, but maybe it would be worse documenting them.
Regarding QE, japan has been doing it for ever, along with the carry trade. They still had deflation. At that time, the real estate bubble was in Japan only, now it’s global. Same causes should cause the same effects.

Also, not sure where you get that banks are buying risky assets, investment banks do seldom hold those risky assets.
Excess reserves are not just sitting in vaults because:
1- they do not exist, they are just accounting gimmicks because m-to-m has been removed and losses unrecognized
2- even if they did exist, they would be sitting at the Fed, earning them a few % a year, since Bernanke decided to recapitalize banks by paying interest on reserves. This is going to take another 5-7 years to achieve, provided no further losses are incurred.

By: Leonard

Leonard — Tue, 01 Dec 2009 13:41:48 +0000

PEJ, the current scenario is somewhat different:
1. I don’t know why, Japanese banks did not buy risk assets as a result of their QE, American banks, I believe, are doing that. This may be a cultural difference. Thus, US equities will have a bid under them, unlike their Japanese counterparts.
2. I don’t know why, the yen did not get squashed as a result of Japanese QE, thus they saw no price increases. This is the opposite of the dollar - we will likely have price increases as the dollar drops inspite of all the hand-wringing about the definition of deflation.
3. 1990’s Japanese QE occurred only in Japan. Today, it is global, so there is a lot more money chasing assets. When will that end?

By: Leonard

Leonard — Tue, 01 Dec 2009 12:48:42 +0000

Even if QE ends and the US consumer pulls back because of higher prices and unemployment, the amount of money sloshing around the system already will put a bid under all asset classes. I have noticed an unannounced change in Rosenberg’s predictions- he now feels the equity markets are only approx. 20% overvalued. I wish he had said that three months ago. Instead, he seemed to imply that equities were grossly overvalued. This clearly did not take into account that the bank’s excess reserves are not just sitting in vaults but are actually being used to purchase real assets.

By: PEJ

PEJ — Tue, 01 Dec 2009 11:57:48 +0000

Leonard, your scenario describes very accurately what happened in Japan for the past 20 years… or does it?

By: Leonard

Leonard — Tue, 01 Dec 2009 11:49:16 +0000

This whole market, it seems, is driven by excess liquidity provided to banks via QE. The 1T in excess reserves is being borrowed at zero % and is used to purchase every asset under the sun-including treasuries, equities, and commodities.The low interest rates are squeezing the little guy into riskier assets also.Since QE and zipr likely won’t end for years, one can see the general direction of the markets for the foreseeable future-bull markets in all of the above. This excess liquidity can not be used to affect forex, which, in my opinion, is the only honest market at this time. So, as the dollar continues to crump unabaited, every import eventually becomes more expensive, and the prices at stores rise, who is going to argue that we don’t have inflation but rather deflation because”money and credit” are contracting. The end purchaser of products at the grocery store is only going to see higher prices.

By: Adam

Adam — Mon, 30 Nov 2009 00:14:18 +0000

Yeah, Rosenberg sees Gold going to $3000/oz despite his deflationary-type views (which I share).

http://www.businessinsider.com/rosenberg-gold-will-take-a-breather-before-surging-to-3000-2009-11

Cheers!