CDZ Two Stumbles and a Fall

[william the wie]

Normally three rate hikes in one year causes a severe market correction. The Fed is arguing currently that Negative interest rates in China, Japan and the EU have offset last year's rate hike. Therefore three hikes are effectively two.

Since negative nominal rates have never been seen previously as a monetary policy no matter what the Fed does it will be exploring unknown territory. I'm posting this thread just to see how many people think they know what is going to happen.

Will rent seeking investors worldwide, also known as yield whores, flood the country with enough hot money to make domestic rate hikes ineffectual?

Will rate hikes cause a market crash?

I assume that both above things will happen but I am clueless as to which order and the lag between one happening and then the other.

Please voice your opinion on the subject so the rest of us and can politely heckle you. This is after all CDZ

 

[Toddsterpatriot]

Normally three rate hikes in one year causes a severe market correction. The Fed is arguing currently that Negative interest rates in China, Japan and the EU have offset last year's rate hike. Therefore three hikes are effectively two.

Since negative nominal rates have never been seen previously as a monetary policy no matter what the Fed does it will be exploring unknown territory. I'm posting this thread just to see how many people think they know what is going to happen.

Will rent seeking investors worldwide, also known as yield whores, flood the country with enough hot money to make domestic rate hikes ineffectual?

Will rate hikes cause a market crash?

I assume that both above things will happen but I am clueless as to which order and the lag between one happening and then the other.

Please voice your opinion on the subject so the rest of us and can politely heckle you. This is after all CDZ

Normally three rate hikes in one year causes a severe market correction.

Hmmmmm.....17 hikes in two years. How serious were the corrections between June 2004-June 2006?

 

[Andylusion]

I have been consistently skeptical of the interest rates destroy markets belief system.

In the short term, interest rate changes can effect the market, but in any long-term view, there is no real causal connection between the two.

And the reason seems simple enough to me. Stock values, are based on company profits. Not on interest rates. It does not matter if interest rates are -1% or +10%. If your company is making steady profits, the stock for such a company is going to have value. If your company does not have steady profits, then your stock is going to lose value.

Now the theory is that if interest rates go up, that people won't buy stuff. But the 1970s prove that isn't true. The market continued to climb... and housing prices (which most assume would be the most effected by interest rates) continued to go up.

Now the economy in the 1970s sucked. That's undeniable. But it sucked because it wasn't growing that fast. Not because of some direct economic failure.

We've had that exact experience for the last 8 years, and that's without high interest rates.

So I doubt that the Fed raising rates will have much of an impact.

Will rent seeking investors worldwide
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What exactly does that mean? What is a "rent seeking investor"?

An investor by definition, is someone who puts into an investment.

A rent seeker, is someone who by definition, does not invest, but just tries to collect money for nothing.

Investors by definition, provide a benefit to society. If they didn't.......... think about it... no one would want an investor. Companies actively seek investment all the time. They do this, because they benefit from investors.

If investors were somehow 'rent-seekers' that just sucked money out of the company.... the company wouldn't try to have them.

 

[william the wie]

Yield whores think they can get higher yields without paying a default risk.

 

[Andylusion]

Yield whores think they can get higher yields without paying a default risk.

That is not rent-seeking. Rent-seeking, is Al-Gore buying a forest, so he can force you to pay him for carbon credits.

What you are complaining about is socialism. I agree. We shouldn't bail out anyone. But that means giving up on this idea of too big to fail. Unfortunately, you are going to have a hard time convincing the left, that we can absolutely allow big banks to fail, and that it will not somehow destroy the planet economy.

 

[william the wie]

TBTF without a congressional investigation into the incompetence shown 10 years earlier in the LTCM collapse. Reread "When Genius Failed" and then reacquaint your self with what was the path to the meltdown and you thought your were already mad?

 

[Andylusion]

TBTF without a congressional investigation into the incompetence shown 10 years earlier in the LTCM collapse. Reread "When Genius Failed" and then reacquaint your self with what was the path to the meltdown and you thought your were already mad?

That really didn't make me mad. First, there are always the Monday morning Quarterbacks, and Armchair Generals, that say in retrospect, that if they had been in charge, they would have known what was best. They would have known the obviously future failures of Y, and clearly done the brilliant and successful Z.

LTCM, a bunch of guys looked at the market, came up with a strategy, and executed it as best they knew how. It worked perfectly for a few years, and then failed.

This is what is known as "normal". Many stores, restaurants, and on and on... all go bust routinely. Where is Pam Am today?

And while it can make someone feel better to scream and yell at those who made mistakes, what difference does that make? I'll open my own company first, and when I am successful, then I'll give advice. Pretty easy to scream insults when I haven't been in that position myself.

Lastly, the big huge problem I have with the 2008 bailouts, was that it involved taxing poor people, giving money to rich people, to pay back rich people.

That's the issue.

Now my understanding of the LTCM, is that the "bailout" involved other private banks, paying in money, to get a cut, of LTCM. I have no problem with that, at all. If the government wants to get private banks to bail each other out, by all means.

Now I'm still not in favor of it, because of the moral hazard argument. When you bail out these banks, that gives them the green light to be more risky, because they know they will be bailed out... regardless of where the cash comes from.

But this is in my view minor. The government should never give tax payer money to anyone anywhere for any private use purpose. Whether it's green energy grants, or bank bailouts.

 

[william the wie]

Two companies bailed on the bailout, essentially sending up smoke signals that they were insolvent. They were Bear Stearns and Lehman. The Fed, SEC and Treasury [assed the buck. Taxing poor people to avoid pointing out the incompetence of the bureaucracy is my problem with the bailout otherwise I agree with you.

 

[Andylusion]

Two companies bailed on the bailout, essentially sending up smoke signals that they were insolvent. They were Bear Stearns and Lehman. The Fed, SEC and Treasury [assed the buck. Taxing poor people to avoid pointing out the incompetence of the bureaucracy is my problem with the bailout otherwise I agree with you.

And here's the problem with that.... What has the government been pushing, since the 1990s? Affordable housing goals. More loans to low and middle income families.

In short... they have been pushing sub-prime housing. Even Franklin Raines who was chairmen of Fannie Mae said exactly that.

Now... let me ask you something.. if I can. I want you to pretend that you are a government employee. You work for the SEC, or OFHEO, or any other oversight group. Doesn't matter which.

You see banks making sub-prime loans, exactly like Fannie Mae, and Freddie Mac are. Do you call them out on it?

How do you think that's going to play with management? Because if you call a private bank out for making a sub-prime loan, the exact same type of loan the Government is pushing through Fannie and Freddie.... what do you think is going to happen? You are going get canned. Or at best, you'll never be promoted. Your career is finished.

Do you see the problem?

You are basically saying "why didn't the regulators committed suicide, by preventing the goals of the entire US government?".

Now in retrospect, we can sit here and say "well obviously because it would destroy our economy to promote bad loans"... but that's not how government saw it.



Now Barney doesn't even think there is a housing bubble, nor a problem in the sub-prime market. This is 2005. You as a low-level government employee, start causing a fuss... Barney would have you removed. He was in the Chairman of Financial Services Committee. One word, and you are no longer in your job.

So... would you rock the boat, and have yourself bumped out of the boat? Or keep your mouth shut, and do your job. Your job, being to uphold the goals of government, not sound banking practices.

Now maybe you of all people would. I doubt it, but perhaps. Fact is, most people would rather keep their jobs. Especially government jobs with lavish retirement benefits.

 

[william the wie]

That I would agree with but LTCM was buying Danish mortgages and that got them in trouble and I'm not saying that Lehman or Bear should have been shut down in 1998 I am saying that supervision to get out of trouble was needed then and was not provided. And for that matter a lot of bureaucrats tried to get some safeguards for reaching that goal and got slapped down for their troubles.

 

[Andylusion]

That I would agree with but LTCM was buying Danish mortgages and that got them in trouble and I'm not saying that Lehman or Bear should have been shut down in 1998 I am saying that supervision to get out of trouble was needed then and was not provided. And for that matter a lot of bureaucrats tried to get some safeguards for reaching that goal and got slapped down for their troubles.

Yeah, that's kind of my point. There is no hope of getting government to try and stop people from doing bad things.

That's why we shouldn't be mad at people for doing bad things, or government for not stopping them.

We should simply allow the Capitalist system to work. When a bank fails.... let them fail. Don't bail them out. Don't try and regulate the crap out of them. Don't waste all this time and effort to try and eliminate the possibility of bad things happening.

Just let them fail. It's that simple.

 

[william the wie]

Sorry I misunderstood your position when we were Both going the same way. `