Doves Spotted! Rejoice

6 thoughts on “Doves Spotted! Rejoice”

1. Good central banking is iterative and should be flexible. It is pretty obvious we have reached an inflexion point. The fomc has until early November to get the joke.

2. “The Hannibal Report”

3. It does not seem possible that rates can ultimately be controlled by the central banks. Will they not eventually destroy their own money/credibility by purchasing what a normal person with good sense would refuse to buy? Why would any sane man or entity buy a 4% bond if inflation is at 5-10%? Inflation should/will dictate interest rate. I do not have the answer to how this is negotiated or resolved, but I doubt it will not be by central banks buying what the market will not. It defies reason.

   I was down visiting the Federal Reserve in New Orleans a few years ago after the 2008 crisis. They were trying to improve their image and were hosting what they thought were prominent people for tours. That was a mistake in and of itself. There was an open session for questions at the end. I am a simple real estate guy by background and no market analyst. I was dabbling in an overseas trade right then and had been thinking on international trade. I made the statement that it seemed to me that the greatest export that the United States had was dollars; that we “shipped” dollars overseas and got hard goods in return. I followed that up with “Do I see this correctly?” The quick response I got was “Yes, what is wrong with that?” It kind of stunned me and I said “Nothing I suppose, as long as the dollars all stay over seas and do not come back here, that would be inflationary.” And we moved on.

   Are the dollars beginning to come home to roost? It appears to me that the demand overseas for dollars is falling on the margin. This run up in the dollar feels like a exhaustion to me. That is my sense.

   On top of that (if that is true – we shall soon see) we are going to start selling natural gas to Europe and dollars are going to flow the other way. Plus, we are talking about being a manufacturing nation again. I like that, but can we afford to do it? We will have to export those goods and dollars will come home. If these things are true, they further undercut our central banks ability to expand its balance sheet. We seem very bloated with obligations to be making more obligations. But we are going to buy more debt because we have to when too few show up at auction.

   It feels like a time to batten down the hatches if one can while the world fights this out; hopefully with money and diplomacy and not guns.

   Walt, I hope things are good. I enjoy your posts. I do not know how anyone can write as much as you do. I particularly I have appreciated your introducing me to Zoltan Pozar. I have listened to his Odd Lots podcasts carefully. I can better understand him talking than writing. I think he is on to something with his Bretton Woods III. I like his view of the dollar as a “project”. This whole economic system is dynamic and changing constantly. It looks very volatile right now.

   1. “Why would any sane man or entity buy a 4% bond if inflation is at 5-10%?” Because, as my old grad finance prof used to say, “Something is always better than nothing.” And my TIPs are throwing off 8.5% … an even better something.

   2. or if you anticipate inflation to fall over a 5, 10, 20, 30 year period you lock in a higher rate now…

   3. Where the dollars are isn’t inflationary in itself. The ratio of overall currency in circulation to things you can buy is the driver of inflation.

      Increasing production is the best way to reduce inflation: the home currency gains value (other things become cheaper) because it can be exchanged for more goods and services. Increasing exports is a sign that the country is producing more than it needs, so it serves to reduce inflation.