QE – Our take on the Bell Curve effect

Making sense of the distribution and lag effects

Let us explain the problem or rather challenge of choosing between Quantitative Easing (QE) and an Interest Rate reduction to stimulate economic activity, with reference to the Bell Curve diagramme above:

There are two major factors at play here:

  1. Distribution
  2. Time

With a bout of QE, the effect feeds into the margins of theBellcurve and it takes time for the distribution network (money supply chain) to filter the new enhanced supply into the economy at large.  So there is both a distribution and time lag effect with QE.

On the other hand, with an immediate Interest Rate reduction, the effect is to cover the larger middle ground of the Bellc urve more instantly.  Yes, it does depend on your wealth and debt holder structure too, but both borrowers and savers feel the effect more immediately.

But, with Interest Rates currently so low, this option is not really that feasible. With inflation running at between 2 – 5% depending on which side of the pond you are, effectively savers are paying an additional ‘tax contribution’ to the Treasury by this stealth means.

So we are back to the scenario of a tax on the stock (or wealth) of the economy, as most flows have dried up.

Therefore, join the happy queue over here.

 Image from: http://agilepartnership.com/blogit/wp-content/uploads/2010/06/sadHappy.jpg

 theMarketSoul ©2011

The Ice Age is Cometh

Originally published 4 October 2009:

Information Asymmetry is what drives the market. We alluded to this in an earlier blog posting (see Market Responsibility, Saturday, 18 October 2008). Yet we still hear the socialist agenda mention regularly that if it wasn’t for the recent government interventions to ‘save the market’, the market would have collapsed. We are sorry, but we just don’t buy this. Yes it is true that individual institutions in the market would have failed, but as a mechanism, the market would have wobbled and other participants would have picked up the distressed bits and pieces and carried on.

True, there was a crisis of liquidity in the system, with severe knock on effects, but as a mechanism for allocating resources, effort and reward, we still believe the market would have survived, with or without the ‘nuclear’ option intervention we saw. The moral of this tale is that unfortunately the socialist elite now believe and make the rest of the market believe that they hold the moral high ground and can dictate the agenda for the next several years. Oh well and so the pendulum swings…

Which was entirely a side track to the real intention behind this posting.

‘The Ice Age is Cometh’ was an article headline in the Radio Times edition of 16 – 22 November 1974. A friend of ours came out with the rank smelling edition of the Radio Times of late 1974, that he discovered stuffed in the chimney breast of his new home. Stuffed in that chimney-breast to obviously keep the cold draughts out, as according to the subtitle the next 1,000 years could be very, very cold, with an advance of the polar ice caps and glaciers. Did we blink or something? We will challenge the BBC to dig out the programme aired in the week of 16 – 22 November 1974 on BBC 2, so that we can be reminded how quickly the agenda and the focus can shift, if we take our eye off the ball and let information asymmetry spin the agenda out of our control.

And we suppose we cannot deny the evidence currently in front of our eyes. Polar ice caps are retreating, which is true if you focus purely on an evidence based approach to trying to understand the wider system. But do make your observations and emotive arguments from within the system, or do you need to step outside that system in order to be more objective. And what about intuition? On a purely intuitive level we believe the earth of GAIA is a self correcting system but we do not have enough evidence to conclusively prove this assertion.

So, in the meantime, we swing one generation to the next, waiting for the ‘Information Assymetrists’ (yes our new made up word de jour) to set the agenda and the morals of the market.

As a soul in this market arena we just keep on being amazed, day in and day out. Please just give us the ability to take the long view…

theMarketSoul ©2009

The Market Equation

Image representing Creative Commons as depicte...
Image via CrunchBase

Please note:  This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ or send a letter to Creative Commons, 444 Castro Street, Suite 900, Mountain View, California, 94041, USA.  If you would like to speak to the author about any aspect of this work, or in order to contribute towards developing the framework and ideas further, please click on the Contact Us link.  (We acknowledge and reward valued contributions).

The Market eQuation (MeQ):

Today we are commencing our investigation and outreach to discover what we will call the Market Equation.

Basically the idea is to come up with a mathematical equation and rating or ranking system to assess the state and status of various markets.

Whether this will lead to a theory of Markets that can compete with some of the other theories in existence is open to debate.

The basic premise is this:

There should be a methodology to access the Openness and Fairness of any given market versus other comparable markets.  This specific ratio or result should therefore determine the individual participant’s level of engagement and commitment to that specific market.  The result should also be able to be repeatable over time in order to elicit trends and movements of particular markets relative to each other.

The basic equation can be expressed as MA2R4K2E3T3 = OF outcome (Open & Fair).

 

Therefore:

OF = (A)2 x (R)4 x (K)2 x (E)3 x (T)3

 

And derives from the Market Equation Table listed below:

 

The Market Equation Table

  

O Open
F Fair
M Multiple
A Accessible Adjoining
R Random Rapid Regular Repeated Regulated Risk
K Complex Connected Competitive
E Effective Efficient Equilibrium
T Technology Time Trade

Key:

Subjective measure
Objective (External)  measure

MA2R4K2E3T3 = OF outcome

Therefore: OF = (A)2 x (R)4 x (K)2 x (E)3 x (T)3

 

Our astute readers might already seen through this equation?

By dropping the M (which will always be 1) the letters that remain result in the word raket.  RA(C)KET?

With the additional C, being the complex bit, ultimately the Market Equation becomes a COMPLEX RACKET.

theMarketSoul ©2011

US Treasuries – An FX or a market call?

So it has finally happened. After threatening for months that a credit rating down grade was probable for the USA, Standard & Poor’s finally took the ‘big step’ on Friday 5 August, after the major markets closed.

English: Logo for FX
Image via Wikipedia

So what next?

In our article ‘US Treasuries – Are the markets really that bothered?‘ published on 30 July 2011, we argued that the markets were not really bothered, as both 5 & 7 year T-Bill currently delivered a negative Real Return to investors.

Everyone is dreading the opening bells in stock capital and forex market on Monday, yet we believe the fundamental question for this week will be:

Is this an FX or market call?

What we meanby this question is:

Will the markets and market participants see the down grade as an opportunity to play an FX gain game; or has the game fundamentally shifted and will the capital markets react by demanding a higher nominal or at least Real Return on US Treasury bills?

All pointers at the moment did not indicate a problem, but time will tell on whether a fundamental shift in attitude has occurred. Remember a credit rating is only a qualitative indicator, not a quantitative one, so on a technical call a few FX traders and investors might make a profit or two; but we are all waiting to see if the entire game has changed, or not.

Other factors that might come into play soon would be QE3 and attitude hardening  by major T-Bill investors.

How the US Treasury and administration now react will be crucial.

Who are we going to trust to make this big call?

English: A logo of the Standard & Poor's AA- r...
Image via Wikipedia

theMarketSoul © 2011

Pleae refer to our disclaimer page

A sigh of relief?

Some say that in life timing is everything…

And so too it is with economics.  We don’t yet have a fully developed and ‘mature’ [in terms of life-cycle] grasp of the impact of timing with leads and lags in the economy in general.

Yes, we have very sophisticated and advance models, analytics, knowledge management, quantitative theories, etc.; but we still do not fully comprehend the impact of time and timing in general on the factors of production influencing our ‘modern’ global economy.

In short, it looks like the potential calamitous US Debt Ceiling crisis has been averted (events during Monday 1 August still need to unfurl), meaning that the US nation can continue to settle its debt obligations for a little while longer, without President Obama having to resort to the 14th Amendment.

And this is where the timing conversation picks up its thread again.  The Debt Ceiling needs to the raised in order to settle obligations already incurred, not new spending.  Therefore, the future continues to look uncertain for the point at which ‘peak US Debt’ will be reached and how long creditor nations and other institutions will continue to fund the US appetite for amassing what seems to be an insurmountable and unsustainable level of sovereign debt.  In our previous article we discussed the negative Real US T-Bill Yields on both new 5 and 7 year US Treasuries.  If this is anything to go by, ‘peak US Debt’ must still be little while off in the distant future.

If only we could get the timing thing right and have a more insightful and meaningful (adult) debate not just in the US, but including global partners, both creditors and debtors alike.

But such is the nature of markets and spontaneous order, as espoused by our friends at the Austrian School, that we still believe and endorse the fact that ‘the market’ is still the best and most efficient mechanism for allocating resources (even financial and debt instruments) and informing the participants of potential risks and opportunities for clearing this market.

theMarketSoul ©2011

The US Treasury Yield Curves #2 – Do you factor inflation into the deal?

In the previous article we posted, mention was made of the (0.72)% [negative 0.72%] real return US Treasury investors can currently expect on 5 Year Treasury Bills.  The Nominal (quoted) Yield Curves and Real (Inflation adjusted) Yield Curves for two specific points in time, namely Friday 29 July 2011 and 30 July 2006 are listed below.

Yield Curve 1

What is interesting to note is the very flat nature of the Yield Curve for all T-Bills at the end of July 2006, at around a 5% Nominal Return for investors.  Yet the most significant fact is that the Real Yield was around 2.37% on 5 Year Treasuries, versus today’s (0.72)% on 5 Year or (0.18)% 7 Year T-Bill yields.  In order to generate a very small Real Return, you have to be looking at purchasing a 10 Year T-Bill to obtain a modest 0.38% Real Return in today’s market.

A cynic might make this remark:

“Not only do you pay your taxes, but with the negative Real Yields on both 5 & 7 Year T-Bills, you are paying the government to hold on to your cash too”

They win both ways!

theMarketSoul ©2011

Source Material:  US Treasury web site:

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-Yield-Data-Visualization.aspx

The US Treasury Yield Curves – Are the markets really that bothered?


 

Department of Treasury Seal (2895964373)
Image via Wikipedia

As a general introduction today we will look at two US Treasury Yield curves.  The first Yield curve in the Curve graphic 1 below is the 3 Month bills compared to the 10 Year bills over the last 5 years.

Yield Curve 1

In this table it is clear that the current 10 Year rate of 2.82% as of 29 July 2011, is still well below the 5 year average rate.  The trend of the 3 Month bills, especially over the last few months has drifted aimlessly between 0.15% on 28 February 2011 and currently at 0.10% on 29 July 2011.  There is in fact no noticeable concern in the Bond / Capital market over the potential technical US Treasury default on 2 August 2011.

The second curve below in Curve graphic 2 illustrates this fact of the 3 Month bills trend since 28 February 2011 to 29 July 2011.  As can be observed, in the last few days a very slight spike has been observed, yet the rate at 0.10% is still below the 0.15% rate of 28 February 2011.

Yield Curve 2

In real monetary terms it is costing 5 Year Treasury bill holders (0.72%) (Yes a negative return of 0.72% currently to buy 5 Year Treasuries.  (See US Treasury web site)

It will be interesting to observe and track the trends over the coming days, especially as we kick off August and Debt Ceiling D-Day in the US congress and Senate.

theMarketSoul ©2011

Source Material:  US Treasury web site: http://www.treasury.gov/resource-center/Pages/default.aspx