tag:blogger.com,1999:blog-17232051.post8381741711518592922..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: Of Course Monetary Policy is an Asset Swap -- But that Doesn't Make it Any Less UsefulNoah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger57125tag:blogger.com,1999:blog-17232051.post-70705678226662651272013-11-19T12:23:20.250-05:002013-11-19T12:23:20.250-05:00Maybe he has time to explain it to you, because yo...Maybe he has time to explain it to you, because you clearly don't understand it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-54721038939187503392013-11-19T12:22:05.351-05:002013-11-19T12:22:05.351-05:00Once again you demonstrate a remarkable lack of un...Once again you demonstrate a remarkable lack of understanding about a topic you insist on publicly commenting on, namely macroeconomics. Case in point:<br /><br />"My underlying point was that the interest rate can be thought of as the price of certain assets, and that evokes a certain microeconomic intuition about asset pricing. On the other hand, the money supply is decidedly a macro concept, and, at least personally, is more reflective of general equilibrium concepts. As such, by thinking in terms of M and not r (at least for these kinds of casual conversations), makes sure you don't mix up the domains."<br /><br />This paragraph doesn't make a bit of sense. Please go to graduate school, learn some economics, then come back.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-572957549003103832013-11-11T11:18:21.357-05:002013-11-11T11:18:21.357-05:00I sent it to you both. I'll keep trying to fin...I sent it to you both. I'll keep trying to find a way to post a link on the off chance anyone else is paying attention to this conversation.Mark Summershttps://www.blogger.com/profile/05024695611563928703noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-14954436670707369432013-11-11T08:49:48.553-05:002013-11-11T08:49:48.553-05:00Yichuan,
That comment was directed at Mark Summers...Yichuan,<br />That comment was directed at Mark Summers. I can be reached at msadowski01@comcast.net.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-71701824800839143552013-11-11T08:42:35.691-05:002013-11-11T08:42:35.691-05:00Mark,
My contact info is here [http://synthenomic...Mark,<br /><br />My contact info is here [http://synthenomics.blogspot.com/p/about-me.html]. I can't actually find your email.Yichuan Wanghttps://www.blogger.com/profile/15398092824604478764noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47624229963650558092013-11-11T08:18:41.407-05:002013-11-11T08:18:41.407-05:00Sure, send me an email.Sure, send me an email.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-65454980736992515212013-11-11T02:02:35.766-05:002013-11-11T02:02:35.766-05:00I've been trying to find a way to create a lin...I've been trying to find a way to create a link to some graphs but am having technical difficulties. I hope you don't mind I'm sending you an email with some graphs and an Excel spreadsheet with the data I've been using.Mark Summershttps://www.blogger.com/profile/05024695611563928703noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-87680795494496983002013-11-10T18:51:13.686-05:002013-11-10T18:51:13.686-05:00Mark,
That sounds like fantastic work. Do you thi...Mark,<br /><br />That sounds like fantastic work. Do you think you could email me what results you've found? I'm doing some time series research with Miles Kimball right now and those kinds of materials might be helpful in clarifying some of the statistical issues in my mind.Yichuan Wanghttps://www.blogger.com/profile/15398092824604478764noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-15563154200760902622013-11-10T18:27:33.113-05:002013-11-10T18:27:33.113-05:00Nice work. However, I think ANXAVS will be more in...Nice work. However, I think ANXAVS will be more influenced by exchange rates. So yes, ANXAVS does continue to expand rather steadily from its low point around August 2009. But it continues to grow while LT rates go up and down in large swings. And it continues to grow when LT rates dive down in the latter part of QE2. When inflation expectations drop substantially after QE 1 and 2 end, ANXAVS keeps growing, and it doesn’t appear to have responded to QE3. It leveled off roughly at the pre-recession level and is relatively flat from around March 2012 until now. I don’t think it is impertinent to this discussion, but I also don’t think it tells us much about the points we disagree on.<br /><br />It’s great that you are running Granger causality tests but I don’t have a lot of confidence in them for a relatively short duration using monthly data.<br /><br />With respect to the investment data we discussed previously, Gross Private Domestic Investment (GPDI) and Gross Fixed Capital Formation (GFCF), we do only have quarterly data. But I still think these are good measures as are 1-unit residential construction permits (though I’ve been including multi-unit permits as well). <br /><br />I can’t claim causality, but there is blatant negative correlation with LT rates from about the end of QE 1 to the beginning of QE3. The same is true with the Michigan survey data you posted. It’s unmistakable if you plot them; from the end of QE1 to the beginning of QE3 (or the end of the series) it moves opposite to the 10-year T-Note rate just like the investment data does, and just like housing permits do relative to the 30-fixed rate.<br /><br />If you look at 10-year T-Note rates and 10-year expected inflation, what you see is that they move in step (with an additional term premium on the T-Note rate). But toward the end of QE2, and continuing until recently, the non-inflation related term premium dropped way down. Prior to this there was something close to a 130 basis point spread and it dropped to something like a 4 basis point spread. In other words the T-Note rate fell much further than 10-year inflation expectations, so the non-inflation-expectations-related portion of the term premium fell dramatically. Also at this time, mortgage rates dropped along with inflation expectations but continued to fall dramatically well after inflation expectations had leveled off.<br /><br />The point is that when this happened, residential construction permits shot up dramatically as did GPDI and GFCF. Consumer confidence went up at this point too. The S&P 500 fell with inflation expectations but then shot up and continued more or less the same trend growth into QE3. ANXAVS also continued to expand during this period until it leveled off near the level it was before the recession.<br /><br />So while I can’t claim causality, there is undeniable correlation and this says to me that the Fed was able to drive down the term premium on LT rates while maintaining more or less stable inflation expectations, and that doing this coincided with a strong recovery in investment and particularly residential construction.<br /><br />I think the reasons we are able to look at the same data and see different things is that you are approaching it from causality and I am looking at graphs and correlations.<br />Mark Summershttps://www.blogger.com/profile/05024695611563928703noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-58460579243070131852013-11-10T15:42:55.391-05:002013-11-10T15:42:55.391-05:00Venezuela looks like the model for Abenomics.
htt...Venezuela looks like the model for Abenomics.<br /><br />http://www.ft.com/intl/cms/s/0/b41fbcb4-d0f1-11e2-be7b-00144feab7de.htmlmeo fiohttps://www.blogger.com/profile/11238486778178048077noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40721982080390001102013-11-10T15:05:29.371-05:002013-11-10T15:05:29.371-05:00"Are we still in disagreement or are we on th..."Are we still in disagreement or are we on the same page now?"<br /><br />I still think there may be a huge gulf between us.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53373362696201298192013-11-10T14:15:18.458-05:002013-11-10T14:15:18.458-05:00"All that said, I do acknowledge that the mon..."All that said, I do acknowledge that the monetary transmission mechanism (I’ll call it inflation expectations) played a much bigger role during this period than I had previously thought. This discussion has forced me to examine the data more closely and to rethink what I thought I knew. Perhaps I was “subject to a lot of misconceptions concerning monetary policy and interest rates” as you said."<br /><br />This discussion has forced me complete even more of the Granger causality tests that I had previously contemplated, and to do some which I had not thought of doing (e.g. on 1-unit permits). <br /><br />"But I have to say that I *still* believe the monetary channel (during this period following the financial crisis) was mostly effective by not allowing inflation expectation to fall too low. And that for current income constrained businesses and consumers it required LT rates to come down via the liquidity premium. In essence I think the Fed has been targeting and real and nominal LT rates."<br /><br />Again, the evidence shows QE has caused longer-term nominal interest rates to go up. The evidence also shows that the only type of real economic activity affected by interest rates is housing starts, and that correlation suggests that if anything QE may inhibit housing starts. But since the main effects of QE are through financial assets, inflation expectations and the exchange rate, and these are unambiguously positive, I do not think that is anything worth worrying about.<br /><br />"Maybe targeting a NGDP futures market would have worked, maybe it wouldn’t have."<br /><br />I'm convinced NGDP Level Targeting would be a huge improvement over our current way of doing things for a variety of reasons not just due to the fact we are still recovering from a serious recession. <br /><br />"One thing I think is clear: that the Fed’s communication strategy for QE3 was very different than previously and that the results were also different. Given the tax increases, sequester, government shutdown, etc. it is somewhat surprising to see that the economy didn’t tank as a result. I think this can be largely attributed to QE3."<br /><br />The CBO's original estimates suggest that payroll employment should have been depressed by about 1.14 million jobs by 2013Q3 by the tax increases and the sequestor. Payroll employment rose 1.7 million between 2012Q4 and 2013Q3, up from the 1.4 million increase in the previous three quarters. This suggests that the fiscal policy tightening was completely offset by QE3 with room to spare.<br /> <br />"Residential development, however, still appears to be constrained by current household income and would likely benefit from lower mortgage rates until AD recovers to some degree."<br /><br />I think the most beneficial thing that could be done for residential investment would be to increase the household sector's nominal income and wealth.<br /><br />"Are we still in disagreement or are we on the same page now?"Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-816011752766593742013-11-10T14:14:32.422-05:002013-11-10T14:14:32.422-05:00"Investment was negatively correlated with in..."Investment was negatively correlated with interest rates and housing starts were negatively correlated with mortgage rates."<br /><br />The second statement is supported by the evidence. With respect to the first statement I've run additional tests.<br /><br />The investment data we discussed previously is not available in monthly frequency. However, Nondefense Capital Goods Excluding Aircraft Industries (ANXAVS) correlates very well with the equipment portion of private nonresidential investment and Private Construction Spending: Nonresidential (PNRESCONS) correlates very well with the structures component. I ran Granger causality tests on both of these data series and the nominal and real 10-year T-Note over the period since December 2008 and find no signs at all of Granger causality. <br /><br />"The data you posted from the Michigan survey is also negatively correlated with rates during this period. In almost every instance that rates rose during QE, the Michigan data reflected a drop in confidence; and in almost every instance that rates dropped, confidence rose. Plot it and you'll see what I'm talking about."<br /><br />I ran a Granger causality test using data in monthly frequency from December 2008 to September 2012 and found that household nominal income expectations Granger cause 10-year T-Note yields at the 10% significance level. Furthermore the impulse response results show that household nominal income expectations have a significant *positive* effect on 10-year T-Note yields which is exactly what term structure theory predicts and which is the opposite of what you are claiming.<br /><br />"In fact if you plot inflation expectations, capital investment, consumer confidence, housing starts, and various LT rates, what you see is that during QE 1 and 2 inflation expectations rose leading to higher nominal rates and subsequent lower investment and lower confidence."<br /><br />I ran Granger causality tests on inflation expectations as estimated with 5-year TIPs with respect to ANXAVS, PNRESCONS, household nominal income expectations, 1-unit permits and nominal and real 10-year T-Notes. The only sign of correlation I found was with ANXAVS. Inflation expectations Granger causes capital goods shipments at the 5% significance level. The impulse response results show a significant *positive* effect. This is consistent with the Unanticipated Price Level Channel of the Monetary Transmission Mechanism, which essentially argues higher inflation improves the balance sheets of firms and leads to increased lending and investment. . <br /><br />"When LT rates fall (I believe because of the reduced stock of LT assets), consumer confidence went up, business investment went up, and housing starts went up. I think this reflects a *current-income- constraint* for which higher inflation expectations are not as effective."<br /><br />The above results suggest that this is not true for households and that this is the complete opposite of what is true for firms.<br /><br />"What this suggests to me is that during this period the Fed used QE (at least for 1 and 2) to keep inflation expectations from falling too low. But relied on what we have loosely called the “microeconomic effects” of reducing the stock of LT assets to bring down the term premium on LT rates. This interplay of maintaining expectations and reducing the term premium brought real *and* nominal borrowing rates down significantly."<br /><br />The only sign that lower interest rates may have served as a channel for higher real economic activity has been through residential construction (1-unit permits). All of the other above evidence suggests that the effect of QE on nominal income and wealth expectations, and on inflation expectations, have been far more important than its effects on nominal or real interest rates, and which in fact have been to raise nominal interest rates.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-89171986588732193932013-11-09T23:00:51.165-05:002013-11-09T23:00:51.165-05:00This is probably unnecessary but I want to be more...This is probably unnecessary but I want to be more clear on the point of current income constraints. Basically, if you can't afford a mortgage now it doesn't matter whether you believe the price level will be higher in the future. The same applies for small business loans given current AD. This is why I think the Fed has been targeting nominal LT rates to some extent. And to be clear, this isn't the norm--as you've pointed out--but I think times were different after Lehman.<br /><br />Now to be fair, I didn't enter this discussion having a clearly thought out view like this. You may or may not agree with what I've said, but nevertheless I want to thank you for forcing me to reexamine my own 'taken for granted' views about monetary policy at the ZLB.Mark Summershttps://www.blogger.com/profile/05024695611563928703noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-57668352036196610122013-11-09T18:46:46.126-05:002013-11-09T18:46:46.126-05:00“I'm sorry if I come off as dismissive…”
Not...“I'm sorry if I come off as dismissive…” <br /><br />Not at all. I’ve found this discussion quite enlightening and I have learned a lot.<br /><br />“…but I really believe you are subject to a lot of misconceptions concerning monetary policy and interest rates.”<br /><br />Perhaps, but actually I think we are in agreement except on one point. Under normal circumstances everything you’ve said is clear in the data. But since some time in 2009 until around the beginning of QE3, things were different because of severe current income constraints. Investment was negatively correlated with interest rates and housing starts were negatively correlated with mortgage rates. The data you posted from the Michigan survey is also negatively correlated with rates during this period. In almost every instance that rates rose during QE, the Michigan data reflected a drop in confidence; and in almost every instance that rates dropped, confidence rose. Plot it and you'll see what I'm talking about<br /><br />In fact if you plot inflation expectations, capital investment, consumer confidence, housing starts, and various LT rates, what you see is that during QE 1 and 2 inflation expectations rose leading to higher nominal rates and subsequent lower investment and lower confidence. When LT rates fall (I believe because of the reduced stock of LT assets), consumer confidence went up, business investment went up, and housing starts went up. I think this reflects a *current-income- constraint* for which higher inflation expectations are not as effective.<br /><br />What this suggests to me is that during this period the Fed used QE (at least for 1 and 2) to keep inflation expectations from falling too low. But relied on what we have loosely called the “microeconomic effects” of reducing the stock of LT assets to bring down the term premium on LT rates. This interplay of maintaining expectations and reducing the term premium brought real *and* nominal borrowing rates down significantly.<br /><br />All that said, I do acknowledge that the monetary transmission mechanism (I’ll call it inflation expectations) played a much bigger role during this period than I had previously thought. This discussion has forced me to examine the data more closely and to rethink what I thought I knew. Perhaps I was “subject to a lot of misconceptions concerning monetary policy and interest rates” as you said.<br /><br />But I have to say that I *still* believe the monetary channel (during this period following the financial crisis) was mostly effective by not allowing inflation expectation to fall too low. And that for current income constrained businesses and consumers it required LT rates to come down via the liquidity premium. In essence I think the Fed has been targeting and real and nominal LT rates.<br /><br />Would a more extreme QE have been better? Would a different communication strategy from the Fed have been more effective? Would businesses and consumers have started borrowing more due to rising inflation expectations despite higher nominal rates, or would current income constraints have held back a recovery? I believe the latter, but we'll never really know. Maybe targeting a NGDP futures market would have worked, maybe it wouldn’t have. <br /><br />One thing I think is clear: that the Fed’s communication strategy for QE3 was very different than previously and that the results were also different. Given the tax increases, sequester, government shutdown, etc. it is somewhat surprising to see that the economy didn’t tank as a result. I think this can be largely attributed to QE3. Residential development, however, still appears to be constrained by current household income and would likely benefit from lower mortgage rates until AD recovers to some degree.<br /><br />Are we still in disagreement or are we on the same page now?<br />Mark Summershttps://www.blogger.com/profile/05024695611563928703noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-86947816159597849762013-11-09T13:03:50.271-05:002013-11-09T13:03:50.271-05:00"Japanese government bond yields most certain..."Japanese government bond yields most certainly came down in the run up to Shinzo’s election and continued to fall. To be fair, they appear to have been falling before it became apparent he would be elected. But they are lower now than when he was elected."<br /><br />Abe doesn't directly control monetary policy. There was a lot of spectulation before the BOJ made its announcement but nobody really knew if they were going to do what they did and that's evident by the response of the markets.<br /><br />"The stock market dropped more than 4% in the days following the taper discussion and didn’t fully recover until the Fed decided to postpone the taper."<br /><br />If you say so, but I don't see much evidence for a negative response.<br /><br />"I’m not saying the income expectations channel isn’t there, but it doesn’t appear to have changed the fact that investment and house purchases have been negatively correlated with rates for the past few years and that investment recovered in large part because rates went down (and according to the Michigan survey income expectations have risen)."<br /><br />Any negative correlations you think you have found between interest rates and real economic activity are at best ephemeral, and the Michigan survey clearly shows the opposite of what you claim.<br /><br />I'm sorry if I come off as dismissive but I really believe you are subject to a lot of misconceptions concerning monetary policy and interest rates.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-27036416810283647502013-11-09T13:03:05.208-05:002013-11-09T13:03:05.208-05:00"Gross fixed capital formation went down duri..."Gross fixed capital formation went down during QE1 until long-term rates started falling at which point it started to rise. It went down during QE2 as rates rose, but then started growing when rates began falling precipitously. It grew steadily and significantly between the end of QE2 and the beginning of QE3 while rates were diving. It faltered in the beginning of QE3 as rates went up, but then continued to grow. From the beginning of QE1 until around January 2013 it is negatively correlated with interest rates."<br /><br />Both real private fixed investment and longer-term rates fell until 2009Q1. From 2009Q1 to 2010Q1 longer term rates rose. Real private fixed investment continued to fall until 2009Q4. Since then private real fixed investment has risen more or less consistently while longer term rates have done their QE dance. I certainly don't see a correlation and there isn't enough data to do Granger causality tests.<br /><br />http://research.stlouisfed.org/fred2/graph/?graph_id=145064&category_id=0<br /><br />"Gross private domestic investment was similar. It too went down until rates started falling at the end of QE1 at which point it turns upward until rates started going up at the beginning of QE2 at which point it started to fall. It started going up again when rates started dropping at the end of QE2. In particular it jumped up significantly when QE2 ended while rates fell dramatically. It did, however, start growing even faster during QE3 even while rates went up. But between the beginning of QE1 and the beginning of QE3 it is negatively correlated with interest rates."<br /><br />Real private domestic investment fell until 2009Q3 and with the exception of back to back declines in 2010Q4 and 2011Q1 it has risen more or less consistently since. I don't think what happened at that particular time is significant enough to draw the conclusions you're drawing. In any case there isn't enough data to do Granger causality tests.<br /><br />I've previously done Granger causality tests on nominal 10-year rates, real 10-year rates, private nonresidential investment as a percent of GDP and private residential investment as a percent of GDP from 1993Q1 to present. What I find is that both kinds of interest rates Granger cause both kinds of investment and that residential investment Granger causes nominal interest rates. Impulse response results show significant effect for both kinds of interest on nonresidential investment, but the effects are positive in both cases which is the opposite of what naive theory predicts.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-86875677046503925112013-11-09T13:02:17.016-05:002013-11-09T13:02:17.016-05:00"The S&P 500 rose about 6% between the en..."The S&P 500 rose about 6% between the end of QE2 and the hint of QE3. During this same time the monthly average 30-year fixed mortgage rate went from 4.51 to 3.60 (June 2011 vs. August 2012)."<br /><br />The S&P 500 has increased by over 50% since late November 2008. During the 41 months there has been QE it has increased at an average annual rate of nearly 13%. That 6% increase only amounts to a 5% annual rate. <br /><br />"Permits for new residential housing units increased by about 30% during this period. The trend growth flattened out during QE3 as rates went up. <br /><br />If you plot newly permitted residential development during this period you see that it took off after QE2 while mortgage rates were diving. Once QE3 started, the trend growth for housing permits slowed as mortgage rates went up. It’s quite negatively correlated with mortgage rates during that past couple of years. Since rates went up in June housing starts slowed."<br /><br />Just out of curiousity I did Granger causality tests on 1-unit permits, 1-unit construction, nominal 30-year mortgage rates and real 30-year mortgage rates (adjusted by yoy PCEPI) over the period from December 2008 to present. I find no Granger causality in any of these permutations except that I find that nominal 30-year mortgage rates Granger causes 1-unit permits. The impulse response results show a significant negative effect in months 8-19 following an increase in mortgage rates. So this confirms what you are saying but this is unusual. Over longer periods of time no such correlations exist.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-91976401381424108632013-11-09T13:00:27.384-05:002013-11-09T13:00:27.384-05:00"Income expectations are not lower now accord..."Income expectations are not lower now according Michigan survey data:"<br /><br />Actually they are. The survey can be found here:<br /><br />http://press.sca.isr.umich.edu/<br /><br />I did extensive econometric work on this very data in April. The survey data comes in monthly frequency but the following quarterly averages should give you the idea: The following are expected percent change in nominal household income one year from the survey: <br /><br />2006Q1-3.8<br />2006Q2-4.0<br />2006Q3-3.6<br />2006Q4-4.6<br />2007Q1-4.1<br />2007Q2-3.7<br />2007Q3-3.8<br />2007Q4-3.2<br />2008Q1-2.9<br />2008Q2-1.8<br />2008Q3-2.7<br />2008Q4-1.0<br />2009Q1-(-0.6)<br />2009Q2-0.6<br />2009Q3-0.5<br />2009Q4-0.9<br />2010Q1-0.7<br />2010Q2-1.4<br />2010Q3-1.5<br />2010Q4-1.7<br />2011Q1-1.0<br />2011Q2-0.9<br />2011Q3-0.9<br />2011Q4-1.2<br />2012Q1-1.6<br />2012Q2-1.1<br />2012Q3-1.8<br /><br />Here are a couple of good blog posts on the Survey:<br /><br />http://macromarketmusings.blogspot.com/2013/04/the-ongoing-dereliction-of-duty.html<br /><br />http://macromarketmusings.blogspot.com/2013/05/balance-sheet-recessions-are-really.html<br /><br />And here's another good paper on the Survey:<br /><br />http://www.chicagofed.org/digital_assets/publications/economic_perspectives/2013/1Q2013_part2_french_kelley_qi.pdf<br /><br />I suggest you reread the post you linked to (I've seen it before). It does not say what you think it says. Household nominal income growth expectations fell off a cliff and have never recovered.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-3163890581683984802013-11-09T11:22:53.055-05:002013-11-09T11:22:53.055-05:00This comment has been removed by the author.Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-56177419933374166392013-11-09T03:40:30.010-05:002013-11-09T03:40:30.010-05:00“...but you do seem to know an awful lot of stuff ...“...but you do seem to know an awful lot of stuff that "just ain't so".”<br /><br />-Thank you for your vote of confidence… :)<br /><br />I’m not sure how we can be looking at the same data:<br /><br />Income expectations are not lower now according Michigan survey data: (http://www.federalreserve.gov/econresdata/notes/feds/2013/why-have-americans-income-expectations-declined-so-sharply/). Granted, they’re nowhere near where they were before the recession.<br /><br />The S&P 500 rose about 6% between the end of QE2 and the hint of QE3. During this same time the monthly average 30-year fixed mortgage rate went from 4.51 to 3.60 (June 2011 vs. August 2012).<br /><br />Permits for new residential housing units increased by about 30% during this period. The trend growth flattened out during QE3 as rates went up. <br /><br />If you plot newly permitted residential development during this period you see that it took off after QE2 while mortgage rates were diving. Once QE3 started, the trend growth for housing permits slowed as mortgage rates went up. It’s quite negatively correlated with mortgage rates during that past couple of years. Since rates went up in June housing starts slowed.<br /><br />Gross fixed capital formation went down during QE1 until long-term rates started falling at which point it started to rise. It went down during QE2 as rates rose, but then started growing when rates began falling precipitously. It grew steadily and significantly between the end of QE2 and the beginning of QE3 while rates were diving. It faltered in the beginning of QE3 as rates went up, but then continued to grow. From the beginning of QE1 until around January 2013 it is negatively correlated with interest rates.<br /><br />Gross private domestic investment was similar. It too went down until rates started falling at the end of QE1 at which point it turns upward until rates started going up at the beginning of QE2 at which point it started to fall. It started going up again when rates started dropping at the end of QE2. In particular it jumped up significantly when QE2 ended while rates fell dramatically. It did, however, start growing even faster during QE3 even while rates went up. But between the beginning of QE1 and the beginning of QE3 it is negatively correlated with interest rates.<br /><br />Japanese government bond yields most certainly came down in the run up to Shinzo’s election and continued to fall. To be fair, they appear to have been falling before it became apparent he would be elected. But they are lower now than when he was elected.<br /><br />The stock market dropped more than 4% in the days following the taper discussion and didn’t fully recover until the Fed decided to postpone the taper.<br /><br />I’m not saying the income expectations channel isn’t there, but it doesn’t appear to have changed the fact that investment and house purchases have been negatively correlated with rates for the past few years and that investment recovered in large part because rates went down (and according to the Michigan survey income expectations have risen).<br /><br />Gross fixed investment appears to be becoming positively correlated with rates (which I presume is what we want), but housing isn’t quite there yet.<br /><br />Thank you Mark for putting up with my insistent questions and thanks for the BB speech reference.<br />-Mark<br />Mark Summershttps://www.blogger.com/profile/05024695611563928703noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-67320028354405676792013-11-09T03:19:40.036-05:002013-11-09T03:19:40.036-05:00This comment has been removed by the author.Mark Summershttps://www.blogger.com/profile/05024695611563928703noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-31076216276453474672013-11-08T13:54:11.523-05:002013-11-08T13:54:11.523-05:00"Could you point me to the research by Ben B...."Could you point me to the research by Ben B. on this subject?"<br /><br />Rather than a paper, how about a recent speech on the subject?<br /><br />"Long-Term Interest Rates"<br />March 1, 2013 <br /><br />http://www.federalreserve.gov/newsevents/speech/bernanke20130301a.htm<br /><br />"I don't doubt that you are correct but other readers of this blog have referenced a statement he made in 2012 saying that recent research showed asset purchases did cause downward pressure on yields."<br /><br />Event studies show statistically significant declines in longer-term yields on the *days of QE announcements*. This probably reflects the liquidity premium effect.<br /><br />"Why did yields come down so much after QE 1 and 2 ended? Did income expectations drop that much?"<br /><br />Yes. <br /><br />"But then why did the stock market continue to rise while yields continued to fall?"<br /><br />QE1 concluded on March 31, 2010 and QE2 was hinted at in Jackson Hole on August 27, 2010. The S&P 500 closed at 1169 on March 31, 2010 and 1047 on August 26, 2010, a *decrease* of 122 points.<br /><br />QE2 concluded on June 30, 2011 and QE3 was hinted at in Jackson Hole on August 31, 2012. The S&P 500 closed at 1321 on June 30, 2011 and 1433 on August 30, 2012, an increase of 112 points. <br /><br />http://research.stlouisfed.org/fred2/series/SP500/<br /><br />So, on average, 100% of the increase in the stock market has occured during QE.<br /><br />"Why did the stock market drop so much at the hint of the taper (but rates jumped up)?"<br /><br />Did it? Ten-year T-Note yields surged in May and June. With the exception of a few days in late June the S&P 500 has consistently closed *higher* than it was in early May:<br /><br />http://research.stlouisfed.org/fred2/graph/?graph_id=144974&category_id=0<br /><br />So it's not clear to me that the "taper talk" has had much effect one way or another.<br /><br />"Why is the long-term composite treasury rate (for durations > 10 years) today 100 basis points lower than it was at the end of QE1 (3.41 today vs. 4.41 on 3/31/2010), and 57 basis points lower than at the end of QE2 (3.98 on 6/30/2011)? Are income expectations lower now than then? "<br /><br />Yes.<br /><br />"Didn’t Japanese government bond rates go down with the advent of Abe Shinzo?"<br /><br />The BOJ announced its QE program on April 4, 2013:<br /><br />http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf<br /><br />The 10-year JGB yield closed at 0.56% on April 3, 2013. It dropped to 0.45% on the day of the announcement. But then it rose to 0.93% on May 29. It's fallen since then but it closed at 0.60% on November 7, an *increase* of 4 basis points since before QE was announced:<br /><br />http://www.bloomberg.com/quote/GJGB10:IND<br /><br />"Mortgage rates make a *huge* difference for home buyers."<br /><br />That's a *huge* myth. If anything there's been a positive correlation between mortgage rates and housing construction since 2009:<br /><br />http://research.stlouisfed.org/fred2/graph/?graph_id=129829&category_id=0<br /><br />Usually there's no correlation at all between mortgage rates and housing construction. By far the most important factors affecting residential investment are household incomes and financial wealth. <br /><br />"In December 2008 the monthly average commitment rate on 30-year fixed-rate mortgages was 5.29%. In October 2013 it was 4.19% (it was 3.54% in May before the talk of tapering). Does this reflect lower income expectations now than in December 2008?"<br /><br />Yes.<br /><br />"Do you believe that home buyers purchase homes because they *consciously* believe QE will permanently raise their nominal income?" <br /><br />Not necessarily "consciously", but yes. <br /><br />"And do their income expectations jump and fall when the Fed starts and stops its asset purchases?"<br /><br />Yes.<br /><br />"These are real questions, not rhetorical ones. I hope I do not sound like I’m being sarcastic."<br /><br />You don't, but you do seem to know an awful lot of stuff that "just ain't so".Mark A. Sadowskihttps://www.blogger.com/profile/08259309059705236763noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-13918520600152703712013-11-08T01:14:35.343-05:002013-11-08T01:14:35.343-05:00Thank you again Mark for replying to my comment. C...Thank you again Mark for replying to my comment. Clearly you have thought a lot about this (certainly more than I have). Could you point me to the research by Ben B. on this subject? I don't doubt that you are correct but other readers of this blog have referenced a statement he made in 2012 saying that recent research showed asset purchases did cause downward pressure on yields.<br /><br />Why did yields come down so much after QE 1 and 2 ended? Did income expectations drop that much? But then why did the stock market continue to rise while yields continued to fall? Why did the stock market drop so much at the hint of the taper (but rates jumped up)?<br /><br />Why is the long-term composite treasury rate (for durations > 10 years) today 100 basis points lower than it was at the end of QE1 (3.41 today vs. 4.41 on 3/31/2010), and 57 basis points lower than at the end of QE2 (3.98 on 6/30/2011)? Are income expectations lower now than then? <br /><br />Didn’t Japanese government bond rates go down with the advent of Abe Shinzo?<br /><br />It would be interesting to see a large-scale survey of home buyers to find out what drove their purchase decisions during this period. I would think it was lower mortgage rates rather than higher income expectations based on some amount of permanent increase in the monetary base. This is totally anecdotal, but the people I know who purchased homes all had saved for many years and because of low rates were able to buy a house they wanted. Mortgage rates make a *huge* difference for home buyers. <br /><br />In December 2008 the monthly average commitment rate on 30-year fixed-rate mortgages was 5.29%. In October 2013 it was 4.19% (it was 3.54% in May before the talk of tapering). Does this reflect lower income expectations now than in December 2008?<br /><br />Do you believe that home buyers purchase homes because they *consciously* believe QE will permanently raise their nominal income? And do their income expectations jump and fall when the Fed starts and stops its asset purchases?<br /><br />These are real questions, not rhetorical ones. I hope I do not sound like I’m being sarcastic.<br /><br />Thank you again Mark, I do appreciate your clearly expert opinion and I *am* trying to understand this all better. But I am having trouble meshing your view with individuals' decisions. If you feel like replying I would enjoy hearing from you. <br />-the other Mark<br /><br /><br />Mark Summershttps://www.blogger.com/profile/05024695611563928703noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-3108555092309726252013-11-07T23:02:06.029-05:002013-11-07T23:02:06.029-05:00Hello Everybody,
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