Friday, February 17, 2017

Sell Bonds

The temporary surge in rates during the first part of 2013 should not be discussed in terms of a "taper tantrum" metaphor. It was the macro-economic net precipitation of the expiration of the FDIC's unlimited transaction deposit insurance @ Dec 2012’ end. Hence, my call for a “market zinger”. It was an increase in savings velocity, where funds that were impounded and ensconced in a world-wide "flight-to-safety" (a re-alignment in a portfolio’s assets weightings), were once again, expeditiously re-invested (put back to work) outside of the commercial banking system (the only place where voluntary savings are actually matched with investment outlets via non-bank conduits).

I.e., “risk on” is not higher FDIC insurance coverage (the FDIC formally modified the assessment base in 2011 to include all bank liabilities), not increased Basel bank capital adequacy provisioning (which literally destroys the money stock), not an increased FDIC assessment fee on 1/1/2007, or 4/1/2009, or 4/1/2011, or an increased churn in speculative stock purchases (the transfer of ownership in existing assets).

All bank-held savings originate within the system, and are not invested (un-used and un-spent). They are lost to both consumption and investment. In other words, DFIs always create new money when they lend/invest. DFIs do not loan out existing deposits, saved or otherwise.

Long-term money flows (our means-of-payment money times its transactions velocity of circulation), or AD, will be on average much higher in 2017, than in 2016. Given that inflation and inflation expectations are historically the primary determinants for longer dated securities, it follows that nominal interest rates will rise in 2017 (and the Fed will follow the market).
Volume X's Velocity;

01/1/2016,,,,, 0.20
02/1/2016,,,,, 0.16
03/1/2016,,,,, 0.13
04/1/2016,,,,, 0.15
05/1/2016,,,,, 0.19
06/1/2016,,,,, 0.15
07/1/2016,,,,, 0.15
08/1/2016,,,,, 0.20
09/1/2016,,,,, 0.20
10/1/2016,,,,, 0.17
11/1/2016,,,,, 0.19
12/1/2016,,,,, 0.11
01/1/2017,,,,, 0.19
02/1/2017,,,,, 0.19 sell bonds short
03/1/2017,,,,, 0.21
04/1/2017,,,,, 0.21
05/1/2017,,,,, 0.24
06/1/2017,,,,, 0.20
07/1/2017,,,,, 0.18
08/1/2017,,,,, 0.21
09/1/2017,,,,, 0.23
10/1/2017,,,,, 0.23
11/1/2017,,,,, 0.20
12/1/2017,,,,, 0.13

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