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Gordon Long

Mr. Long is a former senior group executive with IBM & Motorola, a principle in a high tech public start-up and founder of a private…

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James Bianco: The Fed's Plan for Interest Rates

James Bianco

Bianco research started in 1998 and is affiliated with Arbor research and training. It is an independent research company with James Bianco as its president. Bianco research specializes in macro, fixed income and equity research.

James views financial repression in light of what Ben Bernake said in his November 12 op-ed in the Washington post:

"the purpose of QE2 is the fed buys bonds, force down interest rates, that would make them relatively unattractive for most bond investors, seeking alternatives they would move further out the risk curve and they would not buy .They would push up those assets prices, create a wealth effect expecting a cycle in which the wealth effect creates economic growth to justify those higher prices".

The forced down interest rate will not bode well for individuals who need certain rates of return to guarantee things like pension and retirement. You end up taking more risk by buying riskier assets which pushes up its price causing you to feel wealthier. He explains that when a government body in this case the CBN steps in and sets price at levels where they would not ordinarily go by themselves, they are repressing the price of interest rate, inflating the price of risk assets. They argue it is a greater good because of the wealth effect that comes from that.

James doesn't think that the wealth effect occurs as a result of that. According to him, Milton Friedman in 1915 developed the permanent income hypothesis which states that if an asset goes up in price for example a house, you treat it as another form of permanent income. One the other hand, if your stock portfolio goes up, you perceive as temporary due to what you read in the paper.

"That's why we obsess over the fed because we think all this stuff is temporary and we want to find out how temporary it is, because when the fed raises rates... I guess to mix my metaphors a little bit with the old warren buffets' old line that we find out that we are swimming naked when the tide goes out".

That's why a rate hike is such a big deal in the financial markets.


What will the Feds do?

"There are two things to keep in mind concerning what the feds will do. There's the economic data and the market pricing of it".

He says that based on the economic data, the fed has set up some parameters for itself and from a data dependent point of view, they have everything they need, but James believes that what will hold back the feds will be market instability. Currently, there is a great deal of volatility and uncertainty in the Chinese and emerging markets. He believes the instability in these markets will cause the feds will to maintain interest rates because they are hoping that things would calm down enough by Dec. He mentions that part of the reason for the unstable markets is due to the Feds insistence on raising rates.


EU

On his view of the EU, James Bianco has this to say:

"The history of the Europe is for the last thousand years is every generation they try to kill each other and the last one was in World War 2".

Then they decided to get closer in order to prevent more wars. This led them to create the euro. According to him, the problem with the euro, is that you have 17 different countries in different cycles using the same currencies. He says that Draghi's plan is to get interest rates to below zero and continue trying to stimulate the economy. He goes further to explain that the current refugee crisis that the EU is facing will have a huge negative impact on their economy. He doesn't think Draghi's plan will work because people think it's temporal and as long as they think that, the permanent income hypothesis will take effect.

Check out his interview with Gordon T Long which covers this and much more.

 

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