Downward Climbing – US Federal Reserve and the RBA’s Change in Policy

Here is an interesting piece of trivia about Spain: it has over 6,000kms of abandoned train tracks. That’s quite a number when you consider the country is only 1,079kms from north to south.

Many of these have never been used, or even completed.

Several are mostly gone, swallowed by nature. Others have been rehabilitated, like the one joining the small village of Olvera to Puerto Serrano.

The old path was part of the much larger train route project from Jerez de la Frontera to Almargen, where they started construction in the 1920s. But then the Spanish Civil War hit and the government never finished the project.

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Today, the Olvera–Puerto Serrano route is a greenway. This means that no cars or motorcycles are allowed on it. People can only go through it by walking, biking or even horseback riding.

The interesting part about the 36km long route is that it has pretty much everything it needs for trains to go through it. There are 30 tunnels running through hills and mountains, with the longest one close to one kilometre long. There are viaducts crossing rivers and even train stations along the way.

All that’s missing is the train tracks…and the trains, of course.

It was with the idea of exploring this unusual route that early on a sunny Saturday morning, my group of friends and I loaded our bikes onto our cars.

While we had heard that many people travel the route one way — from Olvera to Puerto Serrano — we had a more ambitious idea.

Our plan was to set out early from Olvera’s train station, now restored and serving as a hotel and restaurant. We would reach Puerto Serrano by lunchtime, just in time to have some tapas, and then bike the 36kms back to our starting point.

Truth was, no one wanted to miss out on the adventure and drive their cars to Puerto Serrano.

With that in mind, our group started the journey.

It was an easy and pleasant ride…initially.

The landscape was beautiful, and it was quite a thrill to go through the old train tunnels.

We were close to half way when we decided to take a break. Part of our group though, decided to start riding back.

They had only been gone a few minutes when we saw them coming back to tell us they realise why most people only journeyed the trek one way.

As they explained, they turned around and noticed that the greenway had a slight slant.

It was barely noticeable on the way to Puerto Serrano, but certainly a hurdle on the way back to Olvera. The uphill battle made the ride back much, much harder…and longer.

It’s easy to roll downhill, it’s much harder to go uphill.

Not sure if it’s just me, but things seem to be shifting into an uphill battle lately.

Without much fuss or fanfare, the US Federal Reserve — and the Reserve Bank of Australia — have done a U-turn on policy.

It was only a few months back that the Fed was decreasing their balance sheet and increasing interest rates. Now they are, once again, back to pumping money into the system to increase liquidity.

The Fed says this is in no way a new round of quantitative easing. Is it?

From Bloomberg earlier this week:

Speaking on Oct. 8 to the 61st annual meeting of the National Association for Business Economics, Powell  said that the Fed’s policy to buy $60 billion of Treasury bills a month through the second quarter of 2020 “should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis,” or what is commonly referred to as QE. Instead the Fed’s purchases are intended to calm the wholesale funding market, commonly referred to as the repo market. […]

So, as Powell noted in his speech, this is not a monetary policy measure per se. Instead, it’s a “technical” step aimed at fixing a particular problem in the plumbing of the financial system.

Not so fast, others retorted.

The start of extraordinary balance sheet operations just more than 10 years ago — what came to be known as QE1 — was aimed at normalizing dislocated financial markets. Only under the successor QE2 policy did the Fed pivot to using this unconventional measure to pursue broader macroeconomic objectives.

They also point to QE2½, also known as Operation Twist, which sought to influence the yield curve, just like the latest measure will, albeit in the opposite direction. The Fed is seeking to bring down interest rates on bills relative to bonds, understandably so given all the worries in recent months about an inverted yield curve fueling self-fulfilling expectations of recession.

In my experience, when things are good money flows. It’s when things turn sour that you start seeing money vanishing from the system.

Global growth is slowing. Stock markets keep reaching new heights, even with weak earnings.

Our uphill battle is weighed down by geopolitical problems and massive amounts of debt…

Central banks are willing to do whatever it takes not to fall into a depression and deflation like Japan. Yet all that stimuli isn’t getting us anywhere. It’s not creating inflation, it’s not creating growth, and it is dipping us into negative rates.

And it will be a steeper uphill battle to get back to normal.

Before I sign off, I wanted to share some exciting news with you. Economist Harry Dent is coming back to Australia this November.

I had the pleasure of meeting Harry Dent earlier this year and let me tell you, Harry has a unique voice. Harry studies cycles and data to predict the effects of demographic trends in the economy.

If you are interested in hearing Harry Dent speak live, subscribers to The Rum Rebellion can get free tickets here.

But just to be clear, this isn’t a Port Phillip Publishing event.

Best,

Selva Freigedo Signature

Selva Freigedo,
Editor, The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


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