Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

[Mn_Mark]

Re: Bugs are the enemy, not Gold!

Even in the event that they do opt to institute a tax, how long would it last before it became clear that it killed any chance of recovering the gold and a new course is new charted?

I think both views could be right: first they engage in a knee-jerk, envy-motivated imposition of a tax, then after a certain period of time it is quietly revoked when the negative consequences become apparent.

If the dollar is in some way tied to gold by the government, then it would seem to me to be counter-productive to put a tax on selling it. If a U.S. citizen had to pay a sales/capital gains/windfall profits tax for selling gold to the government at whatever the current pegged/floating price is (while foreigners do not, because they are not citizens subject to our income tax laws) then U.S. citizens would smuggle their gold out of the country (personally or via the black market), sell it to foreigners to avoid the taxes, and the foreigners would sell it to the U.S. government. The difference here is that we are talking about something (gold) that the government would now be in the business of exchanging for dollars, and they would eliminate the possibility of buying that gold from their own citizens if they penalize the citizens for selling the gold to them by taxing the sale.

I think it is very difficult to clearly understand gold because it is such a unique case. It's not like oil or any other commodity. It's not like any fiat currency. Its nature has been obfuscated by our government, the Keynesian economic zeitgeist of our time, and a lifetime of using an irredeemable fiat currency whose lifespan was extended this long because of the unique (and disappearing) economic and political power the U.S. enjoyed. Because we understand a thing by looking for similarities with other things we already understand, we try to analyze gold as if it is just another commodity ("there will be windfall profits taxes, like oil") or just another investment class ("there will be a blow-off top before it crashes back to its previous trend line, like tech stocks in 2000") or just another fiat currency; yet all such comparisons are misleading because gold is unlike any other economic entity.

[radon]

Re: Bugs are the enemy, not Gold!

Exactly why the politicians will target and scapegoat gold owners: to score points with the vast majority of angry, poor, envious have-nots.

But, we look just like everybody else. Are they going to make us wear a yellow star or something?

[radon]

Re: Bugs are the enemy, not Gold!

tax gold... tax property... tax anything that moves.......

This policy would only exacerbate their capital flight problem. The promises won't be paid because they can't be paid, gold confiscation or no.

[ProdigyofZen]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I think this is the real deal. This is a maasive, all in QE that will break the bond market and increase inflation expectations.
This is not about the number of billions per month. It is about the message that was between the lines. What I am confused about is this... Higher inflation will inflate the debt away, however, the higher rates go, the more difficult it will be for the Treasury to service the debt. So which one will prevail? The beneficial effects of higher nominal growth or the negative effects of rising rates? I actually wonder how much the Treasury cares about rising rates.. I believe they extended the maturity profile of the debt substantially plus a big chunk is owned by the Fed.

I will repeat what I said before... Faber has it right... 25 pct in gold, 25 in cash, 25 in good equities, and 25 in corporate bonds. This game is becoming to difficult to navigate.

What happens to the 25% you have in corp bonds when all the debt those companies rolled into the last 4 years was with rates at 0% and then they have to rollover all that debt into rates of 4 to 6%?

Bonds are going to get crushed.

[jk]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

the debt is too high to allow rates to rise until after there is sufficient inflation to make that debt more manageable. the debt cannot be serviced if rates rise without a higher rise in nominal gdp. repeat: the inflation must happen first. otherwise the gov't will have to default or, more realistically, print in earnest, which will keep rates in check. q.e.d.

[rogermexico]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

What happens to the 25% you have in corp bonds when all the debt those companies rolled into the last 4 years was with rates at 0% and then they have to rollover all that debt into rates of 4 to 6%?

Bonds are going to get crushed.

Actually none of these Harry Browne-type defensive maneuvers make much sense in current times. With an epochal shift about to occur in the IMS, it's a no-brainer that some of these categories that might function just fine to passively weight a portfolio should just be scratched before you even start. Harry Browne is for the normal cyclical periods with an established IMS and no predictable but radical change of state in the offing.

No bonds should be held until there is again a real market in US debt. None.

PMs, very carefully selected equites or private equity (includes closely held small businesses) and T Bills or cash - that's it.

We are about to experience the monetary equivalent of Ice 9.

[Guest]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

What happens to the 25% you have in corp bonds when all the debt those companies rolled into the last 4 years was with rates at 0% and then they have to rollover all that debt into rates of 4 to 6%?

Bonds are going to get crushed.

Why didn't i think of that before? I will immediately notify Faber that a flaw in his thinking was discovered.

But seriously, you work for a fund and should know that all bonds are not created equal and that interest rate risk can be hedged by shorting treasuries. Short dated, high coupon bonds are less sensitive to interest rate changes than long dated, low coupon bonds.

Furthermore, only pension funds and private banks are silly enough to buy 30 yr corporate bonds yielding peanuts. There are plenty of short dated bonds that yield between 7.5 and 13 per cent. You just need to know where to look.

[mmr]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Of course, any short-dated bond yielding 7% - 13% bps over Treasuries is likely priced at that high of a yield for a reason (i.e., market believes there's a good chance that one won't receive par at maturity)

[Guest]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Of course, any short-dated bond yielding 7% - 13% bps over Treasuries is likely priced at that high of a yield for a reason (i.e., market believes there's a good chance that one won't receive par at maturity)

These are EM bonds, of course. Lots of "abandoned" bonds the big players won't touch - unrated, too small an issue, not in an index, etc. Credit risk is obviously a factor but market frequently misprices it.

My point was, what would you rather own - all UST portfolio or for example a mix of EM sovereign and corporate bonds such as a 7.5 %, 7 yr bond issued by Russia's largest private bank that did not default in 1998 or 2008? Or a 2.5 yr bond paying 9.5 pct, issued by Ukraine's largest steel company. You can short the Treasuries as a hedge for rising rates. You do have to be comfortable with each credit story and have a diversified portfolio.

[*T*]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

the debt is too high to allow rates to rise until after there is sufficient inflation to make that debt more manageable. the debt cannot be serviced if rates rise without a higher rise in nominal gdp. repeat: the inflation must happen first. otherwise the gov't will have to default or, more realistically, print in earnest, which will keep rates in check. q.e.d.

I agree with this and said as much in part II discussion (though nobody replied ).
The only way inflation will meaningfully reduce the private debt burden though is wage inflation. Asset / cost-push inflation surely cannot help.
Once it takes hold, surely there will be a self-reinforcing feedback loop with govt spending and inflation. I don't see how there is a way to stop this loop without crashing the bond market, and therefore I take this as a hyperinflation argument. I would like to understand the refutation of this argument; how is this loop broken?

[jk]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I agree with this and said as much in part II discussion (though nobody replied ).
The only way inflation will meaningfully reduce the private debt burden though is wage inflation. Asset / cost-push inflation surely cannot help.
Once it takes hold, surely there will be a self-reinforcing feedback loop with govt spending and inflation. I don't see how there is a way to stop this loop without crashing the bond market, and therefore I take this as a hyperinflation argument. I would like to understand the refutation of this argument; how is this loop broken?

the balance of gov't spending will be improved by higher nominal gdp. tax revenues will rise, one hopes more quickly than rates. also if nominal gdp is rising quickly, unemployment payments and other such counter-cyclical expenditures will shrink. thus debt service will become less of a burden for the gov't, as deficits shrink as a % of gdp. thus i don't think it has to lead to hyperinflation, as the printing can be dialed back as the gov't's deficits are reduced. although this would be called growing our way out of debt, it's only partially growing, and partially inflating.

[BadJuju]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I just do not see how hyperinflation can develop in an economy like the US. We are not Weimar Germany nor are we Zimbabwe. High inflation is certainly a possibility, but runaway hyperinflation seems ludicrous.

[c1ue]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

I just do not see how hyperinflation can develop in an economy like the US. We are not Weimar Germany nor are we Zimbabwe {yet}. High inflation is certainly a possibility, but runaway hyperinflation seems ludicrous {right now}.

Edited for accuracy.

[BadJuju]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

Edited for accuracy.

I don't see how we would get there. Weimar Germany was ruined by war and then what remaining industries it had were occupied by foreign powers so they could ensure they got paid in value. Zimbabwe completely broke down economically as a result of a mad man at top wildly destroying industries through redistribution programs. Never mind it was not particularly stable or in good shape before that.

[*T*]

Re: Election as Forcing Function - Part I: On Track for a Bond Market Panic - Eric Janszen

the balance of gov't spending will be improved by higher nominal gdp. tax revenues will rise, one hopes more quickly than rates. also if nominal gdp is rising quickly, unemployment payments and other such counter-cyclical expenditures will shrink. thus debt service will become less of a burden for the gov't, as deficits shrink as a % of gdp. thus i don't think it has to lead to hyperinflation, as the printing can be dialed back as the gov't's deficits are reduced. although this would be called growing our way out of debt, it's only partially growing, and partially inflating.

This is the crux. However as negative real rates are eroding the real capital base, and (in the UK) a lot of govt liabilities are effectively inflation linked, I don't see that growth in tax receipts can outrun growth in expenditure. I don't think you can print to get ahead of your expenditure. Continuing to try is the feedback loop I am concerned about.

Further, as I alluded to, QE is inflating asset prices, not wages. This is not reducing the private debt burden since those suffering the debt burden are not those with large stock portfolios or houses. The wealthy's marginal propensity to spend is low. Thus I don't think QE will reduce the read private debt burden either, or raise the tax base usefully.