No such thing as a Treasury bond bubble - Eric Janszen

[junkacc]

Re: No such thing as a Treasury bond bubble

I for one cannot see that with the massive issuance of new bonds there will not be foreigners who either simply don't come to the party as they have parties of their own they need to maintain. When they don't come to the party and the Fed starts playing the part of the guests then those foreigners will realise the dollar itself is in jeopardy.

The only question to me seems to be in jeopardy against what as most currencies are in some form backed by the USD itself.

Anyone that can point out any flaws in this thought process please lay into me. I've found that it is more important to find where you are or could be wrong than to be right. Correct analysis of investments take care of themselves, it's the ones that you get surprised by that cause the most pain.

This is called the "race to the bottom", where all foreign CBs try to inflate, be it so they can maintain currency pegs, or get rid of their own debts.

As long as the USD is the reserve currency, it is the safest bet. In other words, as long as the US has aircraft carriers in every ocean and bases on every continent, exerting its will on client states, it would be unwise to bet against it. That is ofcourse, unless things get so bad there is a concerted effort by other powers. But that would lead to WWIII.

Next time a collegue complains about military spending, remind them of this fact. Its a choice between slowly bleeding to death maintaining a huge military or having a swift death if you don't. That's why all empires fail in the end.

[LargoWinch]

Re: No such thing as a Treasury bond bubble

If you buy silver, remember to hang onto your britches, because it will take you for a hell of a bronco ride. That metal is cantankerous.

Yep; my understanding is that it magnifies gold losses/returns.

It does provide for some diversification however, and maybe some protection against confiscation (?).

PS: "Cantankerous", that is worth saying over and over again!

[bpr]

Re: No such thing as a Treasury bond bubble

In Why Ben's Helicoptors Are Doomed, I talk about an article that lays this out, that money is created by borrowing demand pulling money into the system...and that pushing money out in the form of reserves or helicoptor drops doesn't do it.

However, I think what EJ is saying, or what I think he should be saying, is that the money creation can and will be conducted by US government operations. The government will borrow money into existence in sufficient quantities to create inflation, and will buy assets in sufficient quantities so as to drive up their price.

One very simple way of looking at the economic crisis is that prices of assets are too low. By driving them up, (by buying them), the government can eliminate the crisis by jumpstarting inflation again, and by lifting asset values to a point where they comfortably exceed the underlying loans against them.

That article is great, thanks. I look forward to the Keen piece here.

[zoog]

Re: No such thing as a Treasury bond bubble

...btw, allowing people to sell equities to the government also provides another channel to move cash into the economy. how many investors are praying for their stocks to get back to where they were purchased so that they can "get even.?" will they sell at that point to the government purchaser? and if so, what will they do with the proceeds?

I can only speak for myself of course, but if the government does manage to induce a noticeable rise in the stock market, even if only nominal, I would be inclined to take the opportunity to get the rest of my 401k out of mutual funds and into the money market fund, where it will likely sit for the next few years. I have no stock investments outside of my 401k and have no intention of adding any at this point. I have more than enough risks and unrealized losses with commodity funds.

[metalman]

Re: No such thing as a Treasury bond bubble

btw, allowing people to sell equities to the government also provides another channel to move cash into the economy. how many investors are praying for their stocks to get back to where they were purchased so that they can "get even.?" will they sell at that point to the government purchaser? and if so, what will they do with the proceeds?

really, really good point. helps consumer confidence, too ej did a piece a long time ago that shows the correlation of the stock market to consumer confidence is very high.

[grapejelly]

Re: No such thing as a Treasury bond bubble

the whole deal is to get asset prices up again...at virtually any price. At least nominal prices of assets...

[c1ue]

Re: No such thing as a Treasury bond bubble

I've been noodling and monkeying with models on the bond front - and here's what percolating out so far:

1) Option ARMs and their related security holders are f***ed. No way out so far for these.

2) Alt-A are presently in relatively good shape due to LIBOR rates.

3) Fixed rates are low also

Basically what 2) and 3) mean is that so long as these rates (LIBOR, 30 year fixed) are low, the government won't intervene in the 30 year (and other) Treasury market.

As soon as we see these tick up, then the intervention will return.

Thus TBT is a good short term trade, but watch out for when the next credit event occurs. Could be sovereign, could be another biggie taking a massive Fed hit (and who is left but Wells Fargo and JPM?), could be a death by 1000 failed small bank cuts, could be something else.

But very clearly in the vacuuming in front of steamroller mode. Whether vacuum is getting nickels or half dollars, that I am still pondering.

[ProdigyofZen]

Re: No such thing as a Treasury bond bubble

I believe the government is going to have the hedge funds and private equity buy all the bad assets so that they can sneak their way in to regulate and put a stranglehold on these firms.!

[grapejelly]

Re: No such thing as a Treasury bond bubble

I've been noodling and monkeying with models on the bond front - and here's what percolating out so far:

1) Option ARMs and their related security holders are f***ed. No way out so far for these.

2) Alt-A are presently in relatively good shape due to LIBOR rates.

3) Fixed rates are low also

Basically what 2) and 3) mean is that so long as these rates (LIBOR, 30 year fixed) are low, the government won't intervene in the 30 year (and other) Treasury market.

As soon as we see these tick up, then the intervention will return.

Thus TBT is a good short term trade, but watch out for when the next credit event occurs. Could be sovereign, could be another biggie taking a massive Fed hit (and who is left but Wells Fargo and JPM?), could be a death by 1000 failed small bank cuts, could be something else.

But very clearly in the vacuuming in front of steamroller mode. Whether vacuum is getting nickels or half dollars, that I am still pondering.

Beyond that...

...there is the simple difficulty of anyone meeting challenging payments for a loan balance that EXCEEDS what they owe.

Why should they keep paying and struggling?

And life intervenes, things turn south, and they stop.

And this drives values down and means more people who *could* make payments also decide not to continue.

Laws such as California's let people walk away from a first lien without any personal liability, so things go south in California quicker and sharper than in many other states, and I believe that is a big reason.

[Thailandnotes]

Re: No such thing as a Treasury bond bubble

It's interesting, when I write a piece like this I'm usually inundated with "Ok, so what do I buy or sell?" type questions. Apparently, even iTulipers are conditioned to ask what to trade, what is "actionable" in every opinion.

This is what 20 yeas of trading industry advertising has done to the American brain, conditioned it this way.

"The government is going to buy stocks. So that means I buy stocks?"

"TPM Reader JC sent me to this interview with Nouriel Roubini and Nassim Taleb on CNBC. Here's what JC wrote: "In this clip, Nouriel Roubini and Nassim Taleb are still being treated as a circus sideshow by CNBC... They're predicting the end of finance, and offering the only clear path out of this mess that I've seen offered (with the knowledge to back it up), and CNBC keeps asking them for stock tips. It's ludicrous."

From:
http://www.talkingpointsmemo.com/

link to video

http://www.cnbc.com/id/15840232?video=1027496846&play=1

[Willette]

Why Not Lifeboats to Gold???

So why, in the wide, wide world of sports, do people not begin to buy gold en masse???? I cannot understand the preference for T-Debt over gold. Never have. EJ makes the case that everything is going to shit, but does not suggest that people will abandon the mess for gold in large numbers. What would it take?

[nero3]

Re: No such thing as a Treasury bond bubble

This is called the "race to the bottom", where all foreign CBs try to inflate, be it so they can maintain currency pegs, or get rid of their own debts.

As long as the USD is the reserve currency, it is the safest bet. In other words, as long as the US has aircraft carriers in every ocean and bases on every continent, exerting its will on client states, it would be unwise to bet against it. That is ofcourse, unless things get so bad there is a concerted effort by other powers. But that would lead to WWIII.

Next time a collegue complains about military spending, remind them of this fact. Its a choice between slowly bleeding to death maintaining a huge military or having a swift death if you don't. That's why all empires fail in the end.

In a race to the bottom, I think it's likely that the dollar, yen and even the swiss franc will weaken significantly and that the "liquidity pump" restarts giving way to new bubbles.

It have been some tendencies the last week. I don't think it takes a very large push now, to get the thing going, with the tide coming back in, lifting all boats.


That will render "commodity currencies the winners, and the EUR will then outperform the USD. The only chance for the dollar to be strong in this enviroment is if the bubble is in the US, and cause massive inflow of capital to the US.

[metalman]

Re: No such thing as a Treasury bond bubble

In a race to the bottom, I think it's likely that the dollar, yen and even the swiss franc will weaken significantly and that the "liquidity pump" restarts giving way to new bubbles.

It have been some tendencies the last week. I don't think it takes a very large push now, to get the thing going, with the tide coming back in, lifting all boats.


That will render "commodity currencies the winners, and the EUR will then outperform the USD. The only chance for the dollar to be strong in this enviroment is if the bubble is in the US, and cause massive inflow of capital to the US.

is it me? am i having a de ja vous? i recall hearing this exact argument before...

[nero3]

Re: No such thing as a Treasury bond bubble

is it me? am i having a de ja vous? i recall hearing this exact argument before...

I don't know. The problem is of course that the US consumer is maxed out, and that it takes a very big inflationary push, to take the debt to gdp levels even higher, if it is possible.

On the japanese market vs the US, I don't think they will part in the way that the US market will go down, as the Japanese goes up. In my study of the Japanese market, they will track eachother, but the US market have been a bit worse because of the financials. The Japanese market have tracked US 10 year treasury notes since around 1990. However, if 10 year notes, and yields in the US starts to rise, I think the japanese market will outperform the US market, if yields in the US get to a certain point, it will signal an inflation problem, and in that scenario, stocks in the US will move flat, maybe they will hit back up to around 10-12000 on the dow, however that does not have to hurt the japanese market. If 10 year notes goes to 8 %, it could certainly mean the dow jones would be at 10-12000 while the nikkei could go to 16000-20000.



I just add a link here to prove my point:

http://finance.yahoo.com/echarts?s=%...urce=undefined

What you will see here is that the nikkei track US 10 year notes. If the US have debt deflation for 10-20 years, then the treasury bond will extend it's bull to 38-48 years, instead of what it is at now, and the nikkei will drop even further, because the nikkei track 10 year notes.

I think the FTSE, Dow, Nikkei, will increase as 10 year notes rise, and I think this reasoning between these indexes and 10 year notes, is the reasoning behind berkshire hathaway's insurance policy on the worldwide stock indexes that Warren Buffet have written. So is it likely that the US now will start off where japan was in 1992, dragging the Dow, Nikkei,down to 2000-3000, 10 year notes down to 1,5-2 %? I don't think so.


Secondly I think the nikkei was an extreme bubble in 1989, extending all the way back to the late 1960-s, in 2003, after the dotcom bust I think the nikkei and dow was in at around the same level.