No such thing as a Treasury bond bubble - Eric Janszen

[bill]

Re: No such thing as a Treasury bond bubble

I'm going to sell it now that one of their representatives has made a statement

http://www.bloomberg.com/apps/news?p...d=aeD4ZWA0j8M4

Feb. 5 (Bloomberg) -- Japan’s plan to waive taxes on profits companies bring home from overseas may limit fund inflows before the financial year ends next month, damping any gains in the yen, Daiwa Institute of Research says.
Many Japanese companies repatriate overseas earnings before the accounting period ends on March 31, helping strengthen the yen. Japanese corporations had accumulated about 17 trillion yen ($190 billion) of overseas earnings, which they had not yet brought home at the end of the fiscal year 2006, according to the Trade Ministry. The firms were reluctant to do so because of Japan’s relatively high national tax rates.
Expectations for the proposed legislation “may create downward pressure on the yen” as companies delay repatriating funds on speculation the new policy will be passed, said Yuji Kameoka, a senior economist in Tokyo at Daiwa Institute of Research, a unit of Japan’s second-largest brokerage.
Japan’s corporate tax rate is among the highest of developed countries, being around 40.7 percent when both national and local taxes are taken into account, according to government calculations.
The planned legislation aims at giving companies greater scope to make new investments in Japan with the goal of helping shore up the faltering local economy.

[Guest]

Re: No such thing as a Treasury bond bubble

I am more and more convinced that there is a huge mispricing of sovereign US bonds, and the US government likes it.

In previous years, the mispricing was kept alive thus: the Chinese sterilizing dollar inflows by buying US treasury debt, keeping interest rates in the US quite low.

Now, it's the crowding out effect of US government guarantees that drive all large pools of capital/debt into US treasurys.

Take the banks (please). The Fed has inflated its balance sheet and the banks have these huge reserves as a result. They are buying government paper, and paying depositors. It is a loser but that's what they are doing.

The US government has crowded out ALL borrowing from the private sector through a combination of "rescues" and "bailouts", via guaranteeing every large pool of debt in site, de facto or de jure nationalization, etc.

So now, I agree with you, the US government's next logical step is to purchase equities. But they are huge beneficiaries of the current financial state of affairs.

The US government's role in private finance is growing by leaps and bounds. They are taking over everything. And they are the world's largest debtor so this suits them just fine. They are looking to spend trillions more on this or that...what a wonderful state of affairs for those in power.

However, I think it will result in complete economic collapse because there is no return in this, no real investment in this, and therefore no real future in this other than stagnation and ruin.

I propose that Itulip hire grapejelly to edit EJ's long and often purposely cryptic columns.

Remember, itulip members pay by the month, not the word. Lay out your case, THEN fill in the details, then sum it up. This is not a creative writing class. The attempts at wit and dancing around the point do not make it more effective, they just waste time.

EJ's columns are usually right and contain a lot of useful information. But reading them takes 4x as long as it should and some sentences don't make sense even after repeated readings. Get the man an editor.

[CanuckinTX]

Re: No such thing as a Treasury bond bubble

EJ's columns are usually right and contain a lot of useful information. But reading them takes 4x as long as it should and some sentences don't make sense even after repeated readings. Get the man an editor.

I like reading EJ's commentaries - the longer the better because I get more for my monthly subscription (just kidding ). But seriously he makes the learning interesting.

I can understand that it's natural for many readers to be sifting through looking for the investment recommendations buried within. I don't think it's that cut and dried though and I trust when he sees something that is actionable he will let us know. This isn't a trading site so I'd be surprised if every article had an investment recommendation.

In the meantime I assume there might be some clues as to what to do in his writings but his conviction on the idea isn't sufficient for him to make a call like "Short treasuries now!". So it's up to me if I want to act on it.

[EJ]

Re: No such thing as a Treasury bond bubble

Is your "buying assets" theory based on information, theory, rumor, inside info or something else?

It is 1) a logical extension of the theory that I put forward in March 2006 when every deflation forecaster asserted that the Fed was never going to do more than buy and sell Treasury bonds, 2) based on global trends published in the newspaper such as the one quoted, and 3) based on rumors I am hearing from colleagues. If the purchase of stocks by government occurs, I will count it as my 14th lucky guess in a row.

As I used to tell my management team, the harder we work, the luckier we get.

[goadam1]

Re: No such thing as a Treasury bond bubble

Thanks. I believe you are right. If you look in the Nytimes today, you see all companies with bad news and stocks slopping up.

No doubt you were the first person to call the fed buying other assets. Long before TARP you said their powers would be expanded.

Is there any evidence you can let us in on? Just curious what the tactic would be. I would imagine the easiest would be to start buying put options to start a short squeeze.

[donalds]

Re: No such thing as a Treasury bond bubble

EJ wrote: If the rush to Treasury bonds at the end of 2008 marked the beginning of a longer term trend away from risk, and if the risk-aversion period is anything like Japan's, it could go on for a decade. That does not strike us as a good shorting material.

So the Masters of the Universe won't succeed in getting investors/speculators out of Ts.

Yet it seems the piece is arguing the opposite, that the Masters will succeed in forcing a rush out of Ts and into risk.

What gives?

Guess I missed it.

[metalman]

Re: No such thing as a Treasury bond bubble

EJ wrote: If the rush to Treasury bonds at the end of 2008 marked the beginning of a longer term trend away from risk, and if the risk-aversion period is anything like Japan's, it could go on for a decade. That does not strike us as a good shorting material.

So the Masters of the Universe won't succeed in getting investors/speculators out of Ts.

Yet it seems the piece is arguing the opposite, that the Masters will succeed in forcing a rush out of Ts and into risk.

What gives?

Guess I missed it.

metalman's summary:

bonds are not a bubble about to pop... but we need to keep an eye on the crazy shit gov't will do to try to crash them... like buy stocks.

stocks are not about to go into a big rally, but we need to be ready for the gov't to make crazy moves there, too.

if you're long stocks, you're nuts... you're betting against a crashing economy.

if you're short stocks, you're nuts... you're betting against the crazy shit the gov't will do to try to reflate the economy.

if you are in cash & gold, you will continue to survive. (cash = 13 wk tbills)

[LargoWinch]

Re: No such thing as a Treasury bond bubble

Okay, but gold is not the only hedge. And picking one hedge is always like betting it all on black or red. So what are the choices?

All right, I will go out on a limb:

I suggest you consider crude oil. I am unclear about other iTulipers view on this, but I understand that EJ and GRG55 are saying that crude oil prices are too hard to forecast at the moment (not during Poom of course). Luke on the other hand appears quite bullish on crude.

As for me, given the relatively high gold/crude ratio (especially in $CAD), I have been buying crude instead of gold for the time being.

You may also want to consider other precious metal like Silver and Palladium to diversify your portfolio.

[Guest]

Re: No such thing as a Treasury bond bubble

You may also want to consider other precious metal like Silver and Palladium to diversify your portfolio.

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.

[jiimbergin]

Re: No such thing as a Treasury bond bubble

This is a response to Santa Fe (#11 above)

I have a significant short position in long treasuries. So I am putting my money where my mouth is as well. I would rephrase your last sentence: my analysis is not flawed, but my prediction may end up being wrong in the short run.

Look at it from a contrarian standpoint. If the Fed feels compelled to buy long treasuries, how convinced are they that long rates will rise?Corollary: When was the last time that govt intervention of any kind worked except in the short run?

Keep the faith and trust your economic principles. Don't try to time the market.

I too have a short position in long treasuries. I have been debating closing it and taking my 10% gain. But I really believe that this is a good long term position to have. Since we will be on a cruise for much of February, I guess I will just put a trailing stop on it and see what happens.

[bpr]

Re: No such thing as a Treasury bond bubble

Thought provoking piece, and great contributions from the group as well.

Doesn't the Treasury simply issue the bonds it needs to pay for government? So the drop in interest rate is a reflection of the demand, but does not reflect quantity. The same number of dollars enter the treasury whether the interest rate is 5% or 1/4% as long as the bonds are sold. And those dollars are almost immediately spent by the government and injected into the economy.

So why would the government want to kick them out of the lifeboat when they need those dollars and they're getting them at a low interest rate?

This also has my head spinning: why would the government want the bond market to weaken? Doesn't a strong bond market mean that the government can continue to borrow more at lower rates?

I see the correlation in getting more money out of the "parking lot" and into the real economy, so to speak, but all of the government's future spending committments are dependent on borrowing outlandish sums at miniscule rates.

Maybe I'm just thinking as a businessman/investor rather than a policymaker here, but if I were the government I'd be very happy to auction more bonds off at under 3%.

I am more and more convinced that there is a huge mispricing of sovereign US bonds, and the US government likes it.

In previous years, the mispricing was kept alive thus: the Chinese sterilizing dollar inflows by buying US treasury debt, keeping interest rates in the US quite low.

Now, it's the crowding out effect of US government guarantees that drive all large pools of capital/debt into US treasurys.

Take the banks (please). The Fed has inflated its balance sheet and the banks have these huge reserves as a result. They are buying government paper, and paying depositors. It is a loser but that's what they are doing.

The US government has crowded out ALL borrowing from the private sector through a combination of "rescues" and "bailouts", via guaranteeing every large pool of debt in site, de facto or de jure nationalization, etc.

So now, I agree with you, the US government's next logical step is to purchase equities. But they are huge beneficiaries of the current financial state of affairs.

The US government's role in private finance is growing by leaps and bounds. They are taking over everything. And they are the world's largest debtor so this suits them just fine. They are looking to spend trillions more on this or that...what a wonderful state of affairs for those in power.

However, I think it will result in complete economic collapse because there is no return in this, no real investment in this, and therefore no real future in this other than stagnation and ruin.

Is that what this piece is all about? Complete econoic collapse? If so, this is not about equities or notes or gold. It's about the large game to human ratio.

[grapejelly]

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.

[EJ]

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.

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?"

It means that the next stage of economic and financial chaos is beginning, the kind you get when a nation develops an unstable finance-based economic system and it collapses, and then the government tries to put it back together again, and every effort to do so has unintended consequences that make the problem even worse than before, the first problem being the government's interventions in the economy that caused it to become finance-based in the first place.

I've been out of the stock market for a decade because it's not kosher.

Will direct government intervention in the stock market, should it come to pass, make it more or less kosher? No?

I'd never recommend shorting anything at this point. Shorting is about timing, and last geat timing bets were in 2008. Now it's all life rafts, a sinking USS FIRE Economy, and frigid ocean all around.

As for the government creating inflation, I have nothing new to add to a subject I have written dozens of articles about, except for the Steve Keen discussion we'll post tomorrow. A google search should cover all questions on this topic. Several of them use this graphic. It depicts the government lending money into existance after the endogenous credit markets collapse. We came up with the chart years before that happaned by way of explaining to readers what was going to happen.

Embed this diagram in your head. Don't forget it.

When consumers and businesses reduce their lending of money into existance AND the endogenous credit market cannot meet the demand for credit, government steps in an suppies credit that allows loans to be made that causes new money to be created. These efforts are not without unintended consequences, of course.

[Me]

Re: No such thing as a Treasury bond bubble

Forget for a minute all the tinkering taking place by governments the world over. There exists something called supply and demand. Demand for oil is down over the last 8 months or so and this trend may well be only getting going....however, supply is being impacted already with fewer exploration projects being considered let alone continued. Looking at all the major oil fields we are left with Gewaar as the only elephant not in decline. This according to the Saudi's. mmmm.

Venezuela, Mexico, Iran, Indonesia, Russia.
What do these countries have in common?
All of them are currently net oil exporters, and combined they make up 20-25% of world oil exports. All of these countries have some unique things in common.
1. They are all experiencing massive declines in oil production.
2. They all control their oil through state run entities, entities which do not re-invest in their businesses but rather spend their cash flows on social programmes. Everything from free housing to free medical care and of course massively subsidized oil for their populace, which incidentally creates artificial demand.
3. They will all in the 3-5 years no longer be oil exporting nations.

A 20% take off in supply of crude in the world markets, irrespective of the greater depression will do some very interesting things to the price. That is not even considering that we have the monetary inflation that will soon rise like a giant tsunami in world financial markets.

[Me]

Re: No such thing as a Treasury bond bubble

OK EJ I agree with your reasoning on this. Back to T-Bonds what I don't fully understand is how the USG will manage to do either of the following two things

1. Borrow an additional $2 Trillion or more in fiscal 09 and maintain current rates. (Foreign creditors are up to their eyeballs in problems of their own and bailout programmes of their own). Sure they can print the money to buy same. Consequences???

2. The credit market contraction was met with credit stimulas amongst other actions. None of which was effective in stemming the collapse. The Fed may be warming up to the game at hand like a boxer who gets knocked about in the first round but comes back with a few good punches later on however given their record and the size of the bond market, it is my assumption that they will be ineffective in dealing with any collapse due to the fact that government is always inadequate compared to private enterprise.

Any actions taken will likely be too late (like arriving to party only to find it is almost over) and then be overdone (going wild and dancing on the tables to make up for the error in timing). The effects of many actions are often not felt for some time. As such the reaction to actions taken (printing of money, buying equities etc) more often than not do not register immediately. This creates a feedback loop whereby the Fed provides more of the same assuming (incorrectly) that the action taken is either ineffective or insufficient in size.

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.