George Soros seems to agree with iTulip thesis

[nero3]

Re: George Soros seems to agree with iTulip thesis

"I think the yield curve will steepen, yields maybe hit 4-5 % on the 10 year, and that we will get an inflationary boom, not that different from the one from 2003, however probably more inflationary. In that initial gain phase in the stock market, At least the first 1 year, I think the metals, that have a fear premium will recede, while stocks will gain, later in the cycle when you get stagflation, and an inflation problem the dow will flatten, and gold will really decouple.

That other scenario I outlined was just to present what could happen if treasuries really tanked, and how it would be good, not bad for gold."

I can see this scenario, as a repeat of the 2002 - 2006 reflation is what TPTB want, and may be able to force or simulate - for a while.

Timing is the problem here, for those who want to play the equity markets during the reflation attempt(s) rather than just sit it out in gold, how to determine when it's failing in time to get out.

I think it's possible that gold will outperform through the earnings season. The market is less resilient than I thought. Soros predicted last year that the central banks would face a dilemma where they could no longer lower the short end, without raising the long end of the yield curve (or be unable to stimulate the economy because of that). So far, that have not happened, instead things have moved further to quantitative easing. Some countries as the US, even the UK are able to get away with this, while other countries, such as Ireland can't. In a sense, if it was not for the reserve status of the dollar, the US would be even worse than Ireland I think, and face the dilemma Soros have raised. I think that, would create a situation, where the central banks could really hike hard, however I suspect that if the situation occur, they will instead let the inflation happen, and avoid raising rates, that's certainly what a country like Italy would do, had they not been on the Euro..

[grapejelly]

Re: George Soros seems to agree with iTulip thesis

Gold does extremely well in periods of rising yields, because of course those are periods of falling bond prices. Money will flee falling bonds and where will it go?

Also, gold does well in periods of increasing distrust of paper.

We are entering a period of both, methinks. Gold is a freakin bargain right now.

[GRG55]

Re: George Soros seems to agree with iTulip thesis

Gold does extremely well in periods of rising yields, because of course those are periods of falling bond prices. Money will flee falling bonds and where will it go?

Also, gold does well in periods of increasing distrust of paper.

We are entering a period of both, methinks. Gold is a freakin bargain right now.

Really?

Seems to me the best of times for gold are when real interest rates are negative, and going more negative.

Once yields on fixed income start rising [to belatedly reflect the inflation that has already manifested itself in rising real interest rates] those instruments start to compete with gold, which pays no yield and therefore becomes increasingly expensive to hold in an environment where real interest rates are going positive...

[Sharky]

Re: George Soros seems to agree with iTulip thesis

Seems to me the best of times for gold are when real interest rates are negative, and going more negative.

Once yields on fixed income start rising [to belatedly reflect the inflation that has already manifested itself in rising real interest rates] those instruments start to compete with gold, which pays no yield and therefore becomes increasingly expensive to hold in an environment where real interest rates are going positive...

Maybe.

Real rates = Bond yield - Inflation. So, if the inflation rate is going up faster than the yield on bonds, then real interest rates would be declining.

Here's a chart that shows 1-yr T-Bill yields, CPI and real yields vs. gold.

[GRG55]

Re: George Soros seems to agree with iTulip thesis

Maybe.

Real rates = Bond yield - Inflation. So, if the inflation rate is going up faster than the yield on bonds, then real interest rates would be declining.

Here's a chart that shows 1-yr T-Bill yields, CPI and real yields vs. gold.

Just "eyeballing" the chart I would say it supports exactly what I said:

"Seems to me the best of times for gold are when real interest rates are negative, and going more negative."

And the above chart shows pretty clearly that whenever real interest rates start rising from a [negative] bottom, gold comes under pressure. And declining real interest rates don't appear to support gold as long as real interest rates are still in positive territory...note what gold did during the long secular decline in real interest rates from 1984 to 2001. The cross-over into negative real interest rates is critical for gold imo.

I don't see any "Maybe" about it in the chart above.

[nero3]

Re: George Soros seems to agree with iTulip thesis

These things tend to go in longer wave cycles. We have bottomed in the cycle, but the debt overhang, and deflationary impact of that debt is pushing down yields, think of Robert De Niro in the Mission, when he takes a bag containing his soldiers Armour and other stuff hanging in a rope up the mountain, pulling him down, making his climb more difficult, and then the Indians cut off the rope. Now it's Bernanke that needs to cut off the rope, or ease the debt overhang so long term rates can begin to rise. What should be coming now, is the debt liquidation phase of the cycle, with the liquidity trap and everything. Or Irving Fisher's debt deflation. However, given modern financial engineering or the lack of a gold standard it should be possible to avoid the debt deflation part of the cycle through inflating the debt away through having an era with negative real interest rates, or in other words climb the long wave cycle, without a Fisher debt deflation. That's where Bernanke's skills as a printing press operator and political will come into play. He should expand the monetary base so strongly that the inflation get's so high, that the money multiplier starts to work again.There have to be a commitment to act irresponsible and deflate living standards, through the printing press. Failing to do that, and act conservative, like someone like Ron Paul is advocating, will ensure a depression. Geithner have all the right words, however lacking in actions. And he knows, that they must act forceful, that's what he is saying, however, they are still doing what he is warning against, not using enough force. The biggest problem as I see it are the conservative republicans (that want to protect the dollar, and possibly living standards), however that denies the fact that living standards and the strength all was a dream, you can't protect what was never real to begin with, and that's possibly what they are trying.

[nero3]

Re: George Soros seems to agree with iTulip thesis

To shed some light on the matter.

On this graph, I think this last leg down, that pushed yields on the 10 year notes lower than in 2003, is artificial. At best, it's a mini bubble of fear, that when it pops will bring yields back to the above 2003 level. At worst, it's the culmination of a bubble that have lasted since Alan Greenspan took over.


In the era of Paul Volcker real interest rates was pretty lousy, and most commodity companies, were basically "flat". From around 1987 however, it's more doubtful.

Here I compare treasuries and potash, the favorite stock of George Soros.

http://finance.yahoo.com/echarts?s=POT#chart2:symbol=pot;range=my;compare=^ tnx;indicator=ema(250)+sma+volume;charttype=line;c rosshair=on;ohlcvalues=0;logscale=on;source=undefi ned


In comparing these two items, I think Potash is in a geniune bull market, and treasuries, are in some sort of bubble. Had treasuries not been in a bubble, Potash, should have performed extremely poor over the last 15 years.

[jtabeb]

Re: George Soros seems to agree with iTulip thesis

Really?

Seems to me the best of times for gold are when real interest rates are negative, and going more negative.

Once yields on fixed income start rising [to belatedly reflect the inflation that has already manifested itself in rising real interest rates] those instruments start to compete with gold, which pays no yield and therefore becomes increasingly expensive to hold in an environment where real interest rates are going positive...

Fear that the CBs won't be able to stop short of hyper-inflation is what causes the gold price to go up the most when CBs are agressively hiking to combat inflation. The only historical example that applies (in my thinkin anyway) is the late 70's early 80's when real rates were Rising to compete with gold. One would think that it plays out as you describe above, but the only historical example that really applies to the US (again IMHO) shows that the real gold move doesn't begin until real yields are rising.

My 2 c anyway.

[rjwjr]

Re: George Soros seems to agree with iTulip thesis

Short video interview at link.

Soros Says Fed in a Bind: Beware Stagflation, Bursting of Bond Bubble

Posted Apr 07, 2009 11:27am EDT by Aaron Task in Investing, Newsmakers Related: dia, spy, GDX, GLD, TLT, TLB, TIP

After the financial market collapsed last fall, the Fed responded with a massive injection of liquidity and expansion of the monetary base.Eventually, Ben Bernanke & Co. will face the challenge of having to remove that liquidity from the system. "That's a big and difficult task and probably the authorities will not be able to do it well," says legendary financier George Soros, chairman of Soros Fund Management. "That's the fear that drives people into gold."

Soros wouldn't say whether he's actively trading gold but certainly implied it's a good bet; more explicitly, he agreed with the view there's a "bubble" in Treasuries that's likely to burst sooner rather than later.

"The moment this fear of deflation turns into a fear of inflation, you'll find interest rates rise in the long end which is going to choke off the recovery," he says. "If we are successful [in reviving the economy] we are heading from the prospect of deflation to stagflation."


http://finance.yahoo.com/tech-ticker...LD,TLT,TLB,TIP

At least Soros' penchant for publicity will get these ideas more into the mainstream spotlight, which should be good for attracting money into the positions in which iTuliper's are already ahead of the curve. That is assuming Alec Baldwin, Sean Penn, Tim Robbins, and the rest of the MoveOn.org big money knuckleheads invest accordingly. Of course, they probably would need to move their life savings out of investments in wind and solar power.

[nero3]

Re: George Soros seems to agree with iTulip thesis

You have Soros, Rogers, Faber, The Dow News latter, Grants interest rate observer, Buffet, David Rosenberg, Bill Gross, all saying the same about treasuries. None of them are what I consider fools. The only question is how long it's going to last.

[GRG55]

Re: George Soros seems to agree with iTulip thesis

Fear that the CBs won't be able to stop short of hyper-inflation is what causes the gold price to go up the most when CBs are agressively hiking to combat inflation. The only historical example that applies (in my thinkin anyway) is the late 70's early 80's when real rates were Rising to compete with gold. One would think that it plays out as you describe above, but the only historical example that really applies to the US (again IMHO) shows that the real gold move doesn't begin until real yields are rising.

My 2 c anyway.

There's been multiple episodes of reversal of real yields [between positive and negative and back again] since Nixon cut the US $ off gold in 1971.

The charts seem to show pretty clearly exactly the opposite of what you suggest...that as soon as negative real yields start rising back towards the zero line, gold gets clobbered. If you don't like the chart that Sharky posted on this thread, I'm sure bart can verify what I wrote with a chart of his own.

[Sharky]

Re: George Soros seems to agree with iTulip thesis

don't see any "Maybe" about it in the chart above.

I agree that gold (mostly) follows real yields.

The "maybe" I was referring to was this statement, which conflicts with your claim about gold prices following real yields:

Once yields on fixed income start rising ... those instruments start to compete with gold, which pays no yield and therefore becomes increasingly expensive to hold in an environment where real interest rates are going positive...

Yields increasing on fixed income isn't enough by itself to start competing with gold. That's only the case when inflation is increasing at a rate that's less than yields are increasing. Otherwise, the real rate is negative and getting more negative....

[GRG55]

Re: George Soros seems to agree with iTulip thesis

I agree that gold (mostly) follows real yields.

The "maybe" I was referring to was this statement, which conflicts with your claim about gold prices following real yields:



Yields increasing on fixed income isn't enough by itself to start competing with gold. That's only the case when inflation is increasing at a rate that's less than yields are increasing. Otherwise, the real rate is negative and getting more negative....

One word in the sentence is misplaced; and I agree it changes the meaning and conflicts with the main point I was trying to make.

The sentence reads [emphasis added]:

"Once yields on fixed income start rising [to belatedly reflect the inflation that has already manifested itself in rising real interest rates] those instruments start to compete with gold..."

and it should have read:

"Once real yields on fixed income start rising [to belatedly reflect the inflation that has already manifested itself in rising interest rates] those instruments start to compete with gold..."

[jtabeb]

Re: George Soros seems to agree with iTulip thesis

There's been multiple episodes of reversal of real yields [between positive and negative and back again] since Nixon cut the US $ off gold in 1971.

The charts seem to show pretty clearly exactly the opposite of what you suggest...that as soon as negative real yields start rising back towards the zero line, gold gets clobbered. If you don't like the chart that Sharky posted on this thread, I'm sure bart can verify what I wrote with a chart of his own.

Sorry, I misspoke.

What I meant to imply is that when nominal yields start to rise, Real rates are likely to be headed much lower until nominal rates rise fast and hard enough to counteract the sinking floor, if you will.

That's when you get an interest rate spike and a shock and gold gets competition.

I'm really saying that I think when nominal yields start to rise, real rates will begin their fall in earnest.

Does that clear up my take on it?

[Sharky]

Re: George Soros seems to agree with iTulip thesis

One word in the sentence is misplaced; and I agree it changes the meaning and conflicts with the main point I was trying to make.

Ah, that makes sense now.

Getting back to grape's point, it's a similar thing: yes, gold tends to go up when yields increase, but only when inflation is going up faster than yields (so real rates are declining) -- which sounds an awful lot like poom to me....