RBS: GET READY FOR THE “CLIFF EDGE”
I’ve read some alarming research in recent weeks and months, but this one takes the cake. RBS is sounding the alarm on risk assets with a call that markets are at risk of falling off the edge of the cliff. They refer to equity investors as the “worst cult in history….which has no basis in fact, or history, but yet seems universally accepted.” (There’s actually a strange truth in that comment). They believe the current downturn could very well “destroy” this “cult”:
“Get ready for the cliff-edge. Be maximum long duration of nominal government bonds in safe haven markets. This means US, UK, Germany, in that order, and perhaps others. Be long gold. Think the unthinkable – we always do, and you should ask yourself why the consensus refuses to do so, and seems perpetually on the ‘everything is ok’ side of events. If I was any more bond bullish we would explode, this is identical to 2008, including the incredible complacent (and we believe wrong) consensus.
They’re not just bullish on treasuries – they are super bulls with a 2% target on 10 year yields:
“Get ready for sub 2% on 10-yr USTs; sub 2% on 10-yr bunds; and the UK not far behind, 2.5% 10-yr Gilts. Our long held US$2000 gold view as a trade for the breakdown of the financial system looks increasingly ok. We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe), and for the global economy (particularly in the US/Europe). We have been wrong before, but we think the risks associated with us being wrong are low (ie, rates just stay where they are, yields back up a little bit, after all we are not about to enter a new global economic upswing!). The risks associated with us being right are >10% returns in 10-yr USTs at the same time that equities/commodities will collapse far beyond what even some equity bears anticipate.”
In terms of valuations they don’t see today’s levels as being particularly attractive:
“For a counter consensus look at just how rich equities actually are if we are right about the economy, and how far they can fall, look at Robert Shiller’s 10-yr real adjusted P/E ratio on the S&P500, which uses ten year smoothed earnings. We have used this as our marker for proper (unbiased) long-term valuations for many years – and is freely available to all investors to look for themselves on his Yale website – and it sits at 20.0. One pillar of our framework is that sometimes it is right to buy equity; sometimes it is right to sell equity. And call us old fashioned, but we will buy at low PEs, and sell at high PEs. So a PE now of 20, sits very uncomfortably right at the TOP of its range if we take out the pre-first great depression spike in 1929 and Nasdaq 2000 spike. We argued in 2007/08 pre crunch that we would buy equities again when they looked cheap, which would be at 6-8 PE on this metric. That is an equity fall of 60-70% from here. Fine, call us mad with such big numbers if you desire, and say we will miss the big equity rally on a structural view (what rally, having been short for 10 years, S&P500 total return since 1Jan2000 is actually -8.1%!). Meanwhile an investment in 30yr USTs has returned you +126%. You do not have to see -60-70% off risk assets to be cautious here, we are just suggesting this is what the numbers say are attainable if certain circumstances prevail, using a 120 year snapshot. The big turnover in the US economy will lead to dramatic turns down in valuations we suspect – and may finally destroy the world’s worst cult: the cult of the equity, which has no basis in fact, or history, but yet seems universally accepted.”
What’s this all add up to? They believe the endgame approaches:
“This all sounds somewhat doomsdayish, so we should update how the real economy/banking is panning out for us. It is saying: the end-game approaches.”
RBS says housing is in the lynch pin in the whole economy and that the next leg down will trigger the collapse:
“First, we have been waiting for the last of the US fiscal easings, the first time homebuyer tax credit, to pass, and have been arguing strongly for some weeks to investors to get ready for the violent turn down which is about to occur. And the trigger (not the only reason, but the trigger) is the US housing market. This is all falling into place lovely. Last week saw the NAHB housing index dip; housing starts at -10%mom (6.3% under consensus), and building permits -5.9%mom (8.4% under consensus). This week has seen existing home sales -2.2% (8.2% under consensus); and new home sales -32.7%mom (14% under consensus). Our theme is building. The BoE financial stability report today shows there is a surplus of 1.75m housing units built since 2006 and even with normal household creation, this will take two years to remove. So the weak housing theme should now pollute its way into consumers, and kickstart the rebuilding of the savings rate (just 3.6% and delayed from rebuilding by the fiscal/monetary shock and awe).”
The problems don’t stop there though. The banking system is still a mess:
“Second, the European banking system faces problems. We have seen downgrades continue in Europe this week. We discussed in last week’s weekly overview about the US$450bn shortage of dollar asset funding for non-US banks, and why the Fed had to reopen swap lines. We are amazed there is not now immense market & media focus on the new letters that will bring forward the end-game and worsen it: 2a-7.”
It gets even worse (amazingly). They believe the implementation of SEC rule 2a-7 could be what pushes us off the edge of the cliff:
“What is this? The new (well ‘new’, it comes in on 30 June but has been known for a year despite no-one discussing it at all) SEC rule. This forces US money market funds – up to now the provider of USD liquidity to those who need it – to become ‘safer’. The SEC puts it thus: ‘The amendments tighten the risk-limiting conditions imposed on tax exempt money market funds by rule 2a-7…the amendments are designed to reduce the likelihood that a tax exempt fund will not be able to maintain a stable net asset value.’ (source: SEC). Our short-term strategists plan a piece next week. The key for us in FI is that these US$2.8trn of 2a-7 funds now have to a) own 30%, not 5%, of assets in sub 7 day liquid paper; b) weighted average maturity of fund has to fall to 60 from 90 days. We can all see the logic – the sovereign defaults from EMU have the power to hit EMU banks badly, and the USA does not want to repeat the calamitous ‘breaking the buck’ problem when in 2008 Reserve Primary Fund wrote down its Lehman assets, took its net asset value sub $1, caused a run
on money funds which then forced them to sell their assets, cutting NAV for other funds, etc. Contagion.From what we can see, the USA is basically pulling up the drawbridge and retreating into its fortress, trying to protect its financial system from coming European banking problems. But the consequence is clear. Banking is about confidence. If you are reliant on markets to fund yourself and that confidence wanes, a total stop can occur immediately/within days. Northern Rock (75% reliant on wholesale markets) was the first example of this in the UK, though not the last. Once we apply 2a-7 (and the ability of US money funds to ‘put’ their EMU bank assets back to the issuer EMU banks within 7 days on signs of trouble, since the US money funds will from now on increasingly own 1yr securities with a 7 day put) to our economic slowdown/deflation themes, this means one thing. If there is a slowdown and sovereign trouble, the problems facing EMU banking have through this rule potentially become a whole lot worse. This worsens – and brings forward – the ‘cliff edge’ potential.”
And what will be the result of the collapse? “Monster” quantitative easing:
“Monster QME coming. With fiscal policy off the agenda, we have always expected more QME (quantitative monetary easing). And this time will be different. We have always argued that buying of bonds is less efficient than guaranteeing yield levels, and that yields are the key, not raising money supply, given demand for credit is dead (so all QME did was raise bank reserves and show money velocity collapse). There has been a subtle shift from central banks toward our view, most evident from the UK MPC, whose £200bn programme started by focusing almost purely on underlying M4, but ended differently with MPC speeches about how successful it was in keeping Gilt yields low.
The next shock and awe will be in the form of large scale QME, but with one massive difference – it will be focused on lowering yields, not expanding money supply (I think). So do not be surprised if the next QME is about guaranteeing yields at, say, 2% 10-yr US, or lower. Even if it is a vanilla buying programme as before, expect it to focus along the curve and bring all yields down in a monster bull flattener (you cannot bring down 5s and not 30s because that just changes savings’ maturity preference, it does not deter saving). Note today’s Telegraph article alleging that the Fed are already mulling more QME of another US$2.6trn (to take their balance sheet to US$5trn), which is totally unsurprising (we think CBs are far more dovish worldwide than investors/investment banks are). Others will follow. We are getting more bond bullish, not less.”
Wow. I don’t really know what to say about that….
Source: RBS
They forgot to allocate their portfolio to guns and butter!
or as the late Warren Zevon would have phrased it: “send lawyers, guns, and money ’cause the **$# has hit the fan!”
I DO fully agree with the RBS.
Same here and would love to hear intelligent counterpoints with data to the litany of facts and realities RBS presented.
I have some additional personal thoughts which are nuancing the view of the RBS.
1. Invest in governments bonds of a country with a Current Account Surplus. These are the ones that are – IMO – the safest. So, I would avoid the US, UK and all the southern european countries.
2. Somewhere in the next, say six months it will be time to sell ALL government bonds. And that will be the time when the entire system is REALLY falling apart.
3. Go long gold ? Yes and no. Gold and goldstocks will – IMO – get hit (again) like they were in the 2nd half of 2008. Because a lot of hedgefunds are still long gold and goldstocks on margin. But like in 2008 they will be the first asset class to (dramatically) rebound, as well.
This sounds good on a theoretical basis, but I doubt there will be any safe havens when we enter this phase of the collapse. Cash will be elected the new King.
I agree!
Haha that is gold! Wouldn’t have thought you are allowed to write such pieces at a large investment bank?!
TPC, what is the history of the writer? Previous good calls/bad calls?
Not quite sure who is the writer but RBS is home to Bob Janjuah who has been spot on from the beginning.
He actually came to my office on 2 July 2007 as I had requested a meeting with him as I was very negative at the time (and it wasn’t fashionable then).
Anyway, the guy has the best track record out there although he tends to be a bit of a scaremonger
when you had your little tete a tete with rbs did you ask him how his bank/employer was positioned for a downturn? many $bns of uk taxpayer money was destroyed keeping that lacklustre entity alive.
from Business week “RBS posted the biggest loss in corporate history in 2008 and required the world’s biggest banking bailout at 45.5 billion pounds.”
if he did sell out of his own holdings in his bank, at the time, we should be told.
I didn’t but I think he was a lone voice at the time. I remember talking to the sales people (credit)there at the time and everybody was completely oblivious to what was coming.
Even 6 months later, I recall talking to the head of the desk and he told me:
“don’t worry, there are many very bright people here, they will find a solution, a product as they need something to do and won’t let it happen.”
From today’s perspective, it seems obvious but if you remember and like me were a mega bear, you were the party pooper.
That’s the main lesson I have learned this last four years:
if you’re bearish when everything is hunkydory you’re the cassandra, the party pooper
Then, having been right, you’re still the “pariah” as people resent you for having been right
So it’s best to keep a low profile, specially if you’ve benefited from the markets.
But I am very glad for all the great websites out there sharing my views
The other lesson I have learned is to avoid giving advice on investments to friends and family. They only remember the bad ones and never thank you for the good ones.
So, it’s mainly aggro without any benefits.
I like Janjuah, but he was aheavy buyer of the Euro at $1.55.
I have never once seen him called on the carpet for that absolutely horrible call.
TPC, I love your desire to provide varying outlooks, but please leave this sort of sensationalism to Zero Hedge. This site is too good for this stuff.
At least it didn’t say: “goled 2 50000 by August bitchez!”
You my friend will left pennyless at the end of this cycle.
Even the most extreme outlooks are worth considering. There’s actually quite a bit of sound research in this note despite its “sensationalism”.
Wow…. Sounds like final euphoria on bonds…
A master piece…
Recommend RBS portfolio:
1. Gold : barbaric, the mining of which causes environmental damage and recently poisoned 186 Africans to death with lead.
2. Government bonds: based on government’s ability to take at the point of a gun even from a dying economy.
However, according to RBS, equity investors are the “worst cult in history….which has no basis in fact, or history, but yet seems universally accepted.” So according to RBS, actual investment is silly while worshiping a shiny metal and taxing productive people is wise.
And we call this capitalism?
Very solid and credible “fear factor” stuff. Hope it hits sooner than later. I’ve got some 5 and 10 year money that needs to go to work.
The next shock and awe will be in the form of large scale QME, but with one massive difference – it will be focused on lowering yields, not expanding money supply (I think). So do not be surprised if the next QME is about guaranteeing yields at, say, 2% 10-yr US, or lower.
—
What?
Buying bonds at 3% heading to 2% (WHOOPIE) in a money printing environment?
I would rather stick a fork in my eye
Buying bonds at 3% heading to 2% (WHOOPIE) in a money printing environment? Spare Me
What? The counterfeiter-in-chief, the Fed, cannot buy US Treasuries at 0% or even negative interest rates if it wants to? And if the US Government wants to bailout the states or actually do some good and bailout the victims, debtors and savers, then it will need some FRNs to do it with.
I would rather stick a fork in my eye Spare Eye?
Don’t do that. It would be worth it if it could save your soul but not merely your wallet.
And if the US Government wants to bailout the states or actually do some good and bailout the victims, debtors and savers, then it will need some FRNs to do it with. FB
Nope. The US Treasury could (and should) simply create some brand new, interest free Greenbacks (United States Notes) and bypass the Fed altogether.
I think the biggest problem is not about inflation/deflation; it’s about the rule of law and fairness. If we focus on adjusting policies according to the market, eventually we will find ourselves in impossible situations, with no guidelines or markers to guide policymakers, instill trust in the people and worse of all, no idea how to bring our kids up.
I call this “Being is smart is good enough, but being too smart is stupidity”; with all our education, we believe that we can find “optimal” solutions according to the situation and scorn history and it’s players who have made the wrong decisions… have you ever looked at ancient artifacts?
Have you ever marveled at their creativity and ingenuity in creating those artifacts? I don’t know about you, but more than once I find myself- with all the modern education that I receive- being lesser of a person than them… I do think that as a whole, we are not smarter than our ancestors 2000-3000yrs ago.
The crux here is… we lack humility in the upper echelons of society; they say it, but they don’t practice it.
I admit that this is probably a conservative opinion according to mainstream classifications and that going back to the rule of law could possibly prevent greater benefit for mankind, but I think that as the world becomes more and more like a village, the rule of law- though a very tough one to take (and one might argue that the length of time required to establish a good rule of law means that it’s probably not a good idea), is more and more essential.
So economic theories and accounting methods aside, I don’t hear or see the Supreme Courts making any decision that makes sense… or is it that the mainstream media has no interest in covering such issues?
We already know that there was plenty of fraud going on during the bubble times, but what is the courts’ ruling on those? It’s been almost 3yrs since BSC failed and so little has come of that.
Yet, we might project a little further- can we expect anything better from the Supreme Court judges when all of them have been educated in the same way that other ‘experts’ have? I mean, they’ve been taking the same “Economics & Finance” courses/modules as others have right?
Perhaps we already know what the present situation is like- that the rule of law can be subversed (is there such a word?), provided that the situation, or the consequences of any action/non-action- lawful or not- is bad enough to threaten the economy and people’s livelihoods.
Anyway, has anyone ever wondered whether “free markets” were practiced in any of the previous civilizations? It’s funny how none of them survived till modern history huh? Maybe it’s because… it doesn’t work that well.
But then again… so did societies with a “rule of law” right?
Hmmm… I wonder.
I am not a “bull” but RBS analysis definitely draconian. I wonder which short HF helped pay them to publish this article! they claim Shiller real adjusted PE is at 20x. Back into that PE and it suggests S&P EPS of $51 – which means they used the trailing 12 month period ended December 09. wow. 1H09 inclusion?? isnt that a bit dated? fast fwd 6 months – at the end of 2010, the TTM S&P EPS will be somewhere in $75 range (below consensus estimates of $80), which means Shiller PE at current 1045 S&P price is really closer to 14x. Cheaper, but not as worrisome as 20x. I still see more risk to downside, but not the levels RBS suggests.
@Silvertip7:
Dude, go back & read the section on PE’s again. They’re not talking about trailing twelve month PE’s, but trailing TEN YEARS. That’s why they call it “smoothed” & use phrases like “real”.
Don’t let earnings get in the way of a grand recession p0rn story Silvertip7
It is all about fear and panic now
It is just the opposite of the Tech Boom – the US market now transitions from one mania to the next – there is no middle ground, no common sense, just sub prime lending to the homeless or triple short bear funds
Waiting for equities to trade at 6-8 times while buying bonds in a money printing environment – really?
umm…I’m sort of a dumb civil servant, who, you know, does the stupid stuff like help those people living under bridges cause they’re too crazy to ask for food.
I’m using just the strategy you mentioned here ( buy medium bond funds and GOLD (up again today, but really just an illusion) while the rigged equities market explodes with the aid of the helicopter drops and all the Boomer 401ks are transferred back to their rightful owners at Goldman Sacks (oh, it’s spelled ‘Sachs’?) via move-to-the-front-goodpal HFT.
So I don’t know if you’re being sarcastic here. I can’t get my money out of the 401k and am too poor to buy farmland.
People who think this scenario can’t happen are whistling past the graveyard.
Cocaine prices must be on the way down…
I can’t help but wonder lately if the magicians controlling the markets through slight of hand and controlled perceptions are not setting it up for another massive short squeeze, to propel it higher. Since they believe they are “doing God’s work” they would regard it as right and just to pay for that outcome with the losses of those “lacking faith” (i.e. the short sellers who are expecting, even counting on, reality reasserting itself). In a market as manipulated as this one seems to be, it is hard to predict what the next move will be.
I should have added: From the world view into which they have been indoctrinated, “God’s work” is to transfer wealth and power from the “unworthy” (in other words, all the rest of us) to the “worthy” (in other words, them and their fellow magicians). And that is what governs their world view and all of their actions.
just a problem i have with spelling; it’s “sleight of hand” not “slight”
=D
Horrors! I was in a slight hurry when I wrote that and apparently didn’t proofread it carefully enough to notice that I’d misspelled “sleight”. Sorry about that.
Okl hit the nail on the head:
“I think the biggest problem is not about inflation/deflation; it’s about the rule of law and fairness. If we focus on adjusting policies according to the market, eventually we will find ourselves in impossible situations, with no guidelines or markers to guide policymakers, instill trust in the people and worse of all, no idea how to bring our kids up.”
You go through school, you are taught by family and society to get a job, work hard, get married, have kids, stay on the career track. You buy a house within your means, drive 5 year old average sedans, pass clothes down from child to child, forego entertainment, and focus on saving for college for the kids. You DO EVERYTHING RIGHT according to “the rules” society had in play for what, 80 years? Then, in the blink of an eye, while you were working your ass off and paying taxes and your mortgage and the kids’ college, you find that the government has CHANGED THE RULES overnight–using your money to bail out banks, to buy car companies, to bail out greedy people who thought their mortgages were pretend, to pay for other people’s kids’ college fees, to pay for school breakfast and lunch for future Democrat voters, to pay for government takeover of anything not nailed down inside your home. Okl is exactly right–it is a complete collapse of trust–the INTENTIONAL and DELIBERATE dismantling of trust–because THAT is what this Radically Leftist government wants. It wants chaos, and mistrust, and division because it is through such “crises” that they can grow their own power and control. It is all classic Leftist extension of power. And the lying and deceit and deliberate misinformation/disinformation campaigns are both destroying the fabric of our nation and extending the power of the most evil government in American history.
Sounds pretty picturesque, I like especially the nailing down part!
But I think what makes it more multidimensional is that the CORPORATIONS ARE essentially the government now, at least its upper reaches. Us civil servants actually do some useful things – ever know anyone that called a cop or the fire department? Imagine a fire station as a “profit center.” Oops.
The corporations own and control the policy and money allocation level– Congress etc– so the government is basically the enforcement arm of the corporations in the corporate transfer of wealth to the — oh let’s be honest– the ruling classes. It’s incredibly efficient and _outstanding_ PR, because the things corps want done– let’s call the corps United Monoliths,(UM). har har. –
The things UM wants but done but doesn’t want to appear involved with, like wars and confiscatory taxation of the working and middle classes, they OUTSOURCE TO THEIR SUBSIDIARY — which WAS — note past tense — WAS — YOUR GOVERNMENT.
Note evidence:
1) Bank bailouts. Taxes to the rich.
2) Mideast wars for Halliburton profits. Taxes to the rich.
3) Car co bailouts. Taxes to the rich.
4) Undermining worker savings which would allow upward mobility through QE ( The rich don’t want company) This one has some sleight of hand– QE diluting stupid grunt’s savings while trillions — go to the rich. QE to the rich.
Gee, that’s 4-0, the rich win your taxes.
They outsource the things they need done to what was your government.
They did a takeover by buying out the key players ( Congress via campaign contributions), just like they do with any corporation except the US CONGRESS was unusually and exquisitely cheap because there’s no stock! You get control of all that tax revenue with only about 500 mill invested ( The one mill per congress person they bought in the last year or so. That’s not even as big as one hedge fund trader’s yearly salary and they BOUGHT THE COUNTRY. The aggregate work of probably 600 million people over 200 years.
This is an incredibly good strategic purchase, for virtually nothing. Doing it is what a corporation is designed for– to maximize profits with no thought of the social consequences.
Then they strip the assets, and leave the teetering, wrecked shell of the corporation.
QE is the effective stripping of the assets of the USA, by destroying the faith in the dollar– the goodwill and faith in the dollar, which was an asset of almost incalculable worth perhaps without a parallel in history, I don’t know because I’m not an economist.
There’s no resistance to it all except window dressing, because the corporate gods’ kids and the congresspeoples’ kids all go to the same private schools. We want our kids to go to school with Good People, don’t we?
..except freaks like Feingold who actually gave a rational reason to get rid of TBTF, and was blithely ignored by the rest of congress like that ugly kid in your third grade class no one would play with. He’s a FREAK because he’s doing his job.
And they successfully misdirect your anger, of course, to the exact people who are getting bent over and reamed out of the last of their savings. Overpaid government workers! All the secretaries I work with make something like $16 an hour. That’s what first world workers SHOULD make– but it’s a crime until wages get down to China’s level. Or some poor schmuck forced to train his replacement in India.
It’s perfect, it’s poetic, and conceived and executed with exceeding genius. Too bad it’s totally evil, and irreversible in our lifetimes.
It’s truth definitely. Just simple math. Look at real GDP growth, real wages growth, government debt and net profit of corporations. Who wins in long term? Corps. But… who buys production of corps? Sustainable growth means all participate from it roughly equaly. We’ve got far from that equilibrium, let’s look at corps earnings, private and gov’s debt. And it’s the same all over the world. Till governments will compete for investments and capital will be free to move around the world (in opposit to workforce and governments), the corps will be GIVEN profit.
What’s comming next? Some radical change, and it can be seen that quantitative monetary easing (aka inflation) is not solution, it’s just a mean to dig the hole deeper. Rich know about that and are now buying land, commodities, real estates in centres of capitals and antiquities. The big rest of the world is going to loose, but after that might also say the final word of this supercycle.
Okl is exactly right–it is a complete collapse of trust–the INTENTIONAL and DELIBERATE dismantling of trust–because THAT is what this Radically Leftist government wants. Federalist45
Fascism leads to socialism; should that be a surprise? Our money system, since 1913 at the latest, has been government backed fractional reserve lending in a government enforced monopoly money supply. It steals purchasing power from savers and the poor for the sakes of banks and borrowers. How about the poor worker who did not qualify for a loan from the counterfeiting cartel as you did? Not only was saving difficult because of negative real interest rates but now he is possibly out of work because of deflation. Blame your neighborhood banker for socialism but don’t blame the socialists for trying to pick up the pieces of the wreck the fascists caused.
Americans have a very hard time facing reality these days, although “reality programs” are very popular on TV. Maybe it is only those “realities” that are entertaining and pleasant that are accepted. There won’t be much pleasant about the Greater Depression unfolding before our eyes. Quantitative Easing to Infinity by the Fed will not solve anything, just make the severity of the coming collapse much greater from a higher UNPAYABLE DEBT LEVEL FOR THE UNITED STATES. Not so sure that bond yields will collapse as European countries default on their debts, junk bonds cough up more and more hairballs, States such as CA and NJ become illiquid and insolvent, and confidence continues to erode in all things made of promises to pay, such as financial instruments. THE BOND MARKETS HAVE IGNORED DEFAULT RISK AND ABSOLUTE CREDIT RISK FOR OVER A DECADE NOW. About time the Bond Vigilantes came to town with risk-adjusted yields overcoming monetary policy driven yields. Sage of Wexford
The BIG question is – IMO – what will happen when central banks are going to pursue a QME strategy. It COULD lead to hyper-inflation but – for the time being – I don’t think that’s a realistic option. We’re – most definitely in Deflation.
They’re not just bullish on treasuries – they are super bulls with a 2% target on 10 year yields
That sounds like a recipe for losing a lot of money. I’ll file this one next to my copy of “DOW 30000″. (Anyone remember that one?)
MBA – if you believe we can be like Japan then it’s not unrealistic to think it can happen. With money printing they can continue to pay off those bonds and the risk is little even though currency destruction is taking place. It’s worked exactly like that in Japan.
if you believe we can be like Japan…
But I don’t. The US has aggressive consumers who love debt, a culture of homeownership, and an economy that is now predicated on running perpetual trade deficits. We also have demographics that support more consumption; unlike Japan, the US is gaining population, and is not an island that shuts itself off to immigrants.
We are more different in terms of economics and demographics than we are alike. We are bound to have minor (reasonable) inflation in the future associated with future growth.
That means that a sub-3% LT treasury investment (assuming rates ever fall that far) would be a financial disaster for the poor sucker who buys it. If you’re feeling that badly about things, you’d honestly be better off putting the money in your mattress (or at least in a good, fireproof safe).
If you’re feeling that badly about things, you’d honestly be better off putting the money in your mattress (or at least in a good, fireproof safe). Angry MBA
Surely you jest? How can the US Treasury/Fed ever fail to make good on its debt?
How can the US Treasury/Fed ever fail to make good on its debt?
It isn’t about default, it’s about the price that you pay for the debt.
Let’s suppose that you buy 10-year treasuries today at a yield of 2.98%. If (when) the economy has fully recovered, the yield will have risen from that level – a sub-3% rate is very low by historical standards, and is not sustainable if we don’t have full-blown deflation.
Going forward, you’ll either be stuck with this 2.98% yield or else you’ll have to sell it at the then-current yield. If you paid 3% and sell into a 4-5% environment, you’ll take a bath. But if you hang on to that yield in order to avoid the loss on the treasuries, then you’ll be taking a different loss in the form of lost opportunity cost.
If they are advocating a trading position (buy treasuries at 3%, sell them later at 2%), then that could make sense if this seen as a short-term fear-driven dip. There might be a reasonable argument for that.
But for this to serve as a long-term investment position, then you’d have to believe (firmly) that the US and most of the rest of the world is in for a long, dark, deep trench. That may seem safe, but that is actually a more aggressive and speculative position than a lot of the other alternatives. If I was a doom and gloomer like that, I’d keep the money in the bank and avoid tying it up for an extended period of time.
“… then you’ll be taking a different loss in the form of lost opportunity cost.” Angry MBA
Thanks. Good explanation.
Angry MBA: The bond market is telling you something. You can laugh at the yields and the “fools” buying all you want, but don’t get so carried away that you actually put on a big short here.
You can lose an awful lot of money in a hurry being short treasuries in a “system solvency” rip higher in UST bond prices.
Keep in mind what else is spoken about here, that is every day chatter now. An additional 2.5T in QE. That means Bernanke’s firepower will be behind the rip also.
but don’t get so carried away that you actually put on a big short here.
I wasn’t advocating a short. I was advocating avoiding the long.
The short is tough to time, and the upside on the short isn’t all that great — even a surge in LT treasuries wouldn’t produce much of a return. So I agree with you that this isn’t something to short, at least not yet. There are much better investments, and I’d stick with those.
But the long-term direction is most likely back to higher (not inflationary, just normal) yields. You’d have to be betting on complete disaster to believe otherwise, and betting on an aggressive long-term long for this is the equivalent of betting on a single number in roulette — you might win, but the odds are against you, and any wins should be chocked up to luck rather than talent.
Unless you really followed this very closely and traded it aggressively and knowledgeably, the long here is very risky. The return is effectively capped (rates can’t go below 0%, and won’t likely ever get anywhere close to zero), while the potential downside is quite high.
The average person reading this should stay the hell away from this. If you feel that badly about things, then stay in cash, choose your targets and wait for the right time. There are bond traders who could pull it off, but this is not something for your average retail daytrader to mess with.
This is pure speculation and, as any speculation, it can pay big. But this (mis)fortune telling is not backed by any data or scenario. To try to predict such massive macro economic events requires much more than a 1 page essay.
However, there are two points to be pessimistic about; the economy is over leveraged and, as Federalist writes, trust is not here anymore (at least for me too). On the optimistic side, the FED has a huge bag of tricks and animal spirit is still alive. After all people are fighting for an I phone and you can still find people to buy Tesla.
TPC,
Didn’t you remember that the RBS also issued a similar view in the summer of 2008 ? And see what happened in the 2nd half of 2008.
MBA – we don’t have to be exactly like Japan, but the point is more toward money printing as a tool. Of course we aren’t like Japan to the Nth degree, but the correlations are pretty close. If you throw in a declining stock market and a need to generate “some” return, then it’s certainly possible that USTs can continue to climb.
I don’t disagree with anything that you said, but IMO the other side of the coin is more likely for the short term of say 2 yrs or so.
the correlations are pretty close.
I see very little correlation, aside from the fact that both economies are large enough and credible, and have currencies that are strong enough, to handle QE policies. Not every nation is robust enough to handle them, but both the US and Japan are.
The US and Japan are fundamentally different because Japan ultimately fights to maintain a trade surplus by creating a market hostile to import consumption. The United States does the opposite of this. This is a critical distinction, and this distinction allows the US consumer to lever up into consumption in ways that Japan never could.
Deflation is a function of GDP growth or the lack thereof, and it is very difficult for a high-wage, high-cost country such as Japan to create economic growth if it tries to restrain imports. The US is the exact opposite of this, and although that may well lead to our eventual implosion over the long run, this gives the US a short- to medium-term advantage.
The US and Japan are in fact different in many ways and across many spectrums, but we share one gleaming similarity. Both of our public and private debt is at a level that mandates deflation and henceforth drags the economy down to a slow grinding death. One that is overwhelmed with speculation that is constantly chasing yield. So you get wild swings in all aspects of the economy. Especially the equity markets. The American business cycle, personal wealth and lack of capital investments, quality of life will mirror that of Japan’s over time, make no mistake about it. This is what miss-allocated and more so miss-priced assets and non performing debt does to an economy. It clogs the system down thus reducing growth and investment. This is going to continue for as long as we allow our financial system to ignore loan losses, increasing government spending and miss priced assets throughout the economy. PERIOD! Japan is proving that the effects of bad debt can linger for a long, long time if it is ignored.
Secondly, the US has become far too lazy of a Society. Some 3 TRILLION plus dollars a year are “given away” each year by your Federal Government. A huge section of our Society feels that the Government should be taking care of them. This is just not right. America needs a wake up call. America needs to quit providing as much so called assistance to its people. What would happen to the people who are gaming the social system who all of the sudden had their hand outs taken away from them? They would get off their fat lazy asses and go get a job. That’s what would happen.
Rise up America! It’s time you stood up for and began preserving the values that this great Nation was founded on.
slow grinding death….Rise up America!
At this rate, TPC is going to have to rename the site Hyperbolic Rhetoric. Pragmatism seems to be in increasingly short supply in the comments section.
America needs to quit providing as much so called assistance to its people. What would happen to the people who are gaming the social system who all of the sudden had their hand outs taken away from them? They would get off their fat lazy asses and go get a job. That’s what would happen. RSDallas
And would a banker say anything different? Actually, a real banker might blush to say the things you’ve said.
Beard,
How can you say that? You need to sit quietly my friend and listen to your heart on this issue. I’m not a banker. I’m a home builder and very proud of it. I have, so far, lived through this mess (profitably) by being both flexible and cautious. Above and beyond everything else I refuse to wine and cry and sit on my ass and blame the system for this mess!
Do something for yourself Mr. Beard, take responsibility for your actions and beliefs and quit blaming the system for your weaknesses.
I’m a home builder and very proud of it. I have, so far, lived through this mess (profitably) by being both flexible and cautious. Above and beyond everything else I refuse to wine and cry and sit on my ass and blame the system for this mess! Dallas
I’m a home builder and very proud of it. I have, so far, lived through this mess (profitably) by being both flexible and cautious. Dallas
So you profited by borrowing from the counterfeiting cartel? How impressive! Yes, there are winners and losers in the fractional reserve rat race. Congratulations! I imagine you would do well in an honest system too. But unfortunately that was not the case, was it? Now you wish to believe you are a self-made man? And look down on those whose purchasing power you and the banks stole?
As for me, I have worked all my life (till retirement) without benefit of borrowing from the counterfeiting cartel though I did in ignorance borrow for a couple of cars and my college education.
Above and beyond everything else I refuse to wine and cry and sit on my ass and blame the system for this mess! Dallas
No, you would rather blame the poor and helpless instead?
What part of “government backed fractional reserve banking cartel in a government enforced monopoly money supply” sounds legitimate to you?
I don’t borrow much from anybody or entity. I believe debt should play a very limited role in any business. Pardon me Mr. Beard, but you are a lonely and lazy Socialist idiot and not worth my time.
Pardon me Mr. Beard, but you are a lonely and lazy Socialist idiot and not worth my time. Dallas
May the Lord judge between you and me in this regard.
you are a lonely and lazy Socialist idiot
One thing that you really need to figure out is that not everyone who is disagrees with you is a socialist.
Beard here is not a socialist, but is (at least partially) an anarcho-capitalist. He must be a fan of the libertarian Murray Rothbard, given his obsession with the elimination of state-issued currency.
Not only is Beard not a socialist, he is actually advocating a variant of Austrian economics, which makes the two of you bosom buddies. You two are practically alike in terms of your economic views.
The fact that you can’t recognize a fellow Austrian when he’s responding to your comments doesn’t give me much faith that you’d know a socialist if one clubbed you over the head. Give the “socialist” crap a rest, unless you’re dealing with an actual socialist (who you are not likely to encounter on a website called “Pragmatic Capitalism.”)
Thanks Angry. Your summation of me is not totally accurate but surely I am no socialist. Lonely yes, lazy probably, but socialist no.
As for you Dallas, I forgive you. Go in peace.
Oh and Angry, I am a fan of Rothbard’s but the Austrians seem to be stuck in gold worship so I’ll have nothing to do with that. Still, the Austrians have taught me a lot and I hope they come to the proper conclusions soon.
You two are the fruit in the fruit cake.
Angry MBA
I think you may be misnamed. Your cool head in a war of words is admirable, as is your depth and breadth of understanding. The clear distinction between the great societies of the US and Japan, is especially welcome. You don’t seem especially angry.
Preparing and obsessing only for the absolute worst conditions leaves one to live in the absolute worst conditions whether mentally waiting for it to happen, or in actuality.
Not worth it really.
I’d like to be invested in a productive economy at fair values, but it is difficult to see where exactly that may be. If we ALL hoard our cash, (individuals, governments and corporations), the economy collapses instantly.
I agree we all need to work productively, but this economy, like many in the past, leaves many able bodied and willing contributors at a loss of what exactly that productive work would be.
For homebuilders like RDallas, what is there to do? We already have more homes than are needed (though possibly mis-priced, and mis-located).
In this instance, it might NOT be private capital and markets that re-imagines what productive work needs doing. It might be government. For that, we need inspiring leadership, beholden to their countrymen, not to their contributors.
I do not think that is socialism, or fascism, or any ism, for that matter. OK, possibly pragmatism…
As for personal attacks, (calling other commentators idiots, socialists, banksters, etc), isn’t there enough of that elsewhere?
Please, behave as if you are a guest in TPC’s home, in the same room with him, and the rest of us, and be grateful that you have discovered the party.
Occasionally there is cause to yell (the BBQ is engulfed in flames, comes to mind), but in general, polite discourse, and reasoned response are far more likely to persuade others, and improve the atmosphere.
Thanks TPC, for a great party! Can I help clean up?
I agree, it’s time to stop gubmint handouts. For instance the “auctions” of spectrums, which really places the government as the guard dog for the corporations to keep anyone else– like some nutcase socialist (or libertarian)– from using said spectrums.
In the information age sense, “selling” a frequency spectrum is like selling Lousiana to a corporation. You’re not supposed to sell your country– it’s for everyone to have. Until a corporation greases your owners. Then, that spectrum is off limits. Except to corporations.
THE CORPORATIONS ARE THE GOVERNMENT.
More government, for the ruling class, by the ruling class, whilst it’s whitewashed as giving everything away to the little guy. Don’t buy it.
Here’s a question:
If a bond vigilante fell in a forest, and no one was around, would he make a sound?
I would not short govvie’s right here and for a little bit. I would average that sucker out for a while — ABSOLUTELY NO TBT — unless you are a terrific market timer.
Japan has had reason to collapse for 20 years and they keep on going. that’s a dangerous game, despite the wonderful graphs done by Faber. Long term going short govvie’s is brilliant, but near term it’s playing with fire.
Okl is absolutely right.
“I find myself- with all the modern education that I receive- being lesser of a person than them… I do think that as a whole, we are not smarter than our ancestors 2000-3000yrs ago. “
America was all about hope, optimist, achievements, individual success and responsibility,
Government is about Power, control, empire biding, bureaucracy and servitude.
Education is now about getting a peace of paper. We are forming educated idiots.
I can’t help but be amazed by the fact that to day after 71 days we learn that the Government will finally accept from 12 countries offers of assistance in cleaning up the oil spill in the Gulf of Mexico. Some countries have very good technology that could have prevented oil from getting to the beaches.
But have no fear the educated bureaucrats are in charge “from day one,”
They have the book of rules.
You can teach a monkey to do a lot of things but thinking is not one of them,
Respectfully, I fully expect a response like this from you Angry MBA. General and meaningless.
Investment in productivity within this country is important. “You go through school, you are taught by family and society to get a job, work hard…….” The Federalist45, the economy does not operate in a vacuum. There are consequences when you pass laws that ship production facilities and the investment of future productivity over seas…so…when you see it these actions being done by the PRIVATE BUSINESS SECTOR then you must ask yourself, is this a good for my and future productivity for our country? Does this mean that my children will have jobs? Why is it that companies are pushing credit, could it be because they are producing goods and services overseas that they need to sell back the US citizen who’s income continues to fall?
The elevator is falling…you can either be in the elevator or you can be outside the elevator watching it accelerate. Sounds like your in the elevator.
You two are the fruit in the fruit cake. RSDallas
Well, you might possibly be correct in my case (except sexually), but surely you discredit Angry MBA unjustly who is a well respected member of this blog.
For your own sake, don’t be so hasty with your words. I am not your enemy; I seek to merely reform the system. You would do just as well under an honest system, I’d bet. But layoff the poor, please, for you own sake.
The generous man will be prosperous, And he who waters will himself be watered. Proverbs 11:25
It troubles me that so many seem to be rooting for a complete collapse of the financial system. Not sure about the psychology behind that desire, but I find it perverse and depraved. I do fully understand people’s frustration and anger at the politicians, the bankers, the system, etc., but to wish for a collapse and depression is, in my opinion, pathological.
30 yr TRBond Prices are in a solid UpTrend / Yield downtrend since April
Recent break-out of a trading range has been noted.
Fed can’t change this trade unless they Raise Interest Rates
As crazy as its sounds a rate increase would stabilize the Long Bond and prevent further speculation.
As crazy as its sounds a rate increase would stabilize the Dollar.
As crazy as it sounds the “Stockmarket” would rally.
In the Bond market “perception and confidence” matter.
If Bubbly Ben wants to put some meat behind his words ” The US economy is recovering” Now would be a good time to adjust rates!
“…Once we apply 2a-7 (and the ability of US money funds to ‘put’ their EMU bank assets back to the issuer EMU banks within 7 days on signs of trouble, since the US money funds will from now on increasingly own 1yr securities with a 7 day put)…”
that doesn´t have to be a bad thing.
it´s way easier for the fed to bail out the banks (by the use of the discount window or by re-establishing a CP facility) than MM funds (who have no fed access at all).
another panic in the MM funds has to the no.1 thing to prevent.
Federalist45 & OKL, without sounding like an ass…. are you two smokin’ dope? There has been NO respect for the Rule of Law since August, 06 when Helicopter Ben starting taking over the mortgage industry to save his friends and with the help of those crooks called Congress saddle the nation’s grandchildren with a half a century of tax enslavement! I will not even get into Paulson, Dodd, Frank, Rangle, McCain, etc and the criminal behavior of this President nationalizing industry after industry of which he has no legal authority to do. Oh there is so much criminal behavior winked at as ‘policy’ that I have to laugh.
Oh, the joke is on me and my rant.. You guys were being sarcastic…oh gosh I am a dope!