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Old 10-12-2012, 11:28 PM #1
Rapier7
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The Coming Bond Bubble

I don't know if any of you guys watch Real Time With Bill Maher, but one of the guest on the show was Sheila Bair (former head of the FDIC). Maher asked her what she thought the next bubble was gonna be and she immediately said "bond bubble".

She ****ing nailed it on the head. Here's why:

10 year Treasury bond yield: 1.663% as of yesterday's close. That means every dollar invested in a 10 year note turns into a buck and eighteen cents in 10 years.

Interest rates in the short term are zero. And given the fact that the Federal Reserve has been stoking the money supply with an incredible amount of money, interest rates are going to have to go up eventually. (I get the fact that "eventually" is the operative word but it doesn't get around the fact that they WILL go up).

When that happens, bonds are going to crash in value. For example, let's say the Fed hikes rates back up to 5.25% (around where it was pre-financial crisis) and that's where newly issued 10 year notes settle at.

That means a dollar turns into a buck and 67 cents 10 years from now. So a person with a 10 year note at 1.663% is going to take a bath if he tries to sell his bond on the secondary market. Nobody is going to buy at 1.663% if they can get it from the Treasury at 5.25%. A fair market value would mean that the guy holding at 1.663% would have to sell at 70 cents on the dollar.

Even if he decides to hold to maturity, his gains get eaten up by inflation and then some; remember, the Fed didn't hike rates for no reason.

The guys in the corporate bond market will fare even worse. Because investment grade corporate bonds (debt issued by the biggest, safest companies) are yielding close to what Treasury debt is yielding. But they're still not as safe as government debt. So when rates rise, values on corporate debt will fall even more than the guys currently holding government debt. And who's going to want to buy new corporate debt when the government is offering such great rates? That's when you truly get the "crowding out" effect that every economist has been worrying about.

The total size of the US bond market is about 30 trillion dollars, which is twice the size of the total US stock market. Rising interest rates is going to create extreme turbulence for the entire economy, because the modern economy runs on cheap money and we've made money the cheapest it's ever been. It can't be this cheap forever.
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Old 10-13-2012, 01:43 AM #2
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money is not cheap. if you insist on using interest rates as a barometer you must first identify the wicksellian natural rate of interest to guage the current stance of monetary policy.

sorry, but this is a zombie idea that i see all the time coming from cess-pits like the WSJ op/ed page. it must be stopped.

Last edited by licence2kill : 10-13-2012 at 01:55 AM.
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Old 10-13-2012, 02:14 AM #3
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license2kill knows how to fix the economy. His teachers taught him how.
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Old 10-13-2012, 02:31 AM #4
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license2kill knows how to fix the economy. His teachers taught him how.
"The problem with “I’m entitled to my opinion” is that, all too often, it’s used to shelter beliefs that should have been abandoned. It becomes shorthand for “I can say or think whatever I like” – and by extension, continuing to argue is somehow disrespectful. And this attitude feeds, I suggest, into the false equivalence between experts and non-experts that is an increasingly pernicious feature of our public discourse."

http://theconversation.edu.au/no-you...r-opinion-9978
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Old 10-13-2012, 10:06 AM #5
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license2kill knows how to fix the economy. His teachers taught him how.
It's like a metal chair over a fire...
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Old 10-13-2012, 12:44 PM #6
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It's like a metal chair over a fire...
The WTC only collapsed because they were only two legs of the chair. Had the center been completed with all 4 towers, it is likely the zionists would never have taken them down.
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Old 10-13-2012, 01:10 PM #7
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Quote:
Originally Posted by Umami View Post
"The problem with “I’m entitled to my opinion” is that, all too often, it’s used to shelter beliefs that should have been abandoned. It becomes shorthand for “I can say or think whatever I like” – and by extension, continuing to argue is somehow disrespectful. And this attitude feeds, I suggest, into the false equivalence between experts and non-experts that is an increasingly pernicious feature of our public discourse."

http://theconversation.edu.au/no-you...r-opinion-9978
This is pretty ironic, being that the point of public discourse (and thereby the discourse of science as an extension) is that the experts can explain and convince the 'non-experts'. Opinion is merely that; not fact. So, yes, one is entitled to opinion.
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Old 10-13-2012, 02:14 PM #8
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Quote:
Originally Posted by licence2kill View Post
money is not cheap. if you insist on using interest rates as a barometer you must first identify the wicksellian natural rate of interest to guage the current stance of monetary policy.

sorry, but this is a zombie idea that i see all the time coming from cess-pits like the WSJ op/ed page. it must be stopped.
Money is incredibly cheap. Just ask the CFOs of the S&P 500: http://professional.wsj.com/article/...005630198.html

Every major company out there has been issuing a bunch of debt and nobody wants to get left out of it precisely because money is so cheap.

So can you get it out of your head that somehow money isn't cheap? If it were, companies would be deleveraging. They're doing the precise opposite. Just because household balance sheets are in ruins (ie uncreditworthy) doesn't mean money is expensive.

Just look at an area where the debts are guaranteed by the government: student loans. They've been increasing at over 6% per year for over the past decade. Somehow it doesn't strike me that people are having a hard time getting access for credit so long as one of the cosigners is creditworthy.
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Old 10-13-2012, 04:38 PM #9
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demand to hold bonds is a signal that monetary policy is incredibly tight, not the other way around. If investors expected higher future inflation they would diversify into other assets, not pour into bonds.

Last edited by licence2kill : 10-13-2012 at 04:41 PM.
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Old 10-13-2012, 04:51 PM #10
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my all time favorite graph:

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Old 10-19-2012, 11:48 PM #11
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Originally Posted by mnp8nt View Post
This is pretty ironic, being that the point of public discourse (and thereby the discourse of science as an extension) is that the experts can explain and convince the 'non-experts'. Opinion is merely that; not fact. So, yes, one is entitled to opinion.
They understand that. The point your missing is people using their beliefs but hiding them behind their "opinion". ALL opinions come out of our beliefs. All of your beliefs are not true. Your brain dismisses any info on any subject that does not go along with your beliefs on that topic. Hence your opinion is mostly paraded around beliefs that your not even sure where they came from(or my fav....personal experience.....lol) or if they are true(to anyone besides yourself).

Since your opinion is tied to your beliefs which everyone knows is almost impossible to change, then it's not really an opinion now is it?

Also it is interesting to note that in your world view, to take over the country to my way of thinking in say 70 years, i would just have to brainwash the experts(most people here realize the majority of experts will come from yale,harvard,etc.)

Last edited by yesme : 10-19-2012 at 11:57 PM.
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Old 10-19-2012, 11:54 PM #12
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Originally Posted by licence2kill View Post
demand to hold bonds is a signal that monetary policy is incredibly tight, not the other way around. If investors expected higher future inflation they would diversify into other assets, not pour into bonds.

This is a perfect example of beliefs parading around as opinion..... well unless ltk wants to label economic theory as fact.


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If investors expected
If

Because their belief, like ltk, is that there wont be higher inflation.

What other asset ltk would you say are good buys if higher inflation does come along? i said if now, i know your brain can not handle thinking higher inflation could come, but if buddy, just if it does come. what other assets would these investors go into?
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Old 10-20-2012, 12:18 AM #13
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if the central bank wants higher inflation we'll get it. If it doesn't then we won't. They absolute control over the nominal economy, whether or not they realize it.

My only investment advice is to take the EMH seriously.
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Old 10-20-2012, 12:19 AM #14
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my all time favorite graph:


Oh using fake gdp figures?

please tell us how the imputations and hedonics the government uses to fudge the gdp figures is always worked out in our favor and not the governments.


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Let's look at a real example of hedonic pricing. The Bureau of Labor Statistics conducted a price analysis of television sets for the purpose of calculating the CPI in 2005, noting the price remained at $329.99 over several months. However, significant improvements were made such as a better screen. Using hedonic pricing, the BLS concluded these improvements resulted in an increase in valuation of the television sets by more than $135. Thus, when determining inflation data for this product, the BLS reduced the price value of these television sets by 29 percent (a deflationary effect) due to improvements, although the sales price remained at $329.99. That sounds like "Enron accounting" to me.

The same methodology is used by the government for many other goods and services from computers to autos. Despite any enhancements in quality or added features, the problem is that consumers are still subject to the same price as far as their wallets are concerned. Thus, it's inaccurate to assume that product improvements will enhance the consumer appeal of goods in the same manner as a price cut, unless we assume that capital is not the limiting factor. While such an assumption might be moderately reasonable by an optimist during a strong economic expansion, (when money is plentiful) it is severely flawed during weak economic conditions.

In conclusion, hedonic pricing can effectively result in decreased inflation (or is deflationary) if the cost is the same, or a smaller amount of inflation if the cost is higher—as long as the goods and services have been improved or additional features have been added relative to the previous economic reporting period.
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Old 10-20-2012, 12:24 AM #15
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if the central bank wants higher inflation we'll get it. If it doesn't then we won't. They absolute control over the nominal economy, whether or not they realize it.

My only investment advice is to take the EMH seriously.
How would they give us higher inflation? Can they force banks to lend out the 1.5 trillion sitting in reserves?

Weak semi or strong EMH?
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Old 10-20-2012, 12:43 AM #16
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how do you fudge NGDP figures?

also, is that from shadowstats? if so, lol.
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Old 10-20-2012, 12:49 AM #17
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How would they give us higher inflation? Can they force banks to lend out the 1.5 trillion sitting in reserves?

Weak semi or strong EMH?
print money and buy bonds and don't stop buying bonds until inflation rises. if you run out of bonds to buy then buy other assets.

better yet, just announce a higher inflation/NGDP target and save yourself the trouble.
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Old 10-20-2012, 01:04 AM #18
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how do you fudge NGDP figures?

also, is that from shadowstats? if so, lol.
http://seekingalpha.com/article/8725...edonic-pricing
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Old 10-20-2012, 02:12 PM #19
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how do you fudge NGDP figures?
Did you miss my post a couple back?

They figure out how much a home owner would pay in rent if he did not own his house, and then ADD that amount to GDP.

How the **** does that seem in any way logical? There was nothing created,sold,bought,traded,promised or pledged. It was a zero sum transaction, but yet the figure gets added in as economic output.

here is a good read on this subject, thats not from shadowstats
http://seekingalpha.com/article/8726...he-gdp-charade


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print money and buy bonds and don't stop buying bonds until inflation rises. if you run out of bonds to buy then buy other assets.

better yet, just announce a higher inflation/NGDP target and save yourself the trouble.
The fed has been buying bonds and printing money, how much cheaper can money be to borrow then right now? Banks are sitting on 1.5 trillion in reserves, talk about bucking a trend....

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Old 10-20-2012, 06:32 PM #20
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if purchasing bonds doesn't raise inflation expectations then we should logically monetize the entire national debt...
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Old 10-21-2012, 01:19 PM #21
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Saw this and thought a bit interesting with investors going overseas to find interest, plowing money into risky emerging market bonds of late. Even the communist country of Bolivia is getting into the market, hiring Goldman Sachs and Bank of America Merrill Lynch to market their bonds.

"What Bolivia, Iceland, and the Fed have in common — and what it means to YOU!"

http://www.moneyandmarkets.com/what-...50717?FIELD9=1

From Mike Larson's article:

Quote:
...If you own ETFs like EMB … or emerging market bond funds … or some of the other over-inflated assets out there that are levitating on a flood of Fed-fueled easy money, now is a good time to start bagging gains.

After all, as PIMCO Chief Executive Officer Mohamed El-Erian just wrote in the Financial Times on October 11:

“The Fed is inserting a sizeable policy wedge between market values and underlying fundamentals … Many asset prices have been taken close to what would normally be regarded as bubble territory, with some already there.”

I couldn’t agree more. And that’s why I suggest lightening up!

Until next time,

Mike
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