Wednesday, August 18, 2010

The Mother of All Sarcasm Reports (v.58)

Jeremy Siegel is a genius!

WSJ: The Great American Bond Bubble

If 10-year interest rates, which are now 2.8%, rise to 4% as they did last spring, bondholders will suffer a capital loss more than three times the current yield.

The investment could potentially lose as much as the S&P 500 has lost since May 1st and then potentially recoup those losses in the following months as higher interest rates once again freak out the weakened housing and stock markets? OMG! Bubble!! Sell! Sell all bonds!

We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.

The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.

Why didn't I think to compare my TIPS to the tech stocks of 2000?

If we buy the 10-Year TIPS this very minute and hold it the full 10 years then...

1. We are GUARANTEED to get ALL of our money back, even if deflation strikes.

2. We are GUARANTEED to get an additional amount to compensate us for 10 years of inflation.

3. We are GUARANTEED to get an additional 0.96% per year in interest.

Yes sir. That's exactly like Jim Cramer's Winners of the New World, well, once you strip out all the guarantees anyway.

I wish you could see my eyes rolling now. They've never moved this sarcastically before. I can't even keep them in the sockets. It's making me so dizzy that I'm tempted to vomit.


Stagflationary Mark said...

One more thought.

In my world, a bubble means that I could lose considerable purchasing power if I choose to invest in it.

If I lose considerable purchasing power in TIPS, then heaven help Jeremy Siegel's stock market.

The only way I can lose considerable purchasing power is if inflation is so high that the taxes on my inflationary gains seriously hurt me.

If the 1970s are any indicator, that environment would be absolutely brutal to the stock market. Here's the reason why.

For inflation acts as a gigantic corporate tapeworm. That tapeworm preemptively consumes its requisite daily diet of investment dollars regardless of the health of the host organism. Whatever the level of reported profits (even if nil), more dollars for receivables, inventory and fixed assets are continuously required by the business in order to merely match the unit volume of the previous year. The less prosperous the enterprise, the greater the proportion of available sustenance claimed by the tapeworm. - Warren Buffett, Berkshire Hathoway Shareholder Letter, 1981

mab said...


I believe people like SIegel can't recognize what is happening because to do so they would have to admit that they have been wrong for most or all of their professional careers.

What Seigel and other "experts" viewed as wealth creation and legitimate economic activity was in reality looting and debt impoverishment.

As I see it, it ain't Joe six pack that is driving bond yields lower as David Rosenberg and others suggest. Joe six pack has no wealth! It's not a bond bubble. It's the wealthy legitimizing their ill gotten gains - dumping bad debt on the Government in exchange for interest bearing and money good Treasury Bonds.

No way will these wealthy fraudsters allow their loot to be inflated away. They run the joint and call the shots - economically and politically.

There's a reason I call it the eCONomy. Fraud and shams replaced hard work and industriousness as the path to wealth a long time ago.

I think Xie and others (as knowledgeable and well meaning as they are) seriously underestimate the level of fraud and corruption in the system.

mab said...


You quoted HOURLY wages and an unemployment RATE. The point I was making is that TOTAL wages and TOTAL employment increased rapidly in the 1970s which helped push inflation. In the 1970s, people made less in real terms but more people were working - think two income families. Unlike the 1970s, aggregate wages and aggregate employment are now dead in the water, in part due to globalization. Big difference imo.

Labor in the West can "demand" higher wages all they want. Unlike Xie, I don't think their higher wage demands will met. Certainly not in real terms and possibly not even in nominal terms.

I see Japan, not the 1970s. Who knows for sure? I admit my forecast could well be wrong.

Stagflationary Mark said...


I think Xie and others (as knowledgeable and well meaning as they are) seriously underestimate the level of fraud and corruption in the system.

Andy Xie has a pretty darned good track record so far. You'd think of all people, an economist based in Shanghai wouldn't underestimate corruption, lol. Then again, nobody is always right. All it takes to blow an economic model is one missing variable. That's probably why economists are often so dismal.

"I wrote my doctoral thesis arguing that Japan was a bubble in late 1980s, a long report at the World Bank in the early 1990s arguing that Southeast Asia was a bubble, research notes at Morgan Stanley in 1999 calling dotcom boom a bubble, and numerous research notes from 2003 onwards arguing that the US property market was a bubble. On the other hand I have never called something a bubble that turned out not to be a bubble." - Xie

Back to you.

The point I was making is that TOTAL wages and TOTAL employment increased rapidly in the 1970s which helped push inflation.

That's a great point. I'll update that. I chose this time frame based on Oct 1973 being a local minimum in unemployment and Nov 1982 being a local maximum by the way, in case you were curious.

Oct 1973 -> Nov 1982

Unemployment: 4.6% -> 10.8%
Average Hourly Wages: $4.21 -> $7.98
CPI: 45.6 -> 98.0
10 Year Treasury: 6.79% -> 10.55%
Total Nonfarm Payrolls: 77.605 million -> 88.770 million

Wages: +90%
CPI: +115%
Real Wages: -12%
Total Nonfarm Payrolls: +14%

That would certainly offset the drop in real wages, but would it really be the cause of the inflation?

A 14% increase in payrolls in about 10 years while unemployment climbed about 6% is certainly not something we're managing this time though. Consider this. We've got the rise in oil in the last 10 years like the 1970s but not the rise in payrolls or inflation. It's stagdeflation?

For what it is worth, I doubt Japan or Europe can manage to increase payrolls much either. So unless the typical Chinese worker can really afford to drive a gas guzzler if the economic pain continues, things should get interesting, especially if Xie and Chanos are right about the Chinese property bubble.

Maybe it isn't Japan or the 1970s. Maybe it is Japan AND the 1970s? Maybe we'll just get more of the same? 10 more years of the last 10 years? It took 20 years to do a massive bull/bubble market from 1980 to 2000. Maybe it takes 20 years to unwind? Or at the very least stagnate?

On that note, I think we still have too many restaurants for what's coming.

Stagflationary Mark said...

One more thought.

Maybe it takes 20 years to unwind? Or at the very least stagnate?

Who am I kidding? Japan's been stuck in this for 20 years. What could possibly pull them out of their mess now? That hole just keeps getting deeper.

Stagflationary Mark said...

Speaking of Japan and Xie...

Andy Xie: What We Can Learn as Japan’s Economy Sinks

We're not learning much so far.

We can learn much from Japan’s experience. The global economy — mainly the Anglo-Saxon economy — is facing the consequences of a massive credit bubble. The remedies most governments have embraced are to keep interest rates low and fiscal deficits high. These are the same policies Japan pursued after its bubble burst nearly two decades ago. How today’s bubble economies are treating bankruptcies and bad debt is shockingly similar to what was seen in Japan. The United States and others have suspended mark-to-market accounting rules to let banks stay afloat despite large amounts of toxic assets. It’s the same “let them earn their way back” strategy that Japan pursued. The strategy fails to work because it keeps an economy weak, limiting the earning power of financial institutions.

Nor is China.

China’s corporate sector increasingly looks like a shadow banking system. It raises funds from banks, through commercial bills or the corporate bond market, and then channels the funds into the land market. The resulting land inflation underwrites corporate profitability and improves their creditworthiness in the short term.

The same thing happened in Japan.

mab said...


That would certainly offset the drop in real wages, but would it really be the cause of the inflation?

I still don't think we are on the same page. Just for a moment, ignore HOURLY wages and look at the aggregates.

Oct 73-> Nov 82 (billions $)

Personal Income: $1150.3 -> $2829.6 (10.4% annualized & 246% aggregate)

Wages & Salaries: $728.6 -> $1603.4 (9.1% annualized & 220% aggregate)

There's your 70s inflation. Imo, Xie is dreaming if he thinks American Labor still has the bargaining power to start a wage-price spiral. Xie's statement makes no sense to me, regardless of his past track record. In fact, it makes me wonder if he isn't just a lucky coin that came up heads five times in a row.

If American's couldn't "demand" wage increases during the housing bubble (a period of inflation as I measure it and as it was measured in the 70s) exactly how are they going to "demand" wage increases during a period of deflation.

Under the current debt system, I don't think we will see high inflation. If the system changes, I'll change my thinking accordingly.

mab said...

Oh dear, in my previous comment I botched up the aggregate percentages (246% should be 146% and 220% should be 120%).

Stagflationary Mark said...


You are right. I was looking at the individual trees rather than the forest. I tend to want to see things in terms of hourly wages because that's how I think when I spend money.

"How many hours would I have to work to pay for that?"

For the benefit of others, here's your data on a log scale so that constant exponential growth is seen as a straight line. Growth is clearly slowing.

Personal Income

Wage and salary disbursements