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The process of delving into the black abyss is to me the keenest form of fascination. - H. P. Lovecraft
March 10, 2008
The Death of Real Yields Continues
In any event, I don't see real yields rising much unless the economy strengthens substantially. I'm certainly not predicting that. I see plenty of long-term problems. Should the economy continue to deteriorate (seems much more likely), then the death of real yields will more than likely continue.
Source Data:
FRB: Selected Interest Rates
US Treasury: Interest Rates
15 comments:
This is yet another opportunity to heckle Jeremy Siegel's theories, but I'm going to take the high moral ground and refuse. ;)
Mark:
I don't know whether you have been following it but the guy who you mentioned was pumping TIP on that Yahoo board left for equities yesterday, or so he announced. Since TIP tracks SPY relatively closely over a three year time period when using the spdr correlation tracker, this is probably not great news for either TIP or SPY :).
Take care,
jshaef1
jshaef1,
That figures. I actually passed on the 10-year TIPS auction this year. I loaded up last February on ultra long-term TIPS when rates were much higher (still holding to maturity). What little ammunition I had left went into safer 0% I-Bonds and potentially risky EE Savings Bonds instead this year. The latter yields 3.53% if held 20 years. Not sure if I'll be holding that long but you never know.
TIP investors are mostly sitting in guaranteed to lose negative real yield short-term TIPS, not that I think many realize it. Meanwhile, stocks have doubled since the bottom. I have to think there are better times in all of recorded history to jump in.
In any event, unlike most TIP investors I root for higher rates and lower bond prices. I'd like better rates when I reinvest as my bonds mature. It is unlikely that I will ever buy stocks again. I see way too many long-term headwinds. Sigh.
One more thought.
His actions make me think of casino gambling. He made some money on the relatively safe nickel slot machines, built up some confidence, and is now heading over to make some seriously leveraged bets over at the roulette table. People have been winning there all day and he's feeling lucky. ;)
Steve Liesman just said on CNBC that inflation is coming in hotter than the doves would have predicted based on the slack in the economy. It is also coming in cooler than the hawks would have predicted. He then compared the risk of deflation to the 1930s and the risk of inflation to the 1970s.
This fits in nicely with my long-standing theory that we're attempting to combine the deflationary Great Depression with the inflationary 1970s, as if two wrongs will miraculously make a right. This theory also helps explain today's high unemployment which was common to both eras.
The 1930s was debt deflation after a credit bubble, which is exactly what started in 2008. Bernanke thinks he is smart enough and has enough elastic currency to "fix" it this time. I don't.
He is using 70s style stagflation money printing to try to restart a dead economy, with little success, but at least he is fueling a 70s style gold rally that I am recklessly riding. (Like all gold riders, I think I'm smart enough to jump off at exactly the right time).
My guess is that this will be the biggest disaster of all time, worse than the 30s and the 70s when the history is written. Or, maybe QE from every central bank in the world for years on end is all we need for endless prosperity. I can't wait until the US debt hits $100 trillion and Cheney tells me it doesn't matter.
My guess is that this will be the biggest disaster of all time, worse than the 30s and the 70s when the history is written.<<
Oddly, the 1930s depression really got rolling with a bond crash in 1931. Even treasuries were sold. One can only imagine what will happen to the leveraged bond bets of pensions and hedge funds (think Bill Gross and other "experts") if rates suddenly head up to last summer's neighborhood (about a percent higher on the 10 year treasury note). I think we are set up for the perfect bond storm.
Jshaef1
Glad I passed on the TIPS auction, and am still holding all my ibonds.
But man, I do not see how we go forward from here without fireworks.
I am tempted by stocks too, and I am the worst equity investor I know. A fact which keeps me from buying any.
What I haven't been able to shovel into ibonds is still sitting on the sidelines, haven't taken the plunge into ebonds.
The 1970s was not a bad time.
http://research.stlouisfed.org/fred2/graph/?g=55j
The unemployment just came from the flood of 20yos entering the labor market.
As did the inflation, or that's my thesis at least.
The 1970s recessions were just caused by the Fed trying to rein in the debt expansion:
http://research.stlouisfed.org/fred2/graph/?g=55k
In other news:
"Foxconn will raise monthly salaries to more than 2,200 yuan for workers who pass technical examinations, it said."
That's still only $2/hr. How are we supposed to manufacture anything anywhere else??? Even Greece can't compete with that labor cost.
The problem for today's individual investor is that the market has too many millisecond trades, and transparency is opaque at best. Ive been sitting in the Vanguard Total Bond Market Index Fund for a bit over a year. (Up about 9%.) I'm not sure where to go from here, or more importantly what the signal is to exit. Maybe when Greece defaults? Or is that a signal to buy more? (If WV gets any more difficult... It has taken three attempts to read this crap.)
Everyone,
I get the feeling that we are currently in the eye of the hurricane. We could remain here for quite a few years, or not. Who knows?
I'm fairly convinced that all our troubles are not behind us though. I'm not even remotely tempted to alter my opinion about the illusion of prosperity. Let's just put it that way.
As a side note, I fear the next generation word verification system. I suspect that it will demand a first born upon a sacrificial altar. I only half joke, lol.
Troy,
From what I can see, the part that sucked (pardon my language) about the 1970s was the exponentially rising price of oil. That's the part we've shared with that era.
Let's not forget the 1973 oil crisis and the nasty recession that followed.
My concern is that in the 1970s the crisis was mostly political. This one seems to be adding geological and financial.
the nasty recession that followed.
Thing is, the Fed was operating then too . . .
http://research.stlouisfed.org/fred2/graph/?g=55z
I was the weakest player in the economy in 1975 -- my poor allowance never survived a trip to the 7/11 -- but I don't think oil was the big story of the the 1970s.
Troy,
It probably depends on whether you grew up seeing gasoline lines and rationing.
Like you, I didn't. I lived in a very small town. We didn't have enough people to even form a line, lol. ;)
File:FLAG POLICY DURING THE 1973 oil crisis.gif
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