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March 22, 2012
Treasurys flat; TIPS auctioned at negative yield
The Treasury Department auctioned off inflation-protected securities at a negative yield Thursday, reflecting strong demand for U.S. debt...
Strong demand for U.S. debt? Bondmageddon has been postponed? Nobody could have seen this coming.
...and investors' belief that inflation will rise in the coming years.
I knew there had to be some reason investors were rushing out of the 30 year treasury bonds. You know, the ones without inflation insurance.
Just look at those rising yields.
3/23/11: 4.44%
3/23/12: 3.31%
They've risen -1.13% over the last year! And for the record, that's almost identical to what the 30 Year TIPS have done.
Maybe there is something wrong with the theory about what investors believe. Does a fire insurance theory work the same as this inflation insurance theory? Since it is an analogy, let's call it verbal reasoning and find out.
There is a strong demand for fire insurance in this country. Right? It can mean only one thing then. Most homeowners believe that their homes will burn in the coming years.
Holy crap! There's pretty much only one way this could happen. Global warming is going to turn into global burning! Move your children to safety! Don't wait for the authorities to tell you.
The world will burn and everyone knows it. I have all the proof I need. Too many people have fire insurance. It is the only logical explanation.
Therefore shall her plagues come in one day, death, and mourning, and famine; and she shall be utterly burned with fire: for strong is the Lord God who judgeth her. - Revelation 18:8
365 degrees, burning down the houses.
In all seriousness, why do I even bother to read the news? Oh wait, now I remember. It makes good sarcasm fodder, lol. Sigh.
Real Estate Newsletter Articles this Week: Existing-Home Sales Increased to
4.15 million SAAR in November
-
At the Calculated Risk Real Estate Newsletter this week:
[image: Existing Home Sales]*Click on graph for larger image.*
• NAR: Existing-Home Sales Increase...
14 hours ago
10 comments:
Here's my main point in a nutshell.
I have insurance because I think something bad may happen. It does necessarily mean that I think that it will happen.
Long-time readers know that I own a lot of inflation protected treasuries. Some might argue that I therefore must think that severe inflation is a given.
That's not the case. If I was so sure that severe inflation was headed our way then I would not have bought EE Savings Bonds for the third year in a row.
My only real belief was that it would be harder and harder to make money off of money. So far, that belief has become a reality.
Those who did not lock in a long-term yield a few years ago (presumably stashing cash under the mattress) are left with some rather unpleasant alternatives.
1. Hope for more deflation.
2. Capitulate and buy TIPS at their current poor yield.
3. Buy commodities and hope the China story doesn't fall apart.
4. Buy stocks after they've doubled.
5. Other.
I honestly can't say which choice is better right now. If the amount to invest is small, then I might suggest this. You could probably do worse.
In any event, this is not investment advice.
It does necessarily mean that I think that it will happen.
I meant to say that it does *not* necessarily mean that I think that it will happen.
And when I say that I might suggest this, I mean a sampling of all the things in the picture (not just the garbage bags).
Psst. Hey buddy, I got your insurance right here.
EscapeEarth2012.com is the only official provider of tickets to escape Earth’s impending doomsday, not to mention the only way to ensure your survival. In fact, we offer a 100% money back guarantee that you will survive 2012 Armageddon!
The E-TICKET is a reasonable $4.95. Very amusing.
My thesis is that, absent firing up the helicopters, the system just gets drained 2015-2035.
The median boomer will age from 58 to 78 during this timeframe.
http://www.calculatedriskblog.com/2010/04/us-births-per-year.html shows how the Medicare influx thus far has been in the 2.5M to 3M range.
But as of this year we're hitting the 3.5M to 4.5M upslope, which will crest with the class of 1961 becoming enrolled in 2026.
Medicare's "average benefit per enrollee" was $12,000 in 2010, so in 2025 that will be a $1T/yr expense even with no cost inflation from now.
The average SSA benefit is $14,000, so with no COLAs there there will be another $1T+ in retiree expenses.
Where is this economy going to get $2T/yr to pay this, let alone the hundreds of billions of unfunded liabilities state employee retirement systems have claims on.
But this $2T/yr is an odd figure. It's not being lit afire, it represents the spending of tens of millions of Americans and will be funneled all throughout the private economy.
Naively, at $50,000 per job, that would be 40 million jobs directly dependent on retiree spending.
We might be able to print this money without inflation just taking it back, but if we can't -- or don't -- then given the nature of the electorate -- old people vote -- they're really going to be getting this money and it's going to have to come from somewhere.
Maybe we can borrow it still, but my crystal ball can't see that far. Is China going to be sitting on $5T of assets by then? What about the oil situation? Will Japan be needing to cash in its $1.2T holding finally?
The last alternative is just simply massive taxes. It's a safe bet that the national debt is going to be $20T+ by 2020, at 3% interest cost that will be $600B/yr in financing burden alone.
I guess where I'm going with this ramble it's not impossible that by 2026 taxes are going to be massive and pervasive, twice what they are now.
And that's pretty deflationary in my book. Rents and land prices would be knocked back to 1970s levels as workers paycheck tax statements begin to mimic the marginal rates that hit British rockers in the 1960s.
But the wildcard here is maybe they can just print the retirement costs w/o triggering wider inflation, maybe combined with some higher taxes in a sort of counterbalancing effort.
"Those who did not lock in a long-term yield a few years ago (presumably stashing cash under the mattress) are left with some rather unpleasant alternatives.
1. Hope for more deflation.
2. Capitulate and buy TIPS at their current poor yield.
3. Buy commodities and hope the China story doesn't fall apart.
4. Buy stocks after they've doubled.
5. Other."
Presumably, these are the same people who will have to come up with the future taxes that will be required to fund the .gov's obligations to today's lenders who expect to receive uninterrupted interest payments along with the return of their principle upon maturity of those obligations?
Troy,
But the wildcard here is maybe they can just print the retirement costs w/o triggering wider inflation, maybe combined with some higher taxes in a sort of counterbalancing effort.
If that theory was a horse in a 10 horse race, I'd give it 3-1 odds. Heck, that might even make it the favorite.
And for what it is worth, they sure do love tolling bridges and roads in my section of the woods lately.
Fritz_O,
I can't tell you how many times my girlfriend and I have been watching a television show and I say, "Those are the people that are going to be paying for my Social Security."
I wish I could say that there wasn't a sarcastic tone to it, lol. Sigh.
"Too many people have fire insurance. It is the only logical explanation"
That's right, Illusion of Prosperity boy. You probably believe WMD's DIDN'T bet moved from Iraq and buried under the Syrian sand. You probably also believe Iran won't launch their one nuclear warhead to kiil'Mericans.
Buck up son and get with the program. Be like a regular 'Merican and practice the art of self deception, quit your stupid diet and exercise regiment, sit on the couch and gorge yourself with chips and dip as you watch 'Merican Idol.
Fatboy,
Buck up son and get with the program.
Can I at least change the channel to The Walking Dead, Fringe, or Justified as I gorge myself? I'm "burned" out on 'Merican Idol. ;)
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