Treasuries Not Meeting Demand as AAA Debt More Expensive
“The question isn’t ‘I’m necessarily afraid of a bad outcome in Europe,’” Vogel said. “It’s ‘I don’t know how it gets better and so I need to reduce my exposure to Europe until I can make a sensible choice.’”
One investing term that one hears less of is that of a "crowded trade."
ReplyDeleteWhile I have yet to find a concise definition of such, I believe that a "crowded trade" has characteristics including the following:
A large number of participants who have similar beliefs (i.e. a large imbalance of sentiment)
A heavy presence of short-term speculators as opposed to long-term holders; this often includes "hot money"
A history of rapid, significant price appreciation in the underlying asset(s) or sector
"Crowded trades" should be viewed with caution as these characteristics likely accentuate price moves and, at some point, volatility. Often, the large imbalance of sentiment leads to overextension in the price movement, which is susceptible to dramatic revision if/when the "crowd" changes its opinion in part or in full.
I view the "crowded trade" as akin to a large, packed movie theater with a single, narrow exit. As long as few want to leave the theater (i.e. nearly everyone shares similar beliefs and as such is content with staying in the theater) everything is fine; but problems arise if/when many or most of the people in the theater suddenly want to leave, only to find they can't quickly exit due to the single and narrow exit.
TJandTheBear,
ReplyDeleteA heavy presence of short-term speculators as opposed to long-term holders; this often includes "hot money"
On the one hand, I've yet to sell a treasury I purchased directly in a government auction (TIPS). I either still own them or they've matured.
On the other hand, I don't live in Greece. What a nightmare that would be. Owe money in a currency you can't personally print? Oh the humanity! That's just asking for *extra* trouble. ;)
The euro reminds me a lot of structured investment vehicles. You slap together a bunch of questionable investments into one mega-investment, slap a nice credit rating on it, then act shocked when the unthinkable happens.
ReplyDeleteWe were told that the euro would be greater than the sum of its parts.
We are seeing that the euro is only as good as its weakest link.
Expectations, meet reality.
That's not to say that the US dollar doesn't have plenty of issues. At least they are mostly known, once you sift through the gallons of lipstick painting its face. Oink! Oink!
The Fed is the overwhelming holder of T-bonds; everyone else holds bills, hence the "heavy presence of short-term speculators as opposed to long-term holders".
ReplyDeleteTJandTheBear,
ReplyDeleteA history of rapid, significant price appreciation in the underlying asset(s) or sector
Where's the significant price appreciation in bills? With inflation at 2% or so and interest rates at 0%, that's a 2% real loss each year.
Does any really buy 3-month t-bills at 0% with the intent to sell it to greater fools for huge profits?
Similarly, I have some of my money in an online savings account. It certainly isn't because I expect significant price appreciation. Relative safety comes at a price. I need the money available until the next long-term TIPS bond in my bond ladder matures.
Oops.
ReplyDeleteDoes anyone really buy...