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November 10, 2012
The Interest Rates of World War II
Click to enlarge.
I realized last night that I had seen that chart shape before. The following chart adds in manufacturing employment as a 2nd data series (in red).
Click to enlarge.
Let's use 10-year moving averages to remove the short-term cyclical noise.
Click to enlarge.
Mind blowing! Now let's take that data and put it on a scatter chart.
Click to enlarge.
This chart is consistent with my view that the 3-month treasury bill rate may remain low for a very, very long time. There are powerful inflationary forces in the world but there are powerful deflationary forces too. Thanks to increasing automation, it is my opinion that global manufacturing employment is definitely not on the rise (at least over the long-term).
Source Data:
St. Louis Fed: Custom Chart
40 comments:
This all presumes that the US poses the same credit risk it did over the past century.
TJandTheBear,
It does presume that the US poses the same credit risk as it once did.
1. I have no desire to lend money to the European Union.
2. I have no desire to lend money to the Chinese government.
3. I am willing to lend money to the US government.
Not much has changed for me.
I am once again reminded of a joke.
Two guys are camping. One guy sees a bear rushing down the hillside towards them. The second guy calmly starts putting on his shoes.
The first guy exclaims, "You fool! You cannot outrun a bear!"
The second guy replies, "I don't need to outrun the bear. I just need to outrun you."
Put another way, it is my opinion that yields are low because the entire world is having a problem, not just us.
The European Union is a slow-motion train wreck.
We may have sent China our manufacturing business but what good is it going to do for 1+ billion people if manufacturing is fully automated someday? Where are their jobs going to come from?
If push comes to shove, at least we have plenty of farmland and a reasonably effective military.
The bottom line is that I am thankful that I live in the United States. I have no desire to flee the country. I doubt very much I'll be needing to bribe a border guard to get out. Let's just put it that way.
You've got me convinced. And I agree with your analysis of credit risks. The US is still the best place to be.
This fits along an old posting by you of the correlation between inflation and wages+PPI. Wages (and thereby inflation) are being suppressed by high unemployment even as some elements of PPI increase.
Ah, where to start...
First, I have no desire to lend money, thus I have no exposure to that bear.
Second, "credit risk" relativity is meaningless when they're all bad; you're simply choosing which bear will eat you.
Also the Fed lowers interest rates in a futile attempt to spur on job growth but because inflation (from wage growth) is tame, there is little pressure to raise rates to counter the inflationary forces.
But . . . but . . . but -- LUMP OF LABOR!
JzB
Scott,
We could certainly be doing worse (and we probably will be doing worse if I am right to be a permabear).
FD: My company's retirement plan offers a very limited menu of bad investment options. I'm compelled to select one, so I've chosen the one that's the "least bad", i.e., probably heavy in T's. Sooooooo... that bear will likely take a fair chunk out of me regardless. Bon appetit! ;-)
p.s.: Great charts as always!
>I have no desire to lend money, thus I have no exposure to that bear.
They have a room for you, too:
http://research.stlouisfed.org/fred2/series/CPIAUCSL?cid=9
TJandTheBear,
First, I have no desire to lend money, thus I have no exposure to that bear.
No exposure?
Questrade: Gold Margin
Questrade offers 80% loan value on gold bullion in non-registered accounts. You can buy gold on credit and borrow on the bullion already in your margin account.
Even if you aren't personally borrowing money to buy gold, some certainly are. You could easily go where they go should they choose to unwind (or are forcibly unwound).
Second, "credit risk" relativity is meaningless when they're all bad; you're simply choosing which bear will eat you.
In the end, we're all dead. Timing is everything.
I acknowledge that I will be financially ruined if the economic system collapses in my lifetime (either through massive credit defaults or hyperinflation). I've been a bear for more than 8 years so far though. I only have 30-40 years to go (based on my life expectancy).
jeff,
Also the Fed lowers interest rates in a futile attempt to spur on job growth but because inflation (from wage growth) is tame, there is little pressure to raise rates to counter the inflationary forces.
Yeah, the deflationary forces and the inflationary forces are fairly well balanced right now (as they've mostly been since I turned bearish in 2004).
Troy,
I'm reminded yet again of Greenspan's quote.
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)
Those who think they've found a "sure thing" way to get around it probably haven't factored in all the variables.
TJandTheBear,
My company's retirement plan offers a very limited menu of bad investment options...
This goes right along with my long-standing theory that it will be harder and harder to make money off of money in the future.
Too much money chasing too few good investment ideas!
Sigh.
Jazzbumpa,
I have been concerned that we might not be able to think up new jobs as fast as we automate and outsource them.
I'm the last person this economy needs right now. I'm a fairly frugal person. I don't spend very much on discretionary items. Once my basic needs are met, I can find a great deal of enjoyment doing things that are nearly free. Fortunately, I'm the exception and not the rule.
not really apropos, but I saw the chain CPI for the first time and wanted to see how bad it will screw me if they change my SSA to that instead of CPI-W:
http://research.stlouisfed.org/fred2/graph/?g=cJ6
is 1990 to now. So over 22 years a $2000/mo payment would rise to $3600 with the current CPI-W and $3200 with that chained CPI idea, if that is the right one.
Funny thing is, I do have about 22 years until full retirement age, so that's exactly the pounding this change would give me.
On the internet over the years I've been a very ardent defender of the SSA idea (forced contributions into government income transfer from young to old) since it's a clever way to shift savings without having to have FIRE middlemen collect their skim.
FICA payers 1990-2010 (ie me) have overpaid $2.6T (well, that includes a lot of accrued interest) so we should be first in line to get our money from the UST as SSA goes cash-negative during the baby boom retirement.
Unfortunately, thanks to ZIRP, SSA's trust fund is only collecting 2% and not 5-6% like they were before. This is a ~$100B/yr shortfall of "income" (actually, treasury is just photocopying bonds to stuff into the SSTF to "pay" this interest), so in 2022 the SSTF is going to have $1T less in it than CBO was projecting not too long ago.
http://research.stlouisfed.org/fred2/series/W823RC1 for the $ amount of SSA checks going out . . .
CBO says we're only going to be spending 5.3% of GDP on SSA in 2020, but they're assuming a $20T real economy by then. Pull the other one!
Here's a graph of SSA costs, 2000-2032.
These are 2012 dollars, so real spending is going to double from $800B now to $1.6T when I am allowed sidle up to the trough in the early 2030s.
CBO is projecting we'll have another $10T/yr of real output by then, so we'll be OK I guess.
Here's a bonus thought about the timing of investments.
I own my house free and clear (no debt). I pay to maintain it. I pay property taxes each year. It clearly has value to me.
I acknowledge that at some point in the next few centuries that it is likely to collapse (or at the very least someone will have *replaced* every single thing in it that supposedly gives it value).
I just find it interesting. I think about it every now and then. At some level, it seems a bit crazy.
BRAVO on owning your place free & clear.
BTW, I don't "expect" an economic collapse... although I don't discount the possibility, either. What I *do* expect is some form of default, probably a quick devaluation. It's not like there isn't precedent.
Troy,
CBO says we're only going to be spending 5.3% of GDP on SSA in 2020, but they're assuming a $20T real economy by then. Pull the other one!
Emphasis added. Nice! ;)
Like you, I too am a defender of the SSA and for the same reasons.
I do have one gripe though. I think it should have originally been tied, at least partially, to average life expectancy.
If we all live to the age of 200 someday thanks to potential ongoing advancements in health care, are we all still going to retire at 67? What a burden THAT would be to the younger workers.
We're living a lot longer than we were when Social Security was created in 1935. Nearly 20 years longer!
TJandTheBear,
What I *do* expect is some form of default, probably a quick devaluation. It's not like there isn't precedent.
I hear you.
There is certainly precedent for doing all kinds of things that I would not necessarily approve of. The Patriot Act comes to mind. Sigh.
I think we're trying to devalue every single day and for the most part we are relatively successful at it.
One way that I may or may not get burned is if a Value Added Tax appears.
The CPI currently includes taxes associated with purchases so I think my TIPS and I-Bonds should absorb the price increases. There's no way to know for sure though. The one thing we can count on is that we can't count on much. ;)
How are taxes treated in the CPI?
Certain taxes are included in the CPI, namely, taxes that are directly associated with the purchase of specific goods and services (such as sales and excise taxes). Government user fees are also included in the CPI. For example, toll charges and parking fees are included in the transportation category, and an entry fee to a national park would be included as part of the admissions index. In addition, property taxes should be reflected indirectly in the BLS method of measuring the cost of the flow of services provided by shelter, which we called owners' equivalent rent, to the extent that these taxes influence rental values. Taxes not directly associated with specific purchases, such as income and Social Security taxes, are excluded, as are the government services paid for through those taxes.
As a side note, an added VAT could easily impact the relative value of my existing EE Savings Bonds (and not in a good way).
being a quasi-Georgist, I find home values fascinating, yes.
I've read that the valuation is the NPV of all future income flows but that math is something I understand but cannot calculate . . .
Houses are such a fixed, dominant presence in our lives that it is hard to come to the realization that they are a good of choice and not obligatory.
But one's housing is so central to one's existence that we pretty much must acquire tenancy of one.
And since land is fixed in supply, the housing good itself very capital intensive to create, housing costs dominate most people's budgets.
We are forced to bid up the price -- both rents and purchase prices -- to the point of unaffordability!
The secret part of land tenancy that people don't think about is that it includes the right of exclusive use of the property -- you can tell anyone on your property to bug off and if they don't the police will eventually come and remove them for you.
We never have to do that, but that's an immensely valuable right to have.
"you can tell anyone on your property to bug off and if they don't the police will eventually come and remove them for you": just wait until The Forces of Progress have finished with that.
Bond prices have reached what looks like a permanently high plateau.<< The famous irving Fisher quote updated for this era :)
^ Thing is, nobody is borrowing money to chase treasuries up. Quite the opposite.
Troy,
There's a house about a mile from me who has a No Trespassing sign in the front yard. I believe that property once had horses but they weren't being cared for all that well. From what I can tell, there are no longer any horses on the property.
I'm pretty sure that sign is directed at the neighbors, the media, *and* the police. Go figure.
Anonymous,
Had Fisher proclaimed that bond prices had reached a "permanently high plateau" in 1929 instead of stocks, any heckling of his theory would have been done after he was dead and buried.
He died in 1947. As seen in the first chart within this post, 3-month treasury bills stayed under 1% until 1948.
Just something to think about! ;)
dearieme,
Rumor has it that the Forces of Progress will be replaced by the Forces of Recess.
Interest rates will remain near rock bottom for the foreseeable future. Why? Because the USD is the "least bad" of the major currencies. And at the end of the day, Treasury market is still the most liquid in the world. What's ironic is that as this whole fiscal cliff issue in the US heats up and increasingly frightens people, investors will flee to - irony of ironies - Treasuries. Frankly speaking, would not be at all surprised to see the 3 month bill go negative in the next few weeks.
Had Fisher proclaimed that bond prices had reached a "permanently high plateau" in 1929 instead of stocks, any heckling of his theory would have been done after he was dead and buried.<<
Of course that wasn't the point--we were just updating the quote for the appropriate bubble.
Interest rates will remain near rock bottom for the foreseeable future. Why? Because the USD is the "least bad" of the major currencies.<<
This proves the point of the updated quote--the inverse is bond prices will remain near all time highs for the forseeable future--very much as impressive a plateau, as Fisher built for stocks in 1929.
You guys can exhault in your t-bonds, inflation protected or not--good luck!! i'll take my hamburger dimes (or is that MCD happy meal dollaz) elsewhere.
Anonymous,
Of course that wasn't the point--we were just updating the quote for the appropriate bubble.
I know it wasn't your point. It was my point. In my opinion, the bubbles haven't changed.
Bond prices stayed high in the 20 years after the Great Depression. Japan's bonds stayed high 20 years after Japan's housing bubble popped. Our bonds could stay high 20 years after our housing bubble popped.
This isn't the prosperous 80s and 90s any longer. I don't claim bonds are safe. I believe nothing is safe. If you think you've found safety elsewhere then good luck to you as well.
Anonymous,
This proves the point of the updated quote...
Opinion yes. Proof no. I refer you to my post.
This chart is consistent with my view that the 3-month treasury bill rate may remain low for a very, very long time.
It "may" remain low. I have made no claim that the rate will remain low. I just lean that way.
A "very, very long time" is not even remotely the same as Fisher's "permanent" claim. There is no way I would ever suggest that bond rates will remain low permanently, nor would I suspect anyone else would here. Eternity is a very long time indeed, especially for a fiat currency.
So exactly what point are you trying to prove?
And we have had a 30+ year bull market in debt here is the USSA--bull markets don't end with a whimper, but they always encourage rear view mirror optimism, the better to punish the majority of investors.
Anonymous,
Do I look like an optimist to you?
I bought inflation protected bonds with the intent to hold to maturity. I will not require a greater fool to buy them from me. Rising interest rates will not affect me. I will simply have lost the oppurtunity to do better. In fact, I root for rising interest rates so that when some of my bonds mature I can reinvest the proceeds.
At best, I won't be getting much but at least I locked in higher rates before they fell. My last major purchase was a 30-year TIPS with a 2%+ real yield. I backed up the truck. 28 1/2 years to go. I bought it the very month Jeremy Siegel warned of the great bond bubble (Feb 2011). In hindsight, he was dead wrong. Our economy isn't nearly as strong as he thought it would be. Big shocker.
At worst, I will be financially ruined. We could default on our debt or we could hyperinflate. If I am ruined, I certainly won't be alone. Not much will be safe in that environment.
Nothing is safe. Pension funds still assume 8% returns going forward? I don't believe it for a minute, especially if you think a bond bubble is about to pop.
Just to be clear here...
As a saver, I root for higher interest rates. That's true even though I have a TIPS bond ladder.
I would love to see the end of the bond bull market, but only if it wasn't accompanied by outright default or hyperinflation.
Unlike Fisher's hubris, I wish I could rule it out. I cannot. I can't protect myself against every potential bad outcome though, so I play the odds the best I can. As Greenspan said in 1966, there is no safe store of value in a welfare state. It's at least as true now as it was then. Sigh.
We all pick our own poison--at least YOU have a plan and it doesn't involve bond ETFs!!
Anonymous,
I hear that. The TIP bond fund has a real yield of just -0.83%. I often wonder if most investors realize what that rate math is actually doing to them over the long-term.
0.9917^30 = 0.78
I suspect some will someday be disappointed that they didn't at least buy 0.0% I-Bonds instead. Just a hunch!
That's not even considering that TIP's price will fall if rates rise and I-Bonds won't. (An I-Bond's nominal price can never fall as long as our government doesn't outright default on them.)
If you can't convince them, confuse them.
http://us.ishares.com/content/stream.jsp?url=/content/en_us/repository/resource/semi_annual_report/is_sar_101.pdf
See note 2
Anonymous,
If you can't convince them, confuse them.
There are a lot of numbers on this page. Only one is the real yield to maturity though.
I'm especially impressed with the top holdings list. Just look at all those juicy coupons!
And that 30-Day Sec Yield of 4.92%? Oh yeah, give me more of that, lol. ;)
In all seriousness, I'm a big fan of cutting out the middle man. The vast majority of my bonds were bought directly from the government in auctions. The one exception being the one ultra long-term TIPS bond that sits in my IRA. I bought in 2011 over concerns that real yields could easily fall a lot further. I need the money in 20+ years. Might just as well lock it in. In hindsight, no complaints!
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