Saturday, November 10, 2012

The Irrational Exuberance Seen in Short-Term Treasuries

I'm probably not going where you think I'm going based on the title. Sorry about that!

Click to enlarge.

The six diamond points in red were used to create the two exponential trend channels in red. As seen in the chart, there was a major trend shift in the early 1980s. The diamond points in blue suggest that perhaps stock market investors didn't get the memo.

Many have tried to predict when the next exponential trend channel change will occur.

Dune (1984) - Memorable Quotes

Paul: They tried and failed?
Reverend Mother Mohiam: They tried and died.

In the fall of 2004, my biggest concern was that it would be harder and harder to make money off of money. It is still my biggest concern. I think the chart clearly shows that my concern is/was valid.

As a saver, I pose three serious questions.

1. When will the next major exponential trend channel change occur?
2. What if it doesn't occur within my lifetime?
3. What if our economy actually requires continually falling interest rates?

The latter question is especially interesting to me. If the answer is yes then stock market investors may be taking on a lot more risk than they think they are. At 0%, there isn't a whole lot further rates can come down.

See Also:
Wikipedia: Irrational Exuberance

Source Data:
St. Louis Fed: 3-Month Treasury Bill: Secondary Market Rate


Stagflationary Mark said...

I just want to clarify this.

The blue diamond points suggest that money was not flowing into 3-month treasury bills as much as it probably should have.

So where was the money going instead? The stock market! Real estate! Sure things! Can't lose!


Luke Smith said...

Correct, Gresham's Law! When the US bond market contracted, bad money began to drive out the good money in the stock market. The good money went into real-estate.

Then we saw bad/easy credit drive out good credit in the real-estate market. In other words, good credit was priced out of real-estate.

So good money/credit was driven out of both stocks and real-estate, now where is it? Sitting in bank accounts earning that fabulous .16% interest.

Good relevant discussion over at

dearieme said...

The Royal Mint has announced that it is going to strike more gold and silver coins for sale to the public, and offer them a storage facility too. What does it portend?

On reflection, I think it means that the Government would like a little list of the people who buy gold and silver.

Stagflationary Mark said...

Luke Smith,

So good money/credit was driven out of both stocks and real-estate, now where is it? Sitting in bank accounts earning that fabulous .16% interest.

And that money is no doubt anxiously awaiting a renewed bull market in real prosperity. I suspect it is going to have a VERY long wait on its hands, lol. Sigh.

Stagflationary Mark said...


Why so cynical? ;)

In all seriousness, part of it could be related to the success of our very own minting.

50 State Quarters

By the end of 2008, all of the original 50 states quarters had been minted and released. The official total, according to the U.S. Mint, was 34,797,600,000 coins. The average mintage was 695,952,000 coins per state, but ranged between Virginia's 1,594,616,000 to Oklahoma's 416,600,000. Demand was stronger for quarters issued early in the program. This was due to weakening economic conditions in later years and the waning of the initial surge of demand when the program was launched. Another factor was the reassertion of the Treasury Department's opposition to the program. When the Director's term ended in 2000, the Treasury proceeded to reduce and finally terminate the most effective elements of the Mint's promotional program despite the high return on investment they earned.

There are roughly 35 billion coins out there and yet it is a very rare event when I actually see one.

While mintage totals of the various designs vary widely—Virginia quarters are almost twenty times more abundant than Northern Marianas quarters—none of the regular circulating issues are rare enough to become a valuable investment.

Doesn't change the fact that serious numbers of coins were hoarded though. I have no idea who the holders intend to sell their coins to for a profit. It won't be me! ;)