Thursday, September 2, 2010

A Saver's Nightmare

Click to enlarge.

The black 10-Year TIPS data points show the results of every 10-Year TIPS auction (does not include reopenings). The blue 10-Year TIPS data point is today's rate, as seen at Bloomberg.

We've seen I-Bond rates fall to 0% (currently 0.2%).
We've seen 5-Year TIPS rates fall to 0% (currently 0.13%).
Are 10-Year TIPS rates next?

January 8, 2008
TIPS Traders Say Forget It

As long-term holders of TIPS, we need only suspect that the long-term direction of future real yields is down (that's the most important thing that determines what TIPS are worth). I not only strongly suspect that real yields will fall, but I'm actively betting on it. Real yields were actually negative in the 1970s. Few seem to know/remember that.

Death of Real Yields Perfect Storm
  1. Guns AND Butter Governmental Policies
  2. Forever War
  3. Banana Republic Trade Deficit
  4. Banana Republic Rising Income Inequality
  5. Banks "Too Big to Fail"
  6. Credit Crisis Flight to Quality
  7. Slowing Economic Growth Flight to Quality
  8. Retiring Baby Boomer Flight to Quality
The 1970s have nothing on us, in my opinion. I don't have to be right on the entire list. Just a few from the list should be good enough.

I underestimated the deflationary forces of the credit crisis. It temporarily provided much higher real yields. The overall premise still holds true though. Real yields are lower now than when I wrote that back in 2008.

January 2, 2008
Stagnation Hits My Blog

So here's my 2008 list of general predictions and observations for the New Year (and quite possibly for many, many years into the future).
  1. There are too many houses.
  2. There are too many banks.
  3. There are too many restaurants.
  4. There are too many shopping malls.
  5. There are too many airlines.
  6. The era of cheap food is over.
  7. The era of cheap energy is over.
  8. Unemployment will continue to climb.
  9. The stock market will stagnate (inflation adjusted).
  10. Real (inflation adjusted) yields will continue to drop.
  11. China will not decouple from us, nor will the rest of the world.
  12. Stagflation (slowing growth with above normal inflation) will continue.
I also believe that these trends will continue far longer than most (those who have only been investing in the 1980s and 1990s anyway) think is even remotely possible.

In hindsight, above normal inflation did not continue. The stock market did much worse than simply stagnate. From what I can see, cheap food still exists. Although I am currently of a deflationary mindset, I do stand by all of those predictions over the long-term though. It does not paint a pretty picture for the future.

Has the government done anything to address any of my concerns from the list? Extend and pretend does not count.

September 2, 2010
Reuters: Housing double-dip threatens banks

Here is the real risk: if banks do require another rescue the political consensus to do it quickly and effectively will not be there. The United States has squandered its opportunity to address the fundamental problems, choosing to extend and pretend and to prop up asset values.

It will be interesting to see what Plan B is.

Plan A was a saver's nightmare. I expect Plan B to ultimately be more of the same.

Source Data:
I-Bond Rates
TreasuryDirect: Auction Results
Bloomberg: Government Bonds


Stagflationary Mark said...

The Market Ticker: ZIRP Destroys Pensions

The initial "impact" of low interest rates appears seductively good. It's not - it's always bad. It forces people to take imprudent risks (how do you think we got a housing bubble in the first place?) and destroys the prudent investor, lender of capital and saver.

I am in complete agreement.

EconomicDisconnect said...

You worry too much Giethner himself said:
"there is no plan B, this is going to work".

I feel so much better even a year after.

Stagflationary Mark said...

No plan B? Holy cow!

What if disabling our zombie banking system's main drive circuit breaker isn't enough to fix all of our problems though? Then what?

EconomicDisconnect said...

Hey, above my pay grade, I suggest you email for more info.

Stagflationary Mark said...


Fantastic news!

Zombie Banking Plan B is just going to be a repeat of Zombie Banking Plan A!

A Comparison of the 2 Plans

Anonymous said...

Plan b:

Soup kitchens, lines of unemployed, bank runs. TFGTF (too far gone to fix).

Archie Bunker

Stagflationary Mark said...

Thanks to the Internet and more sophisticated phone systems, the hungry and/or unemployed rarely need to be seen in public.

It's kind of like Hogan's Heroes!

Anonymous said...

unemployed rarely need to be seen in public.<<

This may change when the US dollar index approaches 120 as Uncle Ben fails in his bid to put a spike into it. Too bad--better turn in those I-bonds for UUP! Hehehe

Archie B.

Anonymous said...

I still think part of the problem is the huge amount of money floating around. Its probably still very easy to borrow money, but no one wants it.

Thus this sloshy money floats around trying to find the next bubble...internet stocks, houses, commodities, and now Treasuries?


Anonymous said...

Here is my idea for how to deal with the banks that fail:

1) Let the shareholders and bondholders lose everything.

2) Nationalize the bank once part 1 is determined. Reduce all salaries at the bank to US$ 80,000 or lower. If staff leaves for better jobs that is fine - its part of the plan, in fact. The goal is to destroy the bank and clear the dead wood, not prop it up.

3) Sell off the bank as quickly as possible. Take a loss is fine - we lose money on all of the hidden subsidies as it is.

I don't like nationalizing shit, but I also don't like just handing money to people who need to be punished by true failure.

Stagflationary Mark said...

My sloshy money continues to look for a safe haven when none exists. Sigh.

I definitely agree that we should not be rewarding failure.