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You Can’t Wipe Your Butt with Gold: Treasuries Since 1798 and Risk-Minimal TradeConstruction submitted by JM
After all of that---JM finally gets it right in the last paragraph--tho i'm opting for the high mtns in AZ.
can anybody explain why TLT is soaring?
should I mention to Hatoyama to dump US Treasuries that Japan is holding?
Hrmmm. Where did you get the pre-1945 Treasury yield data?
Nice article.... but question. If a T-Bond issued in 1979 with a 12% coupon matures in a month, what could they sell it for today?
*sigh* C'mon people.
Is it really possible that people still have absolutely no idea how the fuck deflation works? C'mon now.
Pre-1945 is sourced at the bottom of the table.
If you buy Ts at the wrong time you get killed. That's where the gold comes in.
No, you're absolutely right... But I'm curious why you didn't include the dollar in the equation... the real rate of interest plays a heavy influence in the price of gold... Like I said though, nice article, I just don't believe we're in an inflationary environment still, it's just a temporary illusion being worked by the Fed, it becomes real when they convince the US to start a war.
Deflation = high real interest rates -> defaults -> insolvency.
Gold is a monetary metal.
You never know what Ben will do when things get grim. Like send you $1000 bills in the mail.
You assume the Federal Reserve will remain and if it does, in the same fashion as it is now. This is an ongoing cycle, things change and the Fed will not win a generational shift. Once it realizes it can't, it'll rob wealth from the system, but nobody will buy into it again. Gold is great, but it's not going to buy you eggs and butter at the corner liquor store where ma and pa use their food stamps.
Oh and for clarity, I'm long calls on GLD, IEF & TLT.
The FED will remain until it is removed by force. do you think for one minute that after all of these years of planning and deceit, that they (Rothschild banking cartel) will let go of this sugar tit?
come on now. would you?
Ummm, at what point did I ever say it wouldn't be removed by force?
By evolution or revolution... this world is going to change.
I didn't talk about dollars, because this position is my dollars. Cash is static and one always needs tempo... I can't stay out of the game even if I tried.
The $ is a bearer bond with no coupon. I'm just stepping out on credit risk in exchange for a coupon while hedging the principal with gold.
Pre-Lehman, functional cash was MBS hedged by Treasuries. Times change.
The issue is what proportion of gold and treasuries is optimal. The that depends on the price at which you purchased them, and some rather compicated back-testing.
I can't see myself buying gold right now, but I can surf this wave, baby.
The backtesting is key and as for surfing....... I've been playing gold and bonds all the way recently, never can tell what rigging the market is going to do for equities... such as shut down for 3 hours.
Completely flawed argument. No offense intended, but read Hugh Hendry for some real analysis. 30-yr yields will decline below 3.0 within the next two months, IMO. Bonds have been in a bull market for 25 years and the bull run isn't over until the stock market bottoms. That's why TLT is rallying. Look at a candlestick chart of the 30-yr yield. Very bearish. Both fundamentally and technically, bonds prices are set to rally. Yield is currently testing the 50 dma. I bet it closes below the 50 dma today.
Oh thank god! Much appreciated to see someone else join in... but damn, dollar getting killed right now...
...I often feel like a lone voice in the darkness..... Seems everyone and their mother, father, brother, sister and 18 cousins thinks treasuries are doomed in the short and long-term. Even Prechter thinks yields are going higher, go figure. Why does the example of Japan not stand out, and why do people seem to forget that everything is relative.
Out of curiousity... what gives you your opinion? For me it's from honestly researching history like crazy and reading economics before the Fed's creation.... the 80 years of freedom from centralized banking produced the greatest economic works of all time... so I'm reading back further than just Japan... curious why you would take the contrary stand.. other than "no one expects the spanish inquisition"
Ohh... thanks for the tip to look up Hendry... never had heard of him before.
I have utter respect for Hugh's thought process. Something he wrote several months ago resonated and caused me to re-think my position.
The fact that we're in a deflationary cycle was never debatable to me, but I looked at QE and debt monitization and heard the talk everywhere about inflation. I felt a lot of internal dissonance until I had an a-ha! moment after reading Hugh and recognizing that monetization must not always lead to inflation. In fact, he felt the greatest threat to the recovery might be a lack of political will amidst cries of inflation when, in fact, we might actually need to monetize more. He said that the dollar will rally because it's the sickest currency. There's more dollar-denominated debt than any other. The Fed would love to create a bit of inflation right now, but it will prove impossible because there's such an enormous overhang that any printing by the Fed will ultimately be swamped by the debt. Default on debt vaporizes dollars, resulting in fewer dollars. If enough debt is defaulted upon, there will indeed be a shortage of dollars that has yet to be seen. If debtors are to have a hope of servicing rather than defaulting, it must become more affordable for them to do so - thus lower rates at all durations. Ah, I ramble.... I'll stop there. Hugh Hendry and Albert Edwards are my sirens, but I don't believe they're leading me toward the rocks!
Here's the June commentary by Hugh that gave me the aha! moment:
Already reading it, here's an interview in July.
Good work :) Thanks for the name.
Ya might want to read "The Theory of Political Economy" by W.S. Jevons.... a lot of essential information in that. He also gives a lot of good references to read. Look for it on Google books...
Woah, Art's at the desk... on CNBC at the moment.
Thanks Phaesed :) I'm going to get the book.
I've been wondering why Art hasn't been on the morning show since the 18th. Thanks for letting us know he's on now!
download it from Google books for free, some of the greatest economic works of all time are in that library.
Quote from Cashin
"You asked me what I was thankful for, now my great fear is that some unforeseen political event causes another flight for safety in the dollar. That'll let the air out of this thing and we can be down a thousand points in a day"
Hendry talks a good game, yet his analysis is politically naive. Yes, we have ferocious deflation right now, but politicians can always address it. Outright devaluation vs oil, yuan, or even war is possible. Hendry knows it and carefully hedges himself with "ultimately in the democracy deflation doesn't happen" plus his latest investment is CDS on Japan sovereign
Me too, I just gave up and joined the darkside.
Currency vaporization vs. debasement - aka Alien vs. Predator.
None taken. I actually think that when folk get a grasp of our future tax burden to pay for this mess, the bear market in Treasuries will slightly lead the bottom in equities. When yields explode, of course.
"Christmas at the White House: An Oprah Primetime Special"
and just now watch the Euro go vertical
Will Rev. Wright be making a guest appearance? I sure hope so. We can use more of his holiday good cheer.
EUR/USD = 1.513
Strange that the indices haven't soared on this dollar fall to new lows?
What I fear is that the gold market will be proven a real bubble, meaning gold not backed by anything but pure hype. They will drive it up to insanity, only to release that one single news-report saying "all physical gold is gone" and see the market crash it into oblivion, leaving the public to hold the bag.
Everyone seems to be so sure that gold is rock-solid, but honestly, I've never seen anything more fragile than someone's promise to exchange gold not even for paper, but for some electronic records in some computer networks.
They will drive it up to insanity, only to release that one single news-report saying "all physical gold is gone" and see the market crash it into oblivion, leaving the public to hold the bag
You are arguing Gold will go down because there will be insufficient supply to meet demand?
I cannot fully grasp the complexity of what's going to happen, but I can clearly see a very quick Gold market crash based on the lack of confidence. This doesn't mean the price of physical gold will not shoot into the stratosphere, but then we are talking physical, not virtual, transactions, such as buying a gold coin in a bank.
Gold cannot be conjured out of thin air like paper dollars can it?
Paper money is backed by what? Promises? Hopium? And when another bit of paper money comes along just like daily newspapers off printing presses what sort of backing is that?
You're absolutely right, there's no substitution to a physical gold coin etc. What I'm talking about here is the organized electronic market that drives up prices based on hype and that will stop functioning momentarily as soon as the confidence in it shatters. In such case, we could potentially witness a situation where the market price of gold will crash, but there will be no market anywhere in the world to buy any gold (except possibly for a black market).
any disruption in the gold market will drive the price up. the fear that you can't get something that is rising in value, while the dollars you would purchase it with are depreciating, will cause a panic buying frenzy.
I actually prefer to wipe my butt with gold. Also, this gives new meaning to the villan "Goldfinger".
Just make sure you wipe with a single 100 ounce bar instead of a 100 single ounce bars or else your hand won't smell too good afterwards.
Just confirmed that you can NOT(or should not) wipe your booty with gold.
Thank you very much.
Gold is just a straddle option to hedge government recklessness and theft. It is an instrument to clip the tail risk in otherwise risk-minimal trades, because it is an excellent long in times of inflation and deflation. But it’s not enough. It generates no income, and it is certainly without risk itself."
Gold is not a good inflation hedge--No one wants gold in inflation--It does of course,maintain its purchasing power but Assets (houses etc) are a far better investment--
Gold does good in hyper-inflation--deflation and political uncertanty--
Today--we have both--deflation and political uncertanty-
"Gold is just a straddle option..."
Can we get off this whole butt-wiping thing? I'm trying to eat my lunch, here.
It's more of a media event to influence/finger policy. The dollar's demise is our own (un)doing, since we "voted" for it. Kill trust (with lies, lead, or tungsten), and civility dies with it. ...And freedom, oh freedom well, that's just some people talkin'...
+100. All of our interactions with most humans on this planet are economic in nature and are based on trust. Destroy trust and chaos ensues. Real chaos,
Houses were not a better investment in 2006/7.
Adapt. Invest in change, it's the only sure bet.
The small round one oz coins are fine...provide better leverage, and no corners to snag.
rofl! +100 plus bonus points for the best pun I've seen in a long while.
Just had a thought. Remember back at the peak (2006-2007) when "exclusive" restaurants were serving Gold on desserts and other delectable abominations?
Maybe the idiots who actually ate the Gold might want to click on some of those "colon cleanse" adds and make a purchase. It might just be profitable if a few "nuggets" can be fished out of the toilet after they "purge".
If nothing else, they say purging is good for the pocketbook...er...soul, right? Just sayin'
Goldschläger hasn't gone up. Yet! Those flakes are 24k.
Mr. Whipple don't squeeze the treasury bonds!
Um - surely that should be:
It generates no income, and it is certainly *NOT* without risk itself.
(A pedant writes.)
Yup. My bad.
Analysts act like Deflation is such a bad thing, but it is not. We need deflation. Things need to get back to being affordable the only people that are really hurt by deflation are rich people with lots of assets. Deflation would actually spur spending at the consumer level because the poorer people could have more to spend and they would spend it.
You are correct that you cannot wipe your butt with gold, butt, at today's value, you can shove about 10 grand up it.
I watched this movie before.The title was Whipsaw.
If I hear another person tell me gold doesn't pay interest I think my head is going to explode. Really, a hard asset doesn't earn interest?? What stellar analysis.
As if yield is THE way to assay the worth of an investment. I tell you what, why don't you go buy some junk debt with a huge yield and tell me how that goes if they go BK. Or, go buy a treasury with a NEGATIVE REAL YIELD and see how that works out for you.
Assets offer yields to: 1) compensate for risk to principal 2) compensate for opportunity cost, and 3) compensate for lost purchasing power of the underlying currency. Since risk 1 and 3 don't apply to gold this lacking of yield is inconsequential.
Furthermore gold can pay interest if a "risk-free" rate is higher than the GOFO rate(which it should be) and you're willing to lend it.
Personally I prefer investments that return me a higher NPV, regardless of the yield. Crazy, I know...
silver lease price has gone way up
All those who see explosive increases in home prices, raise your hands. *looks around the room* I see zero hands up.
All those who see explosive increases in prices of malls and office buildings, raise your hands. Nod. ZERO.
All those who see explosive increases in the price of laptops and desktop computers, raise your hands. Nod. ZERO.
Get it through your heads, people. Housing is over 30% of the CPI. IT IS OVER 30% OF THE CPI. If housing is not going up, and electronics (which are in cars and pretty much everything else, thereby taking their price down) is not going up DAMN LITTLE IS GOING UP AND THERE IS NO INFLATION.
Get it through your heads, people. I don't care if there are 90 gazilliontrillion dollars sitting in banks around the world. If no one is buying anything, then the seller of that anything can't raise prices.
There Is No Inflation. Prove otherwise. With actual price data of houses and electronics measured in dollars. I'll listen.
the 2 things they leave out of inflation figures are food and fuel. they have both gone up this year, the food probably because of the fuel.
Yes, the argument he presents is oft-repeated but rather silly, isn't it? Think instead "Deflation in everything you own, inflation in everything you need."
Obviously, you haven't been in the guns and ammo market lately . . . .
I just tried the following experiment to test the difference between wiping my ass with gold and and a shot gun. To my amazement coins actually scooped the crap quite nicely, while gold dust and shot seemed to just stick to the poop. I then placed a 12 gauge gently against my anus and pulled the trigger. To my suprise, it worked quite well. Except that my anus, blood, and poop are now stuck my wall. Well, off to the hospital!
Well, that's just the worst effin' Thanksgiving story ever...
Where is the real, inflation adjusted, analysis on total returns to treasuries?
Couldn't get 'em. Historical price series are marginal at best outside of food and fuel. CPI... oh, wait.
Your point is well taken. The gold standard was probably biased towards deflation, and yeilds reflected it. Note my sub-sample points show bias.
JM - Thanks for the reply.
Yes, the CPI data, flawed as it may be does go back to 1913 at FRED (St. Louis)
While NOT asking you to do more work, it might be interesting to have a break point in your analysis for data, before and after 1913. Of course the icing on the cake might be the CPI adjustements tracked by John Williams' Shadow Gov't. Statistics: http://www.shadowstats.com/
So what is the true inflation adjusted price of gold? Anyone?
Well let's see.
1. Gas heat: Gone up.
2. Electricity: Gone up.
3. Taxes: Gone up.
4. Groceries: Gone up.
5. Gas/fuel: Gone up.
6. Insurance: Gone up.
7. Cigarettes: Gone up.
8. House payment: Stayed same.
9. House worth: Gone down.
10. 401(k): Gone down.
11. Salary: Gone down, after being layed off for 5 months, got my old job back with a cut in salary
I don't play the market, I don't invest, just trying to survive. I read these articles and posts to stay informed.
I beg to have someone convince me deflation is good. I hope to fuck inflation makes things better. Convince me it will improve the items listed above.
This is how middle-america, blue-collar sees things. Of the list above, guess when #11 goes up. Just like employment, it's the LAST thing to improve.
I wonder what the median disposable income is, right now. Like, just chop off everyone making over 100k (per capita) and take a look. Maybe a lower number - a lot of .gov jobs are paying around 100k with even 3 - 5 years experience.
Check out this random selection and the pay range for many of them. WTF!
inflation or currency debasement+ same thing, loss of purchasing power. deflation would be okay if you kept your job, without another pay cut.
The 'flation argument must not be thought of as an either/or, all-or-nothing argument. Think "hyperinflationary depression", where everything you own crashes, and everything you need skyrockets, and you lose your job. Think Argentina.
Thanks JM interesting post. Finding a sensible well thought out idea makes wading thru the tin foil worthwhile. Please keep em coming. Thanks again.
Pain in sovereign debt doesn’t imply complete destruction of sovereign debt. It implies a rise in the risk-free rate of return, and convergence to the historical mean in risk premia.
There's a presumption built into this statement that I am not sure is compatible with the ongoing reserve currency shift. Later, you allude to the point:
You cannot escape the fact that the dollar—with all its faults—is the reserve currency of the world by virtue of the U.S. government’s military power, and its ability to tax the living daylights out of its subjects.
It is not likely that the dollar will remain the reserve currency of the world for much longer. This fact argues for a war; the U.S. currently has the largest military but knows that its economy will not allow it to be maintained. I am quite sure U.S. planners will embrace "Use it or lose it". The reserve-currency status and the military are mutually-supporting.
As for the government's ability to tax the living daylights out of us, I take issue there as well, along with your apparent embrace of the possibility of a "Japan" scenario for the U.S. Under current circumstances, raising taxes kills the economy. Period. And, there is no Japan scenario for the U.S. It is not even remotely possible, and curse Shedlock et al for encouraging the world to think it is. The Japan scenario worked for Japan, first and foremost, because it had an active buyer for its exports. That buyer is now dead, as you point out, and Japan is about to find out there is no Japan scenario for Japan this time around. Japan is going to die a horrible, agonizing death: manufacturing jobs, no markets, and an unenviable population demographic. Japan hopes in vain it doesn't get caught up in the (coming) war between the U.S. and China. Japan has already begun the process of distancing itself from the West. Should China want to threaten Japan completely into its sphere of influence all it needs to do is threaten to use its USD to buy JPY.
Is there any way the U.S. can indulge in a Japan scenario? Reserve currency, world empire to maintain, FIRE economy? It's laughable.
Gold screaming higher doesn’t necessarily imply a doomsday scenario, a currency crisis, or a variant apocalyptic vision. Gold is just a straddle option to hedge government recklessness and theft.
You have cause and effect reversed.
Further, the transactions costs associated with gold (less so ETFs) make it somewhat illiquid.
Actually, the risk associated with gold as an investment strategy arises from not being able to find it in quantity to buy, as central banks are now net buyers in large quantity.
Treasuries are not exactly free of default risk, but they are close. This is not because they have superior fundamentals. It is because the Federal Reserve controls currency printing. In nominal terms, they will always be able to fulfill their obligations.
This depends entirely on how you define "default" and "fulfill...obligations." As far as I am concerned, printing is one valid definition for default. And so the argument here comes full circle: the entire world's investment strategies are based on the so-called "risk-free rate of return", and that is exactly what has been shown to be a falsehood. It's difficult to part with this concept if one has defined his entire professional life around it. But this is what a reserve currency shift really means: breakdown of the "risk-free rate of return", followed immediately by the commencement of a total reassessment of all investment strategies, by everyone, globally. It's easy to see what the banks are afraid of.
Happy Thanksgiving, Virginian. I'm a little busy, so I can't touch on every point.
Let me say it this way: I believe in raw power, and the ability of a wounded Wall Street to live off the skim like Sicilians.
There will be inflation, but not yet.
Look at the open interest on UUP and the size of the positions. There are incredibly powerful vested interests that will not allow the Federal Reserve to do anything as stupid as utterly destroy the system that they live off of.
The greatest pump and shank-job in the history of the Wall Street is coming and they they used the Fed like a consigliare to do it.
Get ready to dump risk.
Away from computers for a few days, not sure if you're still notified of posts here.
The only "risk" I have still is my PM positions and some miners, and I consider them core position and not tradable. I have been expecting a major market dump since QE officially ended in September (I dumped my "risk" then); any one of a number of triggers have been waiting in the wings, it's only a matter of time.
I understand your comment; my point of disagreement is whether or not they will actually be able to continue to support the system as it is, and whether or not the polity will tolerate the measures they will take in their effort to do so. TARP II is unpalatable. Tax revenues are down, and IMO will continue their downward trend absent more "stimulus" or other deficit spending. How long can they continue to lie about the condition of the banks while tax revenues continue to fall?
I don't know either. We'll see.
Fractional reserve banking systems do NOT GENERATE INCOME. They only appear to generate income while they run the ponzi scheme until the ponzi scheme collapses. Sorta kinda working for short times has been our economic engine for centuries. The income generation portion must exactly match the inflation adjustments. By fudging it and then throwing in massive inflation adjustments the system works for short periods.
Enjoyed reading JM.
TIPS issuance, if increased significantly, introduces tangible default risk in the trade.
TIPS issuance, if increased significantly, introduces tangible default risk in the trade.
Do you think Treasury would selectively default--on TIPS only? Wouldn't the default risk for all Treasurys explode on that event?
The TBAC minutes suggest that Treasury is lusting after that inflation premium and is willing to ignore the fact that TIPS have been expensive to it since introduction. For better or worse, we're going to see a lot more TIPS.
I think long-dated TIPS creates put a heightened default risk in the back of people's minds, because the Treasury can't print away the interest burden, only lessen it by mis-reporting CPI. And this in turn jacks up interest in TIPS, and TIPS issuance. Repeat in vicious cycle
That said, the US isn't going to default. This is all just driving expectations of hightened risk. All they have to do is reverse the dollar slide and problem solved short term.
Thanks for clarifying. Hope to see more from you in the future.
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