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Jim Grant Takes On David Rosenberg And The Bond Bulls, Warns The Fed Chairman: "Watch Your Back Ben Bernanke, Cycles Turn"
In one of the most erudite, intelligent, and insightful conversations on the Bond bull/bear debate, David Rosenberg and Jim Grant go all out at each other, trading blows in this "Great Debate" which is a must see by all. As we pointed out yesterday, Grant is very bearish on bonds, and in a self-made prospectus has decided to downgrade the US, since the rating agencies, which have long been thoroughly incompetent, corrupt and afraid to disturb the status quo, will not do so until it is too late. Jim's point is simple: you can't resolve massive debt with more debt, and says Treasuries, which he calls "certificates of confiscation" are a surefire way to lose one's money. He points to the record supply of US Treasuries, makes fun of the SEC (who doesn't), and in a stunning move, cautions the Fed Chairman, whose ongoing dollar debasement, was once considered treason by the US. His conclusion: "watch your back, Ben Bernanke. Cycles turn" could not have come at a more opportune time. As a contrarian, Rosenberg discusses the McKinsey report looking at sovereign debt, and the Reinhart and Rogoff studies on debt default and highlights that there is a major disconnect between theoretical applications of sovereign default models and practice: in essence the US is still deleveraging as private debt is decreasing and public debt is surging but to a slower degree. In essence, David claims, the second largest monthly debt issuance in March of $333 billion is merely a side effect of ongoing deleveraging, which is a leading and/or coincident indicator of deflation: an environment in which the long bond thrives (Japan is a good reference point).
Agree or disagree, the fact that two of the smartest economists in the world can present very persuasive cases for either side indicates precisely the conundrum we are in, and is precisely why the Fed will pretend it is operating in the shadow of a so-called Goldilocks economy, even as it prints record trillions of new debt until one or the other is proven wrong. If, as many expect, Grant ends up being correct, than Bernanke will have gambled and lost the future of the United States.
Some of the more persuasive arguments by both include a refutation by Grant that the US economy now is in any way comparable to that of Japan, for a variety of reasons, namely the underlying domestic "dynamism." Rosenberg disagrees and presents the trend pricing for JGBs which, even with record ongoing debt/GDP and deficits, has seen a contraction in JGB yields by 70 bps, even after a round of downgrades.
For traders, the recent move wider in bonds, as well as the first ever observation of negative swap spreads is likely a warning signal that the 10 Y may finally be breaking out of the 3.20% - 3.80% range where it has been stuck for the past year. If yesterday's post NFP move is any indication, we will likely see a 4.00%+ print in the next week, after which the next resistance level is in the mid 4's.
Our personal take is that the key factor that is least discussed by pundits, is the demographic shift in both Japan and the US, with both populations ageing, and a record number of Americans entering retirement age over the next 5 years (and discovering that Social Security is bankrupt). To believe that this cohort will invest in equities is about as stupid as saying that IT is the current GARP sector of choice. What is the alternative? Corporate bonds may be reaching an adverse inflection point as both foreigners and Primary Dealers begin to pull out - is the slowest money, mutual funds, about to follow? Will the next big move be a derisking exemplified by a shift into Treasury funds and an increase of the Household purchases? Unlikely - we have seen that the savings rate has just dropped to its lowest level since 2008 of 3.1%. Consumers are once again running out of unvisitable cash, and instead are loading up on one-day fad trinkets like Kindles. On the other hand Primary Dealers, which usually are a harbinger of things to come, have increased their capital allocations to bonds dramatically over the past several months. Or will the shift be a derisking one? Also unlikely, due to the primary demographic observation highlighted above, and also with the majority of the population having sat out the bear market rally (intuitively aware that it is based on one-time, non-recurring fiscal and monetary stimuli), which is logical: just the richest decile of the population tends to benefit from blistering bear market rallies. To be sure, Uncle Sam is waiting on the other side with the IRS taxman to take his share. Also, domestic equity mutual funds have seen a substantial $3.5 billion outflow in 2010: why should that suddenly change?
In short - confusion prevails. We anticipate many more such very intelligent debates will take place in the future before we finally see a breakout either over resistance as inflation wins out (and cause massive losses to the Fed's SOMA portfolio at a $1 billion DV01), or below support, as the Rosenberg thesis of deflation finds the greatest number of followers. In either case, an accelerating move to either direction will be widely destabilizing and should finally break the trance that stocks have been in for the past year.
Full 40 minute video after the jump.
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Both Grant and Rosenberg could be partly right. The CPI could go to 4-5% while the 10 year drops to 3%. Something similar happened in FDR's time, with long rates gradually dropping despite net inflation following the New Deal's implementation and despite wartime inflation in the '40s.
In this managed financial system, there is every incentive and now every power for the Govt to scare, force and cajole Treasury buyers to continue to pay high prices--real yields be damned.
Our current economic system is designed to create deflation.
The continious confiscation of future production to finance current public spending through debt leaves it impossible for the system to enter any inflationary state.
Every bank knows that the future taxation needed to finance the current runaway spending is going to kill the midle classes ability to finance any additional debt. Thus, by not lending out money, they increase the value of their current money.
There will be no inflation as long as the current system is in place.
The change will come when governments start defaulting and start depending on printing money to finance expenditures.
Then and only then, when the issuance of money is transfered to the people, will inflation kick inn.
well said
April fools was a couple days ago.
"the dollar's timeline was ending as its ability to produce non price inflationary economic gains came into sight."
The dollar has lost its ability to profitably absorb capital, that is when you get bannana republic style monetary inflation.
The continious confiscation of future production to finance current public spending through debt leaves it impossible for the system to enter any inflationary state.
Only in the classical sense of the word "inflation." I find this type of framing the debate (inflation vs deflation) to be worse than useless. Actually, the continuous confiscation of future production and then consuming it virtually guarantees a currency collapse, as it guarantees insufficient capital is available to be devoted to growth-enhancing productive endeavors. Absent real growth, increasing levels of debt can't be serviced. We tried substituting increasing leverage and lowering interest rates for growth, and got away with it for awhile.
A currency collapse is not inflation; the outcome of a currency collapse is not found anywhere in the inflation/deflation debate.
The change will come when governments start defaulting and start depending on printing money to finance expenditures.
Have you looked at the monetary base lately? Did you forget about QE already? It only ended three days ago. Ben printed $1.6 Trillion and bought some Treasuries and some more MBS. Printing money to buy your own debt is, IMO, the very definition of default.
http://research.stlouisfed.org/fred2/series/BASE
Then and only then, when the issuance of money is transfered to the people, will inflation kick inn.
That's the plan anyway. They are hoping for inflation. That's why it's time to get the Chinese to float the Yuan (up). Theft from Chinese savers by inflation. What the fed wants to avoid is a run for the exits in the Treasury market.
Not to mention a run on the banks...
Only in the classical sense of the word "inflation." I find this type of framing the debate (inflation vs deflation) to be worse than useless. Actually, the continuous confiscation of future production and then consuming it virtually guarantees a currency collapse, as it guarantees insufficient capital is available to be devoted to growth-enhancing productive endeavors. Absent real growth, increasing levels of debt can't be serviced. We tried substituting increasing leverage and lowering interest rates for growth, and got away with it for awhile.
I agree, the difficulty however is not determining the outcome in the long run, currency collapse, to survive one has to foresee the outcome in the short and intermidiate term. You may define this debate as useless if you wish, but I warn you that you are treading on dangerous grounds in doing so.
Have you looked at the monetary base lately? Did you forget about QE already? It only ended three days ago. Ben printed $1.6 Trillion and bought some Treasuries and some more MBS. Printing money to buy your own debt is, IMO, the very definition of default.
Yes, printing money would be definition be a default, however borrowing money from the future is not.
A government is not a person, difference is that a government borrowing from itself is a government borrowing from future taxpaiers and as long as the current creditors have faith in their ability to pay the cycle may continue.
That's the plan anyway. They are hoping for inflation. That's why it's time to get the Chinese to float the Yuan (up). Theft from Chinese savers by inflation. What the fed wants to avoid is a run for the exits in the Treasury market.
Perhaps, but never underestimate their ability to play you for a fool.
There is very little that indicates that the FED wants inflation of any sort, because if they did their behaviour in the past would have been very different.
Anyone who has studdied Ricardian equivalence where one allows for runaway spending knows what happens in the long run, it is a recepie for deflation, no other outcome is possible.
The question is if QE inflates the money supply.
In the short run, yes ofcourse, but to what cost?
Our monetary base is in many ways like a well, you may pump more water out than is replenished and boost the water supply. The people may indeed live in prosperity for a while, their surpluss will increase and the quality of life aswell. However, sooner or later the well runs dry.
What then?
If you are then sitting on a private water deposit and you watch the public well being pumped dry causing water prices to plumit, will you dump your water aswell?
I agree, the difficulty however is not determining the outcome in the long run, currency collapse, to survive one has to foresee the outcome in the short and intermidiate term. You may define this debate as useless if you wish, but I warn you that you are treading on dangerous grounds in doing so.
That is exactly why I am not "all-in". I have seen this inflation/deflation debate, and participated in it enough times to know that, in the end, we wind up quibbling about definitions. This framing of the debate also completely avoids ever having to discuss the end game: a persistent deflation destroys a sovereign's ability to service debt, resulting in a currency collapse or a deliberately forced currency devaluation.
...never underestimate their ability to play you for a fool.
Quite some time ago, I came to terms with the fact that the government lies to me constantly. When their lies are no longer effective, they resort to force. I am no one's fool.
There is very little that indicates that the FED wants inflation of any sort, because if they did their behaviour in the past would have been very different.
This is a very surprising statement. The Fed is known to target money supply growth of about 3% per year, though they might not couch it in those terms anymore. Their past behaviour is a perfect indicator of their intentions: constant theft-by-inflation, gradual enough that the average person doesn't notice.
If you are then sitting on a private water deposit and you watch the public well being pumped dry causing water prices to plumit, will you dump your water as well?
As a matter of fact, no I won't, if I have diverse indicators that the public well is about to run dry, and especially if I am not on the "friends and family list" of the man with his finger on the pump's on/off switch. Again, this is why I am not "all-in".
You seem to be a reasonable man and I value your feedback.
Yet I urge you to reconsider the dept of the rabbit hole.
If you have come to terms with the fact that the government constantly lies to you, then why belive the publicly stated target for the FEDs money supply?
The FED has indeed run the well dry and at the current time we are feeding on the storage from the past.
However, our storage is diminishing faster than the water-supply is replenishing. Soon we will face famine, and the value of everything will plummet.
Who do you think will buy it all for pennies at the dollar?
This is theft-by-deflation, and it will come sudden enough for no one to be prepared.
In the final analysis, from the central bankers' perspective, inflation is the lesser of two evils. Persistent deflation collapses tax revenues, leading to sovereign default, thus proving that governments and central banks are incompetent, corrupt, stupid. Should this point be proven, there would arise a resounding call for less government (like now, except even more resounding). They will avoid this at all costs, printing, and subsequently risking a currency collapse in the process. This leads to collapse of the denominating soveriegn (fiat) currency. Of course, they will suspend civil liberties first, on some pretext or manufactured event. This is the reason I tell the Tea Partiers "the government will do our recruiting for us." Isn't it obvious?
Should all paper fiat currencies become suspect, anyone having real goods to trade will want something real in trade. Wealth will be accumulated in real things. Portable real things = gold. Simple and honest money. Imagine!
Rosie says everyone is bullish on stocks right now. Not true, the little guys are not even buying.
Going short trashurys is the long term contrarian play.
Short treasuries = long stocks
both stocks and treasuries can decline in price and historically have in the second part of both inflationary and deflationary cycles (e.g. 1965-1981 and 1929-1932 respectively). in these two examples, stocks lost a real 80%+. bonds took a hit in the '30's, a rise in yields of about 30%, dwarfed by our current 80%+ off the slot canyon of xmas '08. tsys went on to deliver a positive real return over the remainder of the '30's i think (but am not sure). in the latter period it was the apocalyptic end to the horrific bond wealth dissolver that started back around 1948. i don't know the real return to treasuries over either period (anyone?) but yields went from near 3% to 16% during a period of considerable and generally rising inflation. i would guess possibly a -90% (again, anyone know?).
Thanks, am not aware of info that far back but interesting to point out.
In today's markets, of course its very possible (and almost common!) to have a day where USTs, SPX, DXY, GLD and insert another asset class here - have all gone up in the same day.
Just shows previous correlations dont mean squat in today's "ultra-efficient" capital markets.
Going short trashurys is the long term contrarian play.
Only if contrarian means squeezing on board the most crowded trade around.
“Five-star awesome” is the correct rating for this wrap up, Tyler. Thanks!
Where there’s talk about low volume in the equities market, it seems contradictory for Rosie to say "everyone is bullish on stocks right now," when at the same time a major slice of equities are being traded by the financial industry. That doesn’t translate to everybody’s back in the stock market. Nor is it a sound statement to say everybody’s in a bullish mood while many market observers as late as last week were expecting another leg down and a correction in the markets, while mystified as to why the indexes rise on bad news. To say everyone is bullish at this point sounds like broker talk to me.
The main subject, IMO, is what is going to happen to the economy. Pretending there is a bull market isn’t going to help the economy if people don’t have money to spend. My question, why does the middle class have price inflation, while multi-nationals and many government economists apparently think price inflation is low?
Monetary deflation doesn’t describe the everyday price inflation Americans are facing in gasoline…heating oil…pellets…natural gas…water…sewage…street cleanup…garbage pick up…city services…parking tickets…speeding tickets…building permits…marriage licenses…electricity…on and on.
It’s difficult to argue deflation while prices homeowners and others pay are going up and up…taxes…college tuition…delivery charges…postal fees…airline baggage charges… appointment shave and a haircut at 200 bits ($50)…dog food…people food and cleaning supplies per ounce…liquor…eating out…medicine…
Any business that has a monopoly is increasing prices tremendously., i.e., government services…the health/hospital/doctor/pharma/insurance industry…the gas/oil/utilities industry…the banking/credit industry… Government, itself a monopoly, helps create monopolies that enable privileged lobbyists freedom of extortion to extract the populace’s lifeblood by an undue exercise of power, overcharge, and force.
And now along comes a monopoly that would make John D. Rockefeller turn pale in envy—Obamacare. Couple this with the Fed money-monopoly built on dollar debasement— and as Yogi Berra would say, “The future ain’t what it used to be!”
Another appropriate oximoronic Yogi Berra quote on the comment "everyone is bulish on stocks right now" is:
"No one goes to that restaurant anymore. it's too busy."
that list above of protected monopolies/oligopolies reminds me of france pre-1789.
does Rosie not realize that the reason american households are only at 6% fixed income is because there is no income in trashurys ?
"Agree or disagree, the fact that two of the smartest economists in the world can present very persuasive cases for either side indicates precisely the conundrum we are in..."
There is nothing to lose and everything to gain from listening when two great minds speak their peace. Both call it as they see it and that's all we can ask from anyone. But the signature line was uttered by Jim Grant when he said "You'll find more bargains in your hotel mini bar than you will on the Treasury yield curve."
Ouch! That $14.95 three ounce jar of cashews I consumed at 3 in the morning last week is still giving me heartburn.
edit: The video can also be found on Jim Grant's web site.
http://www.grantspub.com/about/jim.cfm
Agree or disagree, the fact that two of the smartest economists in the world can present very persuasive cases for either side indicates precisely the conundrum we are in
The conundrum is deliberate; it is the signature and distinct feature of Fed policy, and will continue to be so as long as it can be maintained. Once policy becomes clear, everyone will place their bets on the appropriate square, and the bets will be self-fulfilling. Choose to be fooled, or not.
You would have to be a fool not to be fooled.
Problem is they are paid to kill us, and they are paid by the hour.
Denial is perhaps our only option.
Well said, SW.
On FED Conundrums:
Here is what the FED will say on women and men. Check the commas.
"Woman, without her, man is nothing."
"Woman, without her man, is nothing."
Take sides please.
The USA is bankrupt several times over, therefore, T-bonds represent a senior claim on the remaining residual 'equity' of the United States in its overall capital structure (once the citizens' equity has been wiped out, of course!).
We trade equities all the time on the stock market, and there is a very well known and recognized framework for valuing equities; if an firm credibly convinces the market that its earnings are growing, then the price of the equity goes up. If not, then the price goes down.
US treasury bonds are like a tech stock that has spent the past 30 years growing exponentially in price (including re-invested dividends), but with losses that continue to get worse with each passing year.
Everyone in the world who sees such characteristics in a stock would short it. Except when it comes to these magical pieces of paper called US treasuries, in which case, they keep buying more, so as to enable an entrenched and proven-to-be-incompetent management group to continue.
Bizarre! To accept that bond prices will continue to rise, is to believe that the US government can continue down its extremely destructive path of the past 30 years without punishment. It is to accept that monumentally wasteful programs like Medicare, Social Security, and illegal immigration can continue indefinitely. It will fall apart.
The USA is not "bankrupt several times over". Have you ever wondered what the value of all Federal property is? All military bases, embassies, Federal courthouses, post offices, interstate highways, tunnels, bridges, national parks, and other massive holdings of Federal owned land? By the way inflation helps these assets.
Our dollars are always worth the ability to pay taxes with them and that value should increase. We have the ability to slash military spending and raise the recipient age of social security by five years. Immigration is deflationary. We can legalize all "victimless" crimes.
Our Federal budget has never seperated out a capital account. We have been investing in real assets as a country for centuries and accounting for it as an expense. I would say we have a lot to work with if our back is to the wall.
There you go, problem solved. Sale-leaseback on Jefferson Memorial, Pentagon, etc? Or just outright sales of missile silos and the Space Station?
First the income statement goes, then the balance sheet. After that, you're faced with reality.
3-D living in the USA: Debt, Deficit & Demographics. (kudos to Jim Rickards)
Reductio ad absurdum is a very weak refutation. Asset sales are a rational way to shrink government. The point is our backs are far from against the wall. Dire alarmism only restates the problem. Do you have any constructive input?
Here is some "constructive input":
Prepare for the worst, hope (there's that word again) for something not as bad.
When I say prepare, I mean really prepare like Mormans on meth. Our elected officials in D.C. are worried about the military "capsizing Guam", nuff said.
Who are the brain-deads that are junking all these posts?
Please just fuck off.
It is easy to hate the Government. I am a staunch Libertarian myself. But hate can be blinding and ignorant. I have long believed the endgame was hyperinflation. When I graduated from college nearly thirty years ago, I bought some gold coins. They are my worst performing investment so far. I should have bought thirty year Treasuries. The anti- bond, anti-dollar trade remains crowded. I perfectly understand the logic of it. But rather than cheerlead an investment thesis, it should be questioned everyday. Why is it not working? This is where I am coming from. I could more easily argue the other side of the arguement. But would that make me money? Internet investment chat rooms are filled with book talkers. It is this site that has tried to rise above the noise. Those who wish to argue with me should heed the advice of the Yeah Yeah Yeahs, and "get your leather on". I came here to learn something. The people who flagged my posts did not.
Haven't noticed you here before but I appreciate your level headedness. Here's hoping you post more.
Anyone wedded to a particular view risks being just plain wrong. While I am bearish on just about everything, including humanity, I try to open my eyes and see what's going on day to day. Maybe there's hope. Maybe there is hope only short term. Maybe it all blows up tomorrow. The folks who did best over the last few years were the ones who anticipated the debt explosion AND anticipated the government's reaction to it. Many of them just held their noses and bought what they know is crap (BAC, WFC, etc.), but expected the government to support those basket cases. THEY were right.
I suspect many of these winners still have a negative long term view, but they know early=wrong.
If you want to make money, be a quant. You'll make lots of money (until you don't).
I didn't come here to learn how to 'make money'. That's the most shortsighted view of the world to take, and in this political-economic climate, playing the market 1) only contributes to the problem, and 2) is inherently fragile and susceptible to black swans.
Instead, I came here to watch and learn, as the system gradually deteriorates and will eventually implode. I want to be here when it happens, so that I can tell all my sleeping friends what actually did happen. I'll be telling my future grandchildren about these months and years when the people placed too much trust in their government and in a financial cartel they knew nothing about; and if sound currency is never implemented because of the coming collapse, well I guess I'll be crazy ole grampa yammering about how much better things coulda been 'if only'.
They'll have to set up a special old-folks home for us.
good point. our wider notion of 'money' and what is of 'value' is highly flawed to say the least. it cannot function in an evolved, future society, if we ever get there...
All land parcels owned by the federal goverment have been confiscated from the States. All real estate owned by the feds belong to the people. The goverment has no money.
If you believe that they do, it is either because it is printed or taxed.
The only time you can work with these assets is if you abolish the federal goverment and redistribute the proceeds of the sale to the people. Nice dream.
One thing the US has that nobody else has is a bunch of aircraft carrier groups that probably cost a couple of trillion each, times however many there are. I don't think any other country has that kind of "reach out and touch somebody no matter where they're hiding" asset. Not that that can help repay a rather large debt, but so many world governments are running up such large debt to GDP numbers at least as big as the US in terms of ability to repay. And if there never was any intention to repay, as it appears since most governments seem to be worried about sustaining their ability to borrow at low rates and nary a whisper from any of them about paying down debt, well, a few carrier groups could come in handy. When that really bad day comes when some governments have to go collect from someone (focus blame else where) before they get lynched, I suspect the gentlemen with the carrier groups and bigassed nuke arsenal get yapped at but someone else gets shot at. At the very least you've gotta admit its government debt better spent than Greece, Spain, Italy,etc (those PISGISM acronym countries mentioned in another thread).
May not hold much water -- any nuclear war outbreak is going to mean end for everyone even if our area is not directly targeted (nuclear winter, etc.). So, I wouldn't have wet dreams about this line of thought...
your argument is a bit all over the place but i like its points generally (and it is certainly not junk). some people (and you know who you are) cannot read ideas with which they disagree and, apparently, form cogent replies. this is not fox news or even hullabaloo.
The USA is not "bankrupt several times over".
We've defaulted twice in the last hundred years. 1933, 1971. We're about to do it again.
Bonds may not be a great investment, but that does not mean yields will rise. The size and duration of the national debt means that the price of bonds will be kept below fair value, either through QE, or through the PDs. The Fed will have the excuse needed to keep rates too low for too long, especially as the owner equivalent rent will help suppress CPI. The conventional argument is this will be positive for equities, as this inflation will be good for asset values. I'm just not sure this will turn out to be true. If consumption does not pick up and margins come under pressure from rising input price pressures, it will be hard to increase payrolls and returns on capital will not rise, in real terms. This does not mean equity prices will fall, they will just be worse value.
The greatest danger in this is artificially suppressing yields on Treasuries will cause a loss of faith in the monetary system, therefore deterring foreign capital.
The comparison with Japan is misleading, there is neither the trade surplus nor the domestic savings rate that has held the Japanese economy together for the past 20 years.
Grant's concerns are well founded
Rosenberg makes some interesting arguments, but I can't get past...
With the above in mind, I agree with the commentator that the most likely outcome for this will be restructuring, first at the state and local level, then at the Federal level. In this scenario, the holders of UST (and munis) will get shafted... so I guess Grant "wins," if you can call it that.
The global market for debt is not finite. Treasury debt does not just crowd out other debt. It crowds out all forms of equity and savings and consumption. Relative to total global wealth Treasury debt remains small. As for the dollar, you tell me what other currency is anywhere near military hegemony, domestic rule of law, accounting standards and portion of global GDP?
Inflation is different for everybody and is a statistical conundrum. Relative to the incremental Treasury bond investor what is their inflation?
Treasury supply and demand can only be judged by present price. Auctions are a gnat on a log.
Aging populations are risk averse. What amount of wealth is presently invested in global equities and what portion will be moved when?
Maybe the Fed's balance sheet needs to grow to $10 Trillion in order to replace the velocity adjusted loss of demand caused by the implosion of the shadow banking system.
Is that you, Liesman? I can't believe you spout this trash and go unjunked. Maybe it is because you package it so well. I should tie such a ribbon around my weeks refuse before taking it to the curb. Domestic rule of law? Accounting standards? Get thee behind me...
I asked a question-did you answer it? Do the Chinese or the Russians honor property rights or contract law? Would you sell a swap to the Chinese? Would you buy an oil company in Russia? Do you think you can open a restaurant in Mumbai or Florence without paying the "man"? Comparing our rule of law to what it should be or used to be is not relevant to the point argued by Grant. Grant is selling newsletters. I am selling intellectual exercise. What are you buying?
True about the capital security, 10 (?) aircraft carriers, taxing power over all domiciled assets and other "fundamental" arguments that make treasuries top-tier credit.
But I am turning to the view that it is not about a "flight to quality" at all. It is about a flight to liquidity.
There is no other place in the world you can plop literally billions of dollars down and get it out with virtually no transactions costs.
The achilles heel to this may be the auctions. They may not be gnats. They may be tsetse flies. Viral problems are nature's way of cleaning up excess.
Not saying the US back is against the wall. Just saying everything must ultimately live within its means.
http://www.transparency.org/policy_research/surveys_indices/cpi/2009/cpi...
Thanks for that. Great info.
Readers fail to grasp that you are speaking in relative terms. While the US has its share of problems with excess debt, lax accounting standards, cronyism, etc., I, too, am hardpressed to find any other country that is cleaner AND has the land, military, food-growing capacity, etc. In this race to the bottom, it may well come down to the one-eyed man in the land of the blind. Of course, at the rate with which this and the last Administration are pushing America into the cesspool, a new king could emerge, albeit not quite yet. It sure isn't going to be China, nor Japan, nor Russia, Brazil, India or the EU.
The option you describe would be much more possible if the U.S. was not maintaining a global empire, and were not issuing the world's reserve currency, and had not offshored so much of its productive capacity, and were not in the complete thrall of the Wall Street / international banksters.
Although fraught with problems as a set of choices; it would not be the worst outcome imaginable if we wind up back as the leader of the Pan American trading block, going back to our isolationist roots for three decades, screwing Eurasia and leaving it to its resource, water and oil wars.
That allows us to close the borders, more tightly screen all traffic and epidemics coming in and re employ more of our industries...leaving a growing Latin America to buy more.
We suddenly find that Chavez insulted three American missionaries when he was in high school and make Venezuela the 51 state while post Castro Cuba "begs" us to drill on their oil shelf.
Preposterous? Yes. But when the vise gets really tight as it surely may?
Timmy,
Are you by chance co-located with GS in their data center, doing their prop trades? Perhaps working with one of their strategically placed former staffers in Washington? Maybe working with a senator or congressman whose vote has been bought? Just trying to understand how you defined a level playing field...
The rule of law is being broken down and corrupted on a daily basis in this country, and unless that is fixed, your theory is flawed. And while I agree with that our system is less corrupt than many others, it is not headed in the right direction.
We still have a fighting chance in this country. The Nov. elections could be interesting. We all must keep up the anti-bankster movement. Lobbyists are powerful, but public sentiment can still win out. People have never before understood the complicity of the central bank and Treasury in financial corporate welfare as they do now. The bankster BS just doesn't play on main street anymore. Most other places, they gave up hope for a fair shake long ago.
There are still little victories like the Scott Brown election or Bloomberg winning their FOIA suit against the Fed. Last week's comments by Hoenig were amazing. We are a stubbornly independent people and banksters underestimate us at their own peril.
thanks for the pep talk. still and all, even if the dollar remains the dominant currency, it (and all the others) can lose value relative to gold (and other, perhaps less easily traded) things.
regarding military hegemony: that seems to cut both ways. we are spending way too much on it and using it foolishly. it may be a net negative as currently configured (yes that can be changed but will it?).
regarding risk aversion as populations age: zirp can and does force such people out the yield curve and, as you know, long duration tsys are definitey risk assets in the short term. and some are probably buying high yield as well. especially for c.d. oriented people, seeing the first brokerage statement after buying the long bond but before an increase in yields of say 4% to 4.5% can be very painful and disorienting.
have to question one of the implicit assumptions going the rounds, "that baby boomers will increasingly shun equities in favor of safer Govt debt instruments as they appraoch retirement". As a member of that BB category, I can say that personally is not the case. Risk appetite remains high and frankly whether I like it or not, I have to keep that profile in order to attain "retirement" financial goals. I think it only applies to the VERY SMALL percentage who are wealthy enough to fund all their retirement needs regardless, and therefore to whom capital preservation is the primary goal. The rest of us will have to nvest quite aggressively and redefine the whole nature of "retirement"
So how on earth can anyone invest rationally with this backdrop.
Ummm, invest in firms that actually make things, perhaps? The US government could collapse next week, but the earth will still need oil, food, and a whole bunch of other stuff.
The sooner people refuse to buy bonds (esp. T-bonds), bank equities, and savings accounts, the sooner that the real and productive economy can begin to recover.
If you want to play the same game that Goldman Sachs played, I would also suggest that you short any instruments issued by the US treasury.
Find someone locally who wants to start a business you understand and put some skin in the game <wink>.
Yes. And use barter.
True. When the Reichsbank made a mess of the mark in 1923, barter and prostitution put bread on the German table.
I know my nomination for Pulitzer Prize.
ZH
Okay people it doesn't take a rocket surgeon to see that Treasury demand can be "managed" by simply scaring everyone into the perceived safety of AAA US government debt; selectively downgrading the rest of the world's soveriegn ratings in the face of an engineered equity and commodity collapse would be good for starters.
The only reason I'm bullish on UST's is this fact alone. Rising interest rates would be the catalyst for such a scenario. Such a period we are entering at precisely this moment.
The last hurrah of the USD and USG will be magnificent to see as the rats bail ship and all risk assets for "safety" while those of us who have been patiently waiting begin hoarding the real safe havens in expectations of the soon to follow hyperinflation.
Sometimes you have to be a criminal to understand how criminals think. This is a simple game of headfakes preceeded by smaller headfakes and the endgame has already been written by history.
Good luck trading.
I thought Rosenberg's worst argument was that retail investors are stampeding into fixed income, (and I am a fan). In my experience poor mom & pop invariably get it wrong. I'm more in the buy physical gold for the disaster scenario, and buy inflationary equity plays with global diversification. I wish it was easier to open foreign brokerage accounts. That doesn't even seem easy in Canada. If anyone has guidance on that I would appreciate it.
Not sure if this is what you're looking for, but there are some US brokerages that specialize in foreign investment, such as Peter Schiff's Euro Pacific.
Video not available anymore?
I guess we either crashed the site or someone doesn't want us to see it. I got past the "watch it Ben" part and then it shut down.
Pissed off I tell ya.
In a way they have reached concensus. That the mechanics of debt have changed so much in the US, especially sovereign, that the opinions presented extrapolate beyong any historical experience.
Put simply, the system is so broken, there are no experts.
The world of bonds, how comforting. I can still here my grandpappy extol their manly virtues while bouncing me on his knee. The words ring down through the ages as if referencing some old railroad bonds of Union Pacific during the days of steam.
This expert historical experience applies to a system of old. Unfortuantely, we are back to the roots of the question; What is bond investing? How do you identify risk?
The heart of bond investing is stability and trust. Without these we no longer create investors.
In today's environmnet if one is forced to re-evaluate a decision to invest, the reasons to buy debt can become as polarized as a light switch. Perhaps is the fact that with bonds you are not very nimble, in relation to volitility and crisis. Especially a dicontinuity from a norm, like monitoring a spread to sudden sovereign default.
For a sovereign nation, default occurs on its bonds well before it is declared.
Mark Beck
Bond pices are rigged, just like equities. How the hell is BB gonna unload that long dated crap on his books if LT rates go much higher?
Shotgun weddings. Get the money to the union pensions. Unions mobsters eerrrrr leaders take a big cut and then buy the crap until the house of cards fall?
Or we could revolt. Hang everyone involved in the racket. Kiss America goodbye. Form New America with original Constitution and cancel old debts. Start anew and deal with the high rates that come with it. But at least we will have a new system that the world can envy again.
YEAH RIGHT! Crack pipe anyone.
I bet, that may be closer than you think.
Think "theory of chaos"
The site says youtube removed it because it was too long. I only got to the 27 minute mark before it went down. Very disappointing cause it wuz good!
MsCreant,
The video can be found on Jim Grant's web site.
http://www.grantspub.com/about/jim.cfm
[deleted]
Nice vid. Good points on both sides.
Jim doesn't have the gift of gab like Rosie does.
The facts are the facts but when trying to get your message across, a better delivery always has a better shot of sticking. The gift of public speaking is powerful. Obama being the prime example.
DAMN!!!
Vid taken down.
Mirrored anywhere else?
The took the video down.
The video was taken down because it exceeded 10 minutes.
The way around this is to break it up into secitons not exceeding
10 minutes and post that.
The real measure is the supply chain. As it deteriorates, interest rates are bound to rise. I don't see how you can call either an economist, since neither knows a thing about the supply chain.
For example, we are seeing a new round of buyout fever, but that's typical in liquidation: it's simply cartelization. However, it is succeeded by induced supply chain deterioration, leading to the next phase of liquidation: industrial boards.
I'm not sure in this scenario, we will see much real difference in what happens to bonds. Remember, liquidation is not about money, it's not even about wealth. It's about POWER.
Follow power instead of bonds. Bonds are simply one liquidationist tool. They are manipulated along with other liquidationist tools.
What neither Grant nor Rosenberg (nor ZH), do is to put bonds in the context of liquidation.
Big mistake.
One thing is sure: liquidation is instituted when economic activity has declined to a certain point, and is perceived to continue to decline.
Then, whether it is "declining" or "growing" becomes a mute point, because power removes government from the society.
We don't really know much at all about bonds (which are government or government proxies) in the context of liquidationist removal of government. Much less do we know liquidationist removal of government in the context of other liquidationist gambits.
Both Rosenberg and Grant are much to glib about many too many issues, largely because they are technicians. For example, has either read a key text: Sraffa's Economic Journal article in 1922 on Mussolini and the banking system? Of course not. For that matter, how many ZH folks have read it?
And yet it is a key document in understanding liquidation. Read it.
In a way we have reached liquidation, but its deflationary (spiral) tendancies have been negated through stimulus of many types, ARRA, FED, TARP. This offset has also helped defer debt recognition from a banking systemic standpoint (Underperforming realestate debt instruments transfered to the FED). Although most would agree it is a temporary fix (TARP and QE ending at somepoint), due to the overwhelming writedowns for both secured and unsecured debt.
Commentors on ZH have talked about the power aspect in US sovereign debt. But, it never is seen as a bargining stance for China (for example), it is always about currency rebalance due to historical massive US trade deficits. But, perhaps it is now time for China to cash out? or should I say liquidate.
I think the power grab, from a transfer of debt standpoint, has already peaked. Conversion from this accumulated wealth into hard assets is well underway.
Many would say the separation of government from the people has already occured. But, uncontrolled greed, in the end, will not aspire to POWER. The real holders of power would try and repair the economy. Because it will take far more time to rebuild it, then to bleed it. What happens when the leech is bigger than the fish? The fish dies and then the leech.
Mark Beck
I think the biggest problem for the gov and hawking the debt right now is the big bad bear market in honesty/transparency. For example unadjusted unemployment #s that match up with what's being paid out, maybe bring back printing M-3 money supply again, and who does own how much of the federal reserve? Would kind of be a lot more honest way to deny conflict of interest questions. Naive I know, but this crap of putting taxes on money leaving the country in the middle of unrelated bills and transferring Fanny and Freddies full liability to the public on christmas eve and whatever else is buried for now but waiting to bite someone in the ass. I mean these guys want to sell and roll-over trillions in debt and they are not even good liars (Oh, I recused myself from that situation Jack, and those other things I can't remember, and the dog ate my homework). I wouldn't leave those guys unacompanied in my living room for a minute let alone buy bonds from them. But like you say where else can you park billions? Nowhere. What happens when that is no longer the case? At least if there were more forthcomingness (is that a word?), maybe it wouldn't be the automatic transfer of funds that it would be now. What? "YOU CAN'T HANDLE THE TRUTH!!!" Why not? To me the problem with treasury debt is what happens if there is another real-estate type melt down and China says screw this and bails, the equities market tanks which would probably be good for the bond market, but what happens with the Freddie/Fannie gaurantees and all the MBS on the feds book. My brain is to small to figure it out, but watching Rosie and Mr. Grant disagree about its investment worthiness and its complexities never mind tossing in a dark grey swann, make me wonder how likely Bernanke and Gietner will be able to avoid iceburgs. Rosies a smart guy but I wouldn't touch treasuries with free money.
As mentioned above, the video is available here:
http://www.grantspub.com/about/jim.cfm
Ummm..I think Rosie might want to check the yield on the 10 year treasury bond as it seems to have risen a bit from this taped converstation..
10-Year 3.625 02/15/2020 97-12+ / 3.94 -0-19½ / .076 04/02I acknowledge up front that I probably know the least about what was on the video than everybody else here.
That written, it was painful to listen to the moderator fumble and stumble through the intro, and it was almost as painful to listen to the guy on the left. To say his humor was "dry" understates it tremendously. His humor was entirely devoid of water in any phase. From a newb perspective, his intended message was very difficult to receive through the humanless delivery.
I thought they were all funny, in their way. True, it may not have been for the reasons they wanted me to laugh. The moderator was split, the smack down thing was pressed way too hard in the performance, but that became funny as he tried for the next and the next joke to work. The joke became the joke for me. And the moderator REALLY WANTS TO BE FUNNY. I bet he does not get to do that too often. He was, brace yourself, off his leash! And feeling kinda goofy about it, guilty, and having fun. I'm willing to give it up for his performance and laugh!! Jim Grant is a scream, his artifice is that he does not appeal to artifice. And there was just a whole lotta Rosey!
I am not a newb, but I do have beginner's mind. Always. Very funny stuff if you put yourself in their place.
Wish I coulda seen it all...
edit: link works!!
Just wonderful. Thank you very much zerohedge.
NYtimes, WaPO, bloomberg (just to mention the "serious" ones) RIP . Who can pay even a dollar to be fed the trash they produce?
Bonds.... Schmonds , Markets.... schmarkets . Legalize Marijuana . Tax problem solved , great investment opportunities, J6P can become even more of a dullard then being mezmorized by American Idol
What about the medical cost to society of lung cancer?
On top of all the other health and public safety hazards, there is the long-term issue of "marijuana psychosis".
Legalized marijuana would be the American Trial Lawyers Association's wettest wet dream come true.
You people are all a bunch of morons. Tim Geithner said on Bloomberg News we are entering a sustainable recovery so quit all the end of days talk.
On a serious note, I believe, as others have stated, that we are still in a deflationary mode that has been masked by massive government spending and the transfer of public for private debt. This action has taken place throughout the world. For Grant to say the US will default is ridiculous unless he acknowledges that all countries are closer to default at this point. If all countries are closer to default then it begs which country could survive a default and/or which country is in a better position to survive such an action by others. Some would say it's a China or Brazil or a Germany given their currency surpluses or natural resource reserves or manufacturing capabilities. I say to those people you are missing the 40 ton elephant in the room - the US military.
You'll continue to see played out over the course of the next few decades in the US the bust/QE/"phony recovery" game.
This will play out until it becomes too much for China, and the Arab states, and the other buyers of US debt to deal with and you end up with a war. You may think that point has been reached but the reality is until there is another country or group of countries that can militarily match the US and it's likely allies (Britain, Western Europe) they'll still be eating sh*t(ie US treasuries) and smiling. The pound sterling was the world's reserve currency for such a long period because of the British Military.
Complete and utter nonsense.
We don't have "a couple of decades" anymore. China has stopped buying Treasuries, they got tired of getting paid back with their own money. All their hoping for is a smooth journey to the exit. Even the Arabs who are totally captured, politically and militarily, are beginning to figure it out.
This monetary system has come to an end, compounded interest will always do that to you, and no military might can change any of that. A couple of decades my ass.
IMO this debate is about confidence in the fiat system. If that confidence is questioned Grant will be right. If that confidence is not questioned then Rosenberg is right.
I agree with those who say, both Grant and Rosie are right.
This is why markets are for trading only now, not investing. There are plenty of traders who would love to short stocks, but they know they'll get killed. The same can be said of almost any market that's getting a bid now. ZH, and even CNBS talk about the problem of all asset classes moving higher on many days.
One day Grant will be right and that will be a dark day. On other days Rosie will be right and people can trade his scenario and make money. Since traditional retail investors are still not active and institutions are following conservative models the traders will continue to push the usual suspects around till the trade collapses.
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