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Russell Napier On When To Expect The Treasury Bubble Crash
A week ago at the CFA Institute's 2010 Annual Dinner, Baupost's Seth Klarman stole the spotlight by announcing to everyone that he was "more worried about the world than ever" while making it clear that he was on the same Jim Grant and Julian Robertson "Treasury put" bandwagon. Yet another speaker present at the event, who undeservedly received much less attention, was CLSA'a Russell Napier, who has long been warning about precisely the thing that all asset managers are realizing rather belatedly, that Treasuries are a very "fundamental asset bubble." The only relevant questions, which Napier has previously discussed extensively, are "when do treasuries crash" and "what do you do" when that happens. The attached presentation provides some color on both.
Russell Napier, whose Anatomy of the Bear (available for a pdf-special $3.95 steal on DocStoc) is one of the better market analysis books available, had one quite insightful observation. As the CFA noted in its press release on the matter, "One point that Mr. Napier made toward the end of his presentation was that the difference between current borrowing and previous peaks in government debt is that previous surges in the debt load were linked with the financing of conflict. As he put it, the current borrowing is to keep people alive rather than to kill. The implication for the global economy of this key difference is that social programs to subsidize a certain quality of life are not a profit-making endeavor in the same way as traditional twentieth century conflicts." We wish we were as sanguine about this conclusion as Mr. Napier. With a rapidly deteriorating geopolitical situation in both the Middle and Far East, perhaps the massive entitlement spending has been nothing short of a diversion from the the traditionally massive "defense" spending. After all, there have been over $257 billion in defense vendor payments by the US Treasury since October, an outlay smaller only than Social Security Outlays and Medicare.
And since Napier's perspective has been largely ignored by the Mainstream media, we provide a link to his most recent comprehensive presentation on the topic of the Treasury bubble from earlier this year. In it, Napier takes (apriori) on a point made last week by Albert Edwards, an states that "balance of payments is key, not current account" pointing out that bigger CA deficits do not necessarily mean falling reserves as can be seen in the Thailand case, leading him to conclude that "Asian reserves will grow as capital flows reverse." Furthermore, back in February, Napier predicted perfectly the most recent TIC data which showed a record foreign capital flow into US securities (whether this was predicated by the capital flight ouf of Europe is largely irrelevant). Napier also questions the role of US commercial banks, and is confident they can plug a hole of up to $1 trillion in Treasury demand, saying "bank purchases of government debt can reflate America" in one of the most vicious Catch 22s, since the Fed funds banks at the discount window with money used to subsequently purchase safe assets, thereby monetizing debt with one small step of separation, a topic long discussed by Zero Hedge. Another key point is the recently notable observation on the plunging M3 via Ambrose Evans-Pritchard - as Napier shows this is certainly not the first time that broad money supply has contracted and led to lower inflation. The real question is what happens to credit demand in a disinflationary phase, all else equal, which however thanks to Europe, will not be the case for a long time.
Lastly, the Asian expert analyzes the role of governments, and specifically those of Asia and China as a preamble to the great Treasury bubble pop:
- China’s return to gradual appreciation of the renminbi does not stop funds pouring into Treasuries
- A one-off revaluation was not spurred by 8% inflation in China in 2008 so it will not happen now
- Capital controls are coming in Asia
- Capital controls will be insufficient and credit controls will follow
- Such measures shorten the duration of the great distortion but still current due to CA surpluses
While Napier does not provide the ever-elusive answer on when to expect the bubble pop, his insights give some more variables to juggle as we all await the bursting of the greatest bubble in capital markets history.
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Treasury bubble starts to burst during the next Trillion of "stimulus."
CFA>MBA
MBA <= 0
DDS > MBA (in terms of positive expected value of return on investment)
* Gives new meaning to the idea of 'drill baby drill'...
Give free money to the banks so they can buy interest bearing treasuries..so the people gaming the system for free food and government handouts can avoid Darwinism?? But these people are having children and the growth is exponential.
Bottomline: NATO 7.62X51mm or X39mm (AK-47). Ammo: a great investment.
;-) Lead is a great hedge too.........
Oh, no. Not more children. Someone has to stop this.
produce what you can support... that's the point we're trying to make.
oh, that problem will take care of itself.
The fedres and fedgub are doomed to borrow, lend, spend, forever. They thought they could trick people who have money into spending it. The problem with that is that the only people with money are those who are in the know and insured by the fed wink, wink. There will be no recovery ever, no margin call ever, no rate rise ever.
a blast from teh past:
by buzzsaw99 on Sat, 10/03/2009 - 20:18#87938
When I bought my first home in New York in the early eighties, I got nailed with a 17% interest rate on my mortgage. We may revisit those levels...
LULZ!! LOLZ!! LMAO!!
When, in the next millenium? HAHAHAHAHAHAHA!! :gasp: HAHAHAHAHAHAHA!!
by ZerOhead on Sat, 10/03/2009 - 21:03#87960
Remember this post Buzzy... and keep your eye on the 30 years.
reply
flag as junk (0)
by buzzsaw99 on Sat, 10/03/2009 - 21:07#87965
I will do both if you will remember that I wrote this:
LULZ!! LOLZ!! LMAO!!
When, in the next millenium? HAHAHAHAHAHAHA!! :gasp: HAHAHAHAHAHAHA!!
How many years have the pundits been calling for a usa t-bond crash? How much more money are FNM & FRE prepared to fluch down the crapper? ZimBen's portfolio has a half life of three to five years but will be toxic for a million.
Never make the mistake of concluding something won't happen because it doesn't happen when you think it will. That's the logic people use when they stop buying earthquake insurance because the big one is a decade overdue.
As Jim Grant says, interest rates go in long 30 year cycles. 2010-1981=29
Bond crash imminent, BUY NOW!! LOLOLOLOLOL!!!
Updated DOW charts :
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Hey, Fuck-Face---why don't you eat a bullet and put us all out of our misery? Thanks in advance.
No Treasury melt as hollowed out banks use the little capital they have to ride the steep curve, and play in the ultra-leveraged off balance sheet playground of derivatives to pay themselves for "risk taking" - forget lending, velocity and inflation themes.
Have a nice day....
How is this predicting a crash in Treasuries? Seems like this article is bullish on Treasuries? Can someone clarify this for me?
From what I understand:
1. The Fed has printed money to prevent deflation.
2. That money is going to commercial banks who are buying treasuries to earn the spread.
3. As a result of printing money that counters the 12% loss in value from their assets, overall change in the money supply is marginal implying a low inflation rate.
4. The banks are putting that money to treasuries so that is bullish on treasuries. Also, since the money is going to "quality" assets, the banks capital ratios improve and lending is done by a private sector who does their due diligence because they aren't guaranteed by tax payer money. Therefore only solid business proposals get money.
5. Since banks have adequate capital and companies can operate under low to moderate inflation, America once again starts growing.
What am I missing here? Why is this article talking about "the treasury bubble crash"?
Can someone please clarify this for me?
You answered it yourself without realizing it.
The more bonds the Fed buys the less fundamentally attractive bonds become.
Wow thanks. That's a catch 22 for ya!
The dollar bills in our wallets are IOUs from the Fed which are backed by the T-bills that the Fed holds--meaning that the government owes the Fed money. All the government is doing is issuing more and more IOUs to cover the endless growth of deficits and the Fed continues to buy the debt and issue more and more dollars (federal reserve notes) for us minions to spend on spinning rims and ipads. The sale of the T-bills soaks up the individuals and corporations....this will cause rising interest rates making it hard for already strapped for cash borrowers to borrow and business will once again slow.
It's not.
The banks are buying Treasuries even as foreign nations are selling them and the massive issuance is being absorbed... The missing question is how will this be sustained if something goes wrong during this plan.... like war? Funny thing is, as the banks buy treasuries, it's in their interest to create deflation and then immediately sell those treasuries and keep us in a massive trading range. But then again, this isn't the A-Team and plans rarely come together.
" America once again starts growing "
It is called 'crowding out '
65 % of Americas' jobs and the resulting 'growin' depends on capital that was permanently sucked out of the system by a govenment that only exists at the pleasure of its creditors.
http://www.takeitbackday.org/Takeitback_Page.php
Too bad the Joint Chief don't have enough hair on their asses to stage a Junta .
My non-PM, non-miner holdings will remain in Treasuries and Cash until the rumors begin of the government making Treasury coupons tax-deductible. At that point, I'm going all-in PMs.
I like your thinking. Sort of like a "Fortress (FIG) indicator".
Let's see, bond market is far larger than equities, so if there's a tres bubble and everyone starts fleeing, you should buy any stock, regardless of how terrible the company without prejudice.
If Treasuries crash, where will the money go? Into equities?
If treasuries crash, there won't be any money.
Bullshit, nothing falls in a strait line.
The first one out profits the most.
I’m sure that’s how the equity perma-bulls will spin it; however, a collapse in treasuries would create tremendous ancillary problems. Mortgage rates would skyrocket, causing house prices to fall further (more foreclosures and impairment of assets on the balance sheets of financial institutions). Many companies, especially high-yield issuers, would default due to the increased cost of capital. Also, stocks essentially represent the present value of future cash flows and that present value declines significantly with higher discount rates. This is one of the reasons valuations were so low in the early 80’s.
That is exactly why long rates will not go up much.
FYI, link is to a PDF of the book review, not the actual book!
Where is that tool named Pheased ?
He is a treasury bug
high interest rates = decimated equity market, noone would buy equities at least at the beginning of the crash...
If you believe so hard that Treasuries are in a bubble than go ahead and short them with as much leverage as you can. And don't lose any sleep over it. It's a sure thing.
If you believe so hard that we are on the verge of hyperinflation then sell your gold and buy real estate, because $100K of cash can buy you exactly $100K of gold at today's prices, but it can buy you $500K of real estate at today's prices. So what are you waiting for. Real estate is a sure safe bet in any hyperinflation. Got a pair?
You can subdivide real estate in so many parts, and so many parts of real estate haven't really crashed yet.
Once the pension funds go down, real estate will get it's second bigger crash. Once they go down, there will be a hughe selloff following in real estate.
One clear thing in real estate is that speed in price changes never go lightspeed.
A hyperinflation with falling real estate prices. That is something new.
There is always a lag, people not being able to pay their mortgage and money moving in. Thats when you load up on real estate.
So is peak oil.
Most everyone on this blog has a pair you smug simpleton. Residential real estate in general is artificially propped up by our socialist government. The high-end has avoided a debacle as our favored political class, money-handlers, have been bailed out by the Feds and poor taxpayers. The value of real estate will ultimately depend on real savings and real disposable income on an after-tax basis. You like that bet Sparky?
Failed auction first...
An excellent presentation simplifies a complicated situation in a methodical and clever manner. This presentation fails to do that for me. I already knew foreigners owned a lot of our government debt and our banks were playing the artificially steep yield curve at my expense. What great new revelation am I missing?
May the members of our armed forces be filled with courage to face each day and may they trust in the Lord's mighty power to accomplish each task. Let our military brothers and sisters feel our love and support.
The Treasury bubble will not end until it sucks capital from every other asset class. In other words the real Treasury bubble hasn't even started yet.
When the Treasury market dwarfs all other risk asset markets combined, then the bubble will be peaking. This is the end game of Keynesian crowding out. The bubble popping will coincide with loss of military hegemony and national sovereignty. This is a geopolitical event- not a trade.
Now.
.......and we keep waiting (or wishing).
Top 5 Bloggers Bearish predictions
The Quantum theory of Uncertainty predicts that particles exist in multiple locations simultaneously. In finance, it's a less probable outcome. The events listed above fundamentally cannot all occur SIMULTANEOUSLY.
Sequentially, not simultaneously.
Even sequentially, the action of one event must be accompanied by an almost immediate reaction of the other. So technically, sequential events, if arbitraged swiftly, will cause a simultaneous occurrence elsewhere. i.e. The all too popular dollar crash can only be good news for landlords and gold bugs but absolutely bad news for Treasuries.
top five bloggers all read each others' blogs. more likely this consensus is just the influence on the others by the most dominent blogger in the group.
Within 3-6 months
Will continue nicely despite deflation, but not to $50k/troy unless the CFTC starts swinging
Possible, but not within 2 years, given state of EU
I'm mostly liquid, but holding physical PMs and TIPS, and waiting with baited breath for the next shoe.
The first 2 already happened when priced in fiat. The next 25% loss will be priced in gold only.
The last 3 are all the result of the same thing. Gold up is the result of dollar/treasury down.
Imagine what happens if M3 and M2 crash but the Fed's money printing inflates M0 and M1?
Capital controls are coming to Asia?
Really, why?
According to what evidence?
Where?
India? Thailand? Brunei? Japan?
This is a very sensationalistic statment with no supporting evidence.
I'd have a bit more time for the fine folks at the CFA Institute if their members had been actually doing their jobs over the past few years to uncover all the nonsense in the bond market instead of being a party to it. I think they all flunked the kurtosis question.