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The Surprising Consequences Of The Global Frenzy For Positive Yield
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
As the dollar soars, so does the real yield on bonds denominated in dollars.
As central banks rush to depreciate their currencies and push yields into negative territory, what's becoming scarce globally is real yield in an appreciating currency. Real yield is yield adjusted for inflation/deflation: if inflation is 3% and bonds yield 2%, the real yield is negative 1%. If inflation is negative 1% (i.e. deflation), and the yield on bonds is .1%, the real yield is 1.1%.
What's the real yield on a bond that earns 1% annually in a currency that loses 10% against the U.S. dollar in a year? Once the foreign-exchange (FX) loss/gain is factored in, the investor lost 9% of his investment.
Needless to say, the real yield must include the foreign-exchange loss/gain. An investor earning 10% in a currency that's losing 20% annually against other currencies is losing 10% annually, despite the apparent healthy nominal yield.
An investor earning 1% in a currency that's appreciating 10% annually against other major trading currencies is earning a yield of 11%.Clearly, the nominal yield is deceptive; the real yield can only be calculated by factoring in both inflation/deflation in the issuing economy and the appreciation/depreciation in the issuing currency against major tradable currencies.
Now we understand why what's scarce globally is real yield in an appreciating currency: the only major trading currency that's appreciating is the U.S. dollar. Any nominal yield on bonds issued in euros or yen turns into a loss when measured in U.S. dollars. Even the Chinese renminbi, which is pegged to the U.S. dollar, has slipped against the dollar as Chinese authorities have responded to the devaluation of the Japanese yen and other Asian-exporter currencies.
One result of the global scarcity for real yield is high demand for U.S. Treasuries, which are denominated in U.S. dollars. High demand pushes bond yields down, effectively replacing the Fed's quantitative easing (QE) bond-buying programs, which the Fed ended last year.
The U.S. gets the benefits of strong demand for its bonds (i.e. low interest rates) without having to issue new money (QE).
Another factor is the reduced issuance of new Treasury bonds as the U.S. fiscal deficit declines. This effectively reduces supply as demand remains strong.
This is a self-reinforcing feedback loop: as the U.S. dollar strengthens and the U.S. fiscal deficit declines, the Fed has no need to buy Treasury bonds (with freshly issued money) to keep interest rates low. Since the U.S. central bank isn't issuing new money while every other major central bank is printing massive amounts of new money to depreciate their currencies, this pushes the U.S. dollar even higher.
And as the dollar soars, so does the real yield on bonds denominated in dollars. That may not surprise everyone, but few can support a claim of predicting this a few years ago.
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This is why I stay away from currency trading. Too complicated for me.
Suggests that eventually, lending gold that's repaid in gold+, will be the play.
although i wonder when the $US bubble pops, will gold go down with it, or will it then be regarded as the only safe haven ? the latter i suspect - unless deflation accellerates and they utterly fail to get hyperinflation off the boards
I think it'll be the opposite -- when the USD pops, it's value goes down and gold will go up in USD. There may be some panic sales like we saw in 2008 the drop gold initially, but that will be over in a matter of days (at most.)
In the short term, though, I suspect the USD will appreciate and be a drag on gold's price in dollar terms, but we know how this ends, and gold doesn't vaporize nearly so well as dead tree paper does.
You're both wrong. You started with the False assumption that it is the gold value that is actually fluctuating. The gold value is constant, and the currency value is what fluctuates.
Well, maybe you're able to buy all the goods you need from vendors who price in terms of PM grams/ounces; the rest of us buy from people who want currency.
And the price of their goods relative to currency is considerably more stable than it is relative to gold.
So good luck with that one.
PMs may appreciate with time against fiat - that has certainly been the rule throughout history - but you can still lose a lot of purchasing power on them in the short/medium term. One glance at a 50 year POG chart will confirm that.
Sitting on PHK over the last 10 years and reinvesting dividends has been very very good to me.
Your vendors are fools if they wouldn't accept gold.
You're both wrong. You started with the False assumption that it is the gold value that is actually fluctuating. The gold value is constant, and the currency value is what fluctuates.
Over time gold appreciates, so if one is repaid in gold (or gold value equivalent), value is preserved and real returns are possible.
The problems: gold loans are often made illegal and the price of gold is manipulated.
Just thinkin' out loud.
Stay away from that last paragraph. It entails "feedback loops"
When you get in your car and drive to work, you're part of the "feedback" loop.
Mr. Yellen to you sir. raise rates and watch the fun...
If the above is correct, abso-fucking-lutely.
It may be a Ponzi scam, but all fiat is. Our scam is soo much bettern' yours. Join the borg collective.
Edited headline:
The Surprising Consequences Of The Global Ponzi For Positive YieldAs Polish and Hungarian mortgagee's found out the hardway, its a two way street.
There is no free lunch.
Actually, there IS a free lunch but it's in the dumpster and is crawing with maggots and worms.
Free lunch is only available for WS Banksters, so solly, none for us serfs.
so this is a good time to be short the usd and us treasurys then? /s
The Fed has one major, major problem with all of this -- the Chamber of Commerce. The mutli-national corps that co-run our government along with the banks want a weak dollar. The politicians who are owned by both factions must be freaking out right about now trying to figure out which of their owners is better to piss off. I tend to think the bankers will win.
Don't they always? Kind of hard to lose when you can print an infinite amount of money and buy whatever you want. If I had that power...but it's best I don't. I'd fuck things up even worse.
I would say that I'd love to see a full-blown oligarch war, but I imagine it would just involve lots of face slapping with white gloves.
Nah. They're mostly psychotic fuckheads. I'm sure some of them consider a nuclear holocaust to be an acceptable method of proving a point. Let's hope we never find out just how far they're willing to go.
Not an option. They have families too. We all live on the same planet.
The Bushes and other criminal oligarchs have property in Uruguay because they know what's coming.
Paraguay actually.
I've seen semi geriatric oligarchs throw punches at each other.
Funny as hell.Pride was the main casuality.
and brains swimming in alcohol
Maybe they switch to an alternate currency and use the conversion to get wherever they want the exdollar/SDR to be.
They have to figure a way to do two things:
1) Clear their debt
2) Clear their owners derivative exposure...
http://www.octafinance.com/kyle-bass-euro-go-oil-will-force-fed-delay-ra... Kyle Bass Interview in Davos
11.3 ~ 11.5
Bullish towards FED credibility ...
invert the yield curve ....
this article reminds me of a cartoon i watched as a child ....
a character was able to absorb power from other super heros ... then he got full of too much power and exploded ...
...if everybody runs to the dollar all at once ...... what happens?
inquiring minds want to know
dollar holders get to buy the world cheaper. There are 2 roads, well, if you will, one road, the imf does what it is claiming, (which could be a fraud, a double cross) it is claiming it wants to get everyone to cooperate and make a system of global reserve currency where all "share". Road two, is that the dollar with its great anti counterfeit features, remains reserve currency, which means america remains able to spend and not get devalued. The imf sdr route is garunteed harsh devaluation of the dollar. Well, of course there is devaluation -against- other things. But you didnt mention them.
"What if games." Love em. no skin in the game. Imagination run riot."What if" the sun doesn't come up tomorrow morning? Excuse me. What if our planet stops rotating?
B-I-T-C-O-I-N
But Wall Street said!
I mean seriously...they turned finance into rocket science and they're Bank blew up on the launch pad.
How is that America's problem?
Now have fun with "your jedi masters" executing on Generalplan Ost.
THERE WILL BE NO SHORTAGE OF SUPPLY IN DEBT LEADING TO A CROWDING OUT EFFECT AND A COLLAPSE IN DEMAND.
This has been true since 2008!
Bwhahahahaha. "Long oil."
Where is the demand coming from? Not Europe, China or the USA that's fer sure. In fact they're building cars without an ICE at all.
That's 400 MILLION barrels of oil in storage in the USA alone!
And we are a net PRODUCER!
And a mass producer of the all electric Nissan Leaf...
The $ seems to be consolidating. I'll see how London Macro works out.
yield vs risk? think i'll sit this one out.
oil eventually...easy peasy sleasy bitchez
vulgar economics with a hint of the theory of relativity, hah?
Wow, CHS read the first page of "International Investing For Dummies"
Problem is that the vast majority of sheeple "investors" cannot understand that book. They do not understand what value is, and think the value of their investment is what their investments can be sold for in their local currency.
And like all frenzies, they will over correct
Charles Hugh Smith doesn't get it.
The US got is very indebted in American dollars; so as the US dollar appreciates the US has to pay back the debt with more expensive dollars.
Over leveraged govts-like Canada in the 80's-need to depreciate their currency to pay back the debt, not appreciate the currency.
This makes a hella bunch more sense than that Marc Weiner article from earlier today. Why do investors pile into Swiss and US bonds? They're the least bad choice. They still suck, but they're the least sucky.
That's all and good selling the us bonds but then again the fx reserves on the fed balance sheet becoming worthless?
You want positive yield and an appreciating currency ?
I would say that there is probably sufficient liquidity here in Godzone for one , maybe two , big players from ZH to take a position on the $NZ. We have a floating currency, which is relatively buoyant, and we sell food.
Anything better out there?
Here ya go:
http://www.interest.co.nz/charts/interest-rates/government-bond-rates
Higher dollar = fewer dollars for US multinationals to book home as revenue and profits. This is starting to hit the stock market but just barely so far. It´s a lagging blow and it´s gonna be hard.
New article by Dr Willie at Ag Doctors. Not a bad read. It's all printed so you don't have to hear the screech.