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Guest Post: Are Treasuries The Worst Investment In The World?
Submitted by John Aziz of Azizonomics,
I admit the headline is a little sensationalistic, but after Wednesday’s WTF bond auction, I feel like slapping the market around the face with a rotten fish. Now certainly there are plenty of penny stocks headed to greater losses far sooner. And certainly, lots of people have made good profits on Treasuries by buying them and flipping them to a greater fool or a central bank. On the other hand, so did many during the NASDAQ bubble, or during the ’00s ABS bubble. Bubbles are profitable for some, and that’s why there have been so many throughout history. But once the money starts to dry up they become excruciatingly painful.
Treasury yields are just going lower:
After a 30-year bull market, you’d think that the financial media might have cottoned onto the idea that there is little scope left for real gains, either by holding bonds to maturity (inflation is outrunning yields) and even by flipping it off to a greater fool (or the greatest fool of all — the central bank).
In theory, there are no limits to how low rates could go. In theory, nominal yields could go deeply negative, so long as there are buyers coming into the market ready to buy at a lower rate, and a push a profit to bond flippers. In reality, even Japan — a nation that has adopted desperate measures including forcing financial institutions to buy treasuries to keep rates depressed — has not managed to push nominal rates below zero. The scope for great profits from flipping bonds seems to be evaporating. And in any case, the latter case of flipping bonds to a greater fool or the central bank balance sheet is a classic characteristic of a bubble. The inherent value in a bond is its yield; everything else is speculation.
In the classic bubble mentality, more and more financial media — hastened on by the prospect of deflation (something which the Fed is absolutely obsessed with preventing, and is prepared to print an unlimited amount of money to do so) — are calling Treasuries something that you can’t afford to not own.
The reality, though, is that even recent years treasuries have not really been a good investment. Bond prices may have gone up, but they’ve been eclipsed by a harder kind of asset — gold:
Indeed, the real bull market in bonds ended in the ’90s. It’s not just that bond bulls are running out of steam; next to gold bulls they have made a relative loss. Here’s what I call the gold-denominated real interest rate (or the “real real interest rate”) on the 10-year treasury — rates minus the percent change in the gold price:
While the bond flippers have done well (just as the NASDAQ-era bubble merchants did well flipping Pets.com to a greater fool), whoever is holding bonds to maturity is gradually pouring purchasing power down the drain. And that is the problem; the only way that the bond flippers can get their pound of flesh is for the Fed to print a whole swathe of money and buy the flippers flip-offed bonds. And however depressed the economy is, printing money to absorb treasuries is hazardous to the currency, and irritating to the largest treasury holders — who America happens to import a lot of goods and oil from — who hold treasuries to maturity instead of flipping them off. A trade war between America and her creditors seems inevitable and the bond flippers on Wall Street may end up being dragged under the bus by such an event — perhaps getting paid off in a heavily devalued dollar and losing their shirt on a bond-flipping trade where they initially only stood to make a sliver of a percent gain on their stake (made even riskier by concentrated ZIRP leverage).
It is hard to really call the timing on the end of a bubble. People and events can always get more irrational. Japan has kept the Treasury ball (painfully) rolling for far longer than most of us expected (through market rigging as much as anything else). But this cannot end well.
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Tom Waits - Hows It Gonna End
http://www.youtube.com/watch?v=6-pywHFUbGw&feature=autoplay&list=AL94UKM...
.
..".. i want to know the same thing ..
how's it going to end?" t.w.
Japan is not a fact, model, or example relevant. Everyone keeps speaking of Japan as falling into one of these patterns. Japan's citizens funded a government debt. Neither the European or American citizens have done that. In Europe, an EU has papered over the debts for years, and now debts are coming due. In the U.S., the world reserve currency has allowed Americans to live so far above their value-added to real-world production that they are incomparable to every other nation. Indeed, America is the most inefficient economy in the world. A cursory examination of American consumption reveals this. Japan is not relevant, nor is Europe. America is a thing sui generis.
#1) Raise rates 50bps [shock the system into reality]
#2) Lower Corporate tax to 18% [U.S. highest in world Mar/2012]
#3) Phase out 'All' energy and agricultural/farm subsidies [Free market capitalism is a pass or fail, period! Never was it meant to be a free ride]
#4) Federal TBTF's as Holding Co. should be terminated!
#5) ??? As far as Treasury's are concerned... teats on a impotent bull are they. Not even suitable for 'rocky-mountain-oyster-stew' on Cheney's Ranch! :-)) Aziz
Au Canada
Au Canada
Friday night inspirational rock video.
http://www.youtube.com/watch?v=KIRB38fQb2o
Treasuries are in a multi-year bull market - upside target for TLT is around 160-180. Aziz is 100% wrong. It is what it is.
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[holds out his hand]
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344 days since the U.S. lost its AAA rating and bonds have gone straight up ever since.
Millions of hedge funds are throwing in the towel on stocks and piling into bonds hand over fist with no end in sight.
And despite that the Dow is still over 12,000.
Wanna become the next bond king? ;-) Give it some time, budy.. give it time to go off the cliff....
Yeah, interest rates can apparently go to minus infinity. How much will people pay for the safety of Swiss bonds? Maybe yields will go to -5% per annum?? -10%???
If physical cash is eliminated completely, interest rates can actually go to negative infinity.
Did America ever even have a Triple A rating?
Dagong says they have a A rating along with Spain.
Dagong says China has a Triple A, so basically S&P and Dagong have the ratings exactly the opposite of each other for both America and China.
I reckon with CHina's obvious goal of dominating the world, and Russia wanting payback, the Chinese will do whatever they can to wipe the USA out. The politicians have no fucking clue what they are doing and as long as the Bush Clinton dynasty exists (so far 30 years), this country will keep declining.
Millions of bonds are being rehypothecated like every other asset into margin collateral. Gold can be but smart people are hiding it in bunkers and having boating accidents.
The dow will shortly be under 12,000 and dropped sharply off 13,000 more than once. It's coming again. Soon
Raise the rates " Ben" go 25 basis points! Trust me you won't regret it! C PBoC & Mof Kampo will shit sideways!
The United States , is back in the " Manufacturing Business"
My Grand Mothers Ghost, Never Lies
Treasury Inflation Protected Securities are a very real and 3x investment in the last 3 years. So they been bery bery good to me.
BREAKING: British Oligarchs Panic, Want Glass-Steagall Reinstated
If that is true then good on you. May be a turning point. Hope springs eternal.
The USA is a sad place to live. Quasi Communist Garbage Pile
What cost $1 in 2010 would cost $0.05 in 1913.
How soon before the nickel turns into a penny? 1 year maybe 2?
So the USA has been a Communist Garbage Pile since 1913?
I'm sure that is news as even the USSR was born in October 1917. Welcome to the first communist republic in the world : the USA of Woodrow Wilson !
Don't quite follow the relation between fiat inflation and communism...
Didn't you read Marx or neo-marxist analysis to understand that inflation is essentially a way of maximising profit at the expense of labour?
As profits grow faster than inflation whereas labour lags it.
We have the BEST example of that evolution in todays age where the Corporate Profit to Labour Wages ratio has Exploded, showing that corporates have never been richer; relative to middle class and labour earnings.
Commie nation USA??? Read this :
The Most Important Charts In The World - Business Insider
Yes we are a quasi communist state, with the corporatocrazy being the state. Each middle class worker is an equal pile of garbage slave.
The government is just their mechanism for making their mandates into law. They are puppets are expendable. In fact I can easily see the Corpotocracy wiping them off the map because of their constant greed and necessary bribes This system can easily be removed. The government just writes paychecks to workers from money from the Corportocracy. There really is no need for them to exist anymore. Who really cares. They are just a bunch of phony liars whose policies have no bearing on anything. A total waste of money.
We don't need no QE3, market looks to have got the taste of blood and wants to front run....Bears had good reasons to be excited "as reported in popular media", Europe is imploding, emerging markets are slowing down, equity is looking least bit exciting or trustworthy by any and all standards to common man.
Yields are dropping like stone in developed markets... negative 50bps yield on Swiss bond, negative yields on German bunds (where is all the contingent liabilities...question will come but later:) )...record low on US and Japanese treasuries ...personally i would park there if I m in a hurry and pay the fee but will get out as soon as i find better investment, yield wise or capital appreciation wise........yes sir this is the power of money-flowing to park itself temporarily at any storage cost before it readies to move to its preferred investment.
All this sound like worlds imploding, there is really something that has imploded. Its the trust banking system had in Sovereign bonds as collateral for shadow banking. Private capital in next one year "Will" (yes this constitutes a forecast and we will revisit this theme in upcoming posts) shun low yielding high tail risk Sovereign Bonds and move to private assets.
This is going to be the genesis of the upcoming "One of Greatest BULL market of our lifetime" ...we will revisit this topic in pieces in upcoming posts ....
Equities..YES THIS MEANS THAT INDIAN MARKET HAS IN HIGH "PROBABILITY" BOTTOMED.....we will keep a close watch on which sectors could be the leaders in follow-up posts...... Asian Equities including Nikkie..infact Nikkie and Shanghai appears to be making long term bottom,and thus looks really good to speculate......
Commodities...Gold and Silver (I would prefer silver between both if I have to speculate), Agri-Commodities, Natural Gas..follow up posts we will post trading set-ups
Currencies: Yen appears to be making a significant top against lot of currencies...we will keep a close eye on this theme as Indian markets allows speculation in Yen. Dollar also looks overbought and Euro looks over sold, both have enough fuel of trend traders to make a good opposite move
www.bubbleshort.blogspot.in
Concerning Investment in T-Notes here is an interesting graphic on the relative historical performance between Bonds and S&P :
The Most Important Charts In The World - Business Insider
It goes against the grain of Aziz's post.
On more burning current issues like the JPM derivatives scam and Barclays's Lie-bor scandals :
How the media world and the financial world continues to live in DENIAL :
Eliot Spitzer Vs. Maria Bartiromo - Business Insider
He is one of the few who is sincere, inspite of his past sexual record.
And this doomer gloom from economist :
ALBERT EDWARDS: The US Is In Recession, Corporate Profits Will Collapse, Stocks Will Tank - Business Insider
All the while the market surges on short term after five bad days :
Closing Bell July 13 - Business Insider
We are in a crazy roller coaster which is heading : ????
ZH has its bets on Edwards, and I must agree its the rational trend to this straight jacket economy over the medium term.
LOL very true. But what happens if people "Go Galt" on borrowing? Interesting, indeed.
BTW, does anyone think they yields of treasuries will ever go back UP? Also, 17 countries in the world today have yields >1%.
PM: Maria Bartiromo. She'll never go on Viewpoint to agrue Spitzer on whether or not AIG committed fraud (wit hthe help of ratings agencies). She's drawing dead in any arguement b/c a) she's a MSM parrot and b) unlike Spitzer, she is not a lawyer (but thinks she is).
Bond yields are going back to 15-20%
HTH
Never mind all this Austrian flapdoodle...
Just tell me how many credit cards I need to spend my way to prosperity. I got 20 filled up to max and I'm not quite there yet.
I NEED MORE MATH.
Real power from fake money?
http://shutupnsing.wordpress.com/2012/07/14/the-centralization-of-real-power-using-fake-wealth-self-interest/
Treasuries represent liquidity but nit necessarily safety,
nothing is demominated in gold, so this entire post is ridiculous
Until the dollar is declared persona non grata by the rest of the world and no longer used to buy oil it is money and gold is just a physical commodity (lumber, copper, soybeans, etc.). This will all switch around when the Saudi's declares that they will accept only gold for oil ... then gold is money and the dollar is well ... paper.
If the House of Saud turned on us -they would all be dead-very soon. The Utube videos of Saddam and Ghaddaffi were a warning to the Saudis, Kuwaitis, the crooked African dictators, etc. -as to what would happen to them if they tried to switch sides. Look what happened in Egypt-we let that one get out of control, or so it seems. Maybe Mubarak was waivering-maybe we had a better plan to make him a sacrificial lamb so we could replace him with a more palatable stooge. Tin pot dictators have no more freedom or authority to buck Uncle Sam as Obama, Clinton or Bush had to buck the Banksters or AIPAC. If you don't understand this, you probably think that (interner aside) we still have a free press in America.
I don't think the central banks are the biggest fools of all, it depends on what you think their objectives are.
They print money at zero cost.
I’ve been liquidating my Treasury positions slowly but surely for about 18 months now; particularly the longer durations. It began when I started asking myself, who would buy these bonds at these prices if I wouldn’t do it myself now? I felt just like I did back in 2006 when I started asking myself, who could afford to buy my house at the market price if I couldn’t do it myself without a higher paying job than I had and the equity I had built up over the years? Exactly; if only I had listened to myself back then.
Its not that they are a bad investment its the fact that China keeps buying them and we all know the problem with high interest rates. Once they get to high and you have to much debt voila big time explosion. Everybody knows if the USA falls, the entire world goes into a big time domino tailspin. People keep talking China this China that. America holds the highest card. If things go bad here the entire world is going to go in the shit bin.
TREAUSURIES VERSUS HOLDING CASH.
TREASURIES: YOU HAVE RISK WITH THE BANK THAT OWNS THEM FOR YOU, RISK WITH YOUR BROKER CHEATING, RISK THAT THE COUNTRY WILL DEFAULT ON THEM, RISK THAT YOU CANNOT SELL THEM WHEN YOU NEED TO , AND OF COURSE RISK THAT INTEREST RATES RISE AND YOUR TREASURY BECOMES WORTH A BUNCH LESS. ALL THIS FOR 2 OR 3 %.
CASH: GUARANTEE OF LOSING PURCHASING POWER (AT -2 TO -3%) PER YEAR, IN RETURN FOR NONE OF THE RISKS ABOVE IF YOU HOLD IT IN YOUR MATTRESS. AND THOSE ARE A LOT OF RISKS. ---
OVERNIGHT DEVALUATION RISK: IS A MOSTLY A WASH BECAUSE CASH AND TREASURIES ARE EFFECTED MOSTLY EQUALLY. THE DEVALUTION EXISTS SO THAT THE TREASURY CAN CONTINUE TO PAY BACK INTEREST ON TREASURIES AND ROLL OVER THE DEBT AND IMPLIES HIGHER INTEREST RATES IN THE FUTURE.
OVERNIGHT DEFAULT RISK: HIGHLY FAVORS CASH. HIGHLY.
Equity rally can resume as overbought USDX daily & weekly chart commences overdue retracement while EURUSD selling ceases for now. This results in SPX / DOW choppy weekly charts reverting to neutral.
The following remains a constant and won't change:
* USDX monthly indicators [ie big picture] continue to warn of significant long term USD upside. (thus EURUSD & AUDUSD etc bearish)
* SPX monthly indicators [ie big picture] continue to warn of significant long term downside for equities which will be worse than 2008.
Bring back the scary clown...
That made it much more interesting, didn't it! LOL!
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http://www.infowars.com/the-real-libor-scandal/
According to his public statements, zero inflation is not the goal of the Federal Reserve chairman. He believes that some inflation is a spur to economic growth, and he has said that his target is 2% inflation. At current bond prices, that means a continuation of negative interest rates.
The latest news completes the picture of banks and central banks manipulating interest rates in order to prop up the prices of bonds and other debt instruments. We have learned that the Fed has been aware of Libor manipulation (and thus apparently supportive of it) since 2008. Thus, the circle of complicity is closed. The motives of the Fed, Bank of England, US and UK banks are aligned, their policies mutually reinforcing and beneficial. The Libor fixing is another indication of this collusion.
Unless bond prices can continue to rise as new debt is issued, the era of rigged bond prices might be drawing to an end. It would seem to be only a matter of time before the bond bubble bursts.
Nomi Prins is author of It Takes A Pillage and a former managing director of Goldman Sachs.
This article first appeared at Paul Craig Roberts’ new website Institute For Political Economy. Paul Craig Roberts was Assistant Secretary of the Treasury for Economic Policy and associate editor of the Wall Street Journal. He was columnist for Business Week, Scripps Howard News Service, and Creators Syndicate. He has had many university appointments. His Internet columns have attracted a worldwide following.
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