Why aren't long term treasuries going up more?

[dualstow]

Very interesting analysis!

[Lowe]

Yes, that was a good analysis, mortalpawn.  I agree that the Fed cannot raise rates now, reasonably, but I had figured that Treasurys weren't making gains recently because people were afraid the Fed might act unreasonably.

I did not consider that the decline in emerging market equity would cause banks to cover bad derivative bets, by selling Treasurys.  That makes sense.  I assume they are also closing some stock positions, which would have contributed to the recent drop in the stock market.

I suppose, all this happening at once is because the Chinese central bank's recent devaluation brought into stark relief the poor outlook for emerging markets, all over the world.

[sophie]

Outstanding post, mortalpawn.

Your points also imply that holding international equities probably does not provide useful diversification for the PP - or indeed for any stock/bond portfolio.

[mathjak107]

i think 1987 , 2000 and 2008 taught us stocks are stocks and we are so globally linked there is no real diversification .  a side from the fact most of the s&p 500 companies to some extent have big foreign holdings or business over seas

[mortalpawn]

Outstanding post, mortalpawn.
Your points also imply that holding international equities probably does not provide useful diversification for the PP - or indeed for any stock/bond portfolio.

We can see Emerging Market equities were great to hold during the "great expansion" - zero interest rates here and easy money led to rapid investment overseas with double digit growth in many markets.  This is the "Dollar Carry Trade" where people borrowed money for zero in the US, and invested it overseas to pocket big returns.  It was a win for the US in some ways as we also exported a lot of our inflation away, which is one reason that Zero Interest Rates (ZIRP) and QE money printing did not produce the expected inflation.

However now that expansion has turned into contraction (crashing commodity prices, rising dollar, falling production demand, etc...) many of those "cheap" EM investments are being exposed as bad risks, and also the cheap dollar debt is suddenly having to be paid back with increasingly expensive dollars.

So unfortunately holding international equities are not going to do much for you as "quantitative tightening" and deflation hits here in the US.  In fact many of these markets are going to suffer more than the US because of their over-reliance on cheap dollars propping their economies up.  Unfortunately (as we're seeing in Brazil) they will suffer from a triple whammy of inflation (remember their money goes down as the dollar goes up), and also contraction of investment capital (no dollars headed their way, and they're selling US reserves to make payment on their existing debt) along with declining income (commodities and production down).

So while we're seeing "deflation" and tightening here due to a strong dollar, many emerging markets will be seeing "stagflation" - declining growth combined with significant inflation.

So - nowhere to hide, and the US may still be the best dressed pig in the pigpen.  I'm hoping the Fed can wave their magic wand and stabilize things before they get out of control - but I'm skeptical!