TLT looking really bad right now

[Pointedstick]

No I just want to hear if anybody can come up with a credible way you can get a real return in 30 year bonds at current rates.

Almost everyone here is holding them. I'm just wondering if anyone can come up with a credible argument for how someone buying a 30 year T-bond is gonna make a real return in the next 30 years with it. I realize there are other reasons you might own it. We don't need to talk about those other reasons anymore there are hundreds of threads on them.

A bond purchased today will yield coupon payments that represent a real return if inflation remains very very low for the next 30 years.

A bond purchased today may see its capital value rise beyond inflation if interest rates fall again and keep doing so for the next 30 years, winding up near zero (!!!)

A bond purchased today and sold according to rebalance bands when its value rises also has the potential to yield a real return.

Other than that, I don't know. And I don't know if either of the conditions necessary to make those examples come true will exist.

And again, everyone here holds them for reasons other than their ability or inability to generate a real return on their own. We hold 25% cash as well, often derided as an unproductive asset. We know that. We hold it for different reasons.

[Pointedstick]

I know you didn't want me to bring up that we hold bonds for different reasons, but I think it's important to keep in mind. We're not buying bonds and only bonds, we're buying them as part of a portfolio concept where they work with other assets, and that means their real return in isolation is less important. I think few here would advocate buying bonds on their own in the VP.

[Kshartle]

Gumby,

The average rate on the Ten-year on Jan 1st since '71 is 6.9%...a little higher on the 30 year. I think we can safely say that would also be the normal rate and 6-8% the normal range. Below that the rates are abnormally low and above it is abnormally high. That's the word I would use. So now rates would be abnormally low. You'll hear that ten times a day on CNBC "abnormally low rate environment". That's what they're referring to. You might not believe in the word or the concept. Ok.

Incidentally I asked what you think will happen if rates return to normal and gave a range. Rather than address the question (you could have ignored the word normal and just went with the rates) you decided to show a chart and challenge the concept of "normal" rates. This is avoiding a valid question by changing the subject.

If you want to post charts...can you post a chart showing any sustained period where the money supply contracted since the US went to a completely fiat system? You keep talking about the money supply contracting in a major way. Can you point to an example of such an event? If not, can you offer a theory as to how it might happen and what you think would result? Do you think the central bank will allow such an event? Hasn't Bernanke repeated over and over that the FED will not permit this? You point out they can print an endless amount. How can you reconcile their ability to print endless amounts, and stated goal of monetary expansion, with all the negative consequences to the government of a deflation, and still think it's a likely occurrence? And if it does happen...what is the result to government inflows and outflows?

One thing affects the other, the government's finances do not happen in a vacuum, tucked safely away from the rest of the US economy.

[Kshartle]

Ever hear of taxes? If people have too much money from this tsunami of spending and interest payments you speak of, the government can just tax the excess back. If on the other hand, people are super productive, the excess money will just feed a larger economy without the need to raise taxes [right, Mdraf? ].

By God what a bunch of nonsense. The government prints a massive amount and prices shoot up impoverishing everyone. Incidently, prices go up for the government even more. Not only do their obligations cost more...they take on more obligations as the economy is wrecked and everyone sticks their hand out.

They can't simultaneously tighten by and run the deficits they will be incurring. How does increasing taxes while inflating improve the situation? Everyone will stop working and turn to barter. The government can print all it wants...it won't matter.

How much higher do you think they can push the taxes without more people deciding they don't want to subject themselves to it?

You really need to think about how one thing leads to another. You are jumping in and out midstream.

[Mdraf]

Ever hear of taxes? If people have too much money from this tsunami of spending and interest payments you speak of, the government can just tax the excess back. If on the other hand, people are super productive, the excess money will just feed a larger economy without the need to raise taxes [right, Mdraf? ].

Nope, I'm not taking the bait this time Gumby. Kshartle is doing a fine job thank you very much 

[Kshartle]

And I don't know if either of the conditions necessary to make those examples come true will exist.

I'm asking what you think those conditions are.

It sounds like I'm asking "Do you think it's possible you'll get a real return...."

Response.."Yes I think it's possible but I can't say how it's possible"

Question - "How can rates fall without inflation, or the rates increase and no default"

Response - "Because rates might fall, or they might rise with no default"

Anyway, we're beating a dead horse. Or at least a really tired one. Again no offense really. This just strengthens my belief that no real case exists for a long-term real return in LTBs.

[Gumby]

By God what a bunch of nonsense. The government prints a massive amount and prices shoot up impoverishing everyone.

Speaking of nonsense. The government has printed massively over the last century and we are far from being impoverished as a country. Your logic doesn't hold. We aren't impoverished just because a 5¢ ice cream cone in 1910 now cost $3.50. All that matters is that the standard of living has increased (and it has).

How does increasing taxes while inflating improve the situation?

Say the government spends $1 quadrillion dollars in interest payments. If it taxes $999 trillion, it only net spends $1 trillion. Nobody feels any richer than if the government net spent $1 trillion.

[Mdraf]

Everyone will stop working and turn to barter. The government can print all it wants...it won't matter.

That's exactly what happens in countries where taxes exceed productivity. In Italy for example barter is huge.  Nearly everyone is ready to work or sell their services in exchange for other goods or services. The "black" economy is about 10X the size of the official one.

[Mdraf]

If it taxes $999 trillion, it only net spends $1 trillion. Nobody feels any richer than if the government net spent $1 trillion.

CullenRochian rubbish. They can't tax $999 trillion if there is nothing to tax

[stuper1]

This just strengthens my belief that no real case exists for a long-term real return in LTBs.

What if yields drop to 1% over the next 10 years?  Is that long enough to be long-term?

[Kshartle]

Say the government spends $1 quadrillion dollars in interest payments. If it taxes $999 trillion, it only net spends $1 trillion. Nobody feels any richer than if the government net spent $1 trillion.

The government would have to employ every single worker and provide every good and service. There would be no market. It would be worse than the Soviet Union. You do remember that entity right? Seriously, I can't respond to this anymore. You need Econ 101. You are trolling and I have to ignore henceforth.

[Gumby]

Say the government spends $1 quadrillion dollars in interest payments. If it taxes $999 trillion, it only net spends $1 trillion. Nobody feels any richer than if the government net spent $1 trillion.

The government would have to employ every single worker and provide every good and service. There would be no market. It would be worse than the Soviet Union. You do remember that entity right? Seriously, I can't respond to this anymore. You need Econ 101. You are trolling and I have to ignore henceforth.

No need to get so worked up. I was simply exaggerating to explain how taxes are deflationary while spending is inflationary.

They can't tax $999 trillion if there is nothing to tax

Obviously it was a bad example.

But, sorry, not following. You can't tax the hell out of a big $1 quadrillion interest payment? Sure you can.

[Kshartle]

Speaking of nonsense. The government has printed massively over the last century and we are far from being impoverished as a country. Your logic doesn't hold. We aren't impoverished just because a 5¢ ice cream cone in 1910 now cost $3.50. All that matters is that the standard of living has increased (and it has).

It was your example. You said the money supply is dangerously high. That would imply the government printed so much it really threated or was hurting the economy. Jesus take ownership for your own statements. I understand why you'd want to divorce yourself from them as soon as you hit post though.......

[Pointedstick]

And I don't know if either of the conditions necessary to make those examples come true will exist.

I'm asking what you think those conditions are.

It sounds like I'm asking "Do you think it's possible you'll get a real return...."

Response.."Yes I think it's possible but I can't say how it's possible"

Question - "How can rates fall without inflation, or the rates increase and no default"

Response - "Because rates might fall, or they might rise with no default"

Anyway, we're beating a dead horse. Or at least a really tired one. Again no offense really. This just strengthens my belief that no real case exists for a long-term real return in LTBs.

They're not my favorite asset either.

But I don't think it's so far-fetched to imagine rates springboarding between 2 and 6 percent. Someone who harvested this volatility could do quite well.

Now, someone who stupidly holds a 30-year bond at low interest to maturity and hopes for a real return is counting on inflation falling or remaining low, and/or interest rates remaining constant or falling. As for how either of those things could happen, I don't think it's so hard to think of examples:

Reasons why price inflation might remains low
• The economy remains sucky and people don't have the money to pay higher prices
• Asset prices continue their boom-and-bust cycle, impoverishing average people who are whipsawed by the wild price movements and slaughtered by transaction costs
• Foreign competition and easy global trade might depress domestic prices as poor consumers purchase cheaper things that are manufactured abroad


Reasons why rates might be flat or fall
• The Fed might use its mandate to drive them even lower buy purchasing even more bonds
• Stocks and/or gold might crash, leading people to pile into bonds as a flight-to-safety asset
• The rest of the world financial markets might be perceived as even riskier than U.S. government debt, leading people to pile into it as a "best-of-the-worst" option.

[MediumTex]

I'll bet Japanese investors would LOVE to be able to buy some 30 year bonds at 3.8%.

During a deflationary period, a 3.8% return is great.

If you say that an extended deflationary period is impossible with the government running gigantic deficits, how would you explain what has been happening in Japan for over 20 years?

I'm not saying that I think that's what will happen here; rather, what I am saying is that if it can happen in Japan it could also happen here and I just want to be protected if it does.

[Kshartle]

What if yields drop to 1% over the next 10 years?  Is that long enough to be long-term?

What if it starts raining Gatorade? Will the elecrolytes make the crops grow better?

Why stop at 1%? How about negative 50%?

[Pointedstick]

What if yields drop to 1% over the next 10 years?  Is that long enough to be long-term?

What if it starts raining Gatorade? Will the elecrolytes make the crops grow better?

Why stop at 1%? How about negative 50%?

I thought you wanted specific examples. Or do you just think that stuper1's example is too far-fetched?

[stuper1]

Why stop at 1%? How about negative 50%?

I believe there are other countries with close to 1% yields currently.  None at negative 50% as of yet.

[Gumby]

Speaking of nonsense. The government has printed massively over the last century and we are far from being impoverished as a country. Your logic doesn't hold. We aren't impoverished just because a 5¢ ice cream cone in 1910 now cost $3.50. All that matters is that the standard of living has increased (and it has).

It was your example. You said the money supply is dangerously high. That would imply the government printed so much it really threated or was hurting the economy. Jesus take ownership for your own statements. I understand why you'd want to divorce yourself from them as soon as you hit post though.......

I never said the money supply is dangerously high. Never said it.

All I said is that government spending is almost nothing compared to the size of private credit. Keep in mind that all this money was used to create stuff. It's not like it was all used for some kind of helicopter drop.

[Kshartle]

What if yields drop to 1% over the next 10 years?  Is that long enough to be long-term?

What if it starts raining Gatorade? Will the elecrolytes make the crops grow better?

Why stop at 1%? How about negative 50%?

I thought you wanted specific examples. Or do you just think that stuper1's example is too far-fetched?

To answer his question, yes I would consider 10 years long term. How on Earth would this happen without the FED buying trillions and trillions? Where do you think prices would be in years against whatever gain this might be?

[Mdraf]

Speaking of nonsense. The government has printed massively over the last century and we are far from being impoverished as a country. Your logic doesn't hold. We aren't impoverished just because a 5¢ ice cream cone in 1910 now cost $3.50. All that matters is that the standard of living has increased (and it has).

It was your example. You said the money supply is dangerously high. That would imply the government printed so much it really threated or was hurting the economy. Jesus take ownership for your own statements. I understand why you'd want to divorce yourself from them as soon as you hit post though.......

I never said the money supply is dangerously high. Never said it.

All I said is that government spending is almost nothing compared to the size of private credit. Keep in mind that all this money was used to create stuff. It's not like it was all used for some kind of helicopter drop.

Yes but it takes more and more government spending to create less and less stuff. The ratio is unsustainable.

As for taxing $999 trillion discussion here is an example. Have you ever been in a country where you ask 'How much does that cost?". The answer is "With or without a receipt?". No receipt, no tax. Private sector continues to function. Government doesn't

[Kshartle]

Speaking of nonsense. The government has printed massively over the last century and we are far from being impoverished as a country. Your logic doesn't hold. We aren't impoverished just because a 5¢ ice cream cone in 1910 now cost $3.50. All that matters is that the standard of living has increased (and it has).

It was your example. You said the money supply is dangerously high. That would imply the government printed so much it really threated or was hurting the economy. Jesus take ownership for your own statements. I understand why you'd want to divorce yourself from them as soon as you hit post though.......

I never said the money supply is dangerously high. Never said it.

All I said is that government spending is almost nothing compared to the size of private credit. Keep in mind that all this money was used to create stuff. It's not like it was all used for some kind of helicopter drop.

You said....If people have too much money from this tsunami of spending and interest payments you speak of, the government can just tax the excess back.

I guess a Tsunami of money that is too much is not dangerous. Ok. Lame.

[Gumby]

You said....If people have too much money from this tsunami of spending and interest payments you speak of, the government can just tax the excess back.

I guess a Tsunami of money that is too much is not dangerous. Ok. Lame.

Heh... No. You misunderstood. That should have read, "the so-called Tsunami of money you speak of". Personally, at 7% unemployment, I think that a good portion of the private sector (i.e. "main street," if you will) could probably use a bit more printed money, or private credit, right now.

[Gumby]

Generally speaking, although you did not like my embellished examples, taxes can act as a thermometer. When inflation heats up, and people have excess cash, you can use taxes to mop up the excess money — whether it be from private credit or government spending — and thwart inflation. When inflation cools off, you can decrease taxes (and increase government spending, if necessary). Now, whether a government actually does that or not is anyone's guess.

[Gumby]

And to tell you the truth, Kshartle, you sound an awful lot like our dear friend Doodle did in 2011, when we started this thread...

http://gyroscopicinvesting.com/forum/pe ... -blinders/

Six months later, after lots of discussion and research on his part, he came to this conclusion...

http://gyroscopicinvesting.com/forum/pe ... the-light/

A complete 180º in his thought process. I have to hand it to him — he really opened his mind and challenged his own beliefs.