US Is in Even Worse Shape Financially Than Greece: Gross

[MediumTex]

I think it might be a mistake to draw too many comparisons between the US and Japan. We are two completely different cultures and societies.

But the two central banks are staffed with people of almost identical beliefs.  In fact, Bernanke's earlier writings suggest that he believes Japan's many rounds of QE were not large enough.

With regards to the Japanese debt the overwhelming majority is bought by Japanese investors as opposed to US debt which is predominantly held by foreign governments.

U.S. debt is held by many parties, but given the requirement that the rest of the world recycle dollars one way or another it's no surprise that foreigners own a lot of U.S. debt.  In other words, there is far greater foreign demand for U.S. debt than Japanese debt.

In previous posts you stated that you think that Americans might come in a fill the hole where the Fed and foreign govts have been buying, though this is possible I am going to say that there is a lot of skepticism regarding our govt right now and I dont think they will have an easy time convincing people to lend them money for 30 years at less than 4 percent.

I don't think that individual U.S. investors are going to take the place of foreign treasury buyers; rather, I think that individual U.S. investors could start buying treasuries in addition to foreign buyers, which could push rates much lower.

During WWII, when U.S. bonds were sold at concession stands in movie theaters, yields were around 4% (and lower).

I sold out of my EDV this afternoon...i bought in when it was yielding around 4.7% but with a duration of 25 years I cannot take that kind of risk if interest rates were to rise.

That's a good trade, but has almost nothing to do with the suitability of LT treasuries in a PP setting.

I am just saying that from a cost / benefit analysis the risks of holding LT treasuries at these low rates outweigh the benefits.

Just like it has for many years, which is what one would expect to see in the mid to late stages of a secular bull market--i.e., as long as there are skeptics still to be won over, we may have more room to run.

[moda0306]

I think viewing LTT's in terms of the view of a retiree is always going to be important, regardless of whether our wish will be to collect for 30 years.

Think of it (not that this is exactly how it will manifest itself, but you get the idea).  You're 65 with enough tucked away, but not TOO much more than enough... you're being offered annuities left-and-right that pay you 6.5% until you die, and they keep the rest.

You really want part of your portfolio to be a safe, fixed piece that will pay you a decent return well into when you plan on living... Yes, inflation might hit, but you can make up for that with the rest of your portfolio in I-bonds, TIPS, dividend stocks etc... you just want some kind of nominal longevity security.

Well 4.2% for 30 years from the borrower of last resort (get you to 95 and STILL return your principal) seems like a very compelling option to retirees... and what do we have more than enough of coming through the trough of life?  A lot of retired people.  They're going to bid that rate down low, methinks.

Remember, this is only as part of their portfolio... I don't think any of the 3 volatile PP assets, on their own, have a great risk/reward balance (they shouldn't on their own... the point is that you put them together)... but given my mortgage situation I have something to hedge my LTT's against that makes them as my VP a decent buy.

[MediumTex]

The govt still has to attract capital by paying more than the rate of inflation. I keep reading that Chinese workers are demanding  high pay increases to keep up with inflation in their country which is driving costs up. This inflation along with rising energy prices will eventually hit the U.S.

And when it does hit the U.S., it is likely to cause a recession, which would push treasury yields lower.

All I am saying is that there is a very coherent argument for long term treasuries, regardless of what actually happens.

Are you suggesting that a PP investor should ditch long term treasuries because there is no way yields can go lower, even though 30 year yields were over 100 basis points lower than they are now a little over two years ago?

[doodle]

Are you suggesting that a PP investor should ditch long term treasuries because there is no way yields can go lower, even though 30 year yields were over 100 basis points lower than they are now a little over two years ago?

Lets say that LT rates go down to 2 percent which causes about a 30% increase in price. This would contribute 7.5% to the overall portfolio. At that point I cannot see rates going any lower.....I would just hang out in cash by then.

So I just don't see that much more upside. In other words you really are not risking much even if we do go into another wicked recession by just hanging out in ST bonds, Cash, or I-bonds.

Unlike Gold which has unlimited upside, LT treasuries (as a type of short against the US economy) have a limited upside (yield wont go negative) and unlimited downside.

[moda0306]

At 2%, which would imply a deflationary environment, even a seemingly small move down to 1.8% would have a much bigger increase in price than a .2% today would.

I'm not sure how big... but maybe someone can calculate it.

The 2% of yield isn't the upside... the potential for a price move if rates drop even lower is.

At 2% yield, .2% represents 10% of the income a retiree would be able to realize from age 60 to 90.  That's $50,000 per year vs $55,000 per year... for 30 years!

The implications of that on price are great.  Saying that rates can't go lower at 2% is like saying that the price at 2% is seriously fundamentally flawed.  No, they can't go negative, but as they approach zero, they become that much more leveraged in nature.

Imagine a 30-year treasury at .5% going to .4%... If grandpa didn't buy at .5%, and now is buying at .4%, that's 20% less retirement income for the next 30 years.... huge implications.

[MediumTex]

When yields get to the levels we are talking about, it's like a game of tennis turning into a game of ping pong, but as moda notes small changes in yields when you get near zero can have a very large impact on the value of the underlying bond.

Ask yourself this: if 2% yields on the 30 year really do suggest it's time to go to cash, what accounts for Japan's ability to sell 30 year bonds at 2% almost every day?  Are those buyers irrational?  It probably depends on where interest rates are when you ask the question.

[doodle]

This guy puts a pretty good argument forward about how the Japanese situation is about to unravel:

http://www.moneyweek.com/investments/bo ... ever-52926

If yields hit 2% retirees are pretty much screwed any which way you look at it. With rates like that the economic activity would be so moribund that I imagine SS and Medicare will be way underfunded without a serious increase in taxes.

At that point those who hadn't lost a ton of money in the deflationary downturn would be investing whats left for a piddly yield that might not even be enough to cover their yearly grocery bill.

I cannot see the US going to this point before massive stimulus interventions which would probably bury us in debt. At that point you would probably see Mexico trying to stem a tide of Americans running south.

I could sure be dead wrong on this but a 2% yield would mean something disasterous had ocurred to our economy.

[MediumTex]

I cannot see the US going to this point before massive stimulus interventions which would probably bury us in debt.

Isn't that what we did in 2009, and isn't that part of the reason that the debt and deficit have exploded since then?

I could sure be dead wrong on this but a 2% yield would mean something disastrous had occurred to our economy.

I would say that something disastrous DID happen to our economy and we are still trying to wrap our minds around just how broken it is now.

I would fully expect that an economy trying to recover from the bursting of a credit fueled asset bubble could see ridiculously low interest rates before the period of deleveraging is over.

As they say, things can go from the impossible to the inevitable without even stopping at the improbable.

[doodle]

So we will have the Republicans cutting taxes to stimulate the economy while the Keynsians inject stimulus by printing dollars. This sounds like a great way to turn the dollar into confetti.

The scenarios that bring us to 2% yields imply a level of economic stagnation that might result in the end of fiat currency.

[MediumTex]

So we will have the Republicans cutting taxes to stimulate the economy while the Keynsians inject stimulus by printing dollars. This sounds like a great way to turn the dollar into confetti.

Didn't we already do that too with the extension of the Bush tax cuts and the 2011 payroll tax cut?

I'm not trying to be difficult here, but it really sounds like every bad thing you are talking about possibly happening in the future has already happened, and all we are doing now is waiting for rates to continue grinding downward.

As far as whether the dollar will become confetti, the Japanese have had to work very hard with the opposite problem--i.e., the strengthening yen has been a nightmare for Japanese manufacturers.  I can easily see the same thing happening to the dollar (which would I'm sure come as a great surprise to the dollar bears).

I'm so happy that the PP doesn't require me to call any of these things correctly because there is potentially a bull case for all three of the PP's volatile assets.  My guess, however, is that gold will be the best performing asset for quite a while longer (though this is definitely just a guess).

[moda0306]

I'd imagine if a deflationary recession was good for anyone it would be bond-invested retirees who ar simply spending already-earned wealth that's often conservatively invested.  The ss medicare piece is a factor, but Ild think it would take decades for them to disappear entirely... I can imagine the cheap commodities and products of a recession would be unwelcome to most seniors.

[moda0306]

MT,

I see your logic with treasuries and deflation...

But what makes you think gold will continue to do so well?  It's harder for me to wrap my head the pricing of a monetary metal that doesn't pay interest than a treasury bond.

[MediumTex]

MT,

I see your logic with treasuries and deflation...

But what makes you think gold will continue to do so well?  It's harder for me to wrap my head the pricing of a monetary metal that doesn't pay interest than a treasury bond.

Because gold is a vote against central bankers, and I think more and more people are going to lose faith in central bank policies as we move forward.

[Lone Wolf]

It's harder for me to wrap my head the pricing of a monetary metal that doesn't pay interest than a treasury bond.

You have to consider the effects of negative real interest rates.  When you lend money at a negative real interest rate, your purchasing power isn't protected.  Nominal Treasury rates are nearly 0% and inflation has been consistently higher than that.

The same forces that make I-bonds with fixed 0% rates look so good also make gold look good.  When dollars can't protect purchasing power, people go to something that will.

[moda0306]

Agreed LW... I realize that's a piece of it.

It's not that I disagree with gold's price going up, it's just difficult for me to quantify where gold should be based on inflation, interest, solvency of central banks, etc.

I tend to see the bond markets (despite the complete eff up on mortgage risk) as the most efficient.  Fixed rates of return and duration are extremely easy to compare, and inflation/default risk are pretty much all that's left... and even inflation will effect all bonds of a given duration, not one more than the other... so it comes back almost 100% to default risk.

Stocks are more difficult, because there are a lot more moving pieces, but at least it's still based on cash flow in the end.

Gold is a mystery... it is a "promise-breaking" gauge I'll never fully understand, even though I'm confident I understand its main drivers, it still doesn't have a coupon rate or a 10-k laid on each brick.... It's like trying to divide by zero for a guy like me.

[Lone Wolf]

I tend to see the bond markets (despite the complete eff up on mortgage risk) as the most efficient.  Fixed rates of return and duration are extremely easy to compare, and inflation/default risk are pretty much all that's left... and even inflation will effect all bonds of a given duration, not one more than the other... so it comes back almost 100% to default risk.

So true.  Long ago, the bond market seemed so mysterious to me.  Over time I learned that it is so much more analytically accessible than the stock market.  (I'm not sure why I missed this when I was younger because it now seems obvious.)

[moda0306]

LW,

Yup... Finally understanding long-term bonds, and later yield spreads and yield curves, it was like a revalation... so simple in some ways.

What's amazing is that in 5th grade we had a stock-market club.  NONE of us had any idea what we were doing, and it just became an exercise in picking your favorite (or your dad's favorite) car company or your favorite soda-pop.

A bond-market-club would have been so much more interesting... if a bit less exciting.

[moda0306]

... in which case I'd have put my money on I-bonds and walked out of the class cockily with my middle finger up (representing an "I" bond, of course).

If I had to be a financial analyst "market beater," I'd so be in the bond market.

[Pkg Man]

It's not that I disagree with gold's price going up, it's just difficult for me to quantify where gold should be based on inflation, interest, solvency of central banks, etc.

I tend to see the bond markets (despite the complete eff up on mortgage risk) as the most efficient.  Fixed rates of return and duration are extremely easy to compare, and inflation/default risk are pretty much all that's left... and even inflation will effect all bonds of a given duration, not one more than the other... so it comes back almost 100% to default risk.

...

Gold is a mystery... it is a "promise-breaking" gauge I'll never fully understand, even though I'm confident I understand its main drivers, it still doesn't have a coupon rate or a 10-k laid on each brick.... It's like trying to divide by zero for a guy like me.

Gold might be considered as the average - a form of index - of a diverse range of commodities.

Gold (average commodities) has been appreciating at near a 20% yearly rate since 2000. Which means that unless you're savings have kept up with that then a partial/substantial 'default' has already been endured. If your savings/investments grew at a 10% yearly rate since 2000 then relative to average commodities - wheat, oats, oil, copper...etc. its little different to having taken a 60% virtual tax hit against your savings/investments. Paper notes stuffed into a mattress hit by a 84% virtual tax.

No gold confiscations required and in true sting style in most cases the mark isn't aware of having been stung.

I'm not sure I buy that Clive.  Inflation for finished goods has been nowhere near that high.  If all you consumed was wheat, oats, oil, and copper, then I might agree, but the prices of commodities have not been fully passed on to finished goods. 

Am I missing something?

[doodle]

Clive,

I think that you are making the same argument that I am trying to make in this thread http://gyroscopicinvesting.com/forum/in ... pic=1103.0

You wrote:

A 30 year T with 4% coupon yield and current 4% market yield might be priced at $1000. If LT (30 year) market yields halve down to 2% then that LT price might rise to $1450. Or if things swing the other way and LT market yield doubles to 8% then the LT price might decline to $550. If inflation soared and LT yields rose to 16% then the LT price would decline down to $260. That's quite a volatile capital value risk/range to secure a potential 2% real. A 10 year T ladder might achieve a similar 2% real reward, but roll/track rates over time in a low risk manner when each rung was held until maturity.

Since yields can only go so low do you believe that an investor can make the determination at a certain point that the risk of holding a 30 year bond at a certain interest rate outweighs the potential upside reward?

When the instruction manual for the PP was written I don't know if Harry Browne considered that one day you would pay more for default insurance on American treasury debt than you would on Mexican debt!

[AdamA]

When the instruction manual for the PP was written I don't know if Harry Browne considered that one day you would pay more for default insurance on American treasury debt than you would on Mexican debt!

HB was still plugging the PP in its current form as late as 2005 on his radio show...in spite of 2008, things are not that much different now than then.

I certainly will still sleep better owning US Treasury debt than Mexican Treasury debt.

[moda0306]

I think of both long-term bonds and stocks as long-term income/growth producing instruments... when trying to compare the two... One has a fixed rate over the next 30 years from the most credit-worthy payer of the U.S. dollar... the other has a variable amount of earnings over the next ?? (assume 30 for this comparison) years from a private entity.... pretty much on the two opposite ends of the risk-spectrum.

In an EXTREME deflation, there may also be challenges to private property and huge hurdles for corporations to make money.  A broad index of corporations may have MANY companies that are at-or-near insolvency, and a lot of others whose prospect for earnings growth is simply gone.  So here you have a bunch of companies in an index, many of which won't be here 30 years from now, and others just barely getting by.

In this world, why wouldn't long-term treasuries be able to go for 1%.  Furthermore, if it's reasonable that they can go for 1% given the risk/reward spectrum of stocks and peoples' will to have a decent nominal rate of return, why couldn't it go to .9% if that outlook changed?  I don't see any reason why we should ever put a floor on long-term interest rates, other than our own optimistic floor as to just how bad things can get.

Yes, planning on a reversion to a mean tends to work... until it doesn't.  I'm not saying 1% returns are likely, but in a world where they exist, people with wealth are looking ever-so-hard for a rate of return that will support them.

Remember, also, that the 30-year treasury represents to most retirees not some volatile deflation hedge (like how we view it), but a source of steady, fixed income from age 65 to 95.  Of course nobody wants this to be their entire portfolio, but especially in a world where shorter-duration yields are proving too sparse for too long, people will want PART of their portfolio in a fixed rate of return.

The same thing that attracts people to putting SOME of their money into a fixed annuity attracts them to 30-year treasuries.  To them, it's not volatile... it's steady.  "Volatile," to them, is the returns they're getting from short-duration bond instruments that are paying extremely low income right now, when just a few years ago they were supporting a pretty nice lifestyle.

Funny how your view of "volatility" within LTT's and STT's change when you're thinking of it in terms of income-support, not as a piece of the PP or looking at its value day-to-day.

[moda0306]

Ok, I guess I can see this being a piece of it.... at 1% return on $1,000, that's $10 per year of income for 30 years.

$10x30= $3,000... therefore, you could get the same amount of income by simply depleting 30% of your wealth over the next 30 years.  That's not too shabby compared to taking on the risk of interest-rates rising during that time.

Conversely, today, assuming a 4% rate, you'd get $40 per year on the same financial instrument.  $40x30= $1,200.  To try to generate that income just by pulling out the cash, you'd run out before the 30-year mark...

I guess it all comes down to your ability to "mimic" income by simply drawing down cash for the same period.  As you get down into super-low interest rates, your ability to simply "cash out" and just draw down the cash every year, and not subject yourself to interest-rate risk along the way, is more-and-more appealing.  We can only live so long, and at a 1% 30-year rate, if the alternative is simply drawing down cash for 30 years and still having 70% of my original wealth, I might just consider that.

This isn't taking into consideration negative interest rates... which I don't even see how they got away with... why wouldn't people just hold their cash?

[doodle]

I think this conversation highlights perfectly how hard it is to actually predict bubbles.

When I hear people justifying ideas like 1% interest on a 30 year bond it sounds strikingly similar to the justifications I was hearing back in 2005 of how housing prices were still a bargain at those insane levels.

4.2% on a 30 year maybe isn't a bubble yet but it is certainly below the US inflation numbers which I think most recently came in around 4.6 annualized.

World economic activity isn't going to come to a complete standstill forever and sooner or later the US will have to attract capital or the balance sheet will get even uglier than it already is. Either way, interest rates at some time must rise....

[Gumby]

Either way, interest rates at some time must rise....

This is what they have been saying in Japan, every day, for the past twenty years or so.

When I hear people justifying ideas like 1% interest on a 30 year bond it sounds strikingly similar to the justifications I was hearing back in 2005 of how housing prices were still a bargain at those insane levels.

Doodle, if the 30 year bond were ever at 1%, you'd be crapping in your pants for fear that your bank would implode and worrying about how much change you could scrounge up to afford a bite of moldy bread to eat.

You would be thanking your lucky stars that you had LT treasuries paying at 3 or 4% on your balance sheet — and you probably wouldn't want to give them up for anything at that point.

If you want to remove that kind of deflation protection from your portfolio, it's your funeral. Not much else we can do to convince you.