TLT looking really bad right now

[Kshartle]

If you flipped it over, wouldn't it be the price chart for TLT?

Obviously they're going to look similar, particularly over a small timeframe. It's still not a price chart. It still doesn't reflect the unrealized loss or gain owners or short sellers have in their portfolio exactly the same as stocks.

It's also such a vastly larger market than any stock, with buyers and sellers in it for a lot of reasons. Like I said I think there are some who will target an interest rate they are willing to buy at but I don't think the predictive power of support and resistance is there like with some other things.

Support and resistance aren't exactly slam dunks either, but at least they make sense logically because they're based on normal human emotions (fear, greed, pain). Unlike moving average crossovers which are just the effect of the price movement and possibly confirm a trend. 

I don't think you can make a long-term living trading crossovers. Once you hit a long-term sideways market you're gonna get whippsawed.

[MediumTex]

It would be equally foolish to think that removing the overwhelmingly largest buyer of a particular item from a market would cause the price to rise long term. I've never gotten whatever deeper insight the FED-absent lower yield point some try to make on here.

Are you saying the FED is not artificially supporting the price of treasuries? What are you really saying when repeat the above quote? Is it more than the obvious that yields are capable of moving lower without the FED? Do you think if the FED wants higher bond prices it should stop buying?!?!?

Treasury yields had been falling for 25 years before the Fed started buying treasuries.

All I'm saying is that the effect of the Fed's treasury purchases is perhaps overestimated.

I cite 25 years of falling yields before the Fed's QE episodes AND the fact that yields fell between QE episodes as a way of challenging the market narrative that says that yields are poised to shoot up once the Fed stops buying treasuries.

Going forward, yields may rise or they may fall, but I don't see one scenario as being more obvious than the other (though I do personally think that it's more likely that rates will head lower from here).

[Kshartle]

1. Treasury yields had been falling for 25 years before the Fed started buying treasuries.

2. All I'm saying is that the effect of the Fed's treasury purchases is perhaps overestimated.

3. I cite 25 years of falling yields before the Fed's QE episodes AND the fact that yields fell between QE episodes as a way of challenging the market narrative that says that yields are poised to shoot up once the Fed stops buying treasuries.

4. Going forward, yields may rise or they may fall, but I don't see one scenario as being more obvious than the other (though I do personally think that it's more likely that rates will head lower from here).

1. Completely True

2. Over 2 trillion in bond purchases over 3 years doesn't seem like it would have that big of an effect? I wonder why they're doing it then? Actually I know why. The Governmnet could not finance it's deficits at higher interest rates. It's not all treasuries but it all reduces the supply of debt for sale.

3. What do you think would happen if the FED reversed it's policy completely and started selling 85 billion a month? That would eliminate a major part of the distortion in this market leaving only other central banks to continue fighting reality. The reality that the US government can never repay what it is borrowing now without severely diminishing the purchasing power of the dollar. Isn't it obvious that yields would shoot up if the FED start unloading it's bonds? This is virtually the same as if they just retire it because the Government will have to find some other buyer to pay off the maturing bonds. Who is going to loan them the money? I'm afraid their aren't enough people following the PP. When bonds yields really start moving up you're not going to see people wanting to jump in.

4. 30 year treasuries are 3.84% as of this morning. You don't think it's more obvious that yields go up in the long-term vs. down? No one can reliably predict the short-term so down is as good up. They have moved up pretty fast so you might get some buyers coming in. 

All that being said you still have this entity that creates dollars with the push of a button and is buying these things with no regard to their P&L. If you create money substitues out of thin air and didn't actually have to work for them it's not the same as the man on the street who buys a treasury bond to protect the purchasing power he actually earned.

I think some of you guys are deliberatly ignoring the obvious about the governments ability to service it's debt because you own them rather than owning them because you've concluded it's sound.

[MediumTex]

I think some of you guys are deliberatly ignoring the obvious about the governments ability to service it's debt because you own them rather than owning them because you've concluded it's sound.

You're making very sound arguments.  The problem is that sometimes the markets simply don't behave according to what sound arguments suggest that they should do.

One day yields will start rising and break out of their multi-decade downward trends.  I just don't know when that will be.  What I do know is that people have been making the arguments you are making for years, and so far they have been wrong in their predictions that dramatic increases in treasury yields were imminent.

What do you think will happen to the housing market if yields were to spike?  If the housing market were to stumble badly due to rising interest rates, what do you think would happen to the larger economy?

Do you follow the Japanese, German and British bond markets?  Long term yields are low in all of those markets as well.  Do you think that interest rate spikes are likely soon in those countries as well as the U.S.?  The government balance sheets of those countries aren't a lot better than the U.S., and obviously Japan's is far worse than the U.S.'s (and, of course, Japan has by far the lowest long term interest rates as well).

[Kshartle]

I think long-term all rates are going up, that includes dividend rates. I think long-term we're going to stocks and bonds (even treasuries) drop the negative correlation they've had for a while now. Time will tell.

I absolutely think these higher yields are going to crash housing and the economy is going to get very bad. I think we're going to see stagflation (higher prices, rising yields, tepid stock appreciation, more unemployment etc.)

I think the US can't continue to count on foreigners to subsidize our lifestyle and propping up the dollar.

Anything can happen all that being said. Hey MT I hope none of this is taken as personal. I just enjoy discussing this stuff and it seems so dog gone obvious to me that I might be coming off like a jerk. I really don't mean to. It would be better if we could all have a chat over a beer. Yes you might see me yell and look exasperated but it would be it would be in fun not anger.

[Kshartle]

What I do know is that people have been making the arguments you are making for years, and so far they have been wrong in their predictions that dramatic increases in treasury yields were imminent.

I've never used the word imminent. I'd just like to point that out. I'm 100% certain that short term predictions are a coin flip. I consider anything under 2 years short-term. I have no idea what the yield will be in 2 years. I think it will be higher but.....

Now 5 years...........much higher or the dollar will have dropped because of the FED. Maybe both.

[Kshartle]

And I definately got blindsided by the drop in Gold this year. I'm about 50-50 gold/silver and stocks  I'm still quietly optomistic that it will end the year positive because i think the fundamentals are getting stronger every week. However....short-run....coin flip.

[AdamA]

Now 5 years...........much higher or the dollar will have dropped because of the FED. Maybe both.

Would you have made the same predictions in 2008 (5 years ago)? 

Many did, and the opposite has turned out to be true.

[Kshartle]

Now 5 years...........much higher or the dollar will have dropped because of the FED. Maybe both.

Would you have made the same predictions in 2008 (5 years ago)? 

Many did, and the opposite has turned out to be true.

5 years ago the 30 year was 4.36% so not much higher. The dollar was a heckuva a lot stronger, Gold was under 1,000 and Gas was back at 2$ so......definately not the opposite.

Ohhh yeah the government debt was half or less than half and workforce participation was higher so the fundamentals for LTBs was a lot stronger. Ohhhhh yeah and the FED has bought trillions since then. So if you think the FED can repeat and buy another 3 plus Trillion and keep yields low I'd say that's possible. But not without hurting the dollar again.

The opposite has definately NOT turned out to be true.

No idea what I would have predicted in 2008. How could anyone predict the FED would buy Trillions and get away with it for this long? Do you think they can get away with it forever?

How do you think you're going to get any real return out of LTBs?

If you run GLD, SPY and TLT for the last five years the returns are 72%, 49% and 30% so let's not pretend LTBs have been great. They've smoothed out the two big stock pullbacks but a 50-50 stock and gold portfolio has been much better, although more bumpy.

[Pointedstick]

No idea what I would have predicted in 2008. How could anyone predict the FED would buy Trillions and get away with it for this long? Do you think they can get away with it forever?

No. But I don't think any of us knows when it'll be. Which is why we still hold bonds anyway.

How do you think you're going to get any real return out of LTBs?

I don't think I'm going to get a real return out of LTBs. I think I'm going to use them in the PP to get an overall real return. A 100% LTB portfolio seems as risky and dangerous as an all-stock or all-gold portfolio.

If you run GLD, SPY and TLT for the last five years the returns are 72%, 49% and 30% so let's not pretend LTBs have been great. They've smoothed out the two big stock pullbacks but a 50-50 stock and gold portfolio has been much better, although more bumpy.

Yes, stocks and gold have been on a tear for the past few years. But who knows when the tables will turn? These rising interest rates could cause gold to fall into a bear market that cuts its value in half or worse, as happened in the 90s. The stock market could explode or gradually fall year after year after year when the market wakes up to the fact that the fundamentals of the economy are very shaky (as you mentioned, the labor force participation rate is very low). We don't know. That's why I'm ultimately happier owning everything rather than trying to make bets on the future, let alone the timing of future events. My track record isn't so good with those.

[Kshartle]

I get it. I'm just interested if anyone here (almost all of which are holding 30 year treasuries) can make a fundamental case for them and not just......rates might fall without the dollar losing purchasing power. 

[Pointedstick]

There's also the guaranteed interest payment. Whatever you think of the wisdom of this, a currency issuer government can always make good on its financial promises by conjuring up more money, unlike a corporation. Corporate bonds are full of all sorts of risks that you can avoid by buying Treasury bonds. They can just up and say, "welp, sorry folks, we're defaulting on all our debt. Best of luck!" The U.S. government has never done that, and if they wanted to, they would probably coordinate with the Fed to replace everybody's bonds with cash first so as to avoid ruining the entire world economy.

None of that is an endorsement of any of this, mind you. It's just an acknowledgement of the capabilities of the government as a financial entity. As long as it exists, its bonds are going to be less risky and less rewarding than equivalent duration bonds from any other entity.

[Kshartle]

There's also the guaranteed interest payment. Whatever you think of the wisdom of this, a currency issuer government can always make good on its financial promises by conjuring up more money, unlike a corporation.

You think counterfeiting is making good on obligations? So you think Zimbabwe made good on it's obligations? Everyone and his brother knows that the government can repay with inflated dollars. Please let's just establish that everyone knows this once and for all so we don't have to ever mention it again. Everyone knows it or if they don't they have no clue about what's going on.

My question is do you think they can repay if the printing stops? Here's a better question....do you think 3.9% interest minus taxes is going to come close to covering inflation over the next 30 years? That is what buying a 30 year bond sets you up for now. It's irrelevant if yields fall because we're not talking about future purchases....we're talking about right now.

Holding a 30 year bond fund is like constantly selling 25-26 year bonds and re-buying 30 or something close to that. It's not the same thing. If the bottom fell out and rates were double digits in a year this would be a completely different situation. I'm talking about the fundamental case right now today.

What is it other than nominally you will see a gain if you hang on long enough (barring an outright default which is, I agree, unlikely)?

[Kshartle]

Ohhh I get that it will dampen volatility. Anyone holding purely to keep volatility down has a good point although I think you might as well just go 1/3 cash, 1/3 gold & 1/3 stocks for low volatility.

LTBs just look like they're going to shield you from long-term gains at these interest rates.

[Mdraf]

I think some of you guys are deliberatly ignoring the obvious about the governments ability to service it's debt because you own them rather than owning them because you've concluded it's sound.

You're making very sound arguments.  The problem is that sometimes the markets simply don't behave according to what sound arguments suggest that they should do.

One day yields will start rising and break out of their multi-decade downward trends.  I just don't know when that will be.  What I do know is that people have been making the arguments you are making for years, and so far they have been wrong in their predictions that dramatic increases in treasury yields were imminent.

What do you think will happen to the housing market if yields were to spike?  If the housing market were to stumble badly due to rising interest rates, what do you think would happen to the larger economy?

Do you follow the Japanese, German and British bond markets?  Long term yields are low in all of those markets as well.  Do you think that interest rate spikes are likely soon in those countries as well as the U.S.?  The government balance sheets of those countries aren't a lot better than the U.S., and obviously Japan's is far worse than the U.S.'s (and, of course, Japan has by far the lowest long term interest rates as well).

According to my 17/43 WEMA the rise has started and is not about to change any time soon. See graph:

[Pointedstick]

There's also the guaranteed interest payment. Whatever you think of the wisdom of this, a currency issuer government can always make good on its financial promises by conjuring up more money, unlike a corporation.

You think counterfeiting is making good on obligations?

Everything the government does is criminal when anyone else does it, sure. Money printing is counterfeiting. Regulations are orders at gunpoint. Arrest is kidnapping. War is mass murder. But that's the world we live in. Raging against it doesn't help us make good decisions.

So you think Zimbabwe made good on it's obligations? Everyone and his brother knows that the government can repay with inflated dollars. Please let's just establish that everyone knows this once and for all so we don't have to ever mention it again. Everyone knows it or if they don't they have no clue about what's going on.

I acknowledge that government money printing is inflationary, not that it automatically causes inflation. For example. If there is 2% price deflation and government prints enough money to make price inflation 0%, it has introduced inflationary forces, but has not actually caused any inflation. It's a subtle distinction, but an important one. It means that when there is inflation, government money printing will make it worse. But when there is deflation, government money printing can actually bring us closer to a stable currency. Not that many of the fools in charge actually understand this, of course.

My question is do you think they can repay if the printing stops?

They could repay it by running a surplus. But whenever the government runs a surplus, that's removing more money from the private sector through taxation than it adds back in through spending. So for a variety of reasons (people hate it, it causes recessions, etc), this is not desirable and is rarely done.

Here's a better question....do you think 3.9% interest minus taxes is going to come close to covering inflation over the next 30 years? That is what buying a 30 year bond sets you up for now. It's irrelevant if yields fall because we're not talking about future purchases....we're talking about right now.

Assuming a 25% federal tax rate, that cuts the effective interest payment to 2.93%. I would be surprised if a 100% bond portfolio composed of these securities beat inflation for the next 30 years after taxes were taken out. But then again, I don't know what inflation is going to be over the next 30 years. I really have no idea. I never would have predicted that it would be near 2% for the past 5 years. And again, I wouldn't hold a 100% bond portfolio for precisely this reason--it will tend to be clobbered by inflation. Same as a 100% stock portfolio will tend to gyrate wildly and be in a slump when you most need the money. Murphy's law and all.
[/quote]

Ohhh I get that it will dampen volatility. Anyone holding purely to keep volatility down has a good point although I think you might as well just go 1/3 cash, 1/3 gold & 1/3 stocks for low volatility.

LTBs just look like they're going to shield you from long-term gains at these interest rates.

It looks like historically, a bond-less portfolio doubles the volatility for almost no additional gain:






Will that be true going forward? I don't know. Maybe bonds will be a drag on the portfolio for the next decade. But gold was a drag on the portfolio throughout the 90s. Stocks were a drag on the portfolio for the 2000s. Cash has sucked for 5 years. The future is unknowable, only guessable.

[Gumby]

My question is do you think they can repay if the printing stops?

Typically the government pays most of its debt by just "printing" more debt. And if the government stopped issuing debt, there wouldn't be any future bonds to purchase from the government. Typically the private sector wants to own government bonds, so there is usually a demand for freshly-printed debt — I for one can't want for the next bond auction .

In other words, the government's liability is the private sector's asset. So long as the private sector is being productive, it would make sense for the government to keep issuing more bonds for the private sector to use.

If you remember a decade ago, the government ran a surplus and decided to stop issuing 30-year bonds. Not cool Uncle Sam, not cool.

[Kshartle]

You're deliberately mischaracterizing my analysis as "raging" to dismiss it. You're not addressing anything I've brought up.

We’ve disagreed on the definition of inflation is the past. I call it expansion of the money substitute supply and some call it rising prices. I think rising prices are a consequence of inflation not the definition of it. Inflation can result in rising prices. Or it could mean prices stay stable when they should be falling. Or it could mean prices fall more slowly than they would otherwise.  These are distinctions without differences. If dollars are printed their value is diminished vs. what it would other be minus the printing.

The government could run a surplus and aliens could land and start buying 30 year bonds. Which one is more likely? If you really think the US will run a surplus then that would be a fundamental case. I’ve never heard anyone make it before. The Government would have to slash its budget so much I can’t imagine what would happen. Imagine the impact on tax receipts from the upheaval? You realize they can’t even propose a balanced budget for 10 years from now?!?! How are they ever going to run a surplus?!?!?! It’s more likely they’ll be forced to sell assets. Real ones, not paper promises.

2% for five years results in 10.4% total increase. Do you think the average price level for goods and services has gone up only 10.4% in the last 60 months? I don’t have anything in front of me, but I can’t think of anything other than home prices that is only up 10.4% since then. I’m sure for everyone we can point out that’s below that there are 5 things that are higher. All with a sluggish economy and high unemployment. And all with foreign governments trading goods for paper.

It’s not even close to double the volatility. You’re only showing the worst 12 month calendar year  and 10% isn’t bad. And this is all with a 30 year bond bull market in place over the 40 years. The largest single 12 month calendar year loss is not the same as volatility.

Guessable? You don’t think there’s anyway to analyze an investment and draw a reasonable conclusion about it’s likely long-term performance? If so ok, we disagree on that and that’s ok.
Hope none of this comes off as personal.

[Kshartle]

My question is do you think they can repay if the printing stops?

Typically the government pays most of its debt by just "printing" more debt. And if the government stopped issuing debt, there wouldn't be any future bonds to purchase from the government. Typically the private sector wants to own government bonds, so there is usually a demand for freshly-printed debt — I for one can't want for the next bond auction .

In other words, the government's liability is the private sector's asset. So long as the private sector is being productive, it would make sense for the government to keep issuing more bonds for the private sector to use.

If you remember a decade ago, the government ran a surplus and decided to stop issuing 30-year bonds. Not cool Uncle Sam, not cool.

So you agree they can't repay without printing?

Their liability is someone else's asset. Yeah, seems like pretty good incentive to devalue it.

[AdamA]

PS I can't figure out how to actually embed these charts into the post it self like you are doing

Go to tinypic.com.

Make sure you resize the image to fit a message board.

[Kshartle]

It's cool guys. I think we just disagree on whether or not it makes sense to fundamentally analyze an investments likely return over a long period. I think there's value in it, some agree, some disagree. It's cool. I think LTBs look really bad long-term and I wanted to hear if anyone really thought they are good hold long term for reasons other than volatility dampening.

A case can be made for Gold, Stocks, even cash in my opinion though I'm holding very little of that (<10%).

I just don't see a credible fundamental case for LTBs producing a real gain, that's all.

[Gumby]

So you agree they can't repay without printing?

Their liability is someone else's asset. Yeah, seems like pretty good incentive to devalue it.

Well, answer me this... Where else would the money come from to pay the principal and interest if all money (except coins) comes from debt in the first place?

Welcome to the paradox of debt-based money.

Either the private sector needs to go into more debt to make the payments or the government needs to go into more debt. It's nearly impossible, in a debt-based society, to pay down debt without creating even more debt in the process.

[Pointedstick]

You're deliberately mischaracterizing my analysis as "raging" to dismiss it. You're not addressing anything I've brought up.

We’ve disagreed on the definition of inflation is the past. I call it expansion of the money substitute supply and some call it rising prices. I think rising prices are a consequence of inflation not the definition of it. Inflation can result in rising prices. Or it could mean prices stay stable when they should be falling. Or it could mean prices fall more slowly than they would otherwise.  These are distinctions without differences. If dollars are printed their value is diminished vs. what it would other be minus the printing.

I'm willing to say that government money printing is inflationary. All I'm trying to add to the discussion is that there are other factors in play as well. If there's a collapse of private credit, that's going to counteract the government-created inflation and give the government more leeway to print without causing high and damaging levels of inflation. When things get better, the stakes will be higher.

The government could run a surplus and aliens could land and start buying 30 year bonds. Which one is more likely? If you really think the US will run a surplus then that would be a fundamental case. I’ve never heard anyone make it before. The Government would have to slash its budget so much I can’t imagine what would happen. Imagine the impact on tax receipts from the upheaval? You realize they can’t even propose a balanced budget for 10 years from now?!?! How are they ever going to run a surplus?!?!?! It’s more likely they’ll be forced to sell assets. Real ones, not paper promises.

This kind of sounds a bit like raging to me.

But yes, I agree that in the foreseeable future, running a surplus is not likely. And so they will finance the debt with more money printing. Same as they've always done.

2% for five years results in 10.4% total increase. Do you think the average price level for goods and services has gone up only 10.4% in the last 60 months? I don’t have anything in front of me, but I can’t think of anything other than home prices that is only up 10.4% since then. I’m sure for everyone we can point out that’s below that there are 5 things that are higher.

Sure, and 5 things that are flat or lower, too. Such as the cost of mortgaged housing, computer equipment, internet access, electricity, industrial hardware, and anything I can get from China.

It’s not even close to double the volatility. You’re only showing the worst 12 month calendar year and 10% isn’t bad. And this is all with a 30 year bond bull market in place over the 40 years. The largest single 12 month calendar year loss is not the same as volatility.

It's not a bad portfolio for someone who doesn't like government bonds. I was just trying to show that it's more volatile than the PP, because you claimed that it would be reasonable to remove bonds if one wanted a low-volatility portfolio. Low volatility compared to 100% stocks or 50/50 stocks and bonds, maybe, but not low-volatility as compared to the PP.

Guessable? You don’t think there’s anyway to analyze an investment and draw a reasonable conclusion about it’s likely long-term performance? If so ok, we disagree on that and that’s ok.
Hope none of this comes off as personal.

No, I think it's quite possible to analyze investments. But it's a really risky game, because all our biases--emotional, political, etc--get in the way. Last year, it seemed totally reasonable to shun bonds, but I bought them anyway, and they've gotten whacked just like I thought they would. But they might not have. Right now, bonds look like a pretty decent purchase, but rates might keep going up. I guess I don't have a lot of confidence in my own ability to correctly predict the markets with enough regularity to make timing and prediction worth it.

[Gumby]

I'm willing to say that government money printing is inflationary. All I'm trying to add to the discussion is that there are other factors in play as well. If there's a collapse of private credit, that's going to counteract the government-created inflation and give the government more leeway to print without causing high and damaging levels of inflation.

Right. And furthermore, Total Private Credit is ~$56 Trillion and the government only net spends ~$1 trillion a year (~$4 Trillion in spending and ~$3 Trillion in revenue). So, it's not like the government is overwhelming the private sector with money printing. The overwhelming majority of our broad money supply comes from private credit (~$56 Trillion). While only ~$16 Trillion comes from T-Bonds. So, the private sector creates the large majority of its own credit-based money.

So, as PS points out, if the ~$56 Trillion Total Private Credit collapses, it's going to make the recent $1 Trillion/year in net government spending almost powerless to create much inflation.

[Kshartle]

I'm convinced you guys will never answer a straight question and will just keep avoiding it. You keep referring to rising prices/inflation whatever. You are seriously trolling and it's annoying.

It's like I'm pointing out that if it rains and you're outside you'll get wet and you reply "Well...what if it's sunny?" That's not the point.