Gyroscopic Investing

http://www.ft.com/intl/cms/s/0/dbe0ab88 ... z1WWsUzNgZ

From the article:

"Mr Gross emptied his $244bn Total Return Fund of US government-related securities earlier this year in a high-profile call that has backfired as the bond market has rallied. As of Monday, Pimco’s flagship fund ranked 501th out of 589 bond funds in its category."

Gross went on to say: "“Do I wish I had more Treasuries? Yeah, that’s pretty obvious,”? Mr Gross told the Financial Times last week, adding: “I get that it was my/our mistake in thinking that the US economy can chug along at 2 per cent real growth rates. It doesn’t look like it can.”?

Once again HB has been vindicated when he said that no one can predict the future. Not even Pimco's Bill Gross.

Not even Jim Rogers.

Not even Nassim Taleb.

Not even Marc Faber.

It is a bit surprising, though, that Gross admits he got this one totally wrong.  Normally, the market wizards just pretend the bad calls didn't happen at all and move on to the next prediction.

Probably means it's a good time to short treasury bonds. 

EE Bond Arbitrage... engage.

According to this graph we are entering into historic territory here in the US in terms of 10 year bond yields. In recent history bond yields have only been below 2% for a short period before WWII.



In Japan I believe the low was somewhere around .5% on the ten year at which point the central bank intervened and drove rates up to 1.5% shortly thereafter. They have been hovering around 1% over the last decade more or less. This experience would be a worse case scenario for the US economy and with US yields below 2% indicates that we are bumping up against upper levels for bond prices.  

The Japanese 30 year is at 2.2% which means there could conceivably be about another 1% drop in the US 30 year from current levels, still upside here is limited as well.

Would members here advocate that new PP investors plow 25% of assets in 30 year bonds at these levels, or take a chance in shorter maturities for a while?

doodle wrote: Would members here advocate that new PP investors plow 25% of assets in 30 year bonds at these levels, or take a chance in shorter maturities for a while?

I would advocate following the PP recipe.

Unrelated question....

Does the Japanese central bank have flexibility with regards to monetary policy in the event that inflation were for some reason to rise? Could they raise interest rates to 5% without having interest payments cut into government tax revenues too much?

In other words once a country reaches a certain level of debt....200% of 300% of GDP, can they effect monetary policy at all to stem rise in inflation? If so, how would they do that?

doodle wrote: Unrelated question....

Does the Japanese central bank have flexibility with regards to monetary policy in the event that inflation were for some reason to rise? Could they raise interest rates to 5% without having interest payments cut into government tax revenues too much?

In other words once a country reaches a certain level of debt....200% of 300% of GDP, can they effect monetary policy at all to stem rise in inflation? If so, how would they do that?

A government that issues its own currency and owes its debt in that currency cannot be insolvent. If they need to raise interest rates, they just do it. However, politicians must also make the right choices to keep things running smoothly. For instance, raising taxes is a potent solution to ward off inflation.

Here's a 2003 speech that Bernanke gave to the Japan Society of Monetary Economics, in Tokyo, Japan. In the speech he talks about ways the BOJ can deal with interest rate risk:

http://www.federalreserve.gov/boarddocs ... efault.htm

Since Japan is fiat and doesn't owe any debt in a foreign currency, there are a lot of options. Here's a quote from the speech:

BEN BERNANKE: The public debate over the BOJ's capital should not distract us from the underlying economics of the situation. In particular, the private shareholders notwithstanding, the Bank of Japan is not a private commercial bank. It cannot go bankrupt in the sense that a private firm can, and the usual reasons that a commercial bank holds capital--to reduce incentives for excessive risk-taking, for example--do not directly apply to the BOJ.

It's worth noting that inflation would generally help the government's financial situation. Here's another helpful quote from the speech:

BEN BERNANKE: From a public finance perspective, increased monetization of government debt simply amounts to replacing other forms of taxes with an inflation tax. But, in the context of deflation-ridden Japan, generating a little bit of positive inflation (and the associated increase in nominal spending) would help achieve the goals of promoting economic recovery and putting idle resources back to work, which in turn would boost tax revenue and improve the government's fiscal position.
Source: http://www.federalreserve.gov/boarddocs ... efault.htm

The Japanese nation has many serious problems. But, the lack of ways and means to finance their debt isn't one of them. Their financial position is a lot better than you think.