I admit the headline is a little sensationalistic, but after Wednesday’s WTF bond auction, I feel like slapping the market around the face with a rotten fish. Now certainly there are plenty of penny stocks headed to greater losses far sooner. And certainly, lots of people have made good profits on Treasuries by buying them and flipping them to a greater fool or a central bank. On the other hand, so did many during the NASDAQ bubble, or during the ’00s ABS bubble. Bubbles are profitable for some, and that’s why there have been so many throughout history. But once the money starts to dry up they become excruciatingly painful.
Treasury yields are just going lower:
After a 30-year bull market, you’d think that the financial media might have cottoned onto the idea that there is little scope left for real gains, either by holding bonds to maturity (inflation is outrunning yields) and even by flipping it off to a greater fool (or the greatest fool of all — the central bank).
In theory, there are no limits to how low rates could go. In theory, nominal yields could go deeply negative, so long as there are buyers coming into the market ready to buy at a lower rate, and a push a profit to bond flippers. In reality, even Japan — a nation that has adopted desperate measures including forcing financial institutions to buy treasuries to keep rates depressed — has not managed to push nominal rates below zero. The scope for great profits from flipping bonds seems to be evaporating. And in any case, the latter case of flipping bonds to a greater fool or the central bank balance sheet is a classic characteristic of a bubble. The inherent value in a bond is its yield; everything else is speculation.
In the classic bubble mentality, more and more financial media — hastened on by the prospect of deflation (something which the Fed is absolutely obsessed with preventing, and is prepared to print an unlimited amount of money to do so) — are calling Treasuries something that you can’t afford to not own.
The reality, though, is that even recent years treasuries have not really been a good investment. Bond prices may have gone up, but they’ve been eclipsed by a harder kind of asset — gold:
Indeed, the real bull market in bonds ended in the ’90s. It’s not just that bond bulls are running out of steam; next to gold bulls they have made a relative loss. Here’s what I call the gold-denominated real interest rate (or the “real real interest rate”) on the 10-year treasury — rates minus the percent change in the gold price:
While the bond flippers have done well (just as the NASDAQ-era bubble merchants did well flipping Pets.com to a greater fool), whoever is holding bonds to maturity is gradually pouring purchasing power down the drain. And that is the problem; the only way that the bond flippers can get their pound of flesh is for the Fed to print a whole swathe of money and buy the flippers flip-offed bonds. And however depressed the economy is, printing money to absorb treasuries is hazardous to the currency, and irritating to the largest treasury holders — who America happens to import a lot of goods and oil from — who hold treasuries to maturity instead of flipping them off. A trade war between America and her creditors seems inevitable and the bond flippers on Wall Street may end up being dragged under the bus by such an event — perhaps getting paid off in a heavily devalued dollar and losing their shirt on a bond-flipping trade where they initially only stood to make a sliver of a percent gain on their stake (made even riskier by concentrated ZIRP leverage).
It is hard to really call the timing on the end of a bubble. People and events can always get more irrational. Japan has kept the Treasury ball (painfully) rolling for far longer than most of us expected (through market rigging as much as anything else). But this cannot end well.
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YES!! Whose f****** brilliant idea** was it to loan money to governments in the first place?
**Fiscal insanity…brought to you by your friendly local, regional and central bankers everywhere.
OK. It is out. A whistle blower informed the highest levels of gobernment about the LIBORGATE FRAUD and nothing was done. This is big.
Will the SHEEPLE demand compensation? I think not. It sickens me that this is going on. There is no point in being a whistle blower. The whole system is rotten.
http://www.marketwatch.com/story/new-york-fed-knew-of-libor-cheating-in-2008-2012-07-13?dist=afterbell
The best investment in the world are shares in LIBOR participant banks.
The best shares?
Doubt it. They will screw the shareholders too.
I think it’s stunning anyone believed LIBOR could be anything but rigged. Any figure based on self-reported information is noise.
great article. saw it on zerohedge. i’ll keep an eye on your page now. i have seen you give permission for posting your articles, and have done so on my website with this one – http://www.tragedycomplex.com. thanks john.
Thanks.
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I’m a little disappointed in you this time, Aziz.
There are actually three ways to make money in bonds:
1) Hold bond to maturity (collecting interest)
2) As interest rate fall, prices of higher yielding paper go up (flipping).
3) Currency bond is denominated in appreciates (currency play).
I think you’re forgetting about #3. The USD is the best looking horse at the glue factory right now. We all know that a strong dollar crushes US stocks. So if you believe the dollar’s going up, you don’t want stocks, and if the dollar’s going up, the other currencies are going down.
So if your a European who bought treasuries March 1, you’re up 3% on the bond price and 9.9% on the currency! Who cares about the pitiful yield? You’re killing it.
Yes — there is a currency element to these trades. Doesn’t really affect purchasing power unless you intend to liquidate the position (flip?) and then convert back to another currency. Though there are plenty of global investors who have benefited from the currency element (though my view is that if they wanna go long dollars they should hold blue chip industrials or dollars, not treasuries), this is a speculative trade; we’re in a currency war, and the dollar can very much go down as well as up. The logical conclusion of this creditor-debtor war is a very significant haircut on treasuries in terms of purchasing power. The market is full of dynamite, even if plenty of people in the future will probably enter and exit safely and profitably.
But you yourself have observed that our “markets” are nothing more than the gaming of the actions of central planners. Those actions (or inactions) are obviously exploited by those in the know, who have access to far more sophisticated strategies than you or I. So treasuries are horrible for the common man, but not global instituions.
Where it gets really crazy is the earnings and dividends of so-called blue chip companies are actually very reliant on the deficit spending of governments, which is entirely dependent on increasing debt sales. When that cycle ends, the whole thing falls apart.
In the end, I think we will see that the market cannot be constrained so easily.
Agreed. I was just trying to point out that the seemingly insane activity in the Treasuries is a cash cow for some. The well-connected continue to find ways to extract more wealth from the broken system.
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The scandal with LIBOR manipulation by banks is a joke. The Central Bank and other banks always manipulate the currency…it is normal business practice…..why is this never outed as a scandal? Why is it being ignored as if it is not a scam?
This is the heart of the matter when it comes to the entire “investment community.” Investing, in almost all cases, is simply a polite word that means appropriating anothers labor-value.
The manipulating of every damn thing as pulled-off by the larger institutions is seen as perfectly OK, as you point out, robc, but it is just the most obvious [as well as being the most profitable] form of theft. All the rest are pretty much the same, although more obscured [so that the majority can feel good about stealing from others].
One of these days, people will look back at this stuff and laugh at how stupid [or uncaring] people were to let this kind of thing go on and on and on…
Human being truly are amazing. .
Investing just means putting time, effort, energy, capital or labour into something. If someone has an idea and labour time, and little capital they need someone else to invest their energy, capital, etc.
Aziz, this is EXACTLY how the slave-owner and feudal lord felt.
Regardless of the method, if you are appropriating another’s labor-value, the result is essentially going to be the same [great wealth/poverty with resultant political instability] .
The goal needs to be getting closer to a place where people have the most control over their own labor-value as is possible. Perhaps the capitalist goddess, Technology, will shift her favor and make this possible.
If both parties enter into a voluntary relationship then I have no problem. If it is a matter of coercion, then there is a problem.
Do you believe that 90% of the population [in the U.S.] whose [real] wages have gone down significantly over the past 40 years “volunteered” to be subject to globalization, financialization, crony-capitalism, and all the rest?
I am with you on this. The ordinary worker who was being shafted by globalization, tarriff reductions, and enphasis on Corporate profits and regulatory capture, heard the arguments for and against in daily papers, but it was over their head.
I remember arguing with my economics teacher in high school about the insanity of tariff reductions in the car industry. Rightly so the quality of cars have improved with competition, but now they are totally noncompetitive with zero tariffs. As a result the industry is on life support. I saw this happening! I was selfish as I had a predilection for Australian built sport cars, but as I matured I realised families relied on jobs and income from these industries.
The shopping centre mall was virtually pioneered in Australia and clothing was flooded by chinese imports. As a result our textile industry collapsed.
Now migrants with no English or “Government industry experience” are unemployed. Depressed disgruntled and a hot bed of future rioting. 50 years ago they were picked up at the Port of entry and given jobs by “Fletcher Jones” Google that stroy he was ahead of his time with corporate social responsibility. Now the business is no more.
I agree, the internet, and 3D printing, may allow the masses to become “empowered”. I had to laugh the other day. Farmers Markets are becoming so popular now, that the big chain grocery store “Woolworths” was paying a advertising agency top drive to the regions on Saturday and Sunday, promoting their “Market Fresh” slogan. What a desperate joke.
BR, what people refuse to see is that in exchange for, “newer and better and cheaper,” [those attributes that drive maximum profit in the capitalist system], you get the resultant accumulation of wealth and political instability.
Economics, like a ll things in life, works best when the system is as balanced as is possible. This means acting in the interests of regular people once in a while [instead of being completely obsessed with ROI].
Throwing 90% of the country under the bus hardly seems like a great way to go about things.
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Actually addressing the intent of your post, Aziz, look at the Swiss 2y at nearly – [yes, minus] 43bps. Imagine that!
This is the problem with being “free!”
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I hope you read this: The perfect Black Swan? Penson Financial Corporation is a clearing firm for a large number of future’s trading brokers. Currently, Penson is boarding on bankruptcy with a stock value of 12 cents. If the clearing firms, such as Apex clearing corporation, a subsidiary of Penson Worldwide, goes under, it could be used to tank up to 1/3 of all futures trading brokers. If you want further proof of Penson’s doomed future: look up the insider trading history of their RECENTLY ACQUIRED CFO, Michael D. Chochon. Also their former director had a hobby for losing money at the race track. To top it off, Mr. Cochon RESIGNED on July 14th. He was replaced by some idiot, Bart McCain, who previously ran PFSI, a penny stock company so broke/small it’s quotes aren’t even listed…
Sincerely, Taco Motha Fuckin Johnson
I predict the US Treasury Bond collapse will occur some time in November 2012. Conditions:
If China issues a Bond to support their stimulus policies, I know where I will be investing.
Correction. December.
Circular marketing.
http://www.flickr.com/photos/expd/7566502480/in/photostream
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