Treasuries, another bubble? – Piggington's Econo-Almanac

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October 11, 2008 at 3:33 PM #14180

underdose
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Surprisingly, yields on 10 year treasuries have risen in the past week, indicating somewhat of a sell off of treasuries at the same time as the sell off in the stock market. This has been rare lately, though. Often you see in the financial news when stocks go down and treasury prices go up (yields go down) the phrases “flight to safety” or “flight to quality”. I do not understand this sentiment.

What if the US government were just a company, like GE or Enron? How would we evaluate their financial strength? We would look at their financial statements. This “company’s” income, or P&L, statement would show a nearly $500 billion LOSS for this year before the additional commitment to spend another $800 billion on the bailout. Over a trillion in the red at the bottom line! Then there is the balance sheet, that just yesterday ticked over $10 trillion in secured debts, with additionally roughly $50 trillion in unsecured obligations for social security and medicare, much of which will fall due in the next few years as baby boomers start to reach 65. This “company” will unlikely default because it has what Enron lacked, a printing press. But printing, as Bernanke has been doing and promises to continue, is effectively defaulting by paying back debts with monopoly money. If the government prints aggressively enough, inflation will be severe.

So why would you lend this arguably bankrupt “company” money for 10 years at less than 4% interest? This is only “safe” or “quality” if you are quite certain that inflation will be mild for the next 10 years. If inflation, or a glut of new treasury issues to fund the bailout, cause yields to climb (and prices to drop), you suffer severe risk of loss of capital if you need to liquidate before the maturity of the bonds. That’s no safer than losing your capital in a falling stock market. If you hold to maturity, you will get all of your capital back in face value, nominal terms, but your purchase power will have evaporated. Again, no benefit. Treasuries look awfully risky to me. And the AAA rating comes from the same agencies that rated toxic subprime mortgage backed securities as AAA too.

Is there some safe or high quality aspect of treasuries that I am overlooking? Or are treasuries, like houses were a few years ago, the subject of gross misconceptions? Are they yet another overvalued asset class on the brink of a tumble?

October 11, 2008 at 4:40 PM #285783

stansd
Participant

The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.

OTOH, it may be more of a relative judgment…outside of Gold, if the U.S. were to suffer economic catastrophe, what investments wouldn’t go with it. Decouping hasn’t happened.

Regardless, this will end. The only thing giving me some confidence in the American economy is the fact that we don’t have the same level of unionization nor the same size public sector as other world economic powers-all things that will slow the adjustment of prices and wages toward the new equilibrium.

On that note, people have no idea how fast the unemployment rate is about to skyrocket. Not only are companies laying off workers, but boomers will be retiring at a slower rate, and people who were retired or semi-retired will be re-entering the workforce as their savings evaporate.

My bet is 10% Unemployment by June.

Stan

October 11, 2008 at 4:40 PM #286075

stansd
Participant

The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.

OTOH, it may be more of a relative judgment…outside of Gold, if the U.S. were to suffer economic catastrophe, what investments wouldn’t go with it. Decouping hasn’t happened.

Regardless, this will end. The only thing giving me some confidence in the American economy is the fact that we don’t have the same level of unionization nor the same size public sector as other world economic powers-all things that will slow the adjustment of prices and wages toward the new equilibrium.

On that note, people have no idea how fast the unemployment rate is about to skyrocket. Not only are companies laying off workers, but boomers will be retiring at a slower rate, and people who were retired or semi-retired will be re-entering the workforce as their savings evaporate.

My bet is 10% Unemployment by June.

Stan

October 11, 2008 at 4:40 PM #286096

stansd
Participant

The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.

OTOH, it may be more of a relative judgment…outside of Gold, if the U.S. were to suffer economic catastrophe, what investments wouldn’t go with it. Decouping hasn’t happened.

Regardless, this will end. The only thing giving me some confidence in the American economy is the fact that we don’t have the same level of unionization nor the same size public sector as other world economic powers-all things that will slow the adjustment of prices and wages toward the new equilibrium.

On that note, people have no idea how fast the unemployment rate is about to skyrocket. Not only are companies laying off workers, but boomers will be retiring at a slower rate, and people who were retired or semi-retired will be re-entering the workforce as their savings evaporate.

My bet is 10% Unemployment by June.

Stan

October 11, 2008 at 4:40 PM #286119

stansd
Participant

The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.

OTOH, it may be more of a relative judgment…outside of Gold, if the U.S. were to suffer economic catastrophe, what investments wouldn’t go with it. Decouping hasn’t happened.

Regardless, this will end. The only thing giving me some confidence in the American economy is the fact that we don’t have the same level of unionization nor the same size public sector as other world economic powers-all things that will slow the adjustment of prices and wages toward the new equilibrium.

On that note, people have no idea how fast the unemployment rate is about to skyrocket. Not only are companies laying off workers, but boomers will be retiring at a slower rate, and people who were retired or semi-retired will be re-entering the workforce as their savings evaporate.

My bet is 10% Unemployment by June.

Stan

October 11, 2008 at 4:40 PM #286127

stansd
Participant

The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.

OTOH, it may be more of a relative judgment…outside of Gold, if the U.S. were to suffer economic catastrophe, what investments wouldn’t go with it. Decouping hasn’t happened.

Regardless, this will end. The only thing giving me some confidence in the American economy is the fact that we don’t have the same level of unionization nor the same size public sector as other world economic powers-all things that will slow the adjustment of prices and wages toward the new equilibrium.

On that note, people have no idea how fast the unemployment rate is about to skyrocket. Not only are companies laying off workers, but boomers will be retiring at a slower rate, and people who were retired or semi-retired will be re-entering the workforce as their savings evaporate.

My bet is 10% Unemployment by June.

Stan

October 11, 2008 at 9:58 PM #286411

underdose
Participant

[quote=stansd]The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.
[/quote]

As I said, misplaced confidence. I’m glad to hear I’m not the only one that thinks this. So you chalk it up to naivete. Can anyone refute, or are we in 100% agreement that bonds have to tank sooner or later? The only gotcha I can think of is Bernanke’s 2002 speech in which he said the Fed could print new money and buy treasuries with it in order to try to manipulate long term interest rates. But again, even if he manages to keep the yields low and prices don’t tank nominally, the dollar would be completely worthless before 10 years are up.

October 11, 2008 at 9:58 PM #286439

underdose
Participant

[quote=stansd]The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.
[/quote]

As I said, misplaced confidence. I’m glad to hear I’m not the only one that thinks this. So you chalk it up to naivete. Can anyone refute, or are we in 100% agreement that bonds have to tank sooner or later? The only gotcha I can think of is Bernanke’s 2002 speech in which he said the Fed could print new money and buy treasuries with it in order to try to manipulate long term interest rates. But again, even if he manages to keep the yields low and prices don’t tank nominally, the dollar would be completely worthless before 10 years are up.

October 11, 2008 at 9:58 PM #286436

underdose
Participant

[quote=stansd]The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.
[/quote]

As I said, misplaced confidence. I’m glad to hear I’m not the only one that thinks this. So you chalk it up to naivete. Can anyone refute, or are we in 100% agreement that bonds have to tank sooner or later? The only gotcha I can think of is Bernanke’s 2002 speech in which he said the Fed could print new money and buy treasuries with it in order to try to manipulate long term interest rates. But again, even if he manages to keep the yields low and prices don’t tank nominally, the dollar would be completely worthless before 10 years are up.

October 11, 2008 at 9:58 PM #286392

underdose
Participant

[quote=stansd]The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.
[/quote]

As I said, misplaced confidence. I’m glad to hear I’m not the only one that thinks this. So you chalk it up to naivete. Can anyone refute, or are we in 100% agreement that bonds have to tank sooner or later? The only gotcha I can think of is Bernanke’s 2002 speech in which he said the Fed could print new money and buy treasuries with it in order to try to manipulate long term interest rates. But again, even if he manages to keep the yields low and prices don’t tank nominally, the dollar would be completely worthless before 10 years are up.

October 11, 2008 at 9:58 PM #286098

underdose
Participant

[quote=stansd]The only thing you are missing is the naivete of the investing public, the false assumption that the American empire can’t go under, and possibly the blind faith that the foreigners who supply our credit won’t pull our line in the face of their own economic insecurity and our profligacy.
[/quote]

As I said, misplaced confidence. I’m glad to hear I’m not the only one that thinks this. So you chalk it up to naivete. Can anyone refute, or are we in 100% agreement that bonds have to tank sooner or later? The only gotcha I can think of is Bernanke’s 2002 speech in which he said the Fed could print new money and buy treasuries with it in order to try to manipulate long term interest rates. But again, even if he manages to keep the yields low and prices don’t tank nominally, the dollar would be completely worthless before 10 years are up.

October 12, 2008 at 8:41 AM #286263

jficquette
Participant

Bond bubble is what is behind this whole mess. Not sure how it is resolved since brutal deflation is inevitable.

October 12, 2008 at 8:41 AM #286557

jficquette
Participant

Bond bubble is what is behind this whole mess. Not sure how it is resolved since brutal deflation is inevitable.

October 12, 2008 at 8:41 AM #286574

jficquette
Participant

Bond bubble is what is behind this whole mess. Not sure how it is resolved since brutal deflation is inevitable.

October 12, 2008 at 8:41 AM #286600

jficquette
Participant

Bond bubble is what is behind this whole mess. Not sure how it is resolved since brutal deflation is inevitable.
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