The Bond Dream Room

Discussion of the Bond portion of the Permanent Portfolio

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dualstow
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Re: The Bond Dream Room

Post by dualstow » Sun Jul 09, 2017 4:31 pm

Saw this posted at Bogleheads

https://www.bloomberg.com/news/articles ... r-the-exit

{ Gundlach. -- long bonds -- end of bull run -- Bloomberg }
The guy in the latest gold commercials pronounces it “goad.” They couldn’t find someone who pronounces the “L”?
I do identify with Fredo. My brother is the smart one.
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Cortopassi
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Re: The Bond Dream Room

Post by Cortopassi » Fri Jul 21, 2017 8:11 am

And here is another reason the bond bull is supposedly over from Karl at the Market Ticker. He's really good at making things sound like the end of the world, and has been for years, but the exponential mathematics he always quotes as being unsustainable never seem to arrive. Not saying he is wrong, but somehow the can is able to continue to be kicked for years and years.

I don't think this will change my allocation, just something else to think about.

https://market-ticker.org/akcs-www?singlepost=3424262

----------Clip

No, the "risk" from "quantitative tightening" is not The Fed.

Yes, the reduction of their balance sheet will be a tightening.

But you're a fool if you think this is the only -- or even the largest source of such tightening over the next number of years -- 10 to 15 years from now, in fact and starting effectively now.

There is in fact, as of right now, $5.486 trillion worth of "tightening" that will take place between now and 2034 and it will probably start in permanent form within the next two years.

Where is it?

Social Security and Medicare.

The system holds bonds as a buffer between demographics. This is a good thing, by the way, because there are baby booms and baby busts in any economy. By holding bonds during "boom" times the system has the assets to pay liabilities during busts.

When it acquires said Treasuries it is effectively bidding for said assets, driving prices higher and yields lower than they would otherwise be. This has the same monetary effect as "Quantitative Easing" if the banks do not lend the 'money' they acquire by such sales to The Fed, and in the current cycle they have not.

But when Social Security and Medicare sell said bonds it effectively offers them into the market which drives prices lower and yields higher. This is exactly the same monetary effect as a Fed balance sheet reduction - - that is, "Quantitative Tightening"!

There is nothing that can be done about this; it is going to happen. If you try to raise taxes so the system doesn't have to sell its cache of bonds then you withdraw money from the system exactly as you do if you sell the bonds, so trying to mitigate the effect with a tax increase won't work either.

This isn't "bad" or "good" -- it just is, and is a function of the boomers going through the system. It cannot be avoided no matter what political or monetary decisions are made.

But this, along with The Fed being at or near zero, is why the 30+ year trend of ever-lower interest rates has ended and cannot extend.

Folks, virtually everything you know about financial leverage and how business works -- especially public firms that have been issuing debt like crazy to buy back stock (they're the only net buyers over the last five years, in fact) along with municipalities and the federal government to fund this and that are all predicated on ever-lower rates which allows you have more "money" outstanding for the same interest payment every time you refinance.

That is over.

It is mathematically over and inescapable.

I've written on this for years but nobody wants to hear it. Well, it's here folks. It's starting now. We had a couple of years where very small amounts of these trust funds were redeemed during the '09 timeframe but the fact that a steady and unrelenting drawdown was going to take place over the space of more than a decade was known then and in fact was known all the way back to the 1990s.

Yet companies continue to buy back stock with debt (which eventually must be rolled) and both the federal and state governmental units continue to issue more and more debt with no plan to ever pay it off which also must be rolled. This continual roll will run smack into the demographically-caused Quantitative Tightening starting now and accelerating through the next decade and there is exactly nothing that anyone can do to stop it from happening.

Why Wall Street continues to "reward" companies that pull this crap (such as Tesla) rather than drive them into the ground is beyond me -- but down this road lies bankruptcy for all of the firms that engaged in this tactic -- and that's most public companies. At the same time bankruptcy also lies ahead for both the Federal and State governments unless they can run permanent surpluses sufficient to pay not just coupon expense today but also the maturity of bonds so they do not have to roll them.

There is exactly one way to do that: Defang the medical monopolies and cut the cost of medical care by 80% now. We have less than four years to do it and have it all take effect and play out before the mathematics overtake us and the spiral gets to the point that it will be virtually impossible to change the outcome without basically zeroing all discretionary spending at both Federal and State levels.

We are out of time.
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Re: The Bond Dream Room

Post by pugchief » Fri Jul 21, 2017 8:22 am

Jeez. Well that was an uplifting prediction. :P
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Re: The Bond Dream Room

Post by flyingpylon » Fri Jul 21, 2017 9:33 am

I've been reading Karl's stuff for several years now and like to think of him as "the angriest man on the internet". :)

I read that post this morning and wondered if I should share it here, so thanks for doing that. But as you mentioned, the impending disasters never seem to arrive. Perhaps he's just early, not wrong... I don't have the expertise to know for sure. Someone else could make an emphatic counter-argument that would seem just as believable. Hence the reason I'm in the PP!
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Cortopassi
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Re: The Bond Dream Room

Post by Cortopassi » Fri Jul 21, 2017 9:40 am

flyingpylon wrote:I've been reading Karl's stuff for several years now and like to think of him as "the angriest man on the internet". :)

I read that post this morning and wondered if I should share it here, so thanks for doing that. But as you mentioned, the impending disasters never seem to arrive. Perhaps he's just early, not wrong... I don't have the expertise to know for sure. Someone else could make an emphatic counter-argument that would seem just as believable. Hence the reason I'm in the PP!
Exactly. There are others, many in the gold blogosphere who foretell the demise of the dollar and rise of gold constantly, who I like reading but take with a huge grain of salt. I have been reading many since 2008, and it looked like they were on the verge of being right in 2011, but now 6 years later, ehh.

Every time he starts out a post with "Incoming" I know it's going to be good, but probably ahead of his time. He has a lot of good thoughts on medical costs/eating.
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Kbg
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Re: The Bond Dream Room

Post by Kbg » Fri Jul 21, 2017 10:05 am

His analysis as posted here is bad on many levels. I'm not going to go into a lot of detail but I will provide a couple of points folks can run with to think for themselves.

Bond liquidation vs. expiration

Current US tax law treatment of debt vs. equity

Actual US demographics vs. purported imbalances

Finally, a little nuance on public debt you never see

https://fredblog.stlouisfed.org/2017/02 ... n=fredblog

Facts are wonderful things...but the main fact is economically the US is on a very positive roll right now. That can and will change but for now the skies are quite blue.
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Re: The Bond Dream Room

Post by Cortopassi » Fri Jul 21, 2017 10:37 am

Kbg,

Exactly as well. The stronger more ardent "we are doomed" message a blogger puts out there, the bigger grain of salt I take it with.

One of the reasons I almost never go to Zero Hedge anymore. You can get outright depressed very quickly looking at that stuff.
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Re: The Bond Dream Room

Post by Kbg » Fri Jul 21, 2017 12:23 pm

Cortopassi wrote:Kbg,

Exactly as well. The stronger more ardent "we are doomed" message a blogger puts out there, the bigger grain of salt I take it with.

One of the reasons I almost never go to Zero Hedge anymore. You can get outright depressed very quickly looking at that stuff.
This isn't a positive or negative comment about the media but the gloom/doom model is a proven successful business model for them. As a reader we just need to be aware of it and factor accordingly. The real challenge though is it feeds on the disproportionate way our brains weigh risk and reward that has been well documented...supposedly we weight them about 2:1.

Update: By "them" I mean media in general not just ZH.
Last edited by Kbg on Fri Jul 21, 2017 3:48 pm, edited 1 time in total.
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Re: The Bond Dream Room

Post by mukramesh » Fri Jul 21, 2017 3:16 pm

Kbg wrote: Finally, a little nuance on public debt you never see

https://fredblog.stlouisfed.org/2017/02 ... n=fredblog
@KBG: That article was very interesting :D
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Re: The Bond Dream Room

Post by Kbg » Fri Jul 21, 2017 3:44 pm

mukramesh wrote:
@KBG: That article was very interesting :D
In some financial circles there is actual concern that as the great taper begins/moves along there will be a shortage of treasury debt needed by pension funds, insurance companies etc. to meet annual liabilities.
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Re: The Bond Dream Room

Post by ochotona » Tue Oct 17, 2017 8:33 am

From Twitter; Kathy Jones is the fixed income strategist at Schwab. I listen to her when I need to be talked off of the ledge.

Kathy Jones‏ @KathyJones

US$ higher on talk of Taylor for #Fed Chair. Fed funds would be much higher if Taylor Rule followed.

Higher US Dollar: lower gold, lower Long Treasuries, and if the yield curve inverts and we get a recession, lower stocks. Hmmmm... :o
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Re: The Bond Dream Room

Post by dualstow » Tue Oct 17, 2017 8:35 am

So much for the cashless quasi-pp?
The guy in the latest gold commercials pronounces it “goad.” They couldn’t find someone who pronounces the “L”?
I do identify with Fredo. My brother is the smart one.
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