Gyroscopic Investing

Negative interest rates seem like governments and central banks policy attempt to push the fairy tale idea of eternal economic growth. As long as that myth persists then I don't see impetus for any change in policy.

see my comment above about why we will likely never go negative here more than 1/2 point or so if at all

Why have bond investors not revolted in Japan and Europe then? Why have central banks been able to take rates negative there? Why would US be unique?

Because they had the US, but if the US rates go negative, there's nowhere else to turn?

exactly ... they don't have to invest in their own country

mathjak107 wrote: ↑Tue Oct 13, 2020 12:30 pm exactly ... they don't have to invest in their own country

I don't understand...who is holding japanese and european bonds then? Is it all being held by the central banks?

doodle wrote: ↑Tue Oct 13, 2020 2:46 pm

mathjak107 wrote: ↑Tue Oct 13, 2020 12:30 pm exactly ... they don't have to invest in their own country

I don't understand...who is holding japanese and european bonds then? Is it all being held by the central banks?

It depends on the relationship to other countries currencies ....many 3rd world countries need a safe country to hold their country’s assets and they don’t mind paying a bit to store it in bonds outside their borders

But less than 15 percent of japanese bonds are held by foreign investors....haven't looked up Europe but wouldn't be surprised if similar. Doesn't seem like third world plutocrats are holding up these markets.

interesting article today as to why china is buying more and more Japanese bonds .



https://www.cnbc.com/2020/10/14/why-chi ... bonds.html

The practice of a currency swap is when two parties exchange an equivalent amount of money with each other in different currencies, in order to protect themselves from further exposure to exchange rate risk, for instance.

“Many reserve managers buy JGBs and then swap or hedge the currency back into dollars, earning an additional ‘basis’ premium”

eli5?

doodle wrote: ↑Tue Oct 13, 2020 10:00 am

mathjak107 wrote: ↑Tue Oct 13, 2020 9:44 am

doodle wrote: ↑Tue Oct 13, 2020 9:41 am

mathjak107 wrote: ↑Thu Sep 17, 2020 5:14 pm at least 2 to 2-1/2% in rates and even then I need to evaluate..it was a 40 year drop to get here ....the return trip back up may not stop for quite a long time .

I don't see how we get back to higher rates at all considering the amount of debt in system and the way asset prices are tied to low rates. A reversal especially a quick one would be brutal and politically unconscionable. After all, everything is on government life support these days. There is no free market.

bond investors will want more yield to take the risk with bonds ..at the end of the day it is the worlds bond investors that decide what is proper compensation.

there is little compelling argument when yields are 1.50% going out 30 years and the fed says their target is 2-3% inflation .

Is it? Or does the Fed control rates? There is some debate to how much influence they can exert on long end of curve but the do have the ability theoretically to ensure auctions never fail.

Europe and Japan are negative now. Why not us next?

FYI, this was touched on last month in the thread "Re: Bonds and the PP -- still make sense?":

"Going negative on rates basically fines the banks for not loaning money. The banks simply pass those costs onto its customers. From my understanding, that is a large reason why governments view this approach as destructive instead of helpful. There is also the negative impact it has on pensions, savers, and the elderly. Again, not very helpful.

Keep in mind that, again, the countries that have negative rates have had different objectives than we would. USD exports are only like 12% of GDP, so trying to have a more competitive exchange rate would have a lot less of an impact than it would for those other countries (not to mention it didn’t even appear to really help them that much)."

viewtopic.php?f=1&t=11022&start=24#p205568

There is some argument to be made that negative rates are actually deflationary instead of stimulative in that they rob so many of interest income. I know I am getting screwed by these rates. In a normal interest rate environment I'd be fully retired by now...need about 3 times what I planned would be enough because of these low rates. So much for plans.

MMT says that interest is corporate welfare. Why does anyone deserve risk free return. population growth is the only very low risk return (new people need loans for cars and homes)

http://bilbo.economicoutlook.net/blog/?p=10404

doodle wrote: ↑Wed Oct 14, 2020 11:24 pm There is some argument to be made that negative rates are actually deflationary instead of stimulative in that they rob so many of interest income. I know I am getting screwed by these rates. In a normal interest rate environment I'd be fully retired by now...need about 3 times what I planned would be enough because of these low rates. So much for plans.

The financial system is set up to reward the profligate and penalize the saver!

Vinny

boglerdude wrote: ↑Thu Oct 15, 2020 3:01 am MMT says that interest is corporate welfare. Why does anyone deserve risk free return. population growth is the only very low risk return (new people need loans for cars and homes)

Fantastic point. Why does anyone deserve risk free return?

I personally expect ZERO return. However, I know I need to make up for inflation. Then I need to make up for that inflation's taxes. I guess that explains the gold bugs.

On top of that, the entire investing environment is so bastardized. Investment is about risk/return. If I wanted to opt out, I should be able to. However, society as a whole throws your children and your children's children under the bus for short-term gains. So by not playing the game, you are just getting both ends of the shaft (assuming that you have a vested interest in future generations).

I was trying to find something Marc Andreessen wrote, questioning why people thought they deserved risk-free returns, and I found this page, thought you might want to read.

I'd be fine without any risk free return as long central banks agreed not to actively devalue the money that I had earned and saved and eliminated banks ability to create loans out of thin air thereby driving up prices by extension of credit. I don't have any issue with spending what one earns. I don't see our system working that way at all. I see lots of people spending what they haven't earned and then getting bailed out when those decisions threaten bankruptcy.

Kriegsspiel wrote: ↑Thu Oct 15, 2020 11:21 am I was trying to find something Marc Andreessen wrote, questioning why people thought they deserved risk-free returns, and I found this page, thought you might want to read.

Interesting article. Thanks!

^ From the comments: "The idea of a “risk-free” is misleading.

As a user of a currency, I want that currency to be stable. If too much money chases too few goods, the currency becomes unstable, which is a bad thing. Therefore, as a user of the currency who cares about its stability, I would be willing to pay people not to chase more goods than there are available to be chased. I cannot personally do that, but the government, on behalf of all of us users of currency, can do it by paying interest on deposits in the Treasury, aka Treasury securities. That so-called “risk-free” rate is better understood as a “risk-independent” rate, because it is paid for not chasing goods and is only as high as it needs to be to prevent people from chasing goods.

All other users of money and credit compete with the Treasury for money, so they must pay more than the risk-independent rate being paid by the Treasury for mere non-spending. Or, as in the case of a commercial bank, they must provide a service like checking to compensate for the use of the money. The Treasury does not allow checking against your account; your bank does allow it, and that is compensation for the use of the money above and beyond what the Treasury is paying. But the point is that we reckon the return on a financial instrument in terms of the payment made to match the Treasury PLUS an amount to account for the risks taken by investing the money in a project more risky than depositing it in the Treasury (hence, the term “risk-free” rate).

What, then, determines what the Treasury should pay people for money? The answer is the amount necessary to prevent inflation by convincing people to deposit their money in the Treasury. That amount is a function of the demand that would exist, relative to the supply that could meet it, in the real economy at any time. Without trying to divine what that number should be, I think it is enough to note that it is not “inherently” positive or negative, so the rate may go to zero, and it may stay there for a long time, or it may not. But “go away” seems to me too binary a concept. Zero is just one interest rate among many, not some special condition of non-existence."

https://en.wikipedia.org/wiki/Financial_repression

doodle wrote: ↑Tue Oct 13, 2020 2:46 pm I don't understand...who is holding japanese and european bonds then? Is it all being held by the central banks?

Old topic, but I figured it's worth replying. As I understand, here in The Netherlands, insurance companies, pension funds and housing cooperatives are tied to regulations that more or less force them to buy bonds.

That's incidentally also the reason why some Dutch economists (amongst others Kees de Korte) have observed that our excellent Dutch pension system is being hollowed out by the actions of the European Central Bank.

bonds to insurers will work very differently than to us .

those who die pay for those who live and their bond returns are magnified greatly .

if you or i buy a bond , all we may get is 1-2% ....

but if 30 of us bought a bond and the deal is that if one of us dies a year the money goes back in for the others , you can see at the end of 30 years the last person gets a whopping 30-60% return

mathjak107 wrote: ↑Sun Nov 08, 2020 3:30 am bonds to insurers will work very differently than to us .

those who die pay for those who live and their bond returns are magnified greatly .

if you or i buy a bond , all we may get is 1-2% ....

but if 30 of us bought a bond and the deal is that if one of us dies a year the money goes back in for the others , you can see at the end of 30 years the last person gets a whopping 30-60% return

But government pension plans are not closed pools. They are open ended.

I Shrugged wrote: ↑Sun Nov 08, 2020 10:13 am

mathjak107 wrote: ↑Sun Nov 08, 2020 3:30 am bonds to insurers will work very differently than to us .

those who die pay for those who live and their bond returns are magnified greatly .

if you or i buy a bond , all we may get is 1-2% ....

but if 30 of us bought a bond and the deal is that if one of us dies a year the money goes back in for the others , you can see at the end of 30 years the last person gets a whopping 30-60% return

But government pension plans are not closed pools. They are open ended.

When people die their allocation goes either to a spouse until they die or back in to the pool ..those who die help pay for those who live....

It is basically your invested money in the pension whether you put it in or your company did and that money which is invested has your share going back in to the pool. Basically these are mortality credits the pension fund gets

I think i just saw somewhere in the last week that 100% of the national debt added since Covid (Aprilish) matches the growth on the Fed's balance sheet. This implies all new bond issuance essentially going to the central via newly created money.

Yeeesh. Buyer of last resort. Will be interesting how high rates have to go to entice net buying from non government institutions or foreigners. How can the piddly interest on bonds ever hope to match inflation?

As horrible as Trump has been for debt growth, if he hands the keys over to Kamala I've got to think it will get worse.

SomeDude wrote: ↑Tue Nov 24, 2020 1:04 am
As horrible as Trump has been for debt growth, if he hands the keys over to Kamala I've got to think it will get worse.

Based on what? Democrats finance projects via taxes. Republicans finance projects via debt.