Gyroscopic Investing

Clive wrote: I still remain far from unconvinced that QE3 will occur any time soon.

For months (years!) they've been 'kicking the can' in what appears to be a 'we know the SHTF event is coming, so let's defer that and restructure in the interim to accommodate pooled losses in the least pain manner before pulling the plug'. England covers Ireland, Germany covers Greece, France covers ....etc.

The debt problem could span decades of discomfort. A hard and fast decline endures a sharp pain but then seeds recovery. If you're braced for the sharp pain, of the two its probably the better option.

In concept August would be an ideal time to pull the plug - many on holiday and relatively small amounts can manipulate the markets.

Total wild guesses, but a year from now maybe Dow 2000, high dividend yields of maybe 8%, single digit PE and attractive potential gains would help raise stock prices, such that by year 2 maybe Dow 4000, 5% yields, just entering double digit PE's.

A PP could prove to be worth (a quarter of ) its weight in gold.

Clive,

If you saw as much of Bernanke as we do, you would know that the scenario you describe is virtually impossible.

Everything Bernanke has written or said in his career suggests that he would never go along with something like that.  He simply doesn't believe in that way of addressing a post-asset bubble economy.

The fact that a quick crash would destroy the financial institutions that have the most political power of any group in society also makes me think that this scenario is very unlikely.

I think Japan is the future for us all (and that is actually a best case scenario).  I don't see any other way.  It has a sort of grim inevitability to it.  The only question is whether it will unfold over five years or 25 years.  So far, it is looking more like 25 years, since it is now 2011, and this mess really began to show up in 2007 and we seem no closer now than we were then to putting it behind us.

I'd have to agree with MT here.  Everything Ben Bernanke has said before contradicts the Austrian economic theory of letting the market clear the bad assets and taking the medicine.  He said before that as a student of the great depression, the reason the great depression was so bad was because the government did not do enough intervention.  Apparently he thinks that the best way out of a bad situation is to intervene as much as possible to keep the markets afloat.

It's as if someone pulled the bathtub drain in the middle of the ocean and Bernanke is running back and forth with buckets of water trying to keep the ocean level from falling.

Interesting chart...

[align=center][/align]

It's all very Sisyphean.

Clive, from a visitor's perspective Japan seemed to me a really nice place. What concerns me is that while they have post bubble deflation, they also have a trade surplus that supports the Yen. We have a trade deficit so I don't see what is to stop a steady slide in the exchange rate for the £ (and the USD) with consequent inflation for anything with a global market. Since the 1980s, we took the bogus cheat option of using asset price inflation as the basis for supporting our curencies rather than using trade. That means that when the asset bubble bursts, aren't we flat on our face?

By the way, are you smuggly totally out of stocks thanks to your SL7 stuff?

Clive, I realize you have backtested your SL7 strategy and I'm just trying to understand it (even though I'm wedded to the "grit your teeth" PP idea). Have you been tempted to use trailing stop losses so that you sell if there is a fall of more than 7% from the high point (rather than the buying point)? When trying to understand the stop loss strategy, I thought it was based on recent falls being predictive of subsequent falls. I struggle to see how the purchase price is relevant. From what I can imagine, owning something now is either a good idea or a bad idea. Whether it has been owned for 100years or five minutes seems to me irrelevant. As such I can make sense of a trailing stop loss but struggle to understand the logic of a "loss from purchase" sell signal.

Clive, am I right in understanding that if price movements really were like Brownian motion (previous price movement not being predictive of future price movement), then the stop loss method could never beat a simple rebalancing strategy? The only reason the stop loss method makes sense is because a fall up until the present time means that a fall from now on is more likely than it would have been had prices been rising.
About hanging on to stocks that you bought at market bottoms- imagine you bought some Apple shares in 2002 and I bought some last week. Surely the performance of your shares and my shares from now on will be exactly the same. The fact that you bought at a good time and I bought at a stupid time makes no difference as to whether either of us should sell now or at anytime in the future. It only tells us about the past

This blog claims that the Fed has a new trick as an alternative to QE. Personally I can't imagine that it will do anything more to help the real economy than the failed QE experiment did but it does make gold seem a good bet as they say.
http://www.financeandeconomics.org/Arti ... 20Repo.htm

Today may be the day.

We will know a lot more in an hour or so.

MediumTex wrote: Today may be the day.

We will know a lot more in an hour or so.

Okay, I guess it is $400 billion in future purchases of long dated treasuries, announced on September 21, 2011.

I missed it by 24 days (I had middle of October) and my estimate of $800 billion was double the actual number.

I guess we can get on to predicting when QE4 will be announced now.

And LTTs just spiked, big time.

Gumby wrote: And LTTs just spiked, big time.

Jim Rogers was spotted running down a Singapore street, sans shirt.

Nassim Taleb was with him.

If they're selling short term treasuries to buy long term treasuries, how is that QE?

Wouldn't they have to just by long term treasuries?

Adam1226 wrote: If they're selling short term treasuries to buy long term treasuries, how is that QE?

Wouldn't they have to just by long term treasuries?

You're right.

In theory, the yield curve should be flattening if not even inverting, but that's not what's happening.

Who knows what the Fed is actually going to do.

Adam1226 wrote: If they're selling short term treasuries to buy long term treasuries, how is that QE?

Wouldn't they have to just by long term treasuries?

It's not QE. It's a "Twist." I believe the idea is that it isn't supposed to increase the size of the Fed's balance sheet, but they are hoping that making long term debt cheaper will spur more productive loaning (which is often based on long term rates).

http://www.businessinsider.com/preview- ... ist-2011-9

TLT through the roof.

Will we see sub-3% yields on 30-years yet?

Why doesn't Ben start buying homes in foreclosure and see if that works?

MediumTex wrote:
In theory, the yield curve should be flattening if not even inverting, but that's not what's happening.

The 6 month, 2, and 5 year went up a little...isn't that consistent with a "twist?"

moda0306 wrote: TLT through the roof.

Will we see sub-3% yields on 30-years yet?

Germany is currently at 2.60%.  I think that is probably where we are headed.

Why doesn't Ben start buying homes in foreclosure and see if that works?

Or maybe Chryslers off of dealers' lots.

Adam1226 wrote:

MediumTex wrote:
In theory, the yield curve should be flattening if not even inverting, but that's not what's happening.

The 6 month, 2, and 5 year went up a little...isn't that consistent with a "twist?"

Yes it is.

So maybe this is just a Titanic deck chair operation.

Incredible.  3.01% on the US 30-year, and maybe not done falling yet.

Now we get to hear how rates really, really, really have nowhere to go but up.  Perhaps now they shall add a 4th "really".

Every day, EE bonds are looking more and more appealing.

Doubling your money in 20 years is getting harder and harder to do these days, or at least a "guaranteed doubling."

I wonder what this will do to a 30-year mortgage...

moda0306 wrote: Every day, EE bonds are looking more and more appealing.

Doubling your money in 20 years is getting harder and harder to do these days, or at least a "guaranteed doubling."

You are correct!  This is particularly true since they come with an option to bail if interest rates pick up.

With the "doubling clause" on EE bonds acting as the equivalent of a 3.53% interest rate, you've got a chance to beat the current 30-year bond rate.  If it doesn't work out, you get the regular interest rate, which still beats current short-term rates.

While it's hard for me to imagine rates staying this low for 20 years, I like having options available to me to deal with "that which I do not expect"!

Lone Wolf wrote: While it's hard for me to imagine rates staying this low for 20 years, I like having options available to me to deal with "that which I do not expect"!

Can't agree more.

I'd almost consider EE bonds a viable "deep bond" portion of your PP at this point.  As the duration shortens, the implied return of keeping it for the next 18, 15, 12, 10, etc more years becomes greater and greater (in fact I've made a chart showing this to help me manage my EE bonds).

If one were to sell some treasury bonds in their retirement account to be turned into cash, and then bought the same value in EE bonds to represent a bond-like option instrument, one could avoid some steep losses on that portion of their bonds if rates ever hop back up again.  If rates muddle along or go lower, have you really lost much holding on to an EE bond?

The thing is, if you were to propose these to someone as a sweet deal they'd laugh in your face.

The more I think about what the Fed did today, the less sense it makes.

First, it disappointed the markets, which is a failure to manage expectations.

Second, the Fed admitted that the economy is in really bad shape, and yet apparently it's not in bad enough shape to warrant more QE.  This raises the question of how much sicker the economy would need to get to warrant more QE?  I have the feeling we will find out in coming months.

Overall, it just seems like a strange thing to do, since flattening the yield curve is going to hurt the profits of the very financial institutions that I thought the Fed was trying to help.  As far as yield curve flattening making it easier for consumers to get loans on favorable terms, I don't think that is going to have any meaningful impact at all.  The problem for a lot of consumers is not that they can't get more credit, it's that they can't pay for the debt they already have.

MediumTex wrote: First, it disappointed the markets, which is a failure to manage expectations.

Based on the violent drop yesterday, it seems like the market had already priced in QE3 and the Fed truly disappointed.  Now the only thing left to do is "send in the plunge protection team.". 

MT,

I guess I don't get it either... personally, it seems this is a case of "QE is pointless with rates this low" moreso than "QE isn't necessary," regardless of what they actaully say.

When people are desperately trying to deleverage and save, rates are going to tumble and a recession will happen.  QE is simply trading one form of savings for another (bonds for cash), which can often lead to a change in preferences by savers/borrowers/investors to generate a "recovery."  It seems to me, the other side of the coin, when QE & OT (operation twist) is simply rearranging the deck furniture on the titanic, is to actually spend the money into the economy.  QE or OT alone will generate recovery much like reducing air-fare on a plane with one wing will generate passengers on that plane.

The only thing I could see that would "fix" the economy in the short-term, while also improving private-sector balance sheets, is massive deficit spending.... which some think we're currently seeing, but I guess I'm thinking it's outside of the fed's hands at this point.  They're being asked to paint a color painting but the only color they have to use is black, while congress is sitting on gallons and gallons of colored paint, yelling at them for their lack of creativity.

This isn't to get into an argument about whether sustained prosperity will result, but simple answering the question: What will get people working and improve balance sheets in the short term?