Gyroscopic Investing

Things are looking mighty mighty deflationary, with commodities and equities crashing. So why aren't LTT's doing better? On "black monday" they went up a bit but it was kind of tepid, all things considered, and then they dropped right back down.

One theory: Things are so deflationary that the market is assuming the Fed won't raise rates, but go the opposite direction, which will lead to inflationary moves come September and push LTT's down.

China has recently sold a lot, maybe that is continuing...

Though deflation may continue in the real world for years, once the LTT has gone up to a certain level, it has effectively priced-in all of the forward-looking market expectation about inflation / deflation. The security will stay at that price point until new "information" (or a rumor) emerges.

So it looks like on Black Money Aug. 24 the LTTs absorbed all of the disinflationary news they could, and the story hasn't changed really since then.

I'm holding on to Medium Tex's quote that a game of tennis can become a game of ping pong, ie it can get intense as rates approach zero and there is still upside.

If TLT goes back up to 135 I might be tempted to bail.

as another example of why preparing to fight the last war does not work , treasury's should have soared today  but instead china , was selling loads of them altering the course that should have played out

guess ole harry never imagined foreigners would control our treasury markets so when the time came to respond they were rendered almost ineffective while others controlled where they went ..

mathjak107 wrote: as another example of why preparing to fight the last war does not work , treasury's should have soared today  but instead china , was selling loads of them altering the course that should have played out

guess ole harry never imagined foreigners would control our treasury markets so when the time came to respond they were rendered almost powerless while others controlled where they went ..

I'm not so sure about that.  Even in 2008 it took a while for LTTs to really take off after the market crash. 

well we didn't have the chineese selling then either , but they said on the financial news today they had the buyers and the flight to safety  , but it was crushed by china's selling .

Even with all that's going on in the stock market the Fed was still talking about possibly raising rates so maybe that had something to do with it.

Seems like people are pulling out of all investments right now because nothing is doing good.

i retired 4 weeks ago , did you expect anything but a crash ?  ha ha ha

i always pictured myself as the poster child for poor sequense risk in retirement lol.

so i made sure we have years of cash and bonds with the back up plan of filing for my ss if i don't want to use invested assets .

i will give it a month , re-evaluate  and then maybe file for ss for 2016 since i have to file 3 months before the first check.

so everyone here , keep working , my ss depends on you all.

mathjak107 wrote: i always pictured myself as the poster child for poor sequense risk in retirement lol.

And everybody considering retirement, like me, should do the same, don't you think?

Fred wrote:

mathjak107 wrote: i always pictured myself as the poster child for poor sequense risk in retirement lol.

And everybody considering retirement, like me, should do the same, don't you think?

Ever thought about becoming an Uber driver?

i rather clean up the empty beer bottles at our local strip club but they wanted to charge me to much to work there .  (*)(*)

mathjak107 wrote: i rather clean up the empty beer bottles at our local strip club but they wanted to charge me to much to work there .  (*)(*)

You should apply to be a dancer.  Your stage name could be "No Caps Jak".

mathjak107 wrote: i always pictured myself as the poster child for poor sequense risk in retirement lol.

...

MediumTex wrote:

mathjak107 wrote: i rather clean up the empty beer bottles at our local strip club but they wanted to charge me to much to work there .  (*)(*)

You should apply to be a dancer.  Your stage name could be "No Caps Jak".

I don't know. Maybe the club sees mathjak as a sequins risk.

MediumTex wrote:

mathjak107 wrote: i rather clean up the empty beer bottles at our local strip club but they wanted to charge me to much to work there .  (*)(*)

You should apply to be a dancer.  Your stage name could be "No Caps Jak".

i will save that for the home .  i got 2 good hips and may be in big demand .

dualstow wrote:

mathjak107 wrote: i always pictured myself as the poster child for poor sequense risk in retirement lol.

...

MediumTex wrote:

mathjak107 wrote: i rather clean up the empty beer bottles at our local strip club but they wanted to charge me to much to work there .  (*)(*)

You should apply to be a dancer.  Your stage name could be "No Caps Jak".

I don't know. Maybe the club sees mathjak as a sequins risk.

Awesome.

the reality is when i dance folks throw money ---to help find a cure    ha ha ha

Here's my perspective. LTT's would have declined further without the crisis in China. Rates are rising in the US.

mathjak107 wrote: the reality is when i dance folks throw money ---to help find a cure    ha ha ha

I'm envisioning a combination bingo parlor/strip joint where every night except Saturday is amateur night.

Saturday, of course, would be reserved for "Tina" and her world famous "Bingo Ball" act.

LOL

buddtholomew wrote: Here's my perspective. LTT's would have declined further without the crisis in China. Rates are rising in the US.

Is that a prediction or an observation?

If it's a prediction, what will fuel the rate increases?  Surging demand for credit?  Credible expectations of future inflation?

My prediction is that rates on long term treasuries will continue trading in the 2-4% range for a while longer, as they have been doing for the last seven years.

MediumTex wrote:

buddtholomew wrote: Here's my perspective. LTT's would have declined further without the crisis in China. Rates are rising in the US.

Is that a prediction or an observation?

If it's a prediction, what will fuel the rate increases?  Surging demand for credit?  Credible expectations of future inflation?

My prediction is that rates on long term treasuries will continue trading in the 2-4% range for a while longer, as they have been doing for the last seven years.

Maybe the question is not what will fuel rate increases but what might preclude rate increases? Solvency of the Federal Government? Have you thought about what a small increase in borrowing cost means for the Feds? How about an economy that is effectively addicted to low interest rates? Ever think about the deflationary  effect rising rates would have on the real estate market, commercial and residential? Cap rates are the inverse evil twin of interest rates. I believe the bet was to drop rates and prop up asset values until the economy made it back to prosperity at which time the crutch could be taken away. Problem is we haven't gotten back to prosperity so take away the crutch and we could very well collapse.

I second the prediction that rates will stay where they are for a while longer.

What I meant to say was rates would have risen more in anticipation of fed raising the funds rate. The Chinese crisis brought in some buyers.

Several reasons for treasuries staying down- collectively now being called "Quantitative tightening":

  - Even though "treasuries" are typically a safe harbor when the stock market declines, worldwide debt levels are double what they were, corporate debt has nearly doubled,  the $500+trillion derivatives market is larger than the last crash, and margin trading debt is at record levels - so all assets including bonds are being sold to cover bad bets. 
  - The smart money is moving into cash instead of treasuries to ride out the storm this time (the fed has threatened to raise rates, and arguably we have a bond bubble).
  - China dumped $100 billion in treasuries in the last few weeks (more than they've sold in last two years!) - this drives yields up (price down)
    http://www.zerohedge.com/news/2015-08-2 ... -two-weeks
  - The $2 trillion dollar carry trade has been hit hard by the strong dollar, forcing emerging market countries to sell their treasury reserves to service dollar-denominated debt built up during a period of QE and zero interest rates.  The $2T dollar carry trade is unwinding.
  - The collapse of oil prices is creating havoc in the petro-dollar countries - Saudi Arabia is operating on a deficit now and selling their dollar reserves to make up the difference.  Other oil-rich countries are also selling dollar reserves to cover losses.
  - The petro-dollar dominance is being challenged by Russia, China and others who are leading a push to move away from dollar as the international currency for oil - reducing demand for dollar denominated reserves overseas
- Commodity prices have collapsed worldwide - as has Chinese (and worldwide) production demand - again reversing a worldwide investment of dollars in emerging markets.  Over 22 emerging country stock markets have already fallen sharply.

Unfortunately none of these are short term trends, and "quantitative tightening" is deflationary in nature and bad for long term bonds. As more bonds flow home it drives interest rates up and prices down.  If the stock market continues its descent, foreign exchange remains volatile and rates rise we'll see more assets sold in the short term to cover bad derivative bets.  The derivative market is 8-10x the size of the stock or bond markets, so what you're seeing in stocks/bonds is only the tip of the iceberg with respect to derivatives or "shadow banking".  The net effect is higher interest rates and tighter money.

This is all completely independent of what the Fed does.  The Fed has no moves left - they can't raise interest rates at this point (which would tighten further), and another round of QE is unlikely to do anything in the face of the tsunami of dollar reserves returning to our shores.

This means your best safe haven is cash in the short term, and likely gold in the medium term if we see the stock and bond markets pop at the same time.  At some point the popping bond and stock market bubbles could lead to a loss of confidence and large bank failures (the big five US banks have over $220 trillion in derivative bets out on the table now) - so deflation could lead to panic and/or widespread inflation.

That's my two cents on the topic - keep your powder dry!