You may be aware of a disagreement between Paul Krugman and Niall Ferguson (not to be confused with Turd Ferguson) about what the rise in treasury yields actually means.Krugman believes it is evidence of confidence about the future and normalcy in terms of market function.
Ferguson believes the market is pricing (what should be) the realization that the US is headed for big trouble as it is printing money, issuing debt and effectively monetizing some of that debt.
Dan Gross chimes in here with links galore if you want to get the whole story.
There are a lot of moving parts to this and for now all anyone can have is an opinion. We won't know the answer for a while yet. Between the two camps (Gross calls them Krugmanites and Fergusonians) is probably where the true answer lies.
As far as confidence and normalcy the pure panic that existed does appear to have subsided. By this I mean confidence that the market can just function (not a directional call for where things are going). Hopefully people remember that there was rampant fear that markets would not function ever again, there were a couple of spasms in this regard of course but we have moved out of the panic stage. I'm not sure how the Fergusionians could argue otherwise as they could be right about the US being in big trouble but the market could easily function the way it should in the face of that outcome.
I suppose there could be a return to that sort of panic but the world is far more educated about things like counterparty risk, the magnitude and danger of the leverage employed and everything else. We can debate whether these things have been fixed or not but if everyone now knows much more than they did before March 2008 then I'm not sure panic in the context we are discussing is possible.
Krugman believes the rise in treasury rates is evidence that investors are willing to go for more return than a few basis points from treasuries, Gross notes how much Brazilian and Indian stock markets have rallied. Again this is a point that is hard to argue because again the US could erode (or implode?) as other markets do well. Money is flowing into other asset classes--not to say it won't all correct aggressively one more time but it is tough to argue that money has not moved from US treasuries to other things.
As for the logic behind the Fergusonian camp I'm not sure how anyone can argue that the US has become a much more attractive investment destination in the last couple of years (to be clear I haven't read anywhere that Krugman has said this). If the US is much less attractive than it was because of all the reasons that you can think of then rates would seem to have to go up a lot, although not necessarily to 1981 levels. I suppose this could be wrong but I don't see how they do anything but go up.
There is an element to this of captive buyers. One way to look at this is that China has to buy US debt in order to protect its current investment. That is at least partially true and I would have to imagine that China getting out of its US investment would require both strategic and logistical planning and some sort of management of the consequence to them when the US can't buy as much stuff from them. No matter your conclusion on this it is a very unhealthy relationship with bad consequences for both parties.
It should be obvious that I am not too concerned with trying to solve this debate as I am concerned for what this means for growing/protecting the portfolio. US treasuries are down a lot but still expensive so anything beyond short term (don't even have any short term though) would be off the table. It seems to me that to think uncomfortably high price inflation (I am not in the hyperinflation camp) won't happen is to believe that the Fed and Treasury will know exactly when to reverse everything which seems unlikely given how reactive they have been all along. Additionally it seems very unlikely that the Obama administration will err on the side of belt tightening.
As I read the Krugman/Ferguson debate they can each be correct on certain things but I am leaning toward the Fergusonian side of the debate because it is closer to what I have expected would happen (not to the same magnitude) and because I see very little need to "protect" against a happy outcome.The pictures are from a NY Times interactive feature about the history of GM. I found the contrast of the two vehicles to be striking. Up top is a 1926 Vauxhall 30-98 OE Type and the second picture is obviously a Hummer.
Sports related: Is Southern Miss this year's Fresno State?
31 comments:
If you follow the article link, then click on a link in the article showing the 30 year bond, then choose the 5 year chart, it looks like that, in general terms, it sat between 5 and 5.5% for years.
It has just now crawled back into that "normal" range. The Ferguson argument would have a lot more going for it if it were ABOVE that range.
the farther you go back to look at the bond yield, the farther we currently are "below normal."
S&P crossed below 200 DMA today. You selling Roger?
The auto pictures are great, relfects what as happened to America.
The early GM car designs reflected values such as hope, fun, intellect, ...
The GM Hummer relfects an ugl fascist military state
8 American jobs saved by a GM vehicle!
Why do we pay taxes to airlift these people to American hospitals? Let them sit on the side of the road and call the Mexican government to come get thier citizens?
SONOITA, Ariz. - Eight illegal immigrants "stacked like wood" in the back of a sports-utility vehicle were killed when the driver lost control on a remote southeastern Arizona highway, authorities said Sunday.
At least 27 men and women were in the vehicle traveling about 4 miles east of Sonoita when the vehicle rolled for an unknown reason shortly before midnight Saturday, said Officer Joy Craig of the Arizona Department of Public Safety.
What does the yield curve say about investing in C.E.F.'s?
And, is this a bad week to be in treasuries with the auction coming up?
Personally, I'll take Rick Santelli's word over either of these economists. He actually talks to traders to find out why they're buying and selling.
And then goes on a planned possibly politically motivated rant? Heh.
SD, yes, for now yields are below normal relative to our life times but they were quite low earlier on.
anon 6:47 aside from having answered you before both yahoo finance and bigcharts have the 200 DMA at 919 as of Friday's close and it will be lower today
CEFs cover a lot of ground so i am not sure what you are asking.
Krugman has made way too many good calls over the past decade so random walk odds would seem to favor Ferguson, except that he doesn't seem to know much about macroeconomics and it is not entirely clear he's got his history right either even though that is his field; e.g., http://tinyurl.com/qjm5j9
Still as some commenters at the time noticed, the choice (to the degree there is one), is not so much between Krugman and Ferguson's respective interpretations of the data but rather when the consequences they foresee might be more probable on a projected time line; i.e., short to intermediate-term willingness to accept risk is clearly increasing, the chance of inflation seems quite low and government borrowing/spending does not crowd out private spending when ZIRP is in action so Krugman has the edge there but long-term is probably another matter; except Krugman didn't say much about the long-term in the debate IIRC and Ferguson didn't seem to know the difference so that might wind up a push.
Even if it doesn't add a great deal of clarity, anything that provides an alternative framework for the big picture can be useful, but as a practical matter my strategic portfolio remains defensive: It has been increasing in value but continues to lag the advance and that obviously constitutes an opportunity cost; regardless I find I invest best when not losing money has highest priority so that cost will have to be born, at least to the degree it can not be offset by profits from my tactical portfolio. The fact that an authority like Krugman is feeling some optimism is another datum, that's all.
I sympathize with money managers who must face a market benchmark and would personally not like to be in the biz at times like this.
OT: I enjoy commenting here but let me know if/when I overdo it. I suspect there are some "Anons" who comment a lot too (how could I know) but, regardless, my own stance is best expressed by Michel de Montaigne's: "All I say is by way of discourse, and nothing by way of advice. I should not speak so boldly if it were my due to be believed."
@RW
OT: I enjoy commenting here but let me know if/when I overdo it. I suspect there are some "Anons" who comment a lot too (how could I know) but, regardless, my own stance is best expressed by Michel de Montaigne's: "All I say is by way of discourse, and nothing by way of advice. I should not speak so boldly if it were my due to be believed."
IMO, you are not "overdoing" it all. Frankly, there are times when I wish you would flesh out your thoughts in even greater detail/length rather than state they are too long for a blog comment. FWIW, and I'm not trying to blow smoke up your @$$, but one of the things I look forward to on reading this blog is your comments.
As far as "nothing by way of advice", I'm a firm a believer that if one is going to get involved in this stock market/investing/trading game then you've got to be a big boy, and take responsibility for your own decisions.
Both on this blog, and across the entire blogosphere, I see way too many commenters, usually anonymous, looking to blame someone else, or ask Roger, or Barry Ritholtz, or whoever to tell them what to do or second guess/indict the blog writer. Look at the all the nonsense comments already with respect to the 200 DMA and looking to play "gotcha".
Have you ever considered writing your own blog?
short to intermediate-term willingness to accept risk is clearly increasing, the chance of inflation seems quite low and government borrowing/spending does not crowd out private spending when ZIRP is in action so Krugman has the edge there but long-term is probably another matter;
Can you expand here? Hussman specifically addresses the crowding out of private spending/investment in this week's commentary:
http://www.hussman.net/wmc/wmc090608.htm
Moreover, there is a far weaker prospect for a return to 2007-like profit margins than investors seem to recognize. Economic expansions are paced not by major growth in consumption (which tends to be fairly smooth even during economic downturns), but instead by gross investment in capital goods, technology and housing, as well as debt-financed durables such as autos. Yet our policy makers have aggressively crowded out private investment through this bailout policy, which allocates good capital to the worst stewards, and they have done virtually nothing to abate the housing downturn.
.....
These policy responses have more than doubled the U.S. monetary base within a period of months, added a trillion more in outstanding Treasury debt, and virtually assure that the value of those government liabilities will be repriced in relation to goods and services over the coming decade. A range of different methodologies suggest a doubling in U.S. consumer prices over the coming decade, though with the majority of this pressure occurring 3-4 years out and beyond.
I was struck by Hussman's use of "virtually assure". He's not Cramer or Kudlow or a shouter but a calm academic who chooses his words wisely, and he is rarely emphatic and when he is, he is usually right (his comments back in Oct 07 on the market, oil in May 08, and financial stocks).
That said, there is some serious intellectual horsepower behind the deflation case as well (see David Rosenberg formerly of Merrill Lynch who had this entire debacle nailed from late 07/early 08).
Buffett also seems to believe inflation is literally guaranteed and "baked in the cake".
IMO, this makes positioning a long-term strategic portfolio very tricky. I do disagree with Roger that getting this call right is not important because the assets you want to be long are completely different. Even if you don't make any big bets, you'd still want to be overweight the likely outperformers under those two radically different regimes. Either you are very long U.S. treasuries or you are not. There is no middle ground. Or you overweight hard assets and energy and materials stocks or you don't.
OK, this is getting long so I'll pull the plug here.
From anon 7:36 to Roger
I should have said either the muni or taxable ETF's from Nuveen & Blackrock. An example is NUV.
Thank you.
Roger, I have to question the oft made assertion that China has "invested/investments" in US treasuries, and that an "investment" philosophy governs their actions in this area.
Seems to me that China has its massive treasury hoard as a result of their (ongoing) interest in sterilizing the trade imbalance and controlling currency value. At some point, overall trade balance progress may fundamentally change China's actions, but it is hard to see them managing treasuries as an investment until that time.
In todays world, China has massive dollar purchases absolutely required to be made - if not treasuries, the real estate, companies, goods, services ...
generally i think the fixed income market is mostly broken and so am underweight everything.
if there is another panic in the bond market I would expect CEFs to feel it worse. If no panic comes then i will have turned out to be too cautious (talking about the bond market as a whole).
I guess your answer depends on what you think will happen with this market--CEFs are just one tool to access fixed income.
10:53, I think I am saying something very similar. I think you describe the "unhealthy relationship" that I think exists. Maybe there is no real strategy now (not sure about that) but I believe China's making a change would require strategy jsut for their own financial well-being if nothing else.
MikeC: Thanks for the complements but my question was really for our host – it's his work and his blog – and while I enjoy reacting to what others have said I'm not particularly original, am rather private, and really have no inclination to start a blog of my own.
As to Hussman, he's probably forgotten more about value investing analysis than I will ever know but, although I am not an economist, I conduct enough research involving complex systems to know the assumption of equilibrium where there is reason to suspect nonlinearity can lead to serious modeling errors. I can't give a full explanation of what, to a macroeconomist, represents a fallacy in Hussman's analysis so here's a rather acerbic critique at http://tinyurl.com/7fp7f3 , http://tinyurl.com/m3slwz , http://tinyurl.com/dfc6oe and http://tinyurl.com/ans2un (follow the links in sequence) of a famous economist who, like Hussman is a finance and accounting specialist using the same assumptions; you can judge for yourself.
NB: Hussman pays so much attention to empirical market behaviors ('action') that I wouldn't expect a significant problem with his funds if he is wrong in his analysis but it will be interesting to see whether the differences between his conceptual framework and the actual investing moves he makes become sufficiently large to cause any cognitive dissonance.
FWIW I also think that inflation is 'baked into the cake' but, not to abuse the metaphor too much, I also think the cake is barely beginning to rise and would collapse if the cat walked on the stove, never mind a real shock. This is a case where keeping something in reserve to swing in either direction is the only viable strategy. JMO
RW,
you have unambiguously cultivated a following here via your useful comment. feel free anytime
In the 'me too' category, Roger's thoughts and ideas keep me coming back every morning. Roger, RW, Stephen Drone, and even some of the anonymous hecklers keep me coming back throughout the day. Hats off to you guys.
You too, man. I didn't even know you had a blog until Friday. heh.
Roger's 200 DMA related moves are such a hot topic they're on the front page of Index Universe!
amusing, i just did the interview this morning
As far as future inflation, Roger hits it on the head. You have to think of probabilities. What is more probable - the Fed and Treasury/Congress/President successfully pull the money out of the system at the precise time (remember these are the same folks who were oblivious to this mess) or that Obama can't halve the deficit over the next ten years and the Fed keeps too much money in the system for too long. I bet on the latter.
I think this will be one of those "no-duh" arguments in a few years just like housing. Everyone now sees the foolishness with the rapid appreciation in housing. It seems like it is a given. But, just a few years ago, those Cassandras were mocked and belittled. I think it will be the same with inflation. We will look back on the situation and come to the conclusion that inflation was inevitable just as the housing drop was.
What scares me about this scenario is those who make an argument for hyperinflation are generally dismissed the same way the housing bears were a couple years ago. I am not saying I fit into this camp, but what scares me is how quick we are to dismiss it. It can never happen here is the argument. But, if we see deficits around a trillion for a few years in a row, the interest expense alone will start to overwhelm the budget. Just about the same time our safety nets of Medicare and Social Security start massive deficits.
Interesting times...
the 'no-duh' argument is crucial (not being sarcastic).
owning one internet stock valued in eyeballs was not a big deal but no-duh that 1/3 of a portfolio in those tpyes of names was bad.
big picture, forest for the trees etc are cliches that matter.
I'm a big RW fan too. I think he (or she) complements Roger's blog nicely with his additional insights. He doesn't need his own blog, I like to think of him as a guest star.
I posted a request yesterday wondering about RW's background and what he reads and studies to keep himself so well informed. Inquiring minds want to know! Please indulge us. I understand the need to be private and discreet too.
both men are wrong. The bonds were weak because of the auction. duh
Anon 5:38PM, you are quite persistent but if you understand the need for privacy and discretion then you will excuse the lack of detail: I am a researcher and educator (and a lot of other things) who began do-it-yourself investing more than three decades ago to protect my family because I learned rather early that money is one of the few areas where you really cannot trust anyone. I understand general systems and found macroeconomics, the 'big picture,' more intuitively satisfying and so read in that area as well as in the nuts and bolts of investing from active practitioners; I explore theory in the former but rarely in the latter. I do not handle accounts for others and, eo ipso, am strictly an amateur but do read extensively from a rather eclectic selection of theory and practice, test what I read in real-world practice as much as I able, and have discovered over time that I generally knew more than many who call themselves professionals, in part because I do not have to concern myself with learning anything about sales (product placement, I hope I make myself clear here). I do not mind speaking up now and then as long is it understood it is in the spirit of Michel de Montaigne to which I have previously alluded: I do not give advice and would pull a lot more punches (or not speak at all) if I thought anyone felt compelled to accept what I said as truth.
RW I heard you used to box under the name Kid Rodriguez (Taxi reference) and that you killed a man in Reno just to watch him die (Johnny Cash reference).
dang right you're an educator. thanks for the background and keep educatin' us.
ROFL, I'm busted: My real name is Tony and I can hear that lonesome whistle.
RR- it appears Craig at Crawling Road has set up a mini Q&A for your readers in reference to the permanent portfolio. IMO, it is a sound strategy.
http://crawlingroad.com/blog/2009/06/06/hello-random-roger-readers/
thanks for the heads up
RW; I think I'm a bit like you, more than 28 years ago. What an interesting two years it has been, from an educational POV.
I'm also different in that I seem to give everyone else better advice than I give to myself - which is mostly to take less risk.
I worked for a bank for best part of a decade so I suppose there is the crucial difference.
FWIW I don't see how hyper-inflation can be a realistic outcome if everyone concerned is aware of it. It's in everyone's - creditors and debtor - interest (no pun intended) to avoid it so that is what shall happen, regardless of how painful the extra tax burden and reduced spending are.
But until that happens I'll be concerned with the creeping inflation that surely must be approaching.
As an economist, Ferguson is a great historian. Krugman has been right so far, he saw all this coming, and I don't think he's suddenly lost intellect. As a general principle, Krugman is right until definitively proven otherwise.
Actually, at the debate, Ferguson got booed off the stage.
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