I'll be putting money in TIPS and Treasuries. I'll probably find an ETP that I can use as a proxy so I can use leverage. Cash, vol, precious metals (for the time being) and technology equities are the only other exposure I'll have and currently do own.

I don't know why it took me so long to figure out what the Fed is actually doing with the PDs. They aren't increasing liquidity, they are reducing it because the banks aren't lending against their new reserves, and in fact are doing the opposite. Some guy I was listening to explained it like if your kid has a bank account in his name that you opened up for him. It's your money not the kids, so the PDs aren't getting flushed with cash in the transaction but instead the ability to lend.

Lacy's point on rising debt levels and decreasing marginal revenue product is so important in the deflation argument. One I've observed and I'm sure you have as our illustrious Congress spends our money to no end. One thing I disagree with him is that technological innovation probably won't be enough to offset the loss in productivity because the federal government appears to be choking that out with regulation and taxes just like Europe did. We don't have the culture in the U.S. anymore to encourage that kind of entrepeneurship and risk taking in the long run. We will continue to shift to a command and control economic model and not reverse that course this decade.

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Posted by Dandaman

Louisiana

Member since May 2017

710 posts

Posted on 9/2/20 at 12:40 pm to wutangfinancial

I like your comments, Wutang.

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Posted by RedStickBR

Member since Sep 2009

14577 posts

Posted on 9/2/20 at 12:43 pm to wutangfinancial

Solid post. Everything you said. If you don't mind, I'd be interested in which vehicles you choose for TIPS and Treasuries.

I'm still working through what Lacy is getting at when he says things like, "When the Fed buys government securities, all that really happens is you switch to the government having a one-day liability which the banks are holding." In the below article, the MMTer, Stephanie Kelton, is said to agree and being cited as saying, "Printing money simply means that overnight central bank liabilities earning the central bank’s target rate replace, say, three-month government liabilities earning roughly the central bank’s target rate. And if the Fed doesn’t pay interest on these reserve balances, then that simply means it wants its target rate at zero."

I can't wrap my head around WTF that actually means

Longtime Bond Bull Lacy Hunt Sees One Huge Risk

Regarding your post about going long Treasuries, this is a must read:

On My Radar: Shilling & Rosenberg on Deflation

Gary Shilling on bonds:

quote:
“People ask [Gary Shilling] if [he] would buy Treasurys today with long-term yields at ~1.40%.” His answer:

He doesn’t care what the yield is as long as it is going down. He buys Treasurys for the same reason people buy equities: for appreciation. He doesn’t think the rally is over. And because of convexity, with rates so low, the appreciable gain is even higher. Inflation vs. deflation is about supply and demand. Gary thinks we are heading for deflation. When you have excess supply around the world, you get deflation. Unless we cut off imports, we are going to continue to see excess supply, so he expects we may see another 100 bps decline in Treasurys. He thinks we are going to see further decline in yields. With deflation, you want to be long Treasury bonds.

David Rosenberg on bonds:

quote:
Gary and David are going to come to the same conclusion.
Here are some data points:
The guys on bubble vision at the end of last year would say, “What idiot would buy a 30-year bond on December 31, 2019 at a yield of 2.40%?”
David’s answer is that the idiot that wanted a 30% return due to the decline of rates from 2.40% to 1.25%. That’s the idiot that would buy.
The U.S. Treasury Bond yield at 1.25% is an absolute bargain.
The German long bond yields negative 0.08%.
The Netherlands long bond is negative 0.07%.
Switzerland, negative 0.39%.
He doesn’t believe Canada is a better credit than the U.S. The long Canadian bond yields 0.98%. France: 0.5%, UK: 0.62%.
Spain and Portugal are about 1% and those are triple B-rated bonds. The U.S. last he saw is still AAA.

quote:
So, what happens to the long-bond yield if the stock market goes down? Normally, they are inversely correlated. There will likely be a race to safety (more demand for bonds, lower yields).
The stock market is so concentrated that if these mega caps correct, the rest of the market will not be able to rally enough to offset it. Where does that take equities if the mega caps roll over?
Where do you think the flight to safety then takes Treasury yields? A lot lower.

quote:
If you are in the deflation camp, you’ve got to be long Treasurys.
The question is, Is monetary stimulus going to be so big that it will create inflation? The Great Financial Crisis affected just a few people. Mortgage and housing and took out a few big banks. This event is much greater than that. This will overwhelm everyone, everywhere. The monetary stimulus is small in terms of overall economic impact.

quote:
David mentioned the need for recurring stimulus. No doubt we are going to be seeing much more stimulus.
There is another $3.5 trillion fiscal plan proposed in the House and a $1 trillion plan proposed in the Senate, and there is no way to stop the Fed—they are full speed ahead.
We have an output gap of 7% between aggregate supply and aggregate demand.
This is very consistent with a depression.
How do you close that gap if you are an academic working at the Fed?
The Fed has to synthetically create a negative interest rate of -14%. David doesn’t believe the Fed can go to negative interest rates, so they will do this by printing money.
To do this, the Fed balance sheet has to go up to at least $11 trillion. So, call it another $4 trillion. Maybe we’ll just create asset bubbles the whole way through. That’s the side effect of what the Fed is trying to do for the greater good, which is to put a floor under deflation.
If they don’t eliminate the output gap, the deflation is not going to go away.
We have to figure out what that time frame might be.
To get to -14%, the Fed has to take the balance sheet to $14 trillion. Maybe we create asset bubbles even more…