Is a bond run in the near future?

Posted by $ blarman 9 years, 9 months ago to Economics
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We know interest rates are going to rise. They are being artificially manipulated right now in order to prop up the massive spending of the government. When they do rise, bond-holders will take it in the shorts. And it isn't as if there is a safer investment vehicle in real estate (currently in a false run) or stocks (which are also over-priced).

If I had any money to invest, it wouldn't be in stocks OR bonds, and not in real estate either. Any kind of fiat-based investment is nearly useless in the kind of inflation of I expect to hit the US economy with in the next 5 years.
SOURCE URL: http://www.businessweek.com/articles/2014-07-03/bond-run-is-wall-streets-worst-case-scenario?campaign_id=DN070814#p1


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  • Posted by $ Abaco 9 years, 9 months ago
    "We know interest rates are going to rise. They are being artificially manipulated right now..."

    They are always artificially manipulated.
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  • Posted by straightlinelogic 9 years, 9 months ago
    Consider the possibility that current interest rates are the product not so much of the Fed's intervention, but a weak economy and a massive deflationary threat to the economy. In the last 30 years, we have witnessed the greatest global expansion of credit ever. When credit unwinds, it acts like margin call. Assets must be sold; prices decline. This healthy process of debt unwinding was short-circuited in 2008-2009 by a massive expansion of governmental debt and central bank monetization. That expansion kept the debt bubble from deflating, but it has not really inflated much except certain financial asset (equity, junk bonds) prices. The piper must be paid however, and when markets lose faith in sovereign issuers being able to make their interest payments, interest rates could well skyrocket for all but the perceived safest debt, initiating an even more massive, across-the-board margin call than what we saw in 2008. That will be profoundly deflationary as so much of the debt that supports our economy and financial markets simply disappears, unpaid. We will be hit by a train, but it won't be coming from the inflation direction everyone expects. Rather we will be blindsided by a deflationary express that nobody sees coming. I have written much more about this on straightlinelogic. PM me if you want the relevant links.
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    • Posted by $ 9 years, 9 months ago
      If we get hit by deflation, anyone in debt is going to be in real trouble. Inflation is generally championed by government because it destroys wealth/savings to prop up the spenders in the economy. Deflation does exactly the opposite, but has the grave effects of creating a huge credit crunch for business and home ownership - not to mention credit cards.
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      • Posted by $ jbrenner 9 years, 9 months ago
        Go deflation, go! As JP Morgan said about Westinghouse without mentioning Westinghouse directly, the financial hard times will only hit those debt-ridden ventures.
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  • Posted by $ jbrenner 9 years, 9 months ago
    Interest rates have amazed me by not going up sooner, but if they do, this country's debt will be crippling. Why we aren't paying down debt while interest rates are low is beyond me.
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    • Posted by CircuitGuy 9 years, 9 months ago
      "Interest rates have amazed me by not going up sooner, but if they do, this country's debt will be crippling. Why we aren't paying down debt while interest rates are low is beyond me."
      I feel like you took my words form another post or independently came to exact same opinion that I have.

      We are in a major expansion cycle. This is the time to pay down debt in a big way. If we were smart we'd put off politics for another time, cut spending on everything just a little, including Military, Medicaid / PPACA subsidies, dept of justice, education, and then raise taxes just a little. The changes would be minor. We could still engage in histrionics about how taxes, PPACA, the military/prison-industiral-complex, or whatever policies you hate are destroying freedom on earth forever. But a tiny across-the-board change makes the problem disappear.
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      • Posted by $ jbrenner 9 years, 9 months ago
        I think I had said that before as well in a different post, CircuitGuy. You and I agree on all but one thing. A tiny across-the-board change is insufficient. To pay down debt, you have to spend less money than you take in. We aren't even close to that. $17+ trillion is more than GDP for a year!
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        • Posted by CircuitGuy 9 years, 9 months ago
          Many tiny is overstated. Suppose all gov't spending were reduced by 10% over two years and set to stop growing in the future. Suppose taxes were increased 10% (this is something like a 2% change in average rate), the deficit would be mostly gone. After a few years of GDP growth and no further increases in gov't spending, we'd start running a small surplus and retiring that debt.

          That would cause a lot of histrionics about favorite programs (Military, PPACA, education, prisons, SBIR/STTR) being cut or an extra 2% coming out of your paycheck, but the problem would melt away.

          This plan never happens b/c politicians sanctimoniously say "we just can't afford [insert large spending they never wanted in the first place] but balk at the notion of cutting their favorite program."
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          • Posted by $ 9 years, 9 months ago
            While I agree with the part about cutting spending, the raising taxes part is a disastrous add-on. Raising taxes cripples business. What we need is to cut the spending way back AND cut corporate taxes (the US currently has the highest corporate taxes among developed nations). Let's get people back to work, off the welfare lines, and let the economy provide the revenue to pay down the debt. The big thing is that we MUST stop spending more than we collect!
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            • Posted by CircuitGuy 9 years, 9 months ago
              Right. But not cutting taxes means deeper cuts. It means more poor people not getting their medicine, more dictators taking action that the US military can't respond to, more drug dealers released from jail early, etc. If people accept that, great. If we had a small tax increase, it means smaller cuts in those things. You can pick deeper cuts or smaller cuts and more taxes. I just don't want to see endless debate about which approach to do and have them take neither until it's a crisis.
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              • Posted by $ 9 years, 9 months ago
                Frankly, I don't think it really matters much. Because of the makeup of the various parties and the control of Senate, House, and Presidency, I don't see any kind of meaningful reduction in spending happening at all - even after two more years of Obama.

                That being said, I believe that there are plenty of opportunities to trim wasteful expense from government without gutting things entirely.

                Start with the Simpson-Bowles commission that recommended hundreds of millions in savings just by shutting down redundant bureaucracies. Add to that an increase in permitting for energy production - which the federal government then receives royalties from. Next, start cutting some of the bogus welfare programs like school lunches in the summer. Cut back foreign aid to governments hostile to us or misusing funds (read ALL of Africa). I think there is room for judicious cuts in the military that do not jeopardize our sovereignty, and that comes based on personal conversations with retired personnel, including an Air Force Colonel. Next, employ those who don't have jobs to finish building the border fence with Mexico. Kill two birds with one stone. Stop all the wasteful purchases of ammunition for the IRS, BLM, and other government agencies NOT tasked with law enforcement.

                I think there are PLENTY of ways the government can cut back that don't jeopardize our nation. The problem is that those who are in charge aren't going to vote to decrease their power base willingly.
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                • Posted by CircuitGuy 9 years, 9 months ago
                  Right, but once you want to cut program's you don't like but only modest judicious cuts to think you do like, you lose the high ground and it becomes a political battle. Anyone can save us money but cutting all the programs he doesn't like and keeping or expanding the few important ones he supports.

                  I wish the goal of balancing the budget were divorced from debating the merits of the programs.
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      • Posted by Robbie53024 9 years, 9 months ago
        Major expansion cycle? What dope are you smoking?
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        • Posted by CircuitGuy 9 years, 9 months ago
          This is the expansion. Wait a few years and we'll be in recession. My guess is three more years of expansion.
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          • Posted by Robbie53024 9 years, 9 months ago
            Nope. We're in a Fed fueled stalemate. Soon the ability to keep things afloat via the Fed will collapse. The demographics are against us (we should be in a contraction until about 2022), and the monetary expansion has all but doomed our economy. I only wish I were able to forecast whether it will be runaway inflation or whether it will be deflation that does us in.
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      • Posted by edweaver 9 years, 9 months ago
        There is a good possibility that they are counting on the coming inflation to feed the spending habit and pay off the debt. Borrow all the money now and pay it off with a flood of tax dollars from all the increased money in the system which they are currently pumping in. One more time the government wins and the people lose.
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  • Posted by CircuitGuy 9 years, 9 months ago
    I strongly agree with the first three sentences, at least to the extent that I can try to predict the financial markets.

    I don't think there's such thing as fiat-based investments. Investments are the things that generate value, usually in the form of products or services. Those don't exist by fiat. Their value is based on future earnings, which is a function of how well they can produce value for customers.

    Regarding what to invest in, I say invest in what you know, in things that you fully understand.
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    • Posted by $ 9 years, 9 months ago
      By fiat-based investment, I mean anything that was based on the belief in that a future price was going to provide a return - such as the current stock market. This was in contrast to hard investments like real estate (conditional), commodities, or precious metals.
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      • Posted by CircuitGuy 9 years, 9 months ago
        I think of commodities, metals, and land as speculations, not investments. Businesses or developed RE generate earnings. We can look at the expected value of future earnings and work back to a valuation. If the business or property has an amazingly stable history, maybe it's worth 15 times earnings. If it's a growing business with a lot of ups and downs, maybe it's worth 3 times earnings. You also have to add in the salvage cost if you sold all the equipment and inventory. These same rules apply whether it's publically traded or your own rental. Of course you have to factor in you have more control over your own rental but you also have liability if they pierce your LLC.

        I consider none of this investing by fiat. It's all based on what things you think people will want in the future and how well a business provides people what they want.
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        • Posted by $ 9 years, 9 months ago
          Uh, just a note, but you are still speculating on an intangible - business performance. I read your post and immediately thought of that little disclaimer I see on all my 401K prospectus information: "past performance is no guarantee of future returns". I can invest in a stock one day, that company can go belly up the next and I am left with nothing. If I invest in a hard commodity, I at least have the physical good I can attempt to resell or use. That was my only point.
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          • Posted by CircuitGuy 9 years, 9 months ago
            I could see it as speculating since we don't _know_ how much value a business will produce in the future. There could be a scandal, mistake, or business environment change. If we invest in a diversified portfolio of businesses and RE, we know our investment will track the economy. The same is sort of true for undeveloped land and commodities, although precious metals tend to go opposite the economic cycle, so if things really turn to worms precious metals are worth more.
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