Julian Robertson Bets the Farm on Inflation

Simply put, Julian Robertson is the definition of a hedge fund legend. And, his success is noted by the fortune he has amassed as he now graces the Forbes' billionaire list. He has pioneered a successful investment methodology, he has generated outstanding returns at his famous hedge fund Tiger Management, and his influence has sprouted some of the most successful modern day hedge funds in the form of the 'Tiger Cubs.' And, most importantly, he predicted the financial crisis two and a half years ago in an interview with Value Investor Insight. When he talks, you listen.

For those unfamiliar with Robertson, we'd highly recommend checking out the profile/biography we just wrote on him. In that piece, we have outlined exactly why you should follow him (and the Tiger Cubs for that matter too). As we detailed in his profile, Robertson has a unique investment methodology. He takes a macro approach, finds a smart idea, researches it exhaustively, and places a big bet. And, when he feels he is more than correct, he will 'bet the farm.' And, it looks like we have identified Robertson's next play where he has and will continue to 'bet the farm.'

Julian's Big Bet

While this is not a new position for Robertson, his constant confidence behind the play has inspired us to look at it more closely. Today, we are going to highlight Julian Robertson's steepener swap play. In layman's terms, he is betting on inflation. Taken from eFinancialNews, "Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate, which is derived from the difference between long and short term rates. Many of these products also use high leverage, where the difference between the two rates is multiplied by up to 50 times to produce a higher return."

He thinks rates could hit 7% easily and could go as high as 18%. We agree with him on this play and we first published our very basic rationale behind shorting US Treasuries back in October of last year. The main point we're focused on is the wager that inflation is in our future. If such an outcome came to fruition, yields on long-term Treasuries would rise. When the yields increase, bond prices will drop, thus benefiting the short position. While the vehicles noted in this article are all slightly different in construction and purpose, they all broadly wager on the same outcome: inflation. Julian's talked about this play in numerous forms, and we actually first heard about his 'curve steepener' play in January 2008 in Forbes. That piece highlighted how Robertson was "long the price of two-year Treasuries and short the price of the ten-year Treasury - betting that the difference, or curve, in the yield between the two will increase." Such a play is negative on the US economy and Robertson executed it because he felt the Federal Reserve would continue to flood the economy with money. And, he has been right.

What's fascinating here is that retail traders and investors could put on essentially the same play using the marvels of exchange traded funds. If you wanted to put a curve steepener play on by going long the 2 year Treasuries and shorting the 10 year Treasuries, you could simply buy SHY (iShares Barclays 1-3 year Treasury etf) and then short IEF (iShares Barclays 7-10 year Treasury etf). This is an easy way to put on the same trade Julian played at the beginning of 2008.

Robertson ultimately feels that the US dollar will become so weak that it causes the central banks of China and Japan to stop purchasing Treasuries. As such, 10-year bond prices would move down and that's exactly what we've seen play out. Back in January of 2008, Robertson told Fortune, "I've made a big bet on it. I really think I'm going to make 20 or 30 times on my money." Moving on from his curve steepener play, we then heard Julian talk about a 'steepener swap' play at a Tiger Cub hedge fund panel. At the panel, Robertson joked that last Christmas his family would have “a steepener in every stocking." This is definitely one of Robertson's token 'bet the farm' plays if there ever was one.

In his recent interview with Value Investor Insight, Robertson lays out further rationale for his play. He says, "I'm amazed at the amount of money the government is throwing at this thing. You don't even react anymore unless somebody's talking about $1 trillion. I genuinely admire the administration's courage in doing what it's doing, but not the wisdom of it. I look at the TALF (Term Asset-Backed Securities Loan Facility) program, for example, and it's almost a bribe to get people to put on more leverage ... I ask anyone to give me an example of an economy beefed up by huge amounts of quantitative easing that did not inflate tremendously when or if the economy improved. I think what we're doing now will either fail, or it will result in unbelievably high inflation - and tragically, maybe both. That would mean a depression and explosive inflation, which is frightening."

While it may be frightening, it seems to be the scenario that Robertson is wagering on. After all, his steepener swap play will shower him with profits if rampant inflation rears its ugly head. He thinks that the US has not solved the current problems and things could go from bad to really bad. He likened the U.S.'s current situation to that of Japan in 1989, but thinks we are in far worse shape.

Notable Investors Bearish on US Treasuries

Robertson is most certainly not alone in his views. Numerous other prominent investors and hedge fund legends share his distaste for treasuries. We just recently noted that Michael Steinhardt says treasuries are a foolish play over the long term. He categorizes them as risky, noting that the yields are low and the danger is high. Steinhardt of course ran one of the first truly successful hedge funds (Steinhardt Management), garnering a 23% return each year for almost thirty years.

Additionally, acclaimed investor Jim Rogers also wants to short government bonds. Rogers is well-known for his stellar returns while managing the Quantum Fund (now defunct) with then partner George Soros. Rogers expects the government to buy Treasuries in an effort to stem borrowing costs. Rogers says that since Governments around the world are printing a ton of money and borrowing insane amounts, he almost has no choice but to short them. Rogers had previously been short the Treasuries, but covered them for the near-term in favor of waiting for another opportunity to short, as we noted when reviewing Rogers' portfolio. We could add even more talented investing names to this list, but suffice it to say that there is a confluence of smart minds all marching to the same beat.

When such a confluence of smart minds all wager on essentially the same thing (inflation), you should probably turn your head at the very least.

How To Play It

Now that we've seen so many smart minds interested in this wager, how do we play it? There are essentially a few different ways to place a bet on inflation similar to that which Robertson has made. The vehicles referenced earlier are not typically available to retail investors and traders. As such, we'll focus on ways that non-institutional players can protect themselves from inflation. Additionally, we'll take a quick look at the complex vehicles for those working at institutions with access to such products.

Exchange Traded Funds (ETFs) / Mutual Funds

The simplest way for retail investors and traders to bet on inflation is to bet against US treasuries by shorting them. Currently, there are a few ways you can do this. There are two exchange traded funds (ETFs) currently offered which index long-term treasury bonds. Ticker TLT is the iShares Barclays 20+ year treasury fund. Its performance corresponds to the price and yield of the long-term treasury market. As such, investors and traders who wish to bet on inflation (and against treasuries) can simply short TLT. Also, those who wish to play the 7-10 year Treasuries can do so via iShares Barclays Treasury index etf (IEF). That vehicle corresponds to the price and yield performance of the intermediate term sector of Treasuries.

Additionally, you could also buy put options (LEAPs) on this index if you were so inclined. Buying puts on TLT is essentially the same bet as shorting TLT outright. We are not necessarily recommending using options to execute this play because of the leverage they employ, the time decay that moves against you, and the fact that we're not big fans of LEAPs to begin with. And, let's face it, such a large bet on inflation could take years to play out. As such, you're pretty much forced to use LEAPs if you wish to execute this play via options.

There is also another exchange traded fund currently out that 'ultrashorts' the treasury market. Its ticker is TBT and it is 2x the inverse of the TLT vehicle we just mentioned. However, there is one huge caveat with this play. Ultrashort ETFs reset on a daily basis and suffer compounding errors over time and noticeably more volatility. So, the longer you hold them, the more your results skew from the index they are supposed to be tracking. And, that is not something you want to experience when placing a longer-term bet on treasuries. Consider that over the past 1 year timeframe, TLT is up 1.43%. Theoretically, since TBT is 2x the inverse of TLT, TBT should be -2.86% over the same timeframe, right? Wrong. As you can see from the chart below, over the same time frame, TBT is actually -24.37% and has not tracked its index accurately over time at all whatsoever.

(click to enlarge)

This is why you should avoid using TBT for anything besides daily trades. There have been numerous articles published on this subject, and we recommend avoiding ultrashort ETFs. Additionally, since TBT employs leverage, it carries more risk. For the retail investor or trader, simply shorting TLT seems to be the best and easiest option at this point in time.

Last, investors also have the option of using the Rydex Inverse Government Bond Strategy mutual fund (RYJUX). This mutual fund has an expense ratio of 1.4% and essentially is the same as shorting TLT outright without leverage. RYJUX is a 1x short of 30-year Treasuries and is another option for investors who don't mind slightly less liquid mutual funds.

Steepener Swaps / Constant Maturity Swap (CMS) Rate Cap

Now we'll turn our focus to the specific investment vehicle Julian has referenced. The vehicle is called a steepener swap and it is typically reserved for institutional investors.

In his recent interview with Value Investing Insight for May/June 2009, Julian Robertson says, "The insurance policy I would buy is called a CMS [Constant Maturity Swap] Rate Cap, which is the equivalent of buying puts on long-term Treasuries. If inflation happens the way it could, long-term Treasuries are just going to explode. Less than 30 years ago, long-term interest rates got to 20%. I can envision that seeming like a very low interest rate compared to what might occur in the future."

Option ARMageddon has also posted up a nice explanation of the vehicle courtesy of Tiger trader Pat O'Meara. They note that these are options to bet on interest rates rising for 10-year or 30-year treasuries. O'Meara provides a current example, in which one could buy for $50,000 a five-year option, betting that the yield on $10 million worth of 10-year Treasuries rises above 4.2% between now and expiration in 2014. Including the 0.5% cost of the option, the break-even yield level is 4.7%." So, the vehicle is slightly more complex and definitely an institutional type of wager.

Other Inflationary Wagers

While Julian certainly thinks inflation is in our future, he is hesitant to buy gold. In the Value Investor Insight interview, he goes on to say that, "I've never been particularly comfortable with gold as an investment. Once it's discovered none of it is used up, to the point where they take it out of cadavers' mouths. It's less a supply/demand situation and more a psychological one - better a psychiatrist to invest in gold than me." While his argument makes sense, we found it intriguing seeing that we have tracked numerous prominent hedge fund managers moving into gold here on the blog.

Robertson's former colleague Stephen Mandel of Lone Pine Capital has a large call position on the Gold etf GLD. Additionally, respected hedge fund managers such as David Einhorn of Greenlight Capital, Eric Mindich of Eton Park Capital, and John Paulson of Paulson & Co all have sizable gold (and gold miner) positions. While Robertson doesn't like gold as an inflation play, he does have a few other recommendations. He likes natural resource stocks and then also says, "Zinc would also seem to me to be a very good inflation hedge."

Precautionary Note

While we have finally gotten around to writing a follow-up to our initial treasuries post, we do want to insert a note of caution. Year to date for 2009, treasuries are already down over 23%.

(click to enlarge)

The sudden and rapid decline is most likely due for a correction and we do not feel that the current time is ideal to initiate a position in shorting Treasuries. We would look for any sign of a rebound before putting on a new short position. That said, we still feel the move in treasuries will take many years to fully play out and this is a very long-term inflationary bet. While short-term moves like the one we've seen this year are nice, the full extent of the move could take years to come to fruition. We consider the publication of our post on this topic to be a contrarian indicator. After all, when there are headlines saying for you to get into something after a big move has already taken place, it's time to at least take some profits. So, place your bets with caution, as you'll have plenty of time before inflation truly rears its ugly head.

If you believe inflation is in our future, then 'bet the farm' with Robertson by buying steepener swaps, shorting US Treasuries, or buying puts on long-term Treasuries (whichever you have access to). As infomercials for rotisserie cookers like to enthusiastically exclaim, just 'set it and forget it.'

Comments

[Macro_Man:]

long Treasuries are becoming a crowded short. There is no one, it seems that likes long U.S. Treasuries. I for one, like long U.S. Treasuries...but have recently acquired only a small position and am not adding to it.

So, if something is this unpopular and sentiment so universally negative and heavily shorted...there is a good chance that when it runs up...it burns the shorts. I agree, that the supply seems limitless and that is what many will point out. But..

Now, what can make it change direction...some indication from the government that they are planning to cut down the size of the 30yr going forward. maybe take out 2 or 3 reopenings. making interest payments partly tax deductible. or just this rally running out of steam in a couple of months.

All I am saying is, when something is this unpopular...it is not a good thing to short now. limited upside...a lot of quick downside

Jun 04 05:00 AM

[MinAkkar20:]

What is Treasury going to do when the same people it was relying on purchasing its debt at auction is short-selling it? I guess the Fed will be there to buy it all...

Macro, you are viewing the shorts as speculation pushing treasuries below their "natural price". But treasuries are coming down from an unjustified high where they offered negative real return due to a flight to safety. I think they have much farther to fall to reflect their utility as a store of value. 30yrs are only at 4.5% as of yesterday. It would only take one unsuccessful auction to push that number up much higher.

I wouldn't want to rely on Congress giving up tax revenue or a geopolitical event to make treasuries turn north.

Jun 04 08:27 AM

[Uncle Pie:]

Some say "oil is the new gold". Whatever happens, well run oil companies make money and pay dividends. Utilities and telecoms and pharma companies are consistently profitable too.
I'm not comfortable making "bets" with ETFs which are after all "derivatives" with counterparty risk. I am very comfortable owning well established, high quality, profitable non-US companies which pay dividends in currencies other than the US dollar. Take a look at Novartis NVS Roche Holdings RHHBY or Swisscom SCMWY for dividends in Swiss francs. Take a look at TOT or EONGY for dividends in euros. Take a look at BCE or Pembina Pipeline PMBIF or Baytex BTE or Crescent Point Energy CPGCF for dividends in Canadian dollars. Or ANZ Bank ANZBY or Woodside Petroleum WOPEY for dividends in Australian dollars. Or Statoil STO for dividends in Norwegian Krone. This writer owns some shares in all of the above.

Jun 04 09:54 AM

[Maxe Paul:]

These hedge fund guys are a real hoot, the guy made this trade in January 2008, and doing this now with ETF's sounds like a complete folly to me, i predict many people will get their fingers burnt.
Good luck to ya!

Jun 04 10:40 AM

[Windsun33:]

I would go so far as to say that most basic materials are the "new gold" - including energy, agriculture, and metals. Iron/steel might be the one exception, but I am watching it. Pretty much anything that will hold its value against the dollar, but I am suspecting that gold and silver might be reaching the end of their run.


On Jun 04 09:54 AM Uncle Pie wrote:

> Some say "oil is the new gold". Whatever happens, well run oil companies
> make money and pay dividends.

Jun 04 10:44 AM

[RonnieR:]

It is downright enjoyable to discover the wise arguments of Jim Rogers, Schiff, Ron Paul, Mises, and other brilliant contrarian thinkers.

In trading:
(1) Never fight the Fed.
(2) Timing is the difference between genius and fool.

I bought TBT when Rogers did and after I lost about 20% (in non-stop day after day losses), I sold. So did Rogers who proclaimed he had to cover, "becuase of that idiot Bernanke" (distorting the free market).

Do yourself a favor and think twice before betting the farm (on ANY one trade).

Jun 04 10:54 AM

[Harry Tuttle:]

I fully agree that it is a crowded trade, however, there is a lot of supply ahead of us which is usually not the case with most things one can short. By the way, Rosenberg likes treasuries. For what it's worth, I don't.


On Jun 04 05:00 AM Macro_Man wrote:

> long Treasuries are becoming a crowded short. There is no one, it
> seems that likes long U.S. Treasuries. I for one, like long U.S.
> Treasuries...but have recently acquired only a small position and
> am not adding to it.
>
> So, if something is this unpopular and sentiment so universally negative
> and heavily shorted...there is a good chance that when it runs up...it
> burns the shorts. I agree, that the supply seems limitless and that
> is what many will point out. But..
>
> Now, what can make it change direction...some indication from the
> government that they are planning to cut down the size of the 30yr
> going forward. maybe take out 2 or 3 reopenings. making interest
> payments partly tax deductible. or just this rally running out of
> steam in a couple of months. geopolitical events..including swine
> flu.
>
> All I am saying is, when something is this unpopular...it is not
> a good thing to short now. limited upside...a lot of quick downside

Jun 04 11:08 AM

[svosavvy:]

Thank you author for this article,

One of the most clear headed I have read in days. Man I love this guy (Robertson). Thank you also for not touting the TBT, something I might add is the TBT is now one of the preferred trading vehicles out there for the weak dollar theme. So I hate it for all the reasons you do plus you will be subject to the whims of heady emotional traders to boot. Thank you for posting how Robertson feels about gold, I couldn't agree more. Take a speculative look at aluminum I think it's cheapity cheap and getting more destocked here. I believe the sentiment expressed by those in the industry that if you get any "green shoot" there could be a pinch in the ramp to meet the demand albeit weak demand. It is a commodity which gives it natural inflation fighting powers and a future metal, just think about all the new wind beasts that will be lining our sky.

Jun 04 11:18 AM

[odin:]

For those who think that "4.5%" is too small a number, the word is: Japan.

Other words that come to mind: output gap, unemployment, deleveraging, rising savings rate. The government borrowing is simply trying to replace private borrowing to keep the economy chugging along. China cannot stop buying treasuries (dont look at the rhetoric, look at the TIC data) if it doesnt want a recession on its hands. It may buy and store commodities, but there is a limit to it (and for what purpose if US consumption fails?). It may buy gold (and will), but gold cant substitute treasuries....the market just isnt that big.

The banks may be making hay while the yield curve is steep...but they also are knee-deep in real estate (where a steep YC is no fun).

Inflation may very well be in our future down the road. But it is no different than saying "this house will eventually be worth more than what i paid for it" or "my equity portfolio will eventually be in the black"..


On Jun 04 11:08 AM Harry Tuttle wrote:

> I fully agree that it is a crowded trade, however, there is a lot
> of supply ahead of us which is usually not the case with most things
> one can short. By the way, Rosenberg likes treasuries. For what
> it's worth, I don't.

Jun 04 11:27 AM

[odin:]

For those who think that "4.5%" is too small a number, the word is: Japan.

Other words that come to mind: output gap, unemployment, deleveraging, rising savings rate. The government borrowing is simply trying to replace private borrowing to keep the economy chugging along. China cannot stop buying treasuries (dont look at the rhetoric, look at the TIC data) if it doesnt want a recession on its hands. It may buy and store commodities, but there is a limit to it (and for what purpose if US consumption fails?). It may buy gold (and will), but gold cant substitute treasuries....the market just isnt that big.

The banks may be making hay while the yield curve is steep...but they also are knee-deep in real estate (where a steep YC is no fun).

Inflation may very well be in our future down the road. But it is no different than saying "this house will eventually be worth more than what i paid for it" or "my equity portfolio will eventually be in the black"..


On Jun 04 11:08 AM Harry Tuttle wrote:

> I fully agree that it is a crowded trade, however, there is a lot
> of supply ahead of us which is usually not the case with most things
> one can short. By the way, Rosenberg likes treasuries. For what
> it's worth, I don't.

Jun 04 11:27 AM

[odin:]

For those who think that "4.5%" is too small a number, the word is: Japan.

Other words that come to mind: output gap, unemployment, deleveraging, rising savings rate. The government borrowing is simply trying to replace private borrowing to keep the economy chugging along. China cannot stop buying treasuries (dont look at the rhetoric, look at the TIC data) if it doesnt want a recession on its hands. It may buy and store commodities, but there is a limit to it (and for what purpose if US consumption fails?). It may buy gold (and will), but gold cant substitute treasuries....the market just isnt that big.

The banks may be making hay while the yield curve is steep...but they also are knee-deep in real estate (where a steep YC is no fun).

Inflation may very well be in our future down the road. But it is no different than saying "this house will eventually be worth more than what i paid for it" or "my equity portfolio will eventually be in the black"..

Jun 04 11:27 AM

[Angel Martin:]

Absolutely, Schiff etc forecast the mortgage meltdown and deduced that the $US would crash and got clobbered by that trade in 2008.


On Jun 04 10:54 AM RonnieR wrote:
>
> Do yourself a favor and think twice before betting the farm (on ANY
> one trade).

Jun 04 11:57 AM

[MinAkkar20:]

Japan's lost decade is used far too often as a comparison to the US. They aren't apples to apples. Japan: export driven, high-savings, aging population, no immigration. US: consumption driven, low savings (even now), high immigration / birth rate (relative to industrialized countries).

Even Japan with its extremely high debt to GDP ratio doesn't come close to the size of debt that is being offered up by the US government. Eventually supply & demand must take hold. China can't stop purchasing treasuries altogether, but they surely could demand a higher return to offset the risk & size of their holdings.

And unless your equity portfolio outpaces what you could buy with it if you sold it, you aren't in the black. You are breaking even. There is no wealth creation with inflation - it just makes everyone feel good when they look at their 401k.


On Jun 04 11:27 AM odin wrote:

> For those who think that "4.5%" is too small a number, the word is:
> Japan.
>
> Other words that come to mind: output gap, unemployment, deleveraging,
> rising savings rate. The government borrowing is simply trying to
> replace private borrowing to keep the economy chugging along. China
> cannot stop buying treasuries (dont look at the rhetoric, look at
> the TIC data) if it doesnt want a recession on its hands. It may
> buy and store commodities, but there is a limit to it (and for what
> purpose if US consumption fails?). It may buy gold (and will), but
> gold cant substitute treasuries....the market just isnt that big.
>
>
> The banks may be making hay while the yield curve is steep...but
> they also are knee-deep in real estate (where a steep YC is no fun).
>
>
> Inflation may very well be in our future down the road. But it is
> no different than saying "this house will eventually be worth more
> than what i paid for it" or "my equity portfolio will eventually
> be in the black"..

Jun 04 12:04 PM

[TurtleTrader72:]

True..Tons of money has been printed in an attempt to restore the global economy. But isn't this already public knowledge. I can't count how many media sights and networks have commented on this already. CNBC comments on it almost everyday. Wouldn't you think that much of this has already been priced into current prices. I think the short side of a trade is almost over..at least in the intermediate term.

Jun 04 12:04 PM

[Market Folly:]

Thanks for all the comments. We agree with those of you who have said this is a crowded trade. In the article, we even noted that our publishing such a piece is most likely a contrarian signal to get out or at least take profits in the near-term. Robertson has been in different forms of this trade (curve steepeners, steepener swaps, etc ) since '08 so he's its obviously in his best interests to publicize his positions.

Since his interview with Value Investor just came out, we wanted to highlight that. Obviously the timing of this article is not the best, as many of you have pointed out. Proceed with caution certainly.

Jun 04 12:31 PM

[odin:]

That is significant point. If Japan, arguably a much more riskier sovereign credit (in light of its slowing productivity, stagnant demand, already high savings rate, low consumption and high debt-to-GDP), couldnt reinflate and could continue to borrow at low levels in face of massive re-deleveraging, what makes the US an exception?

I'm not saying that we will follow the path of Japan (and the last thing we need is a bond bubble and another hit to bank earnings) but all I want to point out is that "4.5%" or thereabouts isnt a magic number in and of itself... That yield can only be too low or too high or just right in some context to which its trading.

Well, look, if you believe in the neon green shoots and think we are back to normal, the money-multiplier is back to normal, lending activity is back to normal, and that the US is continuing to run a easy monetary and easy fiscal policy in the face of those facts, then obviously inflation is the answer. However, the same crowd that points to inflation argues about an extended muddle-through economy and rise in risk. Shouldnt the equity/credit premiums rise in that context and depress yields on those assets?

If massive inflation is the worry, why not just re-leverage instead of trading stocks or shorting treasuries? Take out a massive mortgage, that auto loan, consume current productivity with bags, shoes, Wiis, flat-screen TVs (because you can discount future productivity heavily). I am skeptical of inflation in the near-term because I believe we are at the end of the line and risk premia have risen for good and the repairing of private balance sheets is inevitable.

On Jun 04 12:04 PM MinAkkar20 wrote:

> Japan's lost decade is used far too often as a comparison to the
> US. They aren't apples to apples. Japan: export driven, high-savings,
> aging population, no immigration. US: consumption driven, low savings
> (even now), high immigration / birth rate (relative to industrialized
> countries).
>
> Even Japan with its extremely high debt to GDP ratio doesn't come
> close to the size of debt that is being offered up by the US government.
> Eventually supply & demand must take hold. China can't stop
> purchasing treasuries altogether, but they surely could demand a
> higher return to offset the risk &amp; size of their holdings.<br/>
>
> And unless your equity portfolio outpaces what you could buy with
> it if you sold it, you aren't in the black. You are breaking even.
> There is no wealth creation with inflation - it just makes everyone
> feel good when they look at their 401k.

Jun 04 12:41 PM

[Chris B:]

Keep in mind, there are dozens of hedge fund managers making the opposite bet, but they are not mentioned in this article. Of course, comparing the past performance of various hedge fund managers with their positions today might be too blatant an example of expecting past results to predict future returns.

Suffice to say, no market theme or perspective endures forever, and chasing heroes is a good way to go broke.

Jun 04 01:13 PM

[GMiki1:]

Gold is the new gold. So is silver. But oil is rather golden as well.

Jun 04 02:38 PM

[J. D. Swampfox:]

Hey Macro_Man:
good comment.
Is this you:
macro-man.blogspot.com/
...or should you change your handle?


On Jun 04 05:00 AM Macro_Man wrote:

> long Treasuries are becoming a crowded short. There is no one, it
> seems that likes long U.S. Treasuries. I for one, like long U.S.
> Treasuries...but have recently acquired only a small position and
> am not adding to it.
>
> So, if something is this unpopular and sentiment so universally negative
> and heavily shorted...there is a good chance that when it runs up...it
> burns the shorts. I agree, that the supply seems limitless and that
> is what many will point out. But..
>
> Now, what can make it change direction...some indication from the
> government that they are planning to cut down the size of the 30yr
> going forward. maybe take out 2 or 3 reopenings. making interest
> payments partly tax deductible. or just this rally running out of
> steam in a couple of months. geopolitical events..including swine
> flu.
>
> All I am saying is, when something is this unpopular...it is not
> a good thing to short now. limited upside...a lot of quick downside

Jun 04 02:52 PM

[I need more...:]

Someone is selling him the swaps, so they are betting the exact opposite. And for every inflationista, there are at least an equal amount of deflationistas. Japan, using the same recipes, couldn't reflate over decades; Japan is the worlds second leading economy, not some insignificant analogy. We have had $15-20T in wealth destruction in US alone, and ever climbing unemployment. Wages are gone for those folks; wages are decling for the rest. The Fed "printing" has gone into black banking holes, velocity has cratered and stayed there.
research.stlouisfed.or...
Businesses are asking fo rmoney to borrow, no one needs to expand presently. Consumers aren't borrowing, they are desperately trying to liquidate debt.
This is no recipe for inflation.
What about dollar devaluation? Versus what, the yen, the euro, the yuan? Perhaps a little, but this is a global problem, and again not a recipe for a major move.

Jun 04 03:15 PM

[Old Rick:]

I agree with Uncle Pie and would add Diageo and PM to his list. If the economy and the $$$ keep going to he!!, sin, especially internationally denominated sin might a the place to be.

Jun 04 03:30 PM

[zagrebzagreb:]

If China stops buying US Treasuries, how else will they invest their US dollars? Stocks, bonds, etc, which carry much more risk and illiquidity? I doubt that very much...

According the Economist, roughly 33% of China's GDP is directly related to exports to the US. Such a huge involvement in the US economy means that it will be incredibly slow (impossible) for them to simply refuse US debt, even if they wanted too... This has been the situation for decades with the developing world and their export led economies.

As with many commenters on this article, I am skeptical that a break with US securities will happen so dramatically.

Jun 04 04:04 PM

[Living4Divi...:]

Odin - I thought China had pretty much stopped its net buying of Treasuries. TIC data is confusing because China is selling the long end and buying the short end. As well, China is selling GSEs and buying Treasuries (Short end)


On Jun 04 11:27 AM odin wrote:

> China cannot stop buying treasuries (dont look at the rhetoric, look
> at the TIC data) if it doesnt want a recession on its hands. It
> may buy and store commodities, but there is a limit to it (and for
> what purpose if US consumption fails?). It may buy gold (and will),
> but gold cant substitute treasuries....the market just isnt that
> big.
>
> The banks may be making hay while the yield curve is steep...but
> they also are knee-deep in real estate (where a steep YC is no fun).
>
>
> Inflation may very well be in our future down the road. But it
> is no different than saying "this house will eventually be worth
> more than what i paid for it" or "my equity portfolio will eventually
> be in the black"..

Jun 04 04:08 PM

[dcb:]

Mobius Says Money Supply to ‘Explode,’ Lift Markets (Update3)
Share | Email | Print | A A A

By Michael Patterson

June 4 (Bloomberg) -- The money supply is set to “explode” worldwide and boost emerging-market stocks as central banks pump cash into the financial system to counter the global recession, Templeton Asset Management Ltd.’s Mark Mobius said.

“Everyone is scared of deflation, so they are printing money,” Mobius, who helps oversee about $20 billion of emerging-market assets as executive chairman of Templeton, said at a press briefing in London. “It’s beginning to flow out, with greater confidence, into emerging markets.”

The MSCI Emerging Markets Index, a 22-country benchmark for developing-nation equities, surged 37 percent this year as central banks led by the U.S. Federal Reserve reduced interest rates and purchased assets to revive economic growth. The European Central Bank and the Bank of England today kept their benchmark interest rates at the lowest levels on record.

The Fed said its M2 gauge of money supply, which includes all currency held by consumers and companies for spending, money held in checking accounts and travelers checks, savings and private holdings in money-market funds, rose at a 9 percent annual rate in the week ended May 18, above the target of 5 percent the Fed once set for maximum growth. The central bank no longer has a formal target.

Mobius, voted among the “Top Ten Money Managers of the 20th Century” by the Carson Group, said emerging-market equities will rise faster than developed-country stocks and that Templeton is buying shares in Russia. The nation’s benchmark RTS Index has jumped 75 percent this year, the second-best performing market worldwide after Peru.

Hedge Fund Bets

While the “longer-term trend is up” for emerging-market stocks, they may suffer a “correction” of as much as 20 percent in part because some hedge funds are selling shares in a bet they will decline, Mobius said.

“There has to be corrections along the way, that is the nature of the beast,” the 72-year-old investor said. “We continue to try to be as fully invested as possible in these markets.”

Commodities will gain and the dollar will weaken in the “longer term,” Mobius said. The Reuters/Jefferies CRB index has climbed 11 percent this year, rebounding from a 36 percent tumble in 2008. The dollar slid 2.2 percent against a basket of six major currencies this year.

Mobius said he may be investing in Iraq in a year and is looking to invest in Iran.

Jun 04 04:15 PM

[Living4Divi...:]

In fact, China is CURRENTLY doing all of the following to recycle dollars, while lessening its exposure to US Long Bonds:
1. Fund their own internal stimulus plans (as a percentage of GDP, China's Economic Stimulus Package is the largest in the world, appx 2x the size of the US's)
2. Shortening the maturities of the US debt that it currently holds. (a classic anti-inflationary play)
3. Selling US bonds and investing the dollars in corporate acquisitions (Rio Tinto, GM Hummer, The Cavaliers)
4. Selling US bonds and investing the dollars in oil, commodities and gold.
5. Using currency swaps for foreign trade to bypass the dollar.
6. Investigating alternatives to holding Central Bank Reserves in Dollars, by talking about using SDR's or creating other regional currencies.

Jun 04 04:19 PM

[dcb:]

we had a two day sell off in emerginag markets and commodities. then everyone went back in.

Much of the problem would fix itself if the government stopped allowing certain players in the market to manipulate it higher.

when stick saves, painting the tape, etc are encouraged it is a disaster.

if you are unsure how to play the game devote half of cash to bonds and half commodities.

having looked at the treasury bill curves the curve is maintained until 4%, if the 10 year goes beyind 4% long term trend is broken.

from looking at the money that poured into commodites today people aren't seeing a correction, they are seeing bad things in the future.

Jun 04 05:15 PM

[Patvano:]

To all the people saying that sentiment is moving towards being short treasuries as opposed to long treasuries, I will go to Buffett, quoting Ben Graham (of course, this betrays that I take a LT view as opposed to a ST one): “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”

Jun 04 05:26 PM

[Market Sniper:]

Timing is everything as they say. Soros and Rodgers got it wrong TWICE on the GBP trade. Third time was a charm. Do not confuse shorter time frame trades with long term position trades. Take a lot of capital to withstand moves against your position and your stops must be very wide and large equity swings in your account is not everyone's cup of tea. Have to say that Probertson's play should ultimately be correct. He sees where this goes but not exactly how and when we get there.

Jun 04 05:46 PM

[joebhed:]

For investors, the money system is a toy used to manipulate the plays of the players so as to maximize gains by a certain group of the whole.
To the taxpayers, the money system is the vehicle for providing economic stability and employment to the workers who pay the taxes.
The money system is set up so that ALL new money must come into being by creating new debts, repayable with interest to the issuers and holders of the debt-instruments.
The debt-nature of the money system makes it extremely difficult, if not impossible, to achieve our economic goals, even in the good times.
The debt-money system requires the federal government to borrow the funds needed to keep the country going toward the stated public goals of our monetary policies.

The issuance of those "treasuries" by the government provides the complete underpinning of the debt-money system of the private bankers who create the debt to the government out of nothing.
At some point, the voting taxpayers of this country are going to wake up and smell the roses.
When the government stops issuing treasuries, for whatever reason, the money system will again contract as it did last fall.
Whilst the capital markets gyrate, the pointing of fingers will becomes the political play of the day.
But the debt-spiral of cascading cross-defaults that result from monetary contraction will prove that it is the debt-money system itself that is insolvent.
And, we will begin establishing a new money system in this country.
Mr. Robertson is of course correct that ANY effort by the government to forestall the collapse will not work.
The question for Mr. Robertson is, if the Geithner-Summers-Rubin plan will NOT work, what WILL work?
The only answer: it depends.

Jun 04 05:46 PM

[Michael_Cohen:]

I'm not so sure shorting treasuries is a crowded trade.

Yes, all you see on SA and sites like safehaven.com is that treasuries are evil, but these are very specific audiences. You mention something like 'treasury bubble' to your average Joe and he has no idea what you are talking about.

My 'average Joe' contrarian calls still seem to think we'll have an economic rebound near the end of the year. Most people don't REALLY think there is an issue with government borrowing.

Also, most people knew housing was at least sort of a bubble near the top...I don't think housing values dropping in California and Florida were unexpected by many (the depth of the downturn though may have been unexpected. Most people just didn't expect the ensuing meltdown would cause a ripple effect and a huge economic recession.

Not until I see a ticker on CNBC showing the long bond percentage constantly on the bottom right of the screen (like they had with oil at $120+) and some of my idiot average Joe friends saying they are putting all of their money into gold and silver will I say the treasury fade/precious metals buy is over and done with.

Jun 04 07:05 PM

[Crocodilian:]

Here's the problem with shorting Treasuries and the whole "China will own us" story: the US savings rate is going up, dramatically.

Deficits much larger than those of the US are routinely financed -- see Japan-- by nations with high savings rates.

A host of factors are boosting US savings rates:
1) bouncing off zero/negative savings of the last five years
2) horrible performance of real estate
3) aging population
4) fears about retirement

Some numbers to consider:
US Personal Income is roughly $12 Trillion, disposable personal income is roughly $10.5 Trillion.

Each %1 change in the savings rate adds $100 Billion annually in savings. In the period September 2008 to the May 2009, the US savings rate has moved from %1.4 to %5.7, or in dollars, from $146 Billion in annual savings to $620 Billion in annual savings.

Moreover, this savings rate is not abnormally high-- its that the Bush era savings rates were extraordinarily low.

If you see savings rates of the %5 - 7 range continuing, then the bear case for US Treasuries seems less convincing. The "steepener" trade is highly susceptible to perceptions of the future savings rate; given how dramatically this rate has moved recently, its would be reasonable for their to be divergent opinions about its future course-- that means that continued high savings, if they occur, will be a real dampener on steepness.

Data from Bureau of Economic Research
www.bea.gov/newsreleas...

Jun 04 07:38 PM

[Market Sniper:]

Crocodilian, well argued points and IF what you outlined had started a lot longer ago that today, you might have been correct. Unfortunately what we are now faced with is too little too late. ANY savings generated will be soaked up by extensive more government borrowing and will totally crowd out the private sector. From whence then will come growth? Tax receipts are plummeting at an alarming rate as well. The month of April, 2009 was historical. For the first time since the institution of the income tax, Federal revenue for that month was EXCEEDED by spending. I am affraid it is way too little and way too late in the game to affect the outcome.


On Jun 04 07:38 PM Crocodilian wrote:

> Here's the problem with shorting Treasuries and the whole "China
> will own us" story: the US savings rate is going up, dramatically.
>
>
> Deficits much larger than those of the US are routinely financed
> -- see Japan-- by nations with high savings rates.
>
> A host of factors are boosting US savings rates:
> 1) bouncing off zero/negative savings of the last five years
> 2) horrible performance of real estate
> 3) aging population
> 4) fears about retirement
>
> Some numbers to consider:
> US Personal Income is roughly $12 Trillion, disposable personal income
> is roughly $10.5 Trillion.
>
> Each %1 change in the savings rate adds $100 Billion annually in
> savings. In the period September 2008 to the May 2009, the US savings
> rate has moved from %1.4 to %5.7, or in dollars, from $146 Billion
> in annual savings to $620 Billion in annual savings.
>
> Moreover, this savings rate is not abnormally high-- its that the
> Bush era savings rates were extraordinarily low.
>
> If you see savings rates of the %5 - 7 range continuing, then the
> bear case for US Treasuries seems less convincing. The "steepener"
> trade is highly susceptible to perceptions of the future savings
> rate; given how dramatically this rate has moved recently, its would
> be reasonable for their to be divergent opinions about its future
> course-- that means that continued high savings, if they occur, will
> be a real dampener on steepness.
>
> Data from Bureau of Economic Research
> www.bea.gov/newsreleas...

Jun 04 09:42 PM

[Crocodilian:]

@Marketsniper
"Crocodilian, well argued points and IF what you outlined had started a lot longer ago that today, you might have been correct. Unfortunately what we are now faced with is too little too late"
----------------------...

Maybe. I'll be very frank and say "I don't know what's going to happen next". I can see a bull case and a bear case, and it will be facts that are not as yet clear which determine which prevails.

I _will_ say that the assumption that the Treasury market is necessary doomed by present debts would seem to be contradicted by the Japanese experience.

Their debt as percentage of GDP is _far_ higher than ours, its been successfully financed by a savings rate far higher than ours (was), and they've had interest rates near zero for a decade.

So it clearly _is_ possible for a major economy (second in the world) to finance a massive deficit without bringing on massive inflation (deflation is the Japanese challenge). That point isn't an opinion -- that's Japanese economic history of the last twenty years.

Is that what's in store for us? I don't know, but as a possibility there's no reason to automatically assume that it won't happen that way.

Jun 05 01:22 AM

[odin:]

China is not so much selling the long end, it is shifting its buying towards the shorter end. I recommend Brad Setsers blog for insight into TIC flows.

Until China develops domestic consumption (I am also skeptical of its stimulus), it needs to finance the US. Thats what keeps its factories humming and its population employed and copacetic (nearing the Tiannenmen Sq anniversary...that is especially relevant point).

Given the slowdown in the economies, its likely that China may accumulate less of a surplus (have to sterilize less) over the long run (in this scenario, people will have to give up the green shoots fantasy). However, that means that US is running less of a deficit (and that savings in this country are going up). I am skeptical that ALL those savings are getting channelled into stocks and real estate again. They will inevitably flow into treasuries to satisfy a risk-averse yield-hungry investor. (Where do you think MM funds, bank excess reserves are flowing to?)

Likely everyone is still risk-averse (from an inflation view) and wants to crowd the short-end of the curve...and granted the yield curve is steep at the moment. But given its steepness and a willingness on part of the Fed to keep rates low for an extended period (which they can, given the demand at the short end), the carry traders will get busy.

I would wait till the fat chairman sings before proclaiming the death of treasuries.


On Jun 04 04:08 PM Living4Dividends wrote

> Odin - I thought China had pretty much stopped its net buying of
> Treasuries. TIC data is confusing because China is selling the long
> end and buying the short end. As well, China is selling GSEs and
> buying Treasuries (Short end)

Jun 05 02:21 AM

[saywhat1:]

Granville once said "If it's obvious then it's obviously wrong." Seems everybody's betting on inflation. Better be careful about that in a deflationary environment.

Jun 05 08:23 AM

[Windsun33:]

Personally, I am betting on Jimmy Carter II - deflation first, then moving into stagflation.


On Jun 05 08:23 AM saywhat1 wrote:

>
> Granville once said "If it's obvious then it's obviously wrong."
> Seems everybody's betting on inflation. Better be careful about that
> in a deflationary environment.

Jun 05 10:32 AM

[La Marque:]

If your holdings are in a US account, aren't you getting paid in dollars?


On Jun 04 09:54 AM Uncle Pie wrote:

> Some say "oil is the new gold". Whatever happens, well run oil companies
> make money and pay dividends. Utilities and telecoms and pharma companies
> are consistently profitable too.
> I'm not comfortable making "bets" with ETFs which are after all "derivatives"
> with counterparty risk. I am very comfortable owning well established,
> high quality, profitable non-US companies which pay dividends in
> currencies other than the US dollar. Take a look at Novartis NVS
> Roche Holdings RHHBY or Swisscom SCMWY for dividends in Swiss francs.
> Take a look at TOT or EONGY for dividends in euros. Take a look at
> BCE or Pembina Pipeline PMBIF or Baytex BTE or Crescent Point Energy
> CPGCF for dividends in Canadian dollars. Or ANZ Bank ANZBY or Woodside
> Petroleum WOPEY for dividends in Australian dollars. Or Statoil STO
> for dividends in Norwegian Krone. This writer owns some shares in
> all of the above.

Jun 05 12:20 PM

[valuefrog:]

Have any of you guys actually tried shorting long bonds via ETFs? There is no borrow on TLT (I know, I tried it a week ago!)

Jun 05 01:58 PM

[svosavvy:]

The dollar is on a tear today and currently the TBT is up 2% in the face of it. Hmmmm?

Jun 05 02:04 PM

[31October:]

They have begun buying American real estate and worthless car companies. American consumers spent a decade getting high on buying un-neccessities with their HELOC cards because they "felt rich." Japanese companies did it 20 years ago. Here come the Chinese... The purchase of Hummer and some real estate tells me that they did not learn from Japan or the USA. Once our dollar collapses against the yuan, their easy purchases will accelerate.

(But your point is correct - Chinese investors will be making some investments.)

On Jun 04 04:04 PM zagrebzagreb wrote:

> If China stops buying US Treasuries, how else will they invest their
> US dollars? Stocks, bonds, etc, which carry much more risk and illiquidity?
> I doubt that very much...

Jun 05 02:53 PM

[E Nuff Sed:]

The best and safest way to play inflation is to buy equities of global blue chip multinationals like P&G, JNJ, PFE, XON, BA. Not only will you get a decent dividend but if inflation rises the price of the asset rises. More and more the income of these companies are derived from outside the US. As the dollar weaken they are hedged.

Jun 05 09:18 PM

[Nelsanity:]

FI world has been watching this ever since Obama announced his budget. Fed cannot act on the daily market fluctuations every time 10Ys get killed. So its pretty simple, don't hold a short position right before a FOMC meeting. When they announce QE... short.

Jun 05 09:48 PM

[Nelsanity:]

Buying a stock in USD is a bad hedge against the US dollar weakening...


On Jun 05 09:18 PM E Nuff Sed wrote:

> The best and safest way to play inflation is to buy equities of global
> blue chip multinationals like P&amp;G, JNJ, PFE, XON, BA. Not only
> will you get a decent dividend but if inflation rises the price of
> the asset rises. More and more the income of these companies are
> derived from outside the US. As the dollar weaken they are hedged.

Jun 05 09:51 PM

[Yeti:]

What are your thoughts on TIPS?

Jun 05 11:21 PM

[Peter Cooper:]

If you really want to bet the farm on inflation then silver would be the right way to go. This metal has the most upside in an inflationary environment if you can handle the volatility, see:
arabianmoney.net/2009/.../
I would also add some junior gold and silver companies for maximum leverage, see:
arabianmoney.net/2009/.../

Jun 06 01:02 AM

[Fighting Yoda:]

All the trades are currently very crowded- short treasury and dollar, long commodity and energy. Market has moved into bubble territory all over again.

Fed will make its next move on the 10 year - will settle the rates one way or other.

Commodities have moved up far too much - don't forget the world is in deep recession - it is a worldwide phenomenon. The largest economies in the world US, Japan, Germany, UK are in deep do do. China is too small to pull the world. Commodity prices buoyed up due to China stock piling - there is limit to it. The commodity trade will die.

If you believe in inflation TIPS is the best and safest play. Playing treasuries is an indirect play on inflation– rates and inflation can have a disconnect if Fed chooses to play it that way, quite likely. Inflation is not a done deal by any means.

Doing nothing is the best option at this time. Sit tight let things settle – they will, much better opportunities will come.

Jun 06 03:34 AM

[pockyclips ...:]

More leverage, eh? Haven't we played in this brier patch before?

Jun 06 11:37 AM

[Nelsanity:]

More correctly the Banks are selling him the swaps, and they make the markets...their job is to be neutral. Meaning they buy the swap from one guy and sell it to another and just make bid/ask all day. If they can't find someone to take the other side immediately the hedge it with other tools.


On Jun 04 03:15 PM I need more cowbell wrote:

> Someone is selling him the swaps, so they are betting the exact opposite.
> And for every inflationista, there are at least an equal amount of
> deflationistas. Japan, using the same recipes, couldn't reflate over
> decades; Japan is the worlds second leading economy, not some insignificant
> analogy. We have had $15-20T in wealth destruction in US alone, and
> ever climbing unemployment. Wages are gone for those folks; wages
> are decling for the rest. The Fed "printing" has gone into black
> banking holes, velocity has cratered and stayed there.
> research.stlouisfed.or...
> Businesses are asking fo rmoney to borrow, no one needs to expand
> presently. Consumers aren't borrowing, they are desperately trying
> to liquidate debt.
> This is no recipe for inflation.
> What about dollar devaluation? Versus what, the yen, the euro, the
> yuan? Perhaps a little, but this is a global problem, and again not
> a recipe for a major move.

Jun 06 07:18 PM

[NY Operator:]

Another way is to invest in farmland:

farmlandforecast.colvi...

Jun 06 07:21 PM

[whatnext:]

I can name several investments that are up a lot since year and are way safer than any synthetic short position that relies on a collapsing T-bond market. How about floaters that pay out more on rising short term rates? Goldman Sachs has several issues that have roughly doubled since February and still yield 6.25% - a dividend that rises if and when LIBOR goes up. AEGON has on ethat has risen from $2.58 a few months ago to $$11.65, for a current yield of 8.6%. same deal if LIBOR rises.

How about gold at $50 oz? Check out TSE listed Eastmain Resources or AUEX Ventures.

These are not known to many US investors - sometimes illiquid but solid prospects for dividend growth and gold development.

Jun 06 07:50 PM

[IOC:]

There is a borrow on TLT. I've executed 2 shorts over the past month on TLT and expect to short more when the govt propaganda machine jawbones the long-end curve down with talk of MBS and Trsy repurchases - it's like sticking your finger in the dike, can't hold back the flood for long. Taking the proceeds from the short and buying High Yld Corps - HYG


On Jun 05 01:58 PM valuefrog wrote:

> Have any of you guys actually tried shorting long bonds via ETFs?
> There is no borrow on TLT (I know, I tried it a week ago!)

Jun 06 08:10 PM

[IronMeteor:]

One day this will be right, but damn that might be a long time. Julian is a billionaire. I hate following billionaires. They can lose 100M and still buy my house 10000X over. I lose 100K on this trade and I just lost my house. I will stick with betting on things I understand. This trade is more complicated than it first seems. Even if you are right on the macro, this trade might still cost you plenty if the Fed doesn't play ball and raise rates. Isn't it true that the yield spread just hit a 7 yr high. Julian needs someone to sell to as he exits. You are it! These guys always have an agenda when they broadcast their views.

Jun 07 03:38 AM

[Distressed ...:]

I found some info about the 70s recession. I'm wondering why people don't talk about it more. Dow lost about 50% and we had 14% inflation. I'll look at 80s too. www.distressedvolatili...

Jun 07 04:06 AM

[Riles:]

Re. utilizing RYJUX vice TBT to short the Long Bond, (and was aware that TBT's results are skewed badly) just compared TLT, RYJUX and TBT over multiple periods, using Morningstar's numbers through 6/6, AND "averaging" (?) TLT's Market and NAV performance. For "One Year", TLT was + 2.95 Mkt, + 3.74 NAV, or "average" of +3.35, therefore "expecting" -3.35 and -6.70 from the shorts. RYJUX was a -10.08, while TBT was -19.70 Mkt. and -21.33 NAV. TBT was, as expected, horribly "in error", but, at three times worse than "to be expected" RYJUX would not seem an appropriate vehicle for a longer term holding either! Interestingly, for periods where TLT was negative, there was better inverse correlation for RYJUX, but not quite so for TBT. YTD TLT (average) -23.65...RYJUX + 29.82 (!) and TBT 50.76. For three months TLT -13.53...RYJUX +16.35 and TBT only 21.68.
The solution is obvious, when Treasuries decline, hold the shorts, and vice versa. :)


On Jun 04 10:54 AM RonnieR wrote:

> It is downright enjoyable to discover the wise arguments of Jim Rogers,
> Schiff, Ron Paul, Mises, and other brilliant contrarian thinkers.
>
>
> In trading:
> (1) Never fight the Fed.
> (2) Timing is the difference between genius and fool.
>
> I bought TBT when Rogers did and after I lost about 20% (in non-stop
> day after day losses), I sold. So did Rogers who proclaimed he had
> to cover, "becuase of that idiot Bernanke" (distorting the free market).
>
>
> Do yourself a favor and think twice before betting the farm (on ANY
> one trade).

Jun 07 04:47 PM

[uphill-skater:]

Think Macro is trying to warn us about how the market can act in a perverse manner at times. He's warning against losing money inspite of having the right fundamental view. If you're short treasuries, the position could go against you big time before it actually starts working for you. Know when to hold 'em... know when to fold 'em..


On Jun 04 08:27 AM MinAkkar20 wrote:

> What is Treasury going to do when the same people it was relying
> on purchasing its debt at auction is short-selling it? I guess the
> Fed will be there to buy it all...
>
> Macro, you are viewing the shorts as speculation pushing treasuries
> below their "natural price". But treasuries are coming down from
> an unjustified high where they offered negative real return due to
> a flight to safety. I think they have much farther to fall to reflect
> their utility as a store of value. 30yrs are only at 4.5% as of yesterday.
> It would only take one unsuccessful auction to push that number up
> much higher.
>
> I wouldn't want to rely on Congress giving up tax revenue or a geopolitical
> event to make treasuries turn north.

Jun 08 01:07 AM

[Audio Tactics:]

It seems to me like Julian Robertson is contradicting himself. "He likened the U.S.'s current situation to that of Japan in 1989, but thinks we are in far worse shape."

If you believe that the US's current situation is similar to Japan, then you should be expecting deflation not inflation!

Is he senile or something???

I also believe that we are in a very similar situation to Japan and that we are facing deflation not inflation. You can't just point to what the Fed is doing and draw a conclusion about inflation or deflation without considering the amount of credit and liquidity that has disappeared from the system. When you compare apples to apples you will see that the Fed's actions are far from excessive.

Jun 08 01:36 AM

[User 428217:]

The US has always liked to export its debt so a shrinking $ is not unappealing... however it does have a sting in the tail. It goes back to saying that there is no such thing as a free lunch. Pumping the money from the Fed into the economy to fix problems works only for a short time - its a bit like a performance enhancing drug. Inflation will swing back and watch out... the key with the money injection is that US industry can kick start and resume its ascendancy in the global markets - only this time it might not and be left like a stalled car on a Nascar track. We live now in the world of hope and bets. The underlying issues have not gone away - and they are not subprime which always was the bankers patsy. Super scaled leverage on banking assets (eg derivatives) and the long term effects of wealth transfer to eastern economices are the big killers. Look at disposable income in the US - down to less than 1%. I am not optimistic about the current rally. It is a deceit.

Jun 09 08:23 AM

[asceptic:]

Well said. It is hard to imagine how inflation can get going as long as there is high unemployment. If the laws of economics still apply then high (bubble) prices should bring forth excess supply. Unemployment will mean weak demand. Therefore deflation looks more likely in the near term.


On Jun 06 03:34 AM Fighting Yoda wrote:

> All the trades are currently very crowded- short treasury and dollar,
> long commodity and energy. Market has moved into bubble territory
> all over again.
>
> Fed will make its next move on the 10 year - will settle the rates
> one way or other.
>
> Commodities have moved up far too much - don't forget the world is
> in deep recession - it is a worldwide phenomenon. The largest economies
> in the world US, Japan, Germany, UK are in deep do do. China is too
> small to pull the world. Commodity prices buoyed up due to China
> stock piling - there is limit to it. The commodity trade will die.
>
>
> If you believe in inflation TIPS is the best and safest play. Playing
> treasuries is an indirect play on inflation– rates and inflation
> can have a disconnect if Fed chooses to play it that way, quite likely.
> Inflation is not a done deal by any means.
>
> Doing nothing is the best option at this time. Sit tight let things
> settle – they will, much better opportunities will come.

Jun 09 01:57 PM

[contraxism:]

I don't buy the inflation story just yet and I am worried that too many wealth managers with people’s savings are acknowledging this inflation story, and investing/speculating accordingly to protect the erosion of savings, artificially driving up the price of commodities and stocks in light of weak fundamentals to support these price levels. This is causing an additional negative drag on the ability of the US consumer in particular to restructure his/her debts. Unfortunately, under the current global economic conditions there really is no safe haven with a better alternative than US Treasuries to park large foreign reserves - China realizes this crystal clear.

China is light years behind opening up free markets that are even remotely capable in reciprocating any sizable consumption to benefit US production and the US is heading down a dangerous social path itself. US production is restructuring, and relocating to be more competitive and US job losses continue at the rate of 600K monthly.

Where is the demand in the US economy going to come from to support sustainable inflation? The only recovery I see possible at the moment is for the trade surplus countries to continue supporting US Treasuries, allowing sufficient time to recapitalize and restructure. The biggest unknown is how much and at what speed will US consumption pull back in light of the inflationary forces that is currently driven by the velocity of the global savings glut instead of the demand for trade.

I also think it is in the best interest of countries holding US Treasuries to engineer and coordinate with the Fed, a suction of liquidity from the commodity and stock markets to shore up their US Treasuries when required to stabilize the USD.

Jun 09 06:47 PM

[contraxism:]

I don't buy the inflation story just yet and I am worried that too many wealth managers with people’s savings are acknowledging this inflation story, and investing/speculating accordingly to protect the erosion of savings, artificially driving up the price of commodities and stocks in light of weak fundamentals to support these price levels. This is causing an additional negative drag on the ability of the US consumer in particular to restructure his/her debts. Unfortunately, under the current global economic conditions there really is no safe haven with a better alternative than US Treasuries to park large foreign reserves - China realizes this crystal clear.

China is light years behind opening up free markets that are even remotely capable in reciprocating any sizable consumption to benefit US production and the US is heading down a dangerous social path itself. US production is restructuring, and relocating to be more competitive and US job losses continue at the rate of 600K monthly.

Where is the demand in the US economy going to come from to support sustainable inflation? The only recovery I see possible at the moment is for the trade surplus countries to continue supporting US Treasuries, allowing sufficient time to recapitalize and restructure. The biggest unknown is how much and at what speed will US consumption pull back in light of the inflationary forces that is currently driven by the velocity of the global savings glut instead of the demand for trade.

I also think it is in the best interest of countries holding US Treasuries to engineer and coordinate with the Fed, a suction of liquidity from the commodity and stock markets to shore up their US Treasuries when required to stabilize the USD.

Jun 09 06:48 PM

[Debra J. Di...:]

Thank you for your article. Julian Robertson is a very smart guy.
Don't forget to consider other ways of playing the decline in the dollar- buy currencies of rapidly growing Asian, Middle Eastern, African and smaller Asian economies. Either through the Rydex ETF's or through Everbank. This is a big idea, maybe the only one you need for the next decade. It is still early and there's a premium for being early.

Jun 09 10:25 PM