Michael B. Krause

Long Term Treasury Yields Likely to Rise, Pressuring Dollar Lower

Everyone likes to be clever and say US treasury yields are going to the sky (and thus the US government is headed towards bankruptcy). Thus the massive interest in this piece.

Any article saying to buy treasury bonds right now is uninteresting, unjustified, and generally doesn't have much popular appeal.

Interesting.

Positioning for Reflation

Remember the credit-created portion of money supply is not made of available credit, it is used credit. The whole crux of the measurement problem is that the effective credit multiplier has dropped, and conventional metrics can't really tell you how far it has fallen. It is clear if you look at M2 money that the destruction of credit money does not show through these aggregates, otherwise you would see a sharp negative spike down (I believe it is still approximately positive y/y, even if you factor out monetary base growth).

If the Fed's knew how much money had been precisely destroyed, this whole problem could be easily solved by printing and filling in the hole directly (capitalizing the banks). Instead, they are creating programs that are the equivalent of a blind man stumbling around in a china shop. Eventually, they will get it right (and even go past). Since these financial markets have self-reinforcing mechanisms, I imagine that once the trend reverses, it will reverse euphorically, and we will get large one time moves in inflation rates. Those won't be sustainable - we may get 10-20% annual inflation rates for a year or three, but eventually the move will subside. Rate of money creation is just important as actual amount created. If they achieve their goal, they can just subside the rate. The difficulty here is the lag time between all of these behaviors.

Remember, if the Fed achieves an upward revaluation of houses by altering the fundamentals (by changing the long term cost of capital), banks presently insolvent are sitting on a gold mine.

All I can say is this: imagine the credit multiplier is not 10x right now, but 5x. Simultaneously the money base doubled (and will soon have tripled). At the moment, the short run (1 year), we're barely keeping our head above water preventing deflation. In the long run (2 years out), as the supply of liquidated homes clears, we are left with the same monetary base and the fed unable to mop a majority of that liquidity up (since it primarily made up of long term MBS, treasuries, and CDOs traded for treasuries in early Fed programs). The new money base will be 3-4T while the multiplier will recover from 5x to 10x, lets say. Suddenly real aggregate money supply has the means to double once credit starts moving. By the time the recovery starts, it will probably be a lot more difficult to position.

Buy Treasuries for a Trade

For a hedge against variable rate debt. I stand to benefit much more if rates fall.

Time To Short Treasuries?

I agree TBT will eventually be a good long (and I am holding some), but lets get real - 30 yr is only up around 20% from the baseline its recently found. That isn't exactly a bubble in comparison to the 300-600% gains in your other charts. I want to buy more TBT going forward ... I will be buying at 25, then 15.... When TBT hits 15-25, then I think we can all agree it is a bubble by all definitions.

Regardless, a great inflation hedge to buy the TBT!

Treasuries and the U.S. Dollar: Twin Bubbles

The direction of monetary velocity is key. If it never recovers, the path is to hyperinflation as we are unable to pay off our debts. It will undoubtedly at some point, as banks feel no more need to hoard. This is probably equal to the point where all downside on homes is properly matched with reserves provided by the fed.

The Fed's Policy May Be Responsible for Interbank Lending Seize-Up

The title isn't mine. The original is 'partially responsible.' The responsibility clearly lies in the originator of the bad loans. My point is that Fed intervention in this prescribed way may be exacerbating the problem, and will most likely have long term effects that may be considered detrimental to some end.

The Bull Market in Credit Default Swaps

I'm actually long 30 yr bond puts. That is my only relevant position.

Peak Oil, Crude Price and Equity Correlation

I am only suggesting it will take $50 crude for it to be a serious stimulus, rather than braking force to the economy. The bulk of this article is quite bullish oil (long term), buying into peak oil. That is of course until demand destruction occurs at a faster rate than supply shortfall.

The Long Bond is Falling - Why?

of course it is - high cpi translates to higher yield on treasuries, which translate to a higher required yield (lower price) on the S&P.

but true global recession will not coincide with price inflation, i guarantee you.

The Long Bond is Falling - Why?

the jury is still out. if we ACTUALLY have a deep recession everyone is forecasting, aggregate demand WILL slowdown and thus prices will have to come down. Inflation rates will temporarily change.

So if you are indeed right, and inflation *for the next 2 years* be at 5%+, then this is also a signal stocks are a buy now (since prices won't drop because economic activity won't reduce from here).

I think this is all a wrong assumption -- when real scary #s of economic slowdown (job losses, systemwide defaults, etc) start hitting, the long treasury bond will fly in both the flight to quality as well as concerns about deflation occur. The long bond has no justification at 4.65% if we are in a long term cyclical credit contraction.

Doesn't anyone remember the 2001 recession when everyone was worried about price deflation? That will justify rates lower.

As far as oil and commodities are concerned, they will all come off when real demand gets hit in a big way. And that takes a real global recession. That hasn't come yet, nor has the fear of one yet hit. Look at countries like Australia that are still raising rates, have lowering jobless rates, etc all on the heels of rampant commodity demand. When countries like Australia and South Africa turn on lower commodity demand, the bond will look great with a 3% yield.

Don't Buy (Sell) The Bear

Nice call on the F# minor. Finally someone gets it.

Here is a response I made on my blog to Reinko:

But whats happening here is a transfer of wealth from mismanaged corporate balance sheets and investors (holders of subprime bonds) to borrowers (many of whom will file bankruptcy). Running up consumer debt, the borrow still gets to enjoy the benefits of the purchasing power he was given, at the expense of the foolish lender.

The fed & US govt knows this, and knows the only solution is to devalue the dollar and inflate future earnings quantities to prevent an excessive slowdown and bankruptcy level. This excessive level of debt (ie 30T) however needs to be compared to cash and equity reserves (401Ks, pensions, cash savings, money markets, total home equity base properly discounted to correction in correspondence with total money supply and inflation, etc.) to have a fair evaluation. If the money supply doubled the past 10 years, then its less meaningful a number. The ratio of debt to money supply is more important.

The fed knows all this and will continue its current policy at the expense of the dollar. This is a weakness of all fiat currencies though, and since this is true, a global economic contraction on the same scale in Europe will hurt the euro just as much. It'll become a question of who hurts more.

Arguing that we're screwed because total debts have doubled in 10 years sounds wonderful to the bear, but it does not present a true picture when considering cash reserves and total money supply has increased as well.

So further conclusions: the dollar will ultimately suffer at the expense of the S&P and housing boom. That is, unless other country recessions follow (which is likely, considering the housing price boom is not something unique to the US).

And if any of you are truly this bearish on equities, I recommend you have a look at this

scriabinop23.blogspot....

and this:

scriabinop23.blogspot....