odin

Julian Robertson Bets the Farm on Inflation

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)

Julian Robertson Bets the Farm on Inflation

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.

Julian Robertson Bets the Farm on Inflation

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"..

Julian Robertson Bets the Farm on Inflation

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.

Julian Robertson Bets the Farm on Inflation

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.