JasonC

U.S. Treasuries in a Bubble, Not Commodities

Problem - the premise is false. The Fed isn't pumping out money. The Fed's balance sheet is the same size as it was last October. All that happened in the meantime is the emergency short term loans to the banking system etc were repaid, and the Fed parked the proceeds in treasuries and agency mortgage backeds.

Everyone in the world is predicting the same US inflation and dollar collapse that was the bubble in the first place. It didn't happen 2005 to 2008 because the Fed held M1 completely constant over that span. It isn't going to happen this time either because the Fed hasn't moved its sheet size in a year.

The treasury auctions are 4 times oversubscribed in bills at zero and 2.5 times oversubscribed for the 10 years with actual yield.

Foreign investors did stop buying agencies over the last year but continue to buy treasuries hand over fist. China, Hong Kong, Japan, the UK, everybody else in smaller amounts. They may talk about the dollar being old hat but it continues to be the place they are parking their net new reserves. Foreign investors have also been buying the US stock market since April, at a $15 billion a month clip.

And the reason is clear - they are not willing to see their current account surpluses disappear, by actually pushing the US to trade balance. So the net capital inflow ot the US has slowed but it remains an inflow.

As for the much vaunted "carry trade", US investors owned less in foreign assets at the end of last year than nearly ever, really. Their foreign stocks got slammed; Americans don't buy foreign government bonds. Meanwhile the supposedly stupid US treasury positions all the foreigners have piled up earned plus 13% in that smash year. Foreign ownership of US assets went down because of the stock market decline, but only by $1 trillion, while US holdings abroad dropped $2.5 trillion - because we own their stock and they own our bonds.

As of the end of 2008, US investors had only a 5% position in foreign stocks and only 3% in foreign bond assets, and 80% of the latter are dollar denominated. The total US investor position in the BRICs is less than 0.5% of US household assets. Some carry trade. Nor can this change much net in the short run, because the net flow of capital remains inward at a $400 billion a year rate.

People talk their ideology but their actual trading positions are saying something quite different. Risk aversion is off the charts after last year's smash, and secular deleveraging continues.

Wednesday Outlook: Commodities, Emerging Markets

No, inflation does not "no doubt" follow.
Everyone piled into the same bubble bet on inflation and got killed, and will continue to get killed.
All the inflationary bubbles go smash. Real estate, oil, BRICs, submerging markets, gold, all of them.

At these spreads, investment grade debt in the first world and especially in dollars is the best asset on the planet. Nominal claims, in the dollars you-lot have pretended are mere monopoly money, will trounce all your bubble blowing headline chasing scaremonger slander-games.

Watch.

The Next Commodities Boom: Around the Corner?

All the king's horses and all the king's men
can't put this bubble back together again.

Will there be another round of a commodity boom? Sure. In 15 to 20 years...