kubilai

De-Leveraging Is Not Deflation

USD will have to devalue eventually. I think that outcome is what the Fed and Treasury desperately wants, because that'll soften de-leveraging and perhaps create some inflation, that also reduces the US debt load which is growing fast. As all things though, it takes time, the US is the strongest country both in economic and military terms, by a good margin. So it's currency will likely be among the last to fall. The British Pound has to go before the USD.

Treasuries' True Risk

It takes minutes to weeks to de-leverage a stock portfolio (depending on size). How long does it take to de-leverage a venture capital portfolio? A real estate portfolio? What other skeletons are hidden among the "toxic asset" closets of the world?

Treasuries' True Risk

One possibility is using treasury bond futures. Looking at the monthly volume report at the CME and the spread right now on a Sunday evening, it appears liquid enough to be much more efficient the the short ETFs.

Also, the government can easily defeat a short treasuries strategy by persistently monetizing treasury debt. It's omnipotent at creating fiat currency out of thin air, but as we all know, not very good at creating real wealth, such as commodities. ;) So maybe short USD long commodities (food energy gold) is all we need? The danger though, is that commodities might go down further still, and it may take a long time for inflation (Austrian) to defeat de-leveraging. All million dollar questions hehe.

Treasuries' True Risk

I'm Austrian too.

Anyway, careful with the treasury short. These short ETFs don't work as you expect them to for medium to long term holding. The Japanese experience showed how high/long government bond can get even in the face of massive quantitative easing. You can argue it was because of the yen carry trade, and I would agree. Still, this can easily last another year.

Thank you for the thoughtful articles.

Treasuries' True Risk

If markets were perfectly efficient, I would agree. But it's not. I think business cycles do exist even in absence of a central bank. Central banking just makes it worse, much worse in this case. Though, if you wield that much power, would you be tempted to give it up before the whole thing collapses?

Treasuries' True Risk

Ok, you're right only printing hard currency creates inflation by the original definition of inflation. It's so easy to be confused what people mean thanks to the meaning of the word being changed over the years. All I meant to say is that leverage creates a widespread increase in prices, just as printing currency does.

Treasuries' True Risk

Say John Doe has 1M. He buys a house for that amount. Then he takes out a 800k home equity loan and buys another house with that. Then he takes out a 600k home equity loan on the second house and buys a third house. Although we started with 1M of hard currency, the end result is there were 2.4M of cash out there chasing real estate. This is how the use of credit increases the aggregate buying power out in the world. This buying power is what they mean by the loose definition of money supply. So loose credit standards increases loose money supply growth the same way as reducing bank reserve ratios.

Where Have All the Value Investments Gone?

For long term it's best to short treasuries directly and long physical gold. For short term it's best to short treasuries directly and long gold futures (before futures are at risk of default).

Where Have All the Value Investments Gone?

Have you considered the size of the stimulus/bailouts as a % of GDP? It's true it's gigantic in real dollar terms but population+productivit... has grown greatly. A lot of the 8.5T obligation will either be unused, or repealed in time, actual spending is not yet as large as the debt the gov took on going through the great depression and WWII (approx 100% of GDP).

As you do, I wish by the time this is over, there'll be a complete rethinking of Keysianism, fiat currency, big government, entitlement etc and there'll be a return to what the founding fathers of this country envisioned centuries ago. Or it could got the opposite way...

Why do you use these Ultra ETFs? They're not efficient. Thank you so much for the post. It's a great read.