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Old 04-15-2011, 03:05 PM
 
Location: San Diego California
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Setting Up for the Con of the Decade | FINANCIAL SENSE

This article lays out a scenario in which the Fed allows interest rates to begin to rise. ( a position already supported by Bill Gross)
This will cause a bear market in bonds.
When interest rates reach their desired level, the uber wealthy step in and buy the Treasuries cheap at attractive interest rates.
The government then introduces austerity programs significantly raising taxes, lowering public services, and freeing up tons of money to pay interest on bonds to the uber wealthy, who sit back and make nice risk free, tax exempt profits.
Does this sound like a plausible outcome?
If this does play out will the bear market in bonds take the stock market down?
With huge sums going into Treasuries, will stocks be out of favor for a decade or more much like the 60's?
Give your thoughts!
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Old 04-15-2011, 03:27 PM
 
85,893 posts, read 83,390,623 times
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not a con, that may or may not be how things work out. nothing stopping you or anyone else from buying them too if thats what you think will happen.
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Old 04-15-2011, 05:46 PM
 
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i dont think there is anything any day that i cant twist and turn to make a rich vs poor issue.

just think about the fact that 70% of the markets are dominated by 20% of the wealth. so if the rich have this plan exactley who is left to take the opposing side to make it play out? .

its alot of hooey.

the reality bill gross sold billions off and even shorted the treasury markets and buyers around the world bid them right back up. speculation thought it might be the chinese or japanese but in any case the biggest sell off in treasuries was undermind.

ole bills shorts are at a loss. if bill couldnt get the market to move the chances of any one group doing it are nil.

the reality is its a dangerous game trying to call interest rates.

qe2 will end because the economy can come off life support. that means eventually higher growth, more demand for capital and higher rates. investors may decide to wrestle those rates higher to be compensated for inflation risk.

the opposing side may see the the markets as relaxing now that que2 is over and if no que3 they may actually start buying again driving rates lower.


we had the bond vigilantes in the 90's during the savings and loan debacle who attempted to get rates bid up so as to be able to buy them cheaper or at least be compensated with higher interest.. well they sold and shorted and did everything they could to get those bonds to drop in value. needless to say the 30 year old bond ralley continued without them.
the term bond vigilante goes back as far as 1984 and was coinded by economist ed yardini.

the truth is no one knows and this thread and that article are just meaningless dribble.

Last edited by mathjak107; 04-15-2011 at 06:32 PM..
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Old 04-15-2011, 08:55 PM
 
8,317 posts, read 27,108,292 times
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The flaw in the theory is that only the wealthy buy government bonds. Truth is, a lot of the working and middle class own various types of Treasuries--either directly, or through things such as pension funds, mutual funds, IRA's and the like.

Right now, the sin being committed by the government is to keep rates too low--which penalizes savers. Until things got weird in the last few years, "nominal" interest rates were typically the inflation rate plus 3%. Treasury bond rates were a little less than inflation plus 3% because they were considered low-risk. The difference between the nominal rate and the inflation rate was the "real" rate of interest. Today, most "real" rates are negative, even if one uses the understated "inflation" rate. Use a true inflation rate, the real rate of interest is even more negative.

There are strong political reasons that this is happening. First, it allows the federal government--the biggest debtor of all--to pay near zero interest rates on much of its debt--and if it ever gets around to paying on the principal (please, try not to laugh too hard at that "outrageous" idea), it will be paying it with cheaper dollars. That keeps are free-spending politicians happy, but it screws the people who are actually trying to save money. Second, the government is scared to death of actually allowing all of the silly debt accumulated by private citizens to be liquidated--as is trying to happen in the real estate markets--so it is doing everything possible to blow up another bubble to keep that from happening. What this does, though, is rob, through inflation, the wealth of people who actually save money--and those are not just the wealthy. In fact, a lot of the shrinkage of middle class wealth--in real dollars and actual net worth (assets minus debt)--has occurred through the indirect "tax" of inflation.

Though quite painful in the short-term, the best thing that could happen in this country would be if interest rates would climb back to 3% plus the rate of inflation. Borrowing and debt would be discouraged--both by private citizens and within the government, savers would actually be rewarded, and the cost of many things would actually decline--because those things would not be "chased" by funny money from debt creation. Unfortunately, no one in Washington has the guts to tell the American people that our debt-binge has to stop if a complete economic calamity is to be avoided, and stopping that debt binge, necessary as it is, will cause some real pain--especially to those heavily in debt.
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Old 04-16-2011, 03:37 AM
 
85,893 posts, read 83,390,623 times
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i believe you have it backwards, treasury bonds always had higher returns than t-bills and inflation just because of the higher risk. from 1972 to 2010 the long term average returns were short term t-bills returned about 6.5% cagr. long term treasuries returned almost 11 %. thats quite a huge difference from the rate of inflation even taken with each year standing alone.
even today you have t-bills at less than 1/4%, the 10 year at 3.5% and the 30 year at 4.5%.

the worst thing i think that could happen is rates go that high. the economy is to weak and money is the fuel to keep buisiness going. the interest due on the national debt would choke this country as well until tax revenues pick up to pay that debt. everything has to be proportional to the economy and we are still aways from going back to the average rates.

Last edited by mathjak107; 04-16-2011 at 04:54 AM..
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Old 04-16-2011, 07:48 AM
 
Location: San Diego California
6,797 posts, read 6,641,250 times
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Quote:
Originally Posted by jazzlover View Post
The flaw in the theory is that only the wealthy buy government bonds. Truth is, a lot of the working and middle class own various types of Treasuries--either directly, or through things such as pension funds, mutual funds, IRA's and the like.

Right now, the sin being committed by the government is to keep rates too low--which penalizes savers. Until things got weird in the last few years, "nominal" interest rates were typically the inflation rate plus 3%. Treasury bond rates were a little less than inflation plus 3% because they were considered low-risk. The difference between the nominal rate and the inflation rate was the "real" rate of interest. Today, most "real" rates are negative, even if one uses the understated "inflation" rate. Use a true inflation rate, the real rate of interest is even more negative.

There are strong political reasons that this is happening. First, it allows the federal government--the biggest debtor of all--to pay near zero interest rates on much of its debt--and if it ever gets around to paying on the principal (please, try not to laugh too hard at that "outrageous" idea), it will be paying it with cheaper dollars. That keeps are free-spending politicians happy, but it screws the people who are actually trying to save money. Second, the government is scared to death of actually allowing all of the silly debt accumulated by private citizens to be liquidated--as is trying to happen in the real estate markets--so it is doing everything possible to blow up another bubble to keep that from happening. What this does, though, is rob, through inflation, the wealth of people who actually save money--and those are not just the wealthy. In fact, a lot of the shrinkage of middle class wealth--in real dollars and actual net worth (assets minus debt)--has occurred through the indirect "tax" of inflation.

Though quite painful in the short-term, the best thing that could happen in this country would be if interest rates would climb back to 3% plus the rate of inflation. Borrowing and debt would be discouraged--both by private citizens and within the government, savers would actually be rewarded, and the cost of many things would actually decline--because those things would not be "chased" by funny money from debt creation. Unfortunately, no one in Washington has the guts to tell the American people that our debt-binge has to stop if a complete economic calamity is to be avoided, and stopping that debt binge, necessary as it is, will cause some real pain--especially to those heavily in debt.
The facts are that 20% of Americans own 80+ percent of the wealth. I assume that this pretty much holds true for government bonds as well as other asset classes.

We cannot blow another asset bubble, due to the fact that asset bubbles are dependent on borrowing to fuel, and banks are clearly not interested in loaning any more money to a populous that is already drowning in debt, and unable to pay what it owes now.

The current course of government action is unsustainable. We are seeing international interest in government bonds waning to the point where the Fed is now the major purchaser, and confidence in the dollar is approaching a dangerously low level. Recently both the IMF and BRIC are calling for alternatives to the dollar which is unacceptable to a country that derives massive benefit from being the world’s reserve currency.

When I first read the article I had some reservations, but the more I think about it in the context of our current economic situation the more plausible it sounds.
Of course this would mean a substantial flow of funds out of equities and into Treasuries which would result in a much lower Stock Market. But then, we have seen almost the reverse of that scenario in the past 2 years.
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Old 04-16-2011, 07:53 AM
 
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i have to tell you neither myself or anyone else i know have been declined money because banks stopped lending.

that may have been true 2 years ago but im not seeing or hearing that to be true anymore.
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Old 04-16-2011, 07:55 AM
 
85,893 posts, read 83,390,623 times
Reputation: 61639
Quote:
Originally Posted by jimhcom View Post
The facts are that 20% of Americans own 80+ percent of the wealth. I assume that this pretty much holds true for government bonds as well as other asset classes.

We cannot blow another asset bubble, due to the fact that asset bubbles are dependent on borrowing to fuel, and banks are clearly not interested in loaning any more money to a populous that is already drowning in debt, and unable to pay what it owes now.

The current course of government action is unsustainable. We are seeing international interest in government bonds waning to the point where the Fed is now the major purchaser, and confidence in the dollar is approaching a dangerously low level. Recently both the IMF and BRIC are calling for alternatives to the dollar which is unacceptable to a country that derives massive benefit from being the world’s reserve currency.

When I first read the article I had some reservations, but the more I think about it in the context of our current economic situation the more plausible it sounds.
Of course this would mean a substantial flow of funds out of equities and into Treasuries which would result in a much lower Stock Market. But then, we have seen almost the reverse of that scenario in the past 2 years.
if bonds rise again its only because the economy is faultering again. if thats the case QE3 will make it negative for bonds once again and positive again for stocks.

my own opinion is it will be a loose/loose for bonds and a win/win for stocks.


the economy is either off life support and on its way to recovery and growth- good for stocks bad for bonds

or the economy sputters and faulters. here comes QE3 , bad for bonds good for stocks.


if you even think of the logic of that article it makes no sense.

if 80% of the markets are controlled by the wealthiest investors well that 80% needs someone on the other side of the trade to make a deal happen. the fact is that 80% is divided on just whats happening next.

1/2 of those doing the deal are buying because they think rates are going to fall but the other 1/2 is selling because they think rates will rise.

you need one on each side to make a trade. that already wipes out this rich people will benefit logic in this article its no different than any other trade by anyone else who thinks things are going up or down.

its like here in nyc every event is somehow tied into a racial issue .

Last edited by mathjak107; 04-16-2011 at 08:39 AM..
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Old 04-18-2011, 08:05 AM
 
Location: San Diego California
6,797 posts, read 6,641,250 times
Reputation: 5180
The bubble prosperity of the past 30 years was financed entirely on borrowing based on inflated values of first the equities market, and then on the real estate market.
In the 1980’s the consumer debt to income ratio was running about 80% compared to the historical norm of about 65%.
The bubbles in the stock market in the 90’s and the bubble in housing beginning in 2001, inflated the consumer debt to income ratio to 130% by 2007. Since then it has only dropped to 118%.
This means it is still at highly elevated levels and makes any type of lending originated bubble impossible.
So the question begs to be answered; where is the spending to facilitate new growth going to come from.
There has been a steady loss of inflation adjusted income of the working class thru boom and bust periods since 1970, which makes it hard to believe we are going to grow our way out of this funk.
Manufacturing is still being exported and showing net losses of jobs every year.
The housing industry is facing an environment that can only be described as a perfect storm.
What we have ahead appears to be many decades of tough sledding as we pay down debt and use up over capacity.
In the mean time the wealthy need a place to make long term, low risk, profits on their investments.
Stocks are currently overvalued, but if done right, the wealthy can move into distribution mode, as insiders have been for some time, and stick the clueless dumb money majority with their holdings as the dirty masses have little choice but to invest in equities after years of no returns in cash equivalents, and their need to recover losses from 2008. They are also ripe with confidence after a few years of gains. At the same time the Media Talking Heads consistently repeat the mantra “buy the dips, buy the dips” which is a sure sign that the set up is coming.
So once the distributions have been completed, the wealthy will be sitting in cash positions ready to buy up the newer higher yielding Treasuries, and sit back for a few decades collecting decent tax free income while the working class toil to pay off the debts incurred to bail out the Financial institutions.
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Old 04-18-2011, 09:37 AM
 
85,893 posts, read 83,390,623 times
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really? only the rich will buy ... ... gee i always thought anyone can buy any investment and at any time... i guess not, only the rich can time things...

of course then it cant be a rich vs poor situation to banter about if each can equally buy the same investments....

oh brother,these spins are so rediculious.!!!!!!!!!!!!!!!!!!. ....
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