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A World-Class Bubble

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15

January 13, 2012 – Comments (5)

Board: Macro Economics

Author: EddieLuck

I forget the exact acronym for the 500-odd billion Euro bailout by the ECB. It sure gave a good impression of "working" this week as sovereign interest rates plunged at the auctions. Banks will make a killing buying Spanish or Italian 2yr. debt at say 3% with money borrowed securely for three years at 1%. Nations will be able to roll over their debt for a while. Oh, bully!

At any rate, the 500 billion, which is an indirect but effective QE, will doubtless be doubled or tripled over the next year or two to give the austerity time to work (and the banks time to make further billions) as the Euro zone digs its hole ever deeper.

At the same time we have the US "operation Twist" which we agreed, on this board, was also a stealth QE operation. Also the entire US yield curve produces negative real yields. This is very unusual in my experience.

Central banks have now driven yields way down in the Euro zone, the US, the UK, and Japan, and more or less have to keep them down indefinitely now because of the debt crises in all those countries. Allowing rates to rise would immediately and inevitably bankrupt the governments in question, as has been happening in Europe, but without the monetary union getting in the way. CBs are going to stay real easy for a long time. China may join in soon. There are easing noises starting to come out of the fed on top of the big international Eurozone bailout announced last week or so. There is fiscal easing in progress by the administration. Emerging market sovereign interest rates are no longer rising and will likely start falling as soon as recessions reveal themselves in the developed world. Then the entire world will be pumping.

Due to these factors and the rest of the financial environment I draw three conclusions. We should:

1) Go long EU and US banks, and stocks all over.
2) Increase PM allocations.
3) Find a nice high balcony, put on a Toga, and grab a fiddle.

I have never dreamed that they would or could all print like this. The banksters are making so much profit though, they don't even want to stop. This coordinated worldwide govt. credit bubble is a very unusual if not unique set of circumstances. It's a good thing we have Iran to put the blame on.

Ed.

5 Comments – Post Your Own

#1) On January 13, 2012 at 4:09 PM, NajdorfSicilian (99.87) wrote:

The US yield curve certainly does not 'all yield negative real returns.' That is absurd.

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#2) On January 14, 2012 at 10:33 PM, Latinus (< 20) wrote:

"2) Increase PM allocations."   Does PM mean Philip Morris?

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#3) On January 14, 2012 at 10:55 PM, mhy729 (30.47) wrote:

PM = precious metals, most likely in this context

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#4) On January 14, 2012 at 11:05 PM, goalie37 (90.53) wrote:

In the forex part of my portfolio, I have always found the easiest profits to be found in shorting the currencies which are being printed against those which aren't.  If your thesis is correct, it is going to be very hard in the future to find a currency not being printed!

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#5) On January 16, 2012 at 12:49 PM, aleax (46.23) wrote:

@NajdorfSicilian, what's absurd about noticing that all US treasuries currently offering negative real returns?

Per e.g http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield yields of 30-years bonds are hovering around 3% (last close just a bit less).

Per e.g http://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp , November's inflation (latest data point available there) was well above that at 3.39% (annualized).

Sure, inflation might go down, but with the increase in the quantity of money a more reasonable "null hypothesis" would have to be that inflation stays around current levels, making 30-year treasuries' returns negative.

Shorter maturities, such as the below-2% yields on 10-year treasuries, make negative real yields even clearer along most of the yield curve, of course.

It may perhaps be absurd for investors to keep buying treasuries offering negative real yields (but high-quality corporate yields aren't that much better...), but it certainly isn't absurd to notice it!-)

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