Submitted by Ed_B
Interest rates have been artificially manipulated to very low levels and really only have one way to go now and that is up. When rates rise, bond holders get slapped with principal losses because older lower rate bonds are not worth as much as newer higher rate bonds. Once rates begin to rise, however, is probably not the best time to head for the bond exits, as there will be a mad stampede of other bond holders seeking escape at that same time and only so many can fit through the exits at one time.
In any case, this is NOT a place where anyone who wants to preserve their wealth should be. Holding US Treasury paper is the financial equivalent of holding a lighted stick of dynamite without knowing just how long the fuse is or how quickly it is burning. I would very strongly urge anyone holding US Treasury paper, perhaps in their retirement account, to sell it immediately.
Having read George Orwell, I am sure that many of us know exactly what is going on here.
Years ago, I invested a substantial amount of money in US Treasury TIPS. This was basically a parking place for some money that I did not want to see reduced in purchasing power by inflation. The TIPS did well and I had about a 12% gain in them due to falling interest rates. Then, in about 2009, I realized that the Fed was fiddling with interest rates in order to make the government policies of the time look better than they truly were and to artificially push rates lower. It occurred to me that the game was rigged, that these interest rates could be juggled at any time, and also that if these rates were being controlled for this purpose, what was to stop the Fed from claiming that there was no inflation so no additional payment to TIPS holders was needed to compensate us for rising inflation? It was a case of, “Inflation? What inflation? We don’t see no steenking inflation!”. I sold the TIPS, collected a fat profit, and then reinvested the money in some conservative stocks and mutual funds.
Two years later, PIMCO chief Bill Gross comes out with a comment that his company had just divested itself of all US Treasury bonds. This was a lightning strike in the financial world if ever there was one! A major figure in the bond world was casting considerable doubt on the desirability of owning US Treasury paper, based on creditworthiness concerns. This had never happened before and was quite remarkable. I believe that Gross was prescient, although perhaps a bit early, in his assessment. The US Treasury market is nearing the time when it will implode from its own weight and the incompetence with which the US dollar and economy are being managed. When that will be, of course, is not known. The only major customers for this drek today seems to be the Fed (about 80%), and the Japanese. Not sure what their percentage is but am guessing 10-15% with the rest going to the “all others” category.
Interest rates have been artificially manipulated to very low levels and really only have one way to go now and that is up. When rates rise, bond holders get slapped with principal losses because older lower rate bonds are not worth as much as newer higher rate bonds. Once rates begin to rise, however, is probably not the best time to head for the bond exits, as there will be a mad stampede of other bond holders seeking escape at that same time and only so many can fit through the exits at one time.
In any case, this is NOT a place where anyone who wants to preserve their wealth should be. Holding US Treasury paper is the financial equivalent of holding a lighted stick of dynamite without knowing just how long the fuse is or how quickly it is burning. I would very strongly urge anyone holding US Treasury paper, perhaps in their retirement account, to sell it immediately. A decent replacement for US Treasuries could be any of the large-cap dividend-paying mutual funds that are offered by your retirement plan. As always, do your own due diligence on this or any other investment decision before making it.
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Its going to be explosive! I’m surprised it has taken this long to blow. Either there are a ton of terrible money managers or the big banks and fed are the only ones left in the markets. Kyle Bass is one of the few good money managers.
So if someone is forced to pick either bonds OR stocks right now, say someone who still has money left in a 401K, it should be large cap stocks? Interesting. Marc Faber said basically the same thing: that Johnson & Johnson, McDonald’s, etc. will last and be able to recover after a crash. So when QE3 first came out he was recommending stocks being able to benefit from inflation better than bonds. Now he is saying he thinks stocks will drop 20% over the next several months, so he has a lot of cash waiting to buy, when he had actually be selling from April through September. The last couple days I noticed bonds and stocks were both going down in general.
Wasn’t there a Jim Willie rant on here recently where he said the 10-year would go below at least 1.25% and maybe as low as 1.00% before a correction? I wonder if he changed his mind.
@silvermeddler – The large-cap, sound corporate treasury, producer, marketer and seller of consumer staples needed in good times and bad is indeed a reasonable place to hide among large-cap stocks. But the trouble is, for the higher dividend paying (and annual dividend raising) corporations that fit that mold, their share prices have been excessively bid higher in the last year as people have been chasing dividend yield and some have also understood the thesis about these stocks being a place to hide. As a result, there’s no more “margin of safety” (term coined by Buffet to describe relative undervaluation) remaining. As Faber says, if someone stuck a gun to his head and forced him to buy either these types of stocks or bonds, he would still buy the stocks. But know that the shares will still see a sizable pullback when the general market pulls back (although not as much).
By the way, adding a further layer of safety to the above thesis, focusing on said companies that also happen to produce natural resources insulates a bit further. We’re talking large oil companies, companies that have exposure to agriculture production at the level of the farm (inputs like fertilizer being easier to invest in vs. actual food producers … big subject, beyond the scope of this post), and large gold companies like Newmont or royalty companies (e.g, Silver Wheaton, Royal Gold, Franco Nevada, Sandstorm) that will raise dividends as gold and silver move higher. The mid-sized producers of gold and silver are going to be better performers over the large capitalization companies, but industry knowledge is required to be really good at picking these companies. Other natural resource industries will do well too, but dealing with economic cycles often enters the picture when talking about base metals, timber, etc. It’s also a good idea to get stock holdings out of street name registration to lessen risk of seeing something like an MF Global situation.
If you go over to TFMetalsReport.com and find the last or second to last Jim Willie podcast, you’ll hear Jim talking about his 1.25% call and how by the time the podcast was recorded, the bond market had clearly turned around and how the inflation trade was finally being seen by most as THE direction for the future, which nullified further downside. He made a correct and good call overall in terms of direction and almost as good in terms of magnitude of the decline. But he acknowledges that the call was no longer in operation and that he’d be proven wrong as to the ultimate degree to which yields would fall. Jim’s a good guy. He’s willing to talk about his incorrect calls and he’s track record is better than 90% of the forecasters out there. But that doesn’t mean that translates into 90% correct forecasts.
Ed_B@ Great article. That was your first here, right? Treat us to more if time and energy permit.
Thanks, Wombat… appreciate the comment. Yes, it was my first article and quite a surprise at that. I wrote that as a comment but it was edited slightly for punctuation and emphasis. I am fine with that. It certainly looks more presentable now.
Time abounds, as I am retired, but energy? Hmmm, that may be a bit more confining. Would be happy to contribute to this terrific site whenever I can, though.
@flying-wombat This is probably the first time I have felt ret hot INSANE anger in regard to one of these pundit blowhards in the silver scene. How long ago did Jim Willie change his call? The ONLY reason I sold my stocks in May and bought treasuries in our 401K was because of Jim Willie and Charles Biderman. I thought they made more sense than the stock bulls. Well, it turns out I lost out on a TON of money. A TON. I kept sitting here like an idiot, waiting for the 10 year to go under 1.25% before I sold and that day was to never come. I am never NEVER NEVVVEERRR going to listen to one of these dipshits again, because if I had kept the mutual funds I already had I would have MADE A KILLING all through the summer and all through September. Instead I am sitting here with a worthless pile of silver and a bunch of fing TIPS.
I’m pretty sure it was during this podcast (http://www.tfmetalsreport.com/podcast/4153/holiday-treat-grilled-jackass), published Aug. 31st. But it’s been well over a month since I listened so it’s possible that it was during the one published just before Aug. 31st.
Having massive investment losses hurts like hell. I’ve been there more than once, including one period where I basically went bankrupt after an internet company I was building died in the 2000 tech crash. I also have been one of those pundits too … and investment analyst and portfolio manager VERY MUCH in the public eye (an audience in the millions) so I know what you’re experiencing as an investor consumer of viewpoints, as well as what it’s like actually being one of those pundits. I know it doesn’t mean much right now, but maybe the whole experience will end up helping you become a better investor going forward. When I have made profound mistakes — and there have been plenty of them — the one thing I learned very early on was to NEVER give up, and to always try to find where I could learn from the mistakes, even if it required admitting that I didn’t do enough research in advance before making a decision. Don’t waste your energy being angry. It’s not going to get you anywhere. Put that energy into having more time to become more well informed. Investing is a bit like other areas in life like physics. It truly is a field where the more one knows, the more one can in fact understand just how much remains to be known and mastered. Humility, taking personal responsibility for one’s actions, and dedication to always try to learn more is a formula that has worked well for me, and for many investors I know.
Hindsight is 20/20, but even back in the Spring, it wasn’t easy to predict that US long-bond yields would fall as much as they ultimately did because to see that result would require the Fed and other central banks to step aside — which is exactly what the Fed did, jawboning about not necessarily having to do more QE while crushing the precious metals market starting Feb. 29th, etc. In other words, a forecast that deflation fears would run even more rampant was contingent on the decisions made by a select few men at the Fed and in Germany, for the most part. Biderman and Willie got it right with the overall read of the zeitgeist of the day — that policy makers would let the global system get even more unstable before acting, and that was the right call. But by the time you were acting on that call, much of the decline in yields had already come. Moving from 2 percent and change down to 1.4 percent on the long-bond was the end of the run and it was visible how frothy and extended the move was so long as one believed that the Fed and central banks in general would ultimately act to fight deflation. Willie and Biderman could have done a better job making it clear that even though more downside to yields would come, the crash at that point had already been astounding, and that it was risky to chase that last bit of yield decline. They didn’t do anyone any favors getting bombastic about that last bit of decline even though seeing it for what it was — massive social unraveling overall — was correct to point out. But you need to take personal responsibility too, because Willie wasn’t recommending people actually take investment positions in bonds to capitalize on that decline. His primary recommendation was to own gold as a hedge against both inflation AND deflation. Biderman did talk about TIPS as an investment choice from time to time, however.
I exited the public eye for many reasons. It’s a long story, and perhaps I’ll share some day. The old saying “Those that can, do; those that can’t, teach” was certainly a factor (even though I like teaching and it’s the main reason I take time to post on SD). The corruption of the 1990s disgusted me and even though I was insulated from the belly of the beast by being a “buyside” analyst, what I saw was astounding. I didn’t have to put up with that crap because, quite frankly, I was a good enough investor that I didn’t need to have clients. But when I was doing newsletter and financial journalist work, there was always the other odd reality that even if I managed to write perfectly clear forecasts and analysis and even if I was right (no one ever gets everything right), I would inevitably inspire at least a few people to the wrong or not so perfectly translated boots-on-the-ground decisions. It’s like the old “telephone game” where a message can be heard but interpreted in multiple ways. It’s not an easy position to be in. Willie could certainly stand to improve on this score because he does have a tendency to be bombastic and sweeping with his style, without sufficient time spent on not just talking narrative about how things are unfolding, but also, spending time on the risk factors associated with events NOT going exactly as he forecasts. He’s passionate and it’s easy to get sucked-in to his narrative. But regardless of who you’re looking to to glean info from, just do your best to get as many alternative views and always play the role of devil’s advocate for yourself. Take more time to research and consider writing down the investment thesis behind each decision you make. Something happened along the way to this bond bomb going off in your hands … because Willie wasn’t outright recommending people get into bonds for the last bit of yield decline.
It’s not your fault because you were a new silver buyer at that time. I’ve discovered silver’s fundamentals on November 2011 so I bought a few ounces at 40$ and lost. But, I’ve bought a lot of silver for 35$ and now, I made profits in terms of dollars. I would’ve done the same mistake as you if I’ve discovered silver’s fundamentals on September 2011. I guess that in your case, it was just bad luck. :/
Worthless pile of silver? If you really feel that way I’ll gladly take it off your hand, free of charge hehe. As for the TIPS, you can keep those lol. Anyway why on earth would you buy TIPS when the interest rate is so low and the price so high? If Jim Willie said that the 10 year was going to dip under 1.25% (link please?), I hardly think you should have taken that as advice to buy, because the main thrust of his many newsletters is the danger of the bond bubble. Here is a link to all his newsletters http://news.goldseek.com/GoldenJackass/. Note that in May of 2012 he wrote an article entitled USTBond Tower of Babel Teeters http://news.goldseek.com/GoldenJackass/1337803200.php. I think it is pretty clear that Jim is not recommending that you buy TIPS. Take some responsibility for your own mistakes, Jim as far as I know has been warning about the danger of bonds for as long as I’ve been reading him. If you bought TIPS after reading his newsletters you must have a reading comprehension problem.
FW thanks for giving us a peek behind your curtain It sounds like you had an impressive career.
I have a couple of thoughts re Willie and his partially right call on bond yields dropping to 1.25 and then to 1%. UST 10 yr hit 1.46% for a day or two. I subscribe to Golden Jackass and enjoy the read. The point he was making in proposing this immense drop was to illustrate that if and when this happened the USD would lose its reserve status AND we would have a near overnight devaluation of the USD by 30% or more while the bond bubble bursts. This was not allowed to happen since the game would be over, Obama could not be reeelected and besides which, European funds were flowing into our marketplace by the trillions, making it no longer worth dropping rates to historical lows. A safe haeven dollar and a modest 1.75% return on 10 yr USTs seems pretty good in light of the other markets.
There is still a chance that the treasuries will go down to 1% if the European central banks continue paying NIRP on 1,2 and 5 yr bonds. Why would the Fed be so inclined to offer something better than 1% for 10 year when no one in the world was offering above 0%.
It appears now that ZIRP will be the stated policy for the next 3-5 years. NIRP is just another step towards the time when we, the people, will see our pension plans and 401Ks expropriated to help fund the debt and deficit. That is just a matter of time. In Europe this system is all the rage We will see it happen here when the flood of money from the Euro zone stops and we still have multi trillion dollar deficits. We who still have private 401ks and IRAs are going to be forced by the Ghillarduci Rule to invest in Federal paper. That law is on the books and right along with NDAA, our financial resouces will rotate to the Fed unless invested in physical assets including silver and gold.
The Federal Pension Enslavement plan signed into law a couple of years ago means that if the Fed can steal your money then rates offered will be whatever the Fed deems acceptable to sustain ZIRP, NIRP or anything else in in the banksters Illuminati NWO of a WORL.
We have all been treated to the vagaries of the market and it is particularly nettlesome to hear that the investment we made are subjected to the criminality of the market maker. IN the case of the UST 10 yr it is at the behest of the Fed that we are whipsawed by the most immense criminal enterprise in human history. My weakness was stocks and after shedding 7 figures loss in the last to equity FUBARs PM’s sure sounded good to me. I made my losses in the last 10 years but in reality only broke even in my own personal Japanese-like lost decade.
Everyone from Bill Gross, head of PIMCO, being whipsawed to the tune of billions in losses to the average joe buyer, the crimex is using us for their feedstock. Gross was the UST dumping ground, eagerly sucking up every offering. PIMCO holds over $1 trillion in treasuries but no longer buys USTs, Neither does China. Bill is going to gold and had made it abundantly clear his preference for the yellow metal and not the junk paper spewed by the government. That’s all Ican think of for now
The reason I listened to pundits was because I was a newb and I didn’t trust my own opinion. I don’t feel bad about being a newb anymore, because no matter how many decades people have been in the game, no one knows what they’re talking about. No one. One reason I might have missed Willie’s change of opinion is because I stopped reading Turd. Why? I didn’t like the way he deleted some people’s comments off his site (censorship is wrong) and I felt his essays actually made the market more confusing rather than less. He was always calling tops and bottoms wrong and there was no way I was going to learn anything over there. People who have helped me understand the markets better are Max Keiser and Jim Rickards. I also reluctantly listen to Marc Faber as he tends to be correct, but these guys have often already made their move by the time they’re telling us to do it. I’ve seen Brotherjohnf be pretty accurate too. I’ve disagreed with him before and seen things happen exactly as he said.
I did my own research and I had picked mutual funds that I thought would do pretty well over the long term for the money we can’t get out of my wife’s 401K. But then I second guessed myself because of Zerohedge, Biderman and Willie. I sold all those small & mid cap stocks and put the money in PimpCo and TIPS. I thought I needed a hedge in case I was wrong about silver & inflation, so I didn’t feel too bad putting my 401K in Treasuries for awhile. Like you said we read these emotionally charged sites every day and sometimes we get convinced the whole thing is going to collapse tomorrow.
The way the Fed can manipulate paper markets, I still firmly believe Treasuries can go lower or Stocks can go higher. Literally anything can happen. To me, it seems like an interest rate of 1.47% is historically low, but saying it can’t go lower is like saying a $147 stock can’t go lower. If it is what they want, that is what will happen because the paper market is a complete hologram. Silver and gold are a temporary manipulation because they are tied to physical reality, but very little else about the market is tied to reality anymore. I’m a little worried about what Sinclair says about silver, as I have a lot of silver and very little gold, but then I remind myself he’s a newb too. He may have been in the markets for decades, but everyone is just a newb. No one knows exactly what is going to happen. Roll the dice or spin the chamber. From craps to russian roulette we’re all doomed.
As much as I may want to pile into stocks again and set my wrongs right, I’m still doing my research and wondering what to do.
If you want a pot to piss in, believe in what you see and not what you hear. I have been looking at the QE3 announcement. The last QE gave stocks a 15% boost this year. I missed that one, lack of cash being the best reason. Looking at the Fed buying Mortgage Backed Securities at a 40 billion a month clip is well worth my time studying their motives. How much you want to bet that those purchased will be home mortgages in the USA. When interest rates rise, the Fed owns your home. It gets worse. They call in the loans!
Best to know what laws come out of DC, what the Murdering Bastards are after (unadulterated usury and greed), and your own due diligence. The latest being Dodd-Frank, and Healthcare Act 2010. These laws are written for 10 or more years down the road. Read the maps correctly and you can get where THEY are going before they get there. Listening to pundits and not watching the road is bad medicine.
PS: TRQ
Yeah, I want some pot to smoke.
I missed my chance at buying silver when it was at 27.50$ per ounce and my local dealer was selling his silver ounces for 0.50$ over spot! I was only able to buy one because of lack of cash. I just can’t forget about that opportunity!
Remember the Seinfeld episode with Opposite George. That’s what seems to work now. Just today FedEx announced business has tanked. One would expect their stock to take a dive. But, they also announced big layoffs. So their stock goes up instead.
Very difficult these days to be both correct on the direction and correct on the timing. Easy to be half right and lose. That’s why I like physical gold and silver so much.
Going long precious metals eliminates the timing. I know with certainty that gov’ts are going to print and print and print. That means gold and silver are going to go up. There is something about taking possession of physical gold and silver I find very calming. I don’t fret over daily price action since I can’t sell them with a keystroke.
It seems to me, if you want calming, there is a deliberate attempt to herd the sheeple into various capital market pens. I can see a pattern. With all of the clamor about this and that, that and this, it is obvious that people in the US will go into stocks chasing that 15% gain this year. Dittos goes to gold. It is also obvious that they are going to hurt the 401ks and annuity people one way or another. Then, QE3 where they boldly state they are buying up MRB’s….and they manipulate the LIBOR rate? Yea. With Zero Interest Rates, they can jack up the rates, lately promising until 2014, and wrench houses from the sheeple. Reverse the obvious. They will crash the markets and confiscate gold that is in the CONUS. Silver is safe as the metal is also industrialized. That is why I am in silver. I was in stocks, and I have a PNC Trust Quarterly to pick and choose from, rather I am day trading TRQ and peeling off 500.00 dollar bills. By using his and her Scottrade accounts, she runs her trades on her account/IP and mine on my account/IP…all legal. I live on a minimum wage frame of mind. I will not chase previous losses with “big score” mind melts. I accepted my losses and moved on. Now, my eyes are squarely fixed on the Murdering Bastards and it is real fun figuring out their game. I love chess.
Now for a neat site I found, and have purchased from. Can you imagine the “what ifs” with a bunch of these and a pile of silver too?
http://www.khukurihouseonline.com
“Interest rates have been artificially manipulated to very low levels and really only have one way to go now and that is up. When rates rise, bond holders get slapped with principal losses because older lower rate bonds are not worth as much as newer higher rate bonds. Once rates begin to rise, however, is probably not the best time to head for the bond exits, as there will be a mad stampede of other bond holders seeking escape at that same time and only so many can fit through the exits at one time.”
You presume that people are only on one side of the fence. Pension funds and insurance companies are getting hit hard because of these low interest rates - their payouts/premiums are calculated on generating certain returns. If they cannot make these returns (eg 7%), their investment capital declines, which means that they become underfunded.
Essentially the federal gov’t has backstopped all the pensions and annuity companies. That’s what TARP was all about. And that gov’t support continues to this day from other avenues.
It sounds crazy, but interest rates are not going to rise due to market forces. The Fed has unlimited money to buy Treasuries. As long as the world is deleveraging it offsets the monetization.
The way Keynesians look at it, it’s about the grand total of money and credit available in the economy. If private sector money and credit is being destroyed, they have room to increase gov’t spending with it’s ensuing credit creation. Remember, Keynesianism is a pyramid scheme. Each year they have to increase the supply of money and credit available to the economy by everything that was available last year plus the interest. Prolonged contraction of money and credit will crash fiat money.
That’s why they spent all the bailout money on special interest groups and not on productive projects. To their way of thinking the only important thing was to spend money and increase the total supply of money and credit. It doesn’t matter where you spend it so long as you spend it.
What is going to crash the financial system is not the interest rate on gov’t debt. The Fed can control that. What will crash the system is when the derivative market blows up, when counter-parties fail and notional value becomes a full fledged balance sheet liability. It will be like dominos.
“You presume that people are only on one side of the fence.”
No, actually, JR, I do not presume that at all. This article was nothing more than a slice of my own experience. I agree with you that others have been and continue to be harmed by the Fed’s current ultra-low interest rate policy. This looks a great deal like something that was done with good intentions and that has helped the government and others reduce their borrowing costs but that WILL have a number of unintended consequences. I am sure that it will be fascinating as it plays out but hope that it will not also be terrifying.
That seems to be what government produces best – “unintended consequences”.
Hey Ed_B – great article. I’m looking forward to more!
Thanks for the comment, Precmetals. Doc willing and the river don’t rise, I just may do that. I learn something valuable and interesting every single time I visit this site. It is a privilege and an honor to be able to contribute something back.
Ed B my apologies I didn’t realize this was your first post. I’ve read all your posts and think highly of them We look forward to seeing your material up front regularly. I will read this one again for additional content
I’ve bought physical silver first and not the other investments because silver is cheap and I knew more about its fundamentals than the others. I think that I’ll never buy stocks, bonds, etc because their values will collapse one day since they are based of the fiat system.