Reading the Economy

[Tervuren]

I've been trying to philosophize what this means without actually looking it up.

So here are my rambling thoughts.

The interest rate on the bonds is driven by demand to hold those bonds. As demand goes up, the interest rate goes down.

When the long term yield drops below the short term yield then that is an indicator that people are not expected to be spending money over that period of years of the long term bond.
You don't buy a long term bond if you have plans to spend that money in a shorter period of time.

When people start saving instead of spending, a debt driven economy has a fit.

The greater portion of the population that shift from a life of debt to a life on the other side the lower the yield on bonds as there are more potential investors than bonds for those investors to buy.

It would be no coincidence that "I'm debt free" threads are starting to appear at a time when the bond curve is flattening. This is money shifting.

So to some extent a flattening or negative is a sign that people are getting tired of being in the rat race. By tightening up their habits to eliminate debt, consumption falls, and the economy slows.

Each time in my adult life time this solidifying of moving from debt has been averted by government interaction.

So without having read about this, those are my thoughts. I'd welcome input.

[john70t]

Originally Posted by Tervuren

The interest rate on the bonds is driven by demand to hold those bonds. As demand goes up, the interest rate goes down.
......................
When people start saving instead of spending, a debt driven economy has a fit.

I guessing at straws here, but I'm thinking the interest rate is going to go up. It's been zero for too long and the fed is going to be slowly reeling it back up to a more 'normal' position without spooking the market. They were talking about getting off the juice for a while now and Yellen dared to raise it a tenth of a quarter percent without the market bum rushing the exit door all at once. Baby steps are needed.

Inflation has to go up in order to equalize stagnant wages versus skyrocketing housing prices, because the disparity of people in heavy debt from all the low-interest NINJA buying mansions is what helped create 2008 (besides primarily the massive ratings and packaging frauds which went unpunished). Housing is still moving up too fast, but a slowdown will create a terminal vacuum without other industries such as steel etc filling the void. Donnie got to bring 'em home and then make them work competitively on the open market in phase two. Immigrants and foreign investments saved our bacon last time but what if all those empty Seattle houses are PRC bombs waiting to going on the market at once.

People saving is a sign of less reliance on government, but the NYC central banks won't want to pay out interest to those pesky responsible savers so people will start investing savings elsewhere. The bankers are still going to get their traditional free slice in the trillions of US GDP either way, even through higher banking costs and higher interest rates when people slow spending and borrowing. In self-interest they will try not to kill their own golden goose like the times before.

What I don't understand is that despite the Baby Boomers retiring a needing medicine, personal saving is going up? Or just is spending going flat? This must mean boomers are self-sufficient and even when they pass the nouveau riche kids are still spendthrifting responsibly(or hoarding from a different perspective) their family funds and not blowing it on hookers and blow. With all the education debt and starbucks and new pickup trucks costing $60k and them all leveraged out the wazoo how could that be? That doesn't make sense to me but I'm not an economist and really not sure of the elements which make the big machine tick.

When spending goes down and banking interest goes up, I'm guessing people will demand access to more information to research purchases and start demanding more for their dollar with higher quality from manufacturers. Which is a good thing.

[tabs]

Originally Posted by Baz

You guys are speaking a foreign language to me.......but I do appreciate that you are engaged.

My focus is mostly on reducing overhead and batting down the hatches here.

I'm dug in.

I am out of my depth when it comes to the nuances of the heavy equipment market. I really do enjoy listening to people who know what they are talking about. It is refreshingly solid...knowledgable.

By the same token when I talk about economy and monetary policy which are abstractions to begin with I can just see how it works. It is like watching a Swiss watch tick with all of its interactions. The same only more so can be said about what I see about the how and why of people's motivations and interactions. I supply you with that unseen and untouchable reason why events and people do the things that they do. I objectify the subjective.

[1979-930]

^^^ I think you may have ment to quote my post Tabs.
But I am a very conservative contractor that has seen one too many go broke on my way up. So I am a lot like Baz's post you quoted. No debt.

My actual long term plan when I got this fleet is expecting another pull back sometime between 2018 and 2022. I don't think it's going to hit this year, could be next year with what you are seeing. But when it happens I'll grab another newer fleet at auction, again, for Cash.
I don't trust wall street and I don't work for the bank. I make money working and protect it from everyone else.

[tabs]

Originally Posted by 1979-930

^^^ I think you may have ment to quote my post Tabs.
But I am a very conservative contractor that has seen one too many go broke on my way up. So I am a lot like Baz's post you quoted. No debt.

My actual long term plan when I got this fleet is expecting another pull back sometime between 2018 and 2022. I don't think it's going to hit this year, could be next year with what you are seeing. But when it happens I'll grab another newer fleet at auction, again, for Cash.
I don't trust wall street and I don't work for the bank. I make money working and protect it from everyone else.

By screwing with the value of the money they are pulling the rug out from under you. This is their new trick.

[jyl]

My thoughts on yield curve.

Why is it predictive of a recession? Two reasons, among others I suppose:
- Direct: banks make money lending at the long rate, to get that money they pay interest at the short rate, so when the long rate is less than the short rate, banks don't want to lend so much. Credit tightens and the economy sinks.
- Indirect: long rates represent bond investors' expectations of future economic growth and inflation, when long rates are below short rates it implies bond investors expect future low growth and/or future deflation, and stock investors take their cue from bond investors.

What is pushing short rates up?
- Fed sees inflation rising (low unemployment, high oil/commodity prices, tariff threats). Fed also sees huge fiscal stimulus (corporate tax cut, rising federal deficit). Fed has been wanting to normalize Fed Funds rate to rebuild their main monetary stimulus tool in time for the next
recession. So Fed is pretty determined to raise Fed Funds rate.
- Fed is allowing its multi-trillion dollar balance sheet run off, meaning letting their treasury and agency bonds mature without buying new ones. A maturing bond is by definition a short-duration security.
- Aforementioned ballooning federal budget deficit is forcing Treasury to increase debt sales, including at the short end (2-3 year). $1 trillion of Treasury debt issuance expected in 2018.

What is causing long rates to lag?
- Other major economies are still pursuing very loose monetary policy, with German 10 year bunds yielding just 0.32%. https://www.bloomberg.com/markets/rates-bonds/government-bonds/germany Japanese 10 year notes yielding just 0.02%. Those ultra-low rates hold down US Treasury 10 year yields, by shifting demand to Treasuries.
- Treasury debt issuance has been emphasizing the short end (I'm reading, haven't confirmed it).
- Increased investor perception of risk is increasing demand for so-called safe-haven assets.

I'm not a bond guy, may well be other factors at work too.

[wayner]

Originally Posted by Tervuren

...

The interest rate on the bonds is driven by demand to hold those bonds. As demand goes up, the interest rate goes down...

I find this interesting.
I always that thought that bond "funds" went up as a result of interest rates falling.
(if rates are falling, and if you need the money out of your bond, I'd like to buy your bond that you are holding that pays a higher rate than the going interest rate, ad if I expect rates to fall further, I may be willing to pay a bit more for it).

I haven't looked at new issue bonds though. For them I thought that they chased the interest rates downward, just paying a bit more than the bank account interest rates to still make them appealing.

Thoughts??

[Sooner or later]

Originally Posted by wayner

I find this interesting.
I always that thought that bond "funds" went up as a result of interest rates falling.
(if rates are falling, and if you need the money out of your bond, I'd like to buy your bond that you are holding that pays a higher rate than the going interest rate, ad if I expect rates to fall further, I may be willing to pay a bit more for it).

I haven't looked at new issue bonds though. For them I thought that they chased the interest rates downward, just paying a bit more than the bank account interest rates to still make them appealing.

Thoughts??

You are correct, you will pay more for a higher rate bond.

A $1000, 6% bond in a 4% environment will cost far more than a grand . The bond fund will go up in a declining rate environment.

[tabs]

Originally Posted by Sooner or later

You are correct, you will pay more for a higher rate bond.

A $1000, 6% bond in a 4% environment will cost far more than a grand . The bond fund will go up in a declining rate environment.

Mutual Bonds Funds are terrible....If interest rates go up after you buy in you LOSE PRINCIPLE, but get a little better income stream. If interest rate go down you GAIN principle but lose income stream. The day you cash out you are either a winner or loser.

Better to create your own Bond portfolio.... Bonds are redeemed at face value upon maturity while you collect your set income stream.

Bonds have had a BULL run with continued price appreciation since the early 90's. Bond prices have gone up while interest rates (income stream has declined) went down. The US has funded it's debt on CHEAP INTEREST RATES...which robs the guy who saved and is sitting on a lot of cash...try making it on 2.5% to a now 3% interest rate...pffft...

You are fked...better to have gone out and blown the money on hookers and blow.

The ONLY fking alternative to make any money has been the EQUITY market with it's associated RISK. The FED has fixed it so that Equities would do well SO THAT THE PENSION FUNDS (institutional investors) COULD MAKE THEIR 8% keep it solvent ROI. WHY DO YA THINK EQUITES HAVE DONE SO WELLLLLL. Only game in town is the answer.

It is a good thing that you Boyz are coming to some understanding of just how fked you ALLL are...But you are REAL LATE TO THE PARTY...

I am continually amazed about HOW CLUELESS EVERY LAST ONE OF YOU ARE...You should stick to your day jobs...there you have proficiency...

I do not mean to be mean, but it is so frustrating wading through all the misconceptions and BS that you Boyz believe in. I just have to shake my head because it is so sad that it make me want to throw up my hands and cry.

I know what is going on because this is my day job, my money has been ON THE LINE FOR 30 years. So it is no abstract pie in the sky BS that I am talking about. It is for REALS....

As a matter of fact I know more than most of the Anointed Masters of the Universe on Wall Street or Academia or DC... It really is interesting when you get quoted on CNBC five minutes after you send them an Email. Or a FED President starts stuttering ashen faced (even Mother in Tucson saw that). When five minutes before sending he was joking around with the crew.

There is just a lot of things you Boyz do not see, and if you can't see it it doesn't exist for you...it is called being CLUELESS. Base you decisions on being Clueless and you wind up LOSING.


America can REDEEM ITSELF, but it is going to have to pay the PRICE. So far...America is still on a drunken binge....and it is going to get a lot worse before you BOYZ start to sober up...

in 1980 I started saying that the US government would continue on with business as usual until it could not beg, borrow, print, steal nor tax another dime. When the business as usual regime comes to a screeching halt is the day that you will wake up...until then carry on kicking the can down the road. It is the simple math of human nature...civilizations come civilizations go...

[Sooner or later]

When interest rates are climbing you don't want bonds or bond funds.

The best you can do is ladder your bond portfolio

[Sooner or later]

Tabs, I am concerned about the debt moving forward. Our current level is high though not disastrous. Debt servicing will eat our lunch if our debt continues to climb. (Debt amount and higher interest rate)

[tabs]

AWARENESS is a fking beothch...the moment that GW came on TV in 08 was when the American face of invincibility in the mirror cracked. As I saw it happen I knew that is what it was...

But ALL THE LEADERSHIP...WS, DC Academia everyone thought if we just do this or do that (the usual prescriptions that seemed to work before) we can get back to the normal business as usual routine... I watched them, and heard them say it....

But has it? With a TRILLON USD DEFICT, with political and social discord as reflective symptoms... With a world order that is fragmenting and is chaotic...With massive rising Global Debt...

That has NOT BEEN FIXED nor is going away, even if EVERYONE has put their heads in the sand while shrugging their shoulders (Simpson & Bolles went home and now Paul Ryan)...while saying IT HASN"T HAPPENED YET....

I guess it takes awhile for the USA in particular to spend EVERY LAST DIME OF FAITH IN IT'S GOOD CREDIT....the US is borrowing so far into the future of it's income that the debt is virtually UNPAYABLE...maybe people will just forget about it...except for the people who need the income stream from it....

[tabs]

Originally Posted by Sooner or later

When interest rates are climbing you don't want bonds or bond funds.

The best you can do is ladder your bond portfolio

You are talking BONDS 101.

[Sooner or later]

Originally Posted by tabs

You are talking BONDS 101.

Yes

[Sooner or later]

We are not so far down the rabbit hole that we are doomed.

A recession now, or the near future, would be devastating.

[tabs]

Originally Posted by Sooner or later

Tabs, I am concerned about the debt moving forward. Our current level is high though not disastrous. Debt servicing will eat our lunch if our debt continues to climb. (Debt amount and higher interest rate)

You are talking DEBT 101...

It already is "disastrous." The engine of debt creation is really set to gain speed as the entitlements need to be funded... LBJ made the entitlements into an ACCOUNTS PAYABLE while funding his and every other Presidents GUN & BUTTER fiscal and monetary policies. That comes to about 100 TRILLION USD that is going to become INTEREST BEARING debt...

Did your azzhole just say OUCH...

DEBT puts a drag on the ability of an economy to perform.

As the CONSUMER DEBT BUBBLE BURST IN 2008, it was SUPERSEDED by the MOTHER OF ALL BUBBLES .."THE SOVEREIGN DEBT BUBBLE"*>....from about 11T in debt when BO took over to 21T in 2018. Increasing by about a Trillion a year as the SS entitlements get paid out..


Go back to what I wrote starting in 2009, I laid it all out and have repeated it ad naseum...please forgive me for repeating myself...BUT NOTHING HAS CHANGED... I am just stating the facts....REALITY even if that is boring.

Do you want me to create a fiction...like you hear on the news or from politicians?

Hey everything is swell nothing to worry about go back to sleep....you will all live like millionaires in the morning.


The US govt is stimulating/juicing the economy by what 3.5T a year of which about a Trillion is borrowed....that amount of money should make any economy run like a scalded dog...according to the GUYS WHO KNOW WHAT THEY ARE TALKING ABOUT..who are so oft quoted on this Board...BUT WHAT HAS THAT AMOUNT OF MONEY DONE SO FAR>>>>a 1.6% economy so far....

So far UNDER Trump the economy has experienced a BUMP???? I am watching and wondering? But what I go back to is a in TRILLION DEFICIT SPENDING and WONDER HOW ROBUST IS AN ECONOMY THAT IS BORROWING THAT MUCH MONEY? It sounds FISHY to me????? So I wait and wonder has anything really changed?????

Fact the US consumer is tapped out...the broad based American MC jobs are getting few and far between, no savings, nor cash, debt to the eyeballs. The US consumer has been the Fatted Calf of the Global economy, the consumer that has propelled it to the height it has achieved...Without that consumer the Global economy STUMBLES... The US Govt has become the surrogate Consumer by providing 23M paychecks...so the spending can continue. When that borrowed US govt money runs out the Sovereign Debt Bubble will burst...

Then because of the position of the US economy and USD it creates a world wide economic tsunami. (That is why the Chinese have been trying to get away from US Global economic and USD hegemony as fast as they can since early 09. They looked into their crystal ball and shyte their pants...aghast at what American brilliant ineptitude has wrought upon their heads.)

[tabs]

I watch this stuff as you would watch a Swiss watch tick....

There I laid out the road map again...I really wanted to avoid it, but call me Pavlov's dog...

[jyl]

Originally Posted by Sooner or later

When interest rates are climbing you don't want bonds or bond funds.

The best you can do is ladder your bond portfolio

Or sell the long duration and hide out in short duration, floating rate, and (maybe) inflation protected bonds (or bond funds, in some cases), until rates have stabilized. A 1 year T bill is yielding about 2.2% and even a 6 month is yielding above 2.0%. Not much but the interest rate sensitivity is so low, the total return will still be positive.

Of course, there is the scenario that rates keep rising, even long after higher rates have started sinking stock values and slowing the economy, and maybe even in the absence of high inflation. Then you might be hiding out in short duration for a long time. But I'd argue in that situation, the very modest returns of short duration might look good relative to negative returns elsewhere, because a likely cause of that scenario is the US Govt having trouble financing its deficit.

[jyl]

Originally Posted by tabs

I watch this stuff as you would watch a Swiss watch tick....

There I laid out the road map again...I really wanted to avoid it, but call me Pavlov's dog...

The bulls think GDP is going to accelerate to 3%+. I don't see it. Most of the (huge) corporate tax cut is going to share buyback, corprate debt paydown, M&A. These aren't especially stimulative activities for the economy, although they stimulate investors. Temporarily.

[tabs]

My old Shrink friend used to say to me..."Tabs you subsume the characteristics of people to figure out their feelings, thoughts and motivations." In other words I put on your shoes and walk in them to make yourself understandable to myself. I am sure you have heard Actors on the talk shows talk about the motivations of the characters that they play. it is the same thing really. Because I understand duality I am especially adept at doing it. You might call it empathy..or seeing both sides of the coin at the same time.

But I am largely finished with that endeavor...and have taken it one step further... I have subsumed the characteristic of the economic "Animal Spirits" If you consider that any economy is a collection of people working and their collective sentiment is considered the "Animal Spirit." All you have to do is figure out what the sentiment of the collective whole of society is. I have taken on the characteristics of the "animal spirits" as an actor would taken on the character of a role he is playing...