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Why is this *not* another jgb-widow-maker?

Posted: Fri Mar 27, 2020 9:16 am
by ertyu
So, the US has started to print like whoa recently, and with that, many very intelligent people on all sorts of social media have started to say that we should expect inflation or hyperinflation. The thing is, Japan did unlimited money printing + fiscal before and has continued to stay deflationary. When they first started, many shorted JGBs - and it didn't go well, to the extent that shorting JGBs and doubling down on one's conviction became known as the "widow-maker" trade.

Why is this time - the case of the US - different? I understant the argument -for- inflation/stagflation, but I haven't heard or read many take the other side. The situation we are in is a deflationary shock.

What is different about US treasury yields? Why is everyone so confident that the US will see inflation or stagflation when monpol3 was tried in JP and did not result in that?

Thanks to anyone who'd like to shoot the shit and speculate

Re: Why is this *not* another jgb-widow-maker?

Posted: Fri Mar 27, 2020 10:18 am
by thedollar
Not sure about deflation/inflation stuff but I don't think we'll see an asset bubble to the extent that Japan did.

From what I've read, Japan had completely insane valuations because of hype and inflation in asset prices from internal asset trade between families/large corporations. Hence we are not at all in the same situation as Japan was in 80s and 90s. Not to say we are better of, but I don't think it's comparable.

Re: Why is this *not* another jgb-widow-maker?

Posted: Fri Mar 27, 2020 10:24 am
by IlliniDave
I don't even know what a JGB is, but I'm very sorry it's spouse might wind up a widow.

I have no idea how they'll try to manage the mess, much less how to bet on the fallout to make money. Central banks seem pretty good these days at managing deflation, but presumably there are limits.

Re: Why is this *not* another jgb-widow-maker?

Posted: Fri Mar 27, 2020 11:48 am
by ertyu
JGB = japanese government bond.

The short-JGB widowmaker trade: When BoJ began hardcore QE and the JP gvt debt began ballooning in much the same way the US gvt debt is ballooning now, traders thought investors would doubt the JP gvt's ability to pay back that debt without inflating it away (same arguments are made about the ballooining US gvt debt now). Investors would thus demand higher return. If gvt debt is ballooning, interest rates should rise, and the value of Japanese gvt bonds would fall. Based on that thesis, traders shorted JGBs.

But as we know, rising interest rates aren't what happened. JP didn't experience inflation as predicted, it experienced yet more deflation and low interest rates (as the world in general has over the past 10 years). People lost a lot of money on their short JGB trades.

Read pretty much any blog today, and you will hear people opining that the ballooning us gvt debt will result in rising interest rates, be inflationary, etc. Why would the ballooning US gvt debt lead to rising interest rates and inflation when the JP ballooning debt didn't? There are many pundits out there who argue that the dollar will be devalued, and by a lot. My question is, why is this time different? Or is this time different.

Re: Why is this *not* another jgb-widow-maker?

Posted: Fri Mar 27, 2020 1:11 pm
by JCD
Let me see if I can take a swing at it. I'm not sure I actually buy these arguments, but at least it might be a place to start.

One of the best arguments for deflation is technology and demographics. I think this piece is a pretty good piece around this is:

A over simplified summary would be if we automate more and more things, either due to a lack of people or simply due to "progress" (e.g. lower costs) you can do more with less. If everyone started to live at home, cooked all their own meals and work remotely (roughly our current world), then you need less oil and have more spare humans looking for work. Thus the price of a human's hour goes down. Since humans have less money and the cost of manufacturing has gone down, over time prices are forced down. In a sense there might be rapid simplification of job roles as fewer roles need humans and so humans are forced to solve problems on their own.

Now you add in a mad man printing as many dollars as possible, trying to stimulate demand. While some, particularly those interested in becoming rich might grab fists full of dollars, many might be contented with the simpler lifestyle. Think millennials not buying their own car (a ~20k purchase every 10 years), instead using their phone (a ~.1-1k purchase every 2-4 years), Uber and public transport. Unless you believe public transport is more expensive than owning your own car, that would appear to be deflationary. Think elderly people who tend to stay home and spend less. "Retirement experts" estimates suggest 20-30% less spending by the elderly. So if the west has a demographic bubble of people entering elderly stage and choose not to grab fist fulls of money, then you start looking more like Japan.

Add to that, when the elderly die they leave their stuff but their debt basically disappears. Granted some of that is repossessed, but that is only assets that have not yet been consumed. If birth rates are going down, then there is an excess of stuff, like housing for the number of people we have. See the mid west of the US. Since debt is leverage and leverage is just pulling profits from the future when that debt disappears, it is like a claim on a income stream disappears and thus the value of that debt becomes 0. That all seems deflationary to me. Basically, banks create magic money (i.e. fractional reserves) from thin air and then charge a fee for anyone to access it via debt. When that debt disappears, particularly if that debt was used for consumption and not production, some of the magic money disappears too.

The other argument I can think of is based upon Paul Krugman's arguments in the 2008 crisis, who described tickets used for baby sitting. You and your friends each have 3 tickets and they say any of your friends will watch your kids for a ticket and you will watch theirs for a ticket. If people just hold onto their tickets, fearing they may need a babysitter for a week, then no one spends. Printing "money" simply gives everyone more tickets, letting them feel safe in knowing they can have their kid watched for a entire week if needed. In such a case, holding more tickets doesn't equal more spending. That isn't deflationary, but it isn't inflationary. Now what if someone's child grows up and they simply quit using their tickets. That is deflationary. That is another way of looking at the demographics. What if more people join the club. You make more tickets, thus that is inflationary. The difference here is that in both cases it is not inflationary or deflationary per capita. GDP != GDP per capita.

I have heard that in Japan they had time-limited payouts when they tried to create inflation (thus trying to drive demand). There were an unexpected large number of people who let their payouts expire. This capture that difference between elderly and younger folks.

One last view requires I point out the obvious: Inflation is simply the price of goods goes up relative to the currency. Is inflation a personal view or a statistical basket of goods? I point this out because all the central bankers are printing like mad. The dollar might not "inflate" relative to other currencies, even if it does inflate relative to your personal needs. Thus betting on inflation might depend on how you count it. Will your dollar be worth less at Target? Yes. Will it be worth less in some forex trade? No.

While not directly related, you might enjoy:

Edited for clarity, I hope.

Re: Why is this *not* another jgb-widow-maker?

Posted: Fri Mar 27, 2020 5:27 pm
by ertyu
JCD wrote:
Fri Mar 27, 2020 1:11 pm

While not directly related, you might enjoy:
Thank you, you are right, I did enjoy it. This is essentially the chinese banking playbook, too. will be interesting to see how things develop. According to this video, one of the main sources of income for JP banks were fx-hedged treasuries - and guess who just slashed their interest rates and is actively suppressing yields by buying metric tons of those. While in the west we're mostly talking about a consumption recession as a result of covid, the discussion of said recession having as a knock-on effect a JP banking crisis has been absent from the podcasts and blog posts I've been exposed to recently. Cool shit. thanks.

Edit: watched the first video as well. Insightful. It seems like "inflation or deflation??" is the wrong question to ask at this stage because the answer is 'yes'