Investments Trade Log

[IlliniDave]

Even after today I'll probably still be down a percent or so compared to last Thursday. The only consolation is that I had less volatility than the equity/currency flailing.

[JL13]

Permanent portfolio is up ~ 11% YTD.

Pretty nice.

[theanimal]

I'm loving Brexit. My portfolio is up ~20% in the last 3 days

[workathome]

That was a fast recovery.

[Dragline]

Crazy isn't it? Some things like LT bonds and silver (up 10%+ this week!) seem to be attached to large helium balloons.

Any casual speculations as to why this is occurring? My best guess is that people are betting that all talk of interest rate hikes are off the table and there may be more QE and negative interest rates in the offing from more than one central bank. So it's buy everything that isn't locked down!

I also wonder if the recent government report/blessing on large US banks essentially freeing them up from stringent capital requirements has encouraged them to start buying more, too.

[jacob]

@Dragline - Did you mean casual speculations or causal speculations? To me, it's yield seeking and flight to safety.

Because I've been following/stating the thesis for many months by now that a low-interest rate environment would be around for much longer than the Feds having been saying due to there being more to the world in terms of locks and connections than just "data driven" employment numbers (which incidentally are so massaged that they are too optimistic anyway) ... Yellen finally admitted to coming around to this viewpoint last week or so. So it just might be that investment advisers (e.g. your basic pension/mutual fund manager) who only follow the official high priests of officialdom are bidding things up slowly. Of course, this begets the question ... are there any even greater fools left other than noise traders? I can't really think of any ... well maybe the ECB (BOJ seems to be giving up.)

Also that mainly Brits (specifically holders of British values e.g. stocks and currency ... so think Japanese hot money) are seeking safety in the usual places. Especially mean reverting trades out of the USD and the JPY.

[JL13]

What percentage of LT treasuries are owned by institutions who must invest in them by decree (Insurance companies, pensions, mutual funds. the FED)? I understand that the LT rates are just future expectation of short term rates, but at this point they're indicating that ZIRP will be around for a long, long time.

What would LT rates be if these players were not required to hold bonds?

[jacob]

@JL13 - Higher for sure ... The negative interest rate policy is very much central banks telling/forcing pension funds to eat crud ... or whatever the appropriate term is. This works well insofar that those funds are defined contribution, but insofar they're defined benefit, it just transfers the problem and concentrates it in the pensions who then become underfunded because they don't have the cash flows from the low interest rates. See e.g. Chicago. Even a small differential of a couple of percent between the returns they get and the returns they expected to get "when promises were made" will blow up exponentially over a few decades.

Pensioners also vote, so this is one very strong lock on the interest rate/currency system, because when people are investing in the big game, politics get involved. I'm not even sure I would use the term "investing" for what pension funds actually do.

[JL13]

I just looked it up, and something like 1 trillion out of 19 trillion is held by "other", the rest is held by foreign governments, the fed, pensions, mutual funds, and insurance companies. Presumably all of these are required to hold them for one reason or another.

So really, ZIRP is a transfer from these to the federal government, correct? As long as real interest rates are negative, then the fed can essentially let inflation erase it's debt? They borrow $20T today at 0%, and pay it back 15 years from now at $20T nominal, or $15t real.

I guess this method beats paying down debt with raising taxes or increasing the money supply? Since all the debt they're issuing is just being absorbed by the guaranteed buyers, then it's not being spent. Is that why you don't see high inflation right now*?

*Granted, there is a lot of inflation in the financial markets, but not so much on main street.

[Dragline]

@Dragline - Did you mean casual speculations or causal speculations? To me, it's yield seeking and flight to safety.

Definitely "casual" in my case -- as in looking at silver while having a cup of coffee this morning. I thought the rallies would have been exhausted by today, or at least there would be a decoupling of asset classes.

@JL13 -- you don't see inflation because the velocity of money continues to decline, as it has since the 1980s. My pet theory is that this secular decline is ultimately related mostly to shrinking and aging populations in developed countries, who just don't spend and start businesses like they used to.

And negative interest rates in Europe and Japan will just make people hoard physical currency and assets (gold) and buy more US Treasuries as the cleanest dirty shirt. TLT is up 16% YTD and EDV up 23%, even as equities are near their highs. A lesson for most in why trying to predict markets is probably a bad idea.

[jacob]

@JL13 - With ZIRP and little inflation, it's more like the government kicking the problem [of funding] over to the pension funds. The government essentially have a bunch of lenders that have to buy their product (bonds) because it's listed in the pension funds' prospectus (prospectuses? prospecti?) as "risk free". Self-imposed regulation and overall denialism essentially force pensions into a dumb deal. However, rewriting contracts is hard ... not just inherently but also because it's like yelling fire in the theatre. If the government owes the funds a few billion, it's the government's problem---like Puerto Rico. But if the government, like the US, owes 18 trillion (or 100%+ of GDP) it's "other"'s problem.

@Dragline - Okay, my casual observation is that when TSHTF, all the junky stuff went down. Because this depressed indexes by a few points, the entirety of the personal finance blogosphere went into a "stocks are on sale!!!" buying frenzy and so bid everything back up again with sensible TSM investments, of course "for the long run since nobody can time the market", except of course when "stocks are on sale". Consequentially, all nonjunky stuff is now overpriced and junky stuff is back to normal

[JL13]

@Ego

Another theory for the lack of inflation (I can't remember if/where I read it) is because we don't bump up against the supply curve anymore. With the exception of food, water, energy, there's a massive surplus of everything else. At the margin, American companies and consumers are bidding against teach other for technology, rather than durable goods. The Cloud can easily scale without hitting a shortage. You do however, see inflation in energy, water, food over the past 20 years.

@jacob

So ZIRP is essentially a tax targeted at pensions (and similar)? It's essentially a (relative) tax break for main street and corporate america at the expense of insurance companies, pensions, and mutual funds?

[jacob]

@JL13 - I wouldn't call it a tax. Rather I'd say that the contractual arrangement allows/forces ZIRP to continue as does currency exchange ratios in terms of trade relations. QE+ZIRP set up structures that are extremely hard and expensive to unwind. Kinda like a man who's become so fat that it's hard to even begin effective exercising. The Feds are used to the market jumping from Fed-speak interpretations... but mere talking is not gonna work to unwind this.

Of course this is just how I see it ... but so far, pretty good... ... of course that doesn't mean that it's going to continue forever. Still not sure what's next. One thing at a time.

[JL13]

How does it unwind? What would happen if they just bumped up the target rate to 3% at the next meeting?

[jacob]

@JL13 - The entire yield curve would go up (LT bonds would crash spectacularly) and very soon (<6-12 months I'd say) the US government would be unable to meet their interest payments (since it has to borrow at a higher rate to roll over its debt). The US Treasury would essentially be out of cash. The only way to fix that would either be to raise taxes, fire some government employees, and start issuing IOU's and hoping that people will keep working. See Chicago to get an idea ...

As to how it unwinds in an orderly fashion? Very very slowly. I think.

[JL13]

So that means interest rates stay low until tax revenue can cover current obligation plus interest (at normal rates) on the debt. We we're just playing a waiting game until GDP gets up to a certain figure?

Is this what Japan has been doing for 30 years?

[cmonkey]

Sold my entire holding of MSFT today, they are supremely overvalued. Made out with over 30% as I bought in April 2015 right before they shot up.

Replaced with POT.

[CECTPA]

Replaced with POT.

Canadian Potash? Do you mind sharing your reasons? I was thinking of buying the Potash (TSX) stock for dividends...

[cmonkey]

Of the three I was considering P/E for POT was historically a bit lower than they other two. The yield is nice but I'm not sure they won't cut that dividend, however, if they do it probably will be line with earnings which should be just under $1/share the next year or two. Would still be a nice yield. This is in my HSA, and I'm typically a little riskier with that.

[CECTPA]

thanks, cmonkey!
That's exactly my thought process too, but I'm new to this and usually prefer to validate my reasons with someone more experienced