Larry Summers Wants to Give You a Free Lunch

Posted on July 8, 2016 by MN Gordon

The existing capital stock continues to be frittered away at the expense of savers and retirees.  Nonetheless, central bankers don’t give a doggone about it.  This, after all, is one consequence of roughly eight years of near zero interest rate policy.

Another related consequence is that the pricing equilibrium of capital markets has broken down.  In particular, bond yields no longer reflect a market determined price of money established by the economy’s demand for credit.  Hence, previously unfathomable interest rate movements are now happening with regular occurrence.

Presently, the yield on the 10-Year U.S. Treasury note is sliding into the abyss.  On Wednesday a new record low yield of 1.34 percent was reached.  This is the lowest historical yield we could find based on a review of 10-Year Treasury rate data going back to about 1870.

The last time the interest rate cycle bottomed out was during the early 1940s.  The low inflection point at that time was somewhere around 2 percent.  Where and when rates will finally turn this time is anyone’s guess. Continue reading →

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Celebrating this Land of Absurdity

Posted on July 1, 2016 by MN Gordon

“Myths and legends die hard in America,” remarked Hunter S. Thompson in The Great Shark Hunt, nearly 40-years ago.  Thompson didn’t likely have U.S. Treasury bonds in mind when he made this observation.  Though, if he were still alive, he may find the present state of the great Treasury bond bubble to be an amusing anecdote.

On Monday the yield on the 10-Year Treasury note touched down at 1.45 percent.  This is but a scant distance from the 1.39 percent yield reached in July 2012.  What compels someone of sound mind and honest convictions to give their hard earned money to the government for 10-years for just a 1.45 percent yield?

Is it the myth that U.S. Treasuries are the safest – default-free – investment in the world?  Is it the legend of American exceptionalism?  Maybe it’s both…or maybe it’s neither.

As far as we can tell, U.S. Treasury investors suffer the same cognitive dissonance that the broad U.S. populace takes with them to the shore each July 4th as they celebrate Independence. Continue reading →

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Quitting the Cucumber Affair

Posted on June 24, 2016 by MN Gordon

Vince Lombardi, the famous American football coach, once said, “Winners never quit and quitters never win.”  Maybe he meant that winners overcome obstacles to reach their goals while quitters give up and fall short…or something to that effect.

Certainly, this makes for a good bumper sticker.  Perhaps it’s a helpful quote for the first time marathon runner to repeat come mile 20.  Saying it aloud may somehow will them across the finish line.

But what about those who never quit, yet still never win?  By default does that make them losers?  Or are they just stubborn pack mules?

And what about those who never quit despite not knowing what it is they are after to start with?  What does that make them?  Are they lost, confused, or something else?

We suspect there’s no one right answer to these questions.  They are a matter of opinion.  Each individual’s response will be influenced by their own experiences and preferences.  Regardless, this is merely the preface to the burden of today’s ruminations. Continue reading →

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Down Goes the Hopes and Dreams of Three Generations

Posted on June 17, 2016 by MN Gordon

The yield on the 10-Year Treasury note’s accelerating its descent toward zero.  The last we checked the yield was at about 1.56 percent.  But in every practical sense, for income investors, a yield of 1.56 percent may as well be zero.

For example, at that rate, if you gave the government $1,000, you’d earn $156 over the next 10 years.  That comes out to just $15.60 per year.  As far as we can tell, that’s a sucker’s deal.

What’s more, it’s likely inflation will significantly erode the buying power of the initial principle.  Using the government’s own highly understated inflation calculator and looking back ten years, we find that $1,000 today has the buying power that $842 did in 2006.  Thus a nominal return of $156, when added to the eroded principle of $842, amounts to an inflation adjusted loss of $2 bucks.

However, principle erosion is not the only concern.  An investment in U.S. Treasuries could be a bad investment for another reason.  According to Michael Hasenstab, manager of the Templeton Global Bond Fund at Franklin Templeton Investments, investors in U.S. Treasury bonds could face “a big capital loss.” Continue reading →

Posted in Inflation, MN Gordon | Tagged , , , , | 2 Comments