Dear friends! I starting a blog that would try to take an irreverent view of all things economic or otherwise. The blog may contain factual, logical, arithmetic or other errors. Well, I did not ask you to read it anyway.
S & P declares the downgrade of US treasuries. A lot of people protest the downgrade. Call names. And wonder of wonders! The treasuries rally, stock markets tank. We saw a recovery on 09 August but today the stocks are on to their downward march. It all sounds crazy. If S&P downgrades US treasuries the yields are supposed to go up, but they did not! This apparent contradiction set forth a jumble of thoughts in my nuthead.
US Economy is weak, growth rate is at a "new normal" (term courtesy Bill Gross of PIMCO) and stalling, US budget deficits are reaching unmanageable levels with or without the pseudo(?) debt deal which cuts projected spending (as if you can go on dieting by deciding not to eat what you are going to eat next year and expect your weight to reduce today - possible if it induces a worry about that day when you are forbidden to eat but that is ridiculous).
Then what may be the reason(s) for the US treasuries to rally?
Reason 1. Methinks it is possible that the ocean of dollars unleashed on an unsuspecting world are finding their way back to USA not having a place to go elsewhere. What can poor holders of dollar do? convert it to yen and deposit it in Japan and earn the same zero rate of interest? Try to convert it to renminbi and find that the Chinese won't let you do it? Convert it to euros and expect that what you deposited went into a sump never to return? (Did I hear a whoosh!!!) Bet on commodities and see the prices go into a downward spiral when you realise that the US consumer (the eternal sucker) refuses to consume more because he is barely surviving with a snorkel being deep underwater in debt?
Reason 2: With Uncle Ben extending a warm invitation to all and sundry for dumping all sorts of securities on his benevolent lap and take money (which is useless anyway) and dump the money back on his lap to buy more treasuries (a further useless option) banks are doing the smart thing. No money from stocks, no credit worthy debtors to loan funds to, too little capital to absorb losses - just buy treasuries to join the ponzi scheme. As more and more opt for treasuries prices are bidden up - book your profits before the house of cards fall. If you believe the house of cards would not fall, you can still look forward to a princely yield of 3 percent if you are brave or atleast 0.25 percent if you are smart (which is better than earning zero). And uncle Ben will oblige by lending you the same money at zero percent. What a racket? Ah! I missed out gold (the barbaric relic as the venerable Keynes and his followers would say). That is an unpredictable lady. She has a mind of her own and is too temperamental.
Reason 3: Your expectation that even zero is better than nothing because USA is going to enter a prolonged period of contraction which implies that the Holy Dow (sounds like holy cow - I like it) is going on a dieting spree which will see it emerging out as a nice young lady at 5000 instead of the present fat ugly thing at 10500. That also means that your investment will go dieting along with it and emerge as a beautify companion to Her Majesty (The Dow-ager). Put your money in treasuries and you may be able to show a positive return even on zero return and still get a bonus if you manage others money or keep your capital (in dollar terms) intact. That the same dollar will buy you less is a story that no respectable banker would like to discuss.
So where do we go from here? My vision of the brave new world of circa 2012 will be revealed if I can keep your attention alive in times to come.
S & P declares the downgrade of US treasuries. A lot of people protest the downgrade. Call names. And wonder of wonders! The treasuries rally, stock markets tank. We saw a recovery on 09 August but today the stocks are on to their downward march. It all sounds crazy. If S&P downgrades US treasuries the yields are supposed to go up, but they did not! This apparent contradiction set forth a jumble of thoughts in my nuthead.
US Economy is weak, growth rate is at a "new normal" (term courtesy Bill Gross of PIMCO) and stalling, US budget deficits are reaching unmanageable levels with or without the pseudo(?) debt deal which cuts projected spending (as if you can go on dieting by deciding not to eat what you are going to eat next year and expect your weight to reduce today - possible if it induces a worry about that day when you are forbidden to eat but that is ridiculous).
Then what may be the reason(s) for the US treasuries to rally?
Reason 1. Methinks it is possible that the ocean of dollars unleashed on an unsuspecting world are finding their way back to USA not having a place to go elsewhere. What can poor holders of dollar do? convert it to yen and deposit it in Japan and earn the same zero rate of interest? Try to convert it to renminbi and find that the Chinese won't let you do it? Convert it to euros and expect that what you deposited went into a sump never to return? (Did I hear a whoosh!!!) Bet on commodities and see the prices go into a downward spiral when you realise that the US consumer (the eternal sucker) refuses to consume more because he is barely surviving with a snorkel being deep underwater in debt?
Reason 2: With Uncle Ben extending a warm invitation to all and sundry for dumping all sorts of securities on his benevolent lap and take money (which is useless anyway) and dump the money back on his lap to buy more treasuries (a further useless option) banks are doing the smart thing. No money from stocks, no credit worthy debtors to loan funds to, too little capital to absorb losses - just buy treasuries to join the ponzi scheme. As more and more opt for treasuries prices are bidden up - book your profits before the house of cards fall. If you believe the house of cards would not fall, you can still look forward to a princely yield of 3 percent if you are brave or atleast 0.25 percent if you are smart (which is better than earning zero). And uncle Ben will oblige by lending you the same money at zero percent. What a racket? Ah! I missed out gold (the barbaric relic as the venerable Keynes and his followers would say). That is an unpredictable lady. She has a mind of her own and is too temperamental.
Reason 3: Your expectation that even zero is better than nothing because USA is going to enter a prolonged period of contraction which implies that the Holy Dow (sounds like holy cow - I like it) is going on a dieting spree which will see it emerging out as a nice young lady at 5000 instead of the present fat ugly thing at 10500. That also means that your investment will go dieting along with it and emerge as a beautify companion to Her Majesty (The Dow-ager). Put your money in treasuries and you may be able to show a positive return even on zero return and still get a bonus if you manage others money or keep your capital (in dollar terms) intact. That the same dollar will buy you less is a story that no respectable banker would like to discuss.
So where do we go from here? My vision of the brave new world of circa 2012 will be revealed if I can keep your attention alive in times to come.
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