The gold standard limited the amount of money that could be printed (limited, not prevented)

But inflation is a really bad thing when you are a net creditor. Hurling money from helicopters would have been a bad thing for a net creditor country.

Today, inflation is still really bad if you are a net creditor — but if you are $12 trillion in debt on balance sheet, with another $50 trillion (at least) off balance sheet debt, than inflation is a wonderful thing. Deflation would be catastrophic, and any half-wit debtor would be printing money like crazy if he had the option.

If deflation did take hold, it would make it impossible for the US government (or any large debtor) to stay in power. Dollar denominated debts would become worthless. Buying Treasuries if you see deflation coming makes no sense.

I see the US government acting like every other spendthrift empire in decline: massive money printing, military intervention all over the globe to protect political elites’ private assets, and continued decline in the belief in government leadership

“Plus ca change, plus ca meme chose’ in politics too

Buying a 30yr in 1977? Bad example for two reasons. First, while history repeats (rhymes?), we don’t know if this is 1972-1974 or 1977. Second, you are making a very crazy assumption that someone would buy a 30yr in 1977 and hold it as rates went from 4.5% to 15%. Few, if any, investors would have that kind of staying power. Anyone managing money professionally would be fired years before that trade came back. Its a fine academic question, but not something anyone in the real world would do.

Buying a 10yr in 2003? While I am undecided on the 1970s “model”, I can definitely rule out 2003 is a guide. We never came out of recession in 2003, we just levered up like crazy. Levering up today isn’t possible. 2003 might repeat years from now, but no one is levering up today. The Fed is out of ammunition (and ideas). The government is fighting the last war (fiscally and militarily) and losing both.

I don’t know if inflation will be moderate or 1970′s severe in the years ahead — but since the largest debtor the world has ever known controls the money printing press, I feel very safe in ruling out deflation. If deflation were to take hold, the US government (and its debt) would be in terrible trouble. Inflation helps debtors, deflation hurts. It defies all common sense that “helicopter Ben” will be unable to do what every banana republic dictator does in his sleep. Deflation isn’t going to happen as long as the US government is a debtor and controls the money printing press.

So yes, Treasuries are once again certificates of confiscation — except in some academic fantasy situation.

I agree with you on EM equities more or less, but I worry that most EM economies (and specific industries) are not as capital intensive as they once were. They don’t need foreign investors as much, and where they do they prefer real money (not heavily indebted / levered fast money).

IMHO — the best investments right now, in the US and outside, are not securitized. Again, both in the US and outside, the things entrepreneurs need most are leadership, guidance, mentoring, advice … not capital.

Ten-year money traded as I suggest, coming out of the recession in the early seventies, returned better than a rolling 1-year strategy did. Precisely for the same reasons I outline, a steep curve flattens as short rates rise, the long end doesn’t rise (or doesn’t rise as much) and the yield capture + duration shortening generate a capital gain (or protection of capital).

“Certificates of confiscation. Seventies.”

David – imagine a 30-year Treasury bought in 1977, with the yield reinvested in the longest-duration money available, and with the principle rolled back into another long-duration bond at maturity in 2007. How, exactly, did that money perform? Relative to the CPI changes, cumulative, since 1977?

I just betcha when you look at it, it won’t look like “confiscation” any more.

“Certificates of confiscation — yours”

Greg, how does a 10-year purchased the LAST time I heard this talk look right now? Coming out of 2003? Purchases of 10YT coming out of recession in 2003 are now THREE-YEAR notes with coupons of around 4%.

We can look at the historical record of long money bought deep after recessions have been recognized, when curves are very steep, and find the same example over and over again. It’s worked, for those willing to try it, multiple times.

“Plus ca change, plus ca meme chose.”

About the “yours” crack – it’s an academic discussion to me. Re-read my comments re: EM equities. Better places to be.

Leaving the academics of Ts behind, if stuck in FI, I agree with David that junk and EM debt is the place to be, but I mourn for those stuck in any one single asset class long-term.

Certificates of confiscation. Seventies.

Preserving value. Thirties.

Today? Personally I like Non-US, non-Euro debt at present, and I owe my readers a post on good funds in that area. What a mess.

This was the logic used by every big bank — they all knew the subprime mortgage assets were junk, but they could finance them short term and collect a spread. When and *IF* the time came, they could always dump the assets for a tidy profit. Ooops

If inflation continues to pick up — actually with two wars, massive government spending of money we don’t have, etc — higher inflation is a sure thing, the only question is how much higher?

If the curve stays “as is”, then a 10yr rolling down to 7yrs might be interesting — but the success or failure of the trade depends on inflation not getting out of control when the President has formally announced $1.5 trillion deficits and the ramping up of Afghanistan and a very slow wind down of Iraq (if Iran cooperates) and he also wants a giant new entitlement health care system.

In short, your trade depends 100% on the whims of politicians — which is a terrible bet.

Goldman’s contention that inflation “cannot” pick up because of high un-employment is absurd. That very scenario already happened in the 1970s — the last time we had war, entitlements, out of control spending, and a government that most people did not trust.

Plus ca change, plus ca meme chose.

Certificates of confiscation — yours

Dave’s Top 10 Reasons to Expect the Yield Curve to Flatten.

Cool ideas you propose — and I will think about them.

I had read the first article previously but missed Goldman’s piece. Note that the primary tool used by the HF PMs in the first article is OPTIONS and not an outright short position. BTW, if you’d like to show a little love to Goldman, it’s always worth finding the article at HIS site and making a link to it, rather than linking to SA. SA gets enough traffic, don’t you think?

To be clear, I don’t advocate or currently hold any position on Ts at any part of the curve. Taking a position requires a frame of reference regarding timeframe, and for a trader on my timeframe, there are other fish to fry, with better risk/reward ratios. Hint: I’m fully in EM equities at the moment.

If a person were to ask my opinion about Ts specifically, the first question I would ask is:

“what is the timeframe and intent?”

Trade and monitor daily?

Trades on a longer timeframe like months or years?

Hold to maturity?

For example, if someone were to suggest buying 30-year money right now, and holding to maturity, I would have very little to say to discourage them. In 30 years, odds are we’ll see 5 or 6 Fed rate cycles and 4 or more recessions. I think there’s a very good chance, with this curve and those rates, that their 30-year money will outpace the CPI over three decades and outperform a 30-year horizon of other maturity strategies.

On the other hand, I think 10-year money bought now and held to maturity will likely lose out to the 5-year or 1-year strategies, over a decade. Even though a 10-year bought today will likely live through another recession and two full Fed rate cycles …

But on the third hand – and most actuaries have three or more hands – there’s a spot for a one-to-three-year trade going long the long money, getting yield capture, and selling your 3-year-old 10-year-T at 7-year rates for about par, give or take. If I were talking to institutional money about Ts, this would be my suggestion.

Top hedge funds bet on big rise in yields

Top Ten Reasons Why the Yield Curve Will Flatten (Hint: This Is a Different Sort of Recession)

I am more reluctant to speculate on the yield curve at present. It is more complex than it seems.

When the Fed does start raising, the short end will move faster and farther than the long end, as the slope regresses to the mean (typically under 100 bps).

By buying long Ts here, and trading out of them in 2-3 years, one gets minimal risk of capital loss and a good chance at capital gain!, with an awesome 300 bps of yield capture for the 2-3 year period.

IMO shorting the long bond here is going to be painful.

When the Fed does start raising, the short end will move faster and farther than the long end, as the slope regresses to the mean (typically under 100 bps).

By buying long Ts here, and trading out of them in 2-3 years, one gets minimal risk of capital loss and a good chance at capital gain!, with an awesome 300 bps of yield capture for the 2-3 year period.

Understand that the proper comparison is NOT what 10-year yields look like 3 years from now. The PROPER comparison is what SEVEN-year money looks like 3 years from now.

You mention 2003 – another time in which I heard a LOT about coming inflation, etc., blah, blah, short the long bonds, yada, yada – how do 10YTs bought coming out of the recession of 2003 look right now?

How about the early 1990s? Same situation.

Ten-year money bought in late 1972 – same situation.

Tell Cody if he’s hot to short some T’s, put on a spread – short the short money and long the long money. Or just short the short money. The long end ain’t gonna move as fast as he thinks, with the spread this steep.