Fed can't keep the rates low

[SharperDingaan]

The only people who want 30 yr bonds are the issuers paying todays interest rate, and speculators trying to short them. The buyers are either insitutions dynamically delta hedging, or life insurers - unable to CF match and avoid inflation hedging altogether. 

 

SD

Edited June 20, 2021 by SharperDingaan

[LearningMachine]

21 hours ago, no_free_lunch said:

My hunch is quite different, I would put p1=50%, p2=20%, p3=30% where p3 is below 3% inflation.

@no_free_lunch, for probabilities, looks like you are saying:

• p1=50%: Mild inflation in 3-4% range for 5 years
• p2=20%: High inflation in 5-10% or higher range at some points in the next 5 years
• p3=30%: Inflation below 3%

Let's go further and assume conservatively in the p2=0.2 scenario that gold will go to $3,528 (2x of $1,764), and that in p1+p3 scenario (0.5+0.3=0.8), gold will go down back to around $1200 (68% of $1764).  

 

Then, the expected value gold will get to is (0.2 * 2) + (0.8 * 0.68)  = 0.4 + 0.544 = 0.944, i.e. 5.6% loss

 

To get to break-even expected return on buying gold with these probabilities, you have to buy Gold at $1600 (so that downside $1200 is only 75% of paid price). 

 

If you wanted expected return to be positive on these probabilities, you have to buy Gold below $1600.   $1200 purchase price would be ideal because that's the price it stablized before, likely because that's when it started approaching production cost for high-cost miners.  

 

I understand this might not be applicable to @wabuffo and @Spekulatius as they believe minimum gold price has nothing to do with marginal cost of production.  I think marginal cost of production still matters for gold.  I do think if gold production were to shut down completely, e.g. if gold price dropped to $800, jewelry, tech & industrial uses will start to drive price up to restart production unless central banks & investors were selling at that time for those uses. 

 

 

Edited June 20, 2021 by LearningMachine

[LearningMachine]

1 hour ago, DooDiligence said:

I haven’t been reading this thread in a while so apologies if this has already been discussed.

 

The Fed isn’t printing as much money as you think - Morgan Housel

 

The article would have been more complete and accurate if it hadn't left M2 out of the picture:

 

[SharperDingaan]

The scenarios assume CB's can maintain inflation within the scenario range - when we still have a world with negative interest rates that have never happened before. CB's have no precedents to refer to, no playbook, and have to do this by the 'seat of their pants'. Very, very fragile.

 

The advantage with the commodity approach, and ongoing hedge reassessment, is that its ALSO antifragile. Somebody screws up, you make a killing. If they get it right, you still do well - just slower.

 

SD

  

Edited June 21, 2021 by SharperDingaan

[tede02]

Is anyone else worried that the central banks (the Fed in-particular) have backed themselves into a corner they can't get out? They know as soon as they start to raise rates and slow bond purchases, it's highly likely asset prices go south. If severe enough, it could impact the real economy. 

 

Additionally, some suggest there isn't enough demand in the market for treasurys without Fed purchases so they can't stop QE even if they want to without rates going up significantly. Obviously if the 10-year jumps to 5% for example, that is going to create some real problems. 

 

So does the Fed just keep right at it because they can't stop?

 

Basically it just seems like we're screwed.  LOL. 

[JRM]

1 hour ago, tede02 said:

Is anyone else worried that the central banks (the Fed in-particular) have backed themselves into a corner they can't get out? They know as soon as they start to raise rates and slow bond purchases, it's highly likely asset prices go south. If severe enough, it could impact the real economy. 

 

Additionally, some suggest there isn't enough demand in the market for treasurys without Fed purchases so they can't stop QE even if they want to without rates going up significantly. Obviously if the 10-year jumps to 5% for example, that is going to create some real problems. 

 

So does the Fed just keep right at it because they can't stop?

 

Basically it just seems like we're screwed.  LOL. 

I'm worried that the fed is dependent on inflation picking up to bail them out that they could change their mandate to start monetizing the debt or coordinate with the Treasury to force spending.  I'm sure they're thinking, if only we could give people transfer payments with a ticking clock attached.  

[K2SO]

I have no idea whether we are on the precipice of significant inflation or are about to fall back into a deflationary funk once the sugar rush ends. 

 

What I know is that tobacco stocks are a phenomenal way to play either outcome. Rates stay low, it's a yield play. Inflation kicks up, it's one of the few businesses with guaranteed pricing power demonstrated over decades. And valuations are dirt cheap. Many thanks to all the ESG investors out there. 

 

[no_free_lunch]

2 hours ago, K2SO said:

I have no idea whether we are on the precipice of significant inflation or are about to fall back into a deflationary funk once the sugar rush ends. 

 

What I know is that tobacco stocks are a phenomenal way to play either outcome. Rates stay low, it's a yield play. Inflation kicks up, it's one of the few businesses with guaranteed pricing power demonstrated over decades. And valuations are dirt cheap. Many thanks to all the ESG investors out there. 

 

A solid idea.  Which ones are you invested in?

[K2SO]

12 hours ago, no_free_lunch said:

A solid idea.  Which ones are you invested in?

PM, MO, BTI. 

[Gregmal]

 

Fed may try continuing to scare people out of the inflation trade, but you cant fight fate.

 

Edited June 22, 2021 by Gregmal

[cubsfan]

^ Love this!! Go for it!

[Gregmal]

Does 50 bps over the next two years mean anything to anyone in the non WS trading world? The real economy? Total desperation move hoping to grab headlines and push back on a narrative. Calling bs.