I always seize this opportunity to rejoinder: "If I knew, I'd be on a yacht off the Isle of Man snorting blow off a stripper's ass." The irony being, of course, that when I respond thusly I usually am snorting blow off a stripper' ass, frequently on a yacht (or some reasonable facsimile thereof, such as a well-appointed catamaran with fine leather and granite finishes). Ergo: I do in fact know when the shithouse will go up in flames. And, feeling charitable towards humanity on account of the solicitous ministrations I am presently receiving (even as I write) from a stripper (the backside of whom I have just availed myself of to snort blow), I will herein reveal it to the general public.
First, consider that the final collapse of the dollar is equivalent to the price of commodities approaching infinity. And when the price of commodities approaches infinity, any ratio with commodity prices in the denominator will, of course, approach zero.
What if we could find a ratio that loses a constant value every year, such that its zero on the time-axis can be easily extrapolated?
My data goes back 23 years, so I am looking for a ratio (1) whose linear regression fits the data well over that period, and (2) has the same linear regression line no matter where you start or end over that 23-year span (e.g. 1990-2013, 1994-2012, 1990-1995, 1990-1999, 2002-2007, 2002-2013 etc.). If such a ratio with commodity prices could be found, extrapolation would be justifiable.
It would also be nice if this ratio had some fundamental significance. For example, if the dollar collapses, it will almost certainly collapse because government debt has become unmanageable and needs to be monetized. The easiest way to maximize the life of the shithouse, then, is to lower interest payments on the debt in real terms as gradually as possible, until you can't do so anymore.
Well, look no further, we have our ratio.
The $TNX:$CCI ratio tells you how much real crap (in units of "CCI baskets") the government has to pay you every year for borrowing your $1000. That ratio has been going down constantly at 0.016 baskets per year for 23 years. But remarkably, it has also been going down ~0.016 baskets per year over just about every decent-sized "sliding window" you can pick over that 23 year span. For clarity, I've drawn only three regression lines on the chart below. First the 23 year regression line (dark blue), then the 1990-1999 regression line (black) and then the post-2002 regression line (pink, center).
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Now we just need to extend the light-blue regression line to see that this ratio hits zero in mid-2014. The parallel lines around it (something like 1 and 2 standard deviations shorter/longer) tell us it could happen as soon as 2013 or as late as 2016.
Or perhaps interest rates really will go negative, and this process can continue . . . forever. Soon we will be paying the government all our income for the privilege of lending it to them. Kind of like North Korea.
40 comments:
Excellent work, inspired even. Coleridge comes to mind. Your 2014 timeline coincides with Alasdair Macleod's:http://www.goldmoney.com/gold-research/alasdair-macleod/money-supply-explosion-will-lead-to-accelerating-inflation.html
SHTF scenario. So it's either 30 days away or 1125 days away. With such pin-point accuracy any clue about the time of the day? Is the stripper and blow compulsory? Not knowing your tastes I hope the "stripper" isn't male in a pink thong. Yuck. Yacht off the I.O.M is bloody cold that time of the year. Would the Caribbean be OK?
Come on GM what sort of a crystal-ball gazer are you? Give us a date and stop pulling our dangly bits.
So, duggo...
You don't like charts, charting, blow, gay strippers, blow on gay strippers, and the north Atlantic in winter.
Hard to please everyone.
Awesome! This is just like the countdown that Jeff Goldblum discovers in Independence Day. Now you just need to do a live-updating version of the chart, so you can put it on your laptop and show it to the president as the line reaches zero.
So why does TSHTF just because interest rates are zero?
Ooops!
@strowger, something to do with velocity of money - if Treasuries go no bid then a man with a beard must create money so the USG can operate. But apart from that, those bids go bidding elsewhere for stuff that returns a yield, which then the USG must compete in the marketplace for those goods, financed from ... etc, which puts more pricing pressure on real goods. Plus 8 trillion dollars worth of foreign reserves returning no yield (or negative real), only redeemable in America because no-one else wants them. Not pretty. We can only hope the 23-year trend stops or reverses!
Limits are always fun.
This reminds me of the ancient paradox of the rabbit at constant speed never being able to catch the tortoise due to only covering half the distance between them in shorter intervals.
Greatly entertaining post though. :D
TF
Hi Warren,
Thank you for replying.
Why does a yield of zero imply no bid? Presumably the same people who thought treasuries were good when they paid 1%, 0.5%, then 0.25% will still be wanting the nominal-terms security of treasuries all the way down to 0%?
@Strowger,
It's a very fair point. People buy gold all the time even though the yield is exactly 0%, with no hope of it ever rising. And if you ask them why they do it, they say it's for 'security'.
[takes cover under the table]
Throws Jeannu d'Arc with a gold bar.
It's excellent for security, see? :P
This chart isn't about 'zero yield' but about 'zero (real) cost of borrowing'.
As Motley Fool said, does it ever get to zero? The $TNX:$CCI ratio would only be zero if the nominal yield is zero or if the price of commodities is infinite.
So yes, yield = zero does not imply no-bid for bonds, just the opposite. I think the implication is that, the point when everyone is paying the US government to borrow, in real terms, is the point where 'something has to give'.
What does the $IRX:$CCI long-term chart look like? In 2011 that ratio was bouncing between 0.0001 and 0.0005. So we're essentially already at a zero real cost of borrowing on the short end of the curve.
There's two reasons to buy bonds with very low yields: return of capital, and capital gains. The first applies more to short bonds and the second applies more to longer bonds.
The same applies to gold, only the 'return of capital' component of gold is more flexible than for bonds, seeing as how the counterparty is indeterminate until the time of sale whereas bonds are tied to a single issuer as a counterparty.
Employing the following ideas...
Folks who toil for folks with a lot of boodle on the line have likely come up with similar (and even more refined and compelling) metrics that demonstrate the high probability that (short of acts of god that upset the human apple cart in ways that only Nostradamus and his ilk might have imagined) sometime in the next three years the gig will be well and truly up.
means that things will probably get quite dicey well before the 1125th day arrives since folks with formidable mojo will be front running the moment when the last grains of sand descend into the bottom of the hour glass.
I love me some Doom
Hey, Duggo...
Yes, the Caribbean would be the natural choice;)
Speaking of doom... we'll have all sorts of it when we get a nice increase in Orbiting Dark Matter over the coming year or two. The economy may be the least of our worries? Two comets(mini black holes)will make us wish we'd pumped WAY more Co2 and warmed this fucker up a bit more... :)
Hell of Witchfinder
Hi all - first post hereabouts and with a bit of TIME on my hands ...and in keeping with the Blogs thrust will try an allucidate the bones of my contra-contrarian viewpoint:
The (above)Scribes Chart is reminiscent of and similar to an inverted Long: Short T-Yield Ratio Chart which IMO is indicative of a loss of faith in the "future".
Of course a "negative" T-bill Yield sends that particular Chart to Infinity.
The "problem" du-jour is not so much an issue with the Reserve Currency per-se, as it is with the Systemic Timeline.
This year has been witness to many and varied "official" meddlings to PREVENT T-bill Yields establishing themselves below parity, the reason being TPTB KNOW the ramifications thereof ...and they're not pretty.
Where GOLD is concerned, Zero Interest (h/t Jd'A)relates to ZERO RISK ...and when you relate THAT to Negative Yield, you'll come to appreciate the ramifications of the latter ...IMHO!
@strowger, I stand corrected. I'm not claiming to be a UST expert so I'll stop talking on the topic but drop a few observations on the way out:
I fully agree that the same conditions forcing the purchase of 0.25 yield will most likely be at play all the way down to 0.0 (nominal). Return 'of' your money is the key, as mentioned by Michael H, plus the USG has not yet run out of tricks to force people to buy. As GM points out in his last sentence, the conditions under which the process continues would be tenuous at best.
From everything I have read, China has stopped bidding for UST, and they were a buyer of size. As far as I know, the FED stepped in to fill that purchasing gap. The last I heard, China was buying up foreign resources like there's no tomorrow.
Indeed, all we're trying to do is identify the tipping point.
OBA wrote:
"The "problem" du-jour is not so much an issue with the Reserve Currency per-se, as it is with the Systemic Timeline."
What, pray tell, does that mean, since, from where I sit, the reserve currency would seem to be inextricable from the system and its timeline?
GM Jenkins,
Interesting post and discussion. Thanks.
h/t Motley Fool for mentioning it over at FOFOA's blog.
Incidentally this disturbing post over at GATA suggests Japan may be the one who yells fire in this crowded Theatre Of The Absurd:
http://www.gata.org/node/11979
Prof. Fekete has pointed out that as interest rates on long bonds declines, the price of the bonds increases (which everyone should already know), but since the bond price is the reciprocal of the interest rate, as that rate approaches zero, the price of the bond will approach infinity.
Others have alluded to this in previous comments, but if anyone drew the ultimate conclusion, I missed it.
The good Prof. points out that Interest rates, at however low a level, can always still be lowered further as the zero limit can never actually be reached, and whenever the interest rate is halved, the price of the bond is doubled.
So, depending on the relation of the bond interest rates to inflation in terms of money supply, those interested in the return of their capital, plus capital gains, may still be motivated to purchase bonds all the way up so long as their price increases faster than money supply.
Eventually, of course, when hyperinflation enters its final blow off, the money becomes worthless in terms of what it can buy, and it doesn't really make very good toilet paper. So, in the end, the bond buyers loose all their capital, so long as it only consisted of fiat not something of real value, like land, or machinery, or certain skills, or yes, even precious metals.
But, as others have also pointed out, things will get pretty bad long before the ultimate end of the monetary system, so we will probably never see what happens when a 30 year USTB is supposedly worth an infinite amount of dollars.
Loris
I took the good professor at his word for that claim a couple of years ago. However in the meantime my position was challenged and upon investigation I found that while there does exist a inverse correlation, it is not as the professor portrays it.
The closer the interest rate gets to zero the less impact halving of the interest rate has on the value of the bond to the upside.
TF
Slow Loris Larry,
Look at the formulas on investopedia for the price / yield relationships.
Perhaps what Fekete meant was that, when the yield is cut in half, one has to buy twice the face value of bonds to make up the same coupon payment.
Because this:
whenever the interest rate is halved, the price of the bond is doubled,
and this:
the bond price is the reciprocal of the interest rate, as that rate approaches zero, the price of the bond will approach infinity
are certainly not correct statements.
Ed: -
The point being risk aversion doesn't relate to the $US as much as it does to the TIME component.
With the short end of the curve going convincingly to Parity and beyond, DX will go ballistic ...which is contrary to "most" analysis.
The reason the Fed et-al are having to buy the long end and frig around with L/T IR's on the Debt side of the Ledger is all to do with confidence (or lack thereof) in the Investment "future" - NOT the I-"present" my friend. A $US T-Bond is most decidedly NOT a $US T-Bill (IMHO)
"With the short end of the curve going convincingly to Parity and beyond, DX will go ballistic."
Yes, OBA, cash will be king...until until it just flat out gets beheaded.
@ Motley Fool & Michael H
I grant that those two statements are not correct, arithmetically.
I should not have used that hypothetical mathematical example without checking into it further, as you both politely suggested.
However, there is still that basic inverse relation between interest on bonds and the market price of bonds, at least under 'normal' circumstances the limits to which we may be getting close to experiencing.
Those who buy bonds who are thinking of riskless 'return of capital' are perhaps thinking of the fact that dollar value of a bond will be returned at its maturity, and that in addition they pay a fixed rate of interest. That would be nice in a deflationary environment, and maybe J'dA should buy them instead of gold.
However, the price at which bonds are bought and sold after their issue and before their maturity depends on the then current rate of interest paid on investments that are regarded as having the same risk profile. So, when market interest rates fall to 2%, a bond issued with a 3% interest rate paid on its unchanging face value will have an increased market price.
So, no matter how many bonds you buy, the interest rate they pay does not change, being set on their maturity value, but their market price does change in terms of what other folks will buy them for in order to earn a little more interest than prevailing market rates on what they think are riskier investments.
What then happens in an inflationary environment? The Weimar German example is instructive, as I recall it (no time to check it out again right now). I think that the price record will show that in the early inflationary years of 1920-22, both stock and bond prices rose more rapidly than the Reichsmark lost purchasing power. However, when the hyperinflation really got going in 1923, the price of both failed to keep pace with new money creation, and in the end of the year both German stocks and bonds were worthless along with Reichsmarks.
So, at present, some folks will still buy 30 year US bonds, but presumably not to hold to maturity, but to sell when the selling is good. For their sake, I hope their timing is good.
Thanks for the great comments.
Re: strowger's point: it's hard to imagine nominal interest rates hitting 0% without the shit having hit the fan. The simple way I think of it is that the government's demand for money (or CCI-baskets: CCIBs) is not really a function of the interest rate, so you can draw it as a vertical line on the supply-demand curve, with x-axis = how many CCIBs government needs to feed itself and grow during year X (minus tax revenue, to keep it simple). But the supply of CCIBs to the government *does* depend on interest rate, and when the official interest rate is pushed below the market rate, the distance between the supply curve and the demand curve must be stolen via inflation (how else?). And the supply curve is concave so the necessary inflation will grow at a faster rate as interest rate approaches nominal 0%. I guess you can say there will be rightward shifts of the supply curve (more treasuries bought at any price) when nominal rates hit 0%, but that's a stretch. Another counter-argument is that the amount Big Money is willing to lend the government is also inelastic to interest rates, but what proportion of the total are supplied by huge players who aren't concerned about interest? Maybe more than I think. Still, my overall point is that if nominal interest rates hit zero they won't be doing it by some natural process (crossing of supply and demand curves), but rather they will be forced down by the only tool the Government has: taxation by inflation. Which makes it unlikely that the numerator of the TNX:CCI ratio will be doing all the legwork.
Hard to imagine? You're not trying, GMJ.
At least, not as hard as US Treasury officials:
http://www.cnbc.com/id/46223259/Treasury_Considers_Going_Negative_on_T_Bills
Negative interest rates keep the capital gains going... never underestimate The BerHavenankenstein's desire to boost asset prices.
And Krugman's advice to the Bank of Japan..."credibly commit to being irresponsible".
http://www.reuters.com/article/2012/11/30/us-japan-boj-idUSBRE8AT00420121130 wherein we see the final takeover of the BoJ by populist politicians looming, how very Weimar.
And in Europe: "The ECB is independent and fully accountable, but it needs clearly identifiable and fully empowered interlocutors,"
http://www.reuters.com/article/2012/12/01/us-eurozone-ecb-coeure-idUSBRE...
This hand-basket is well on it's way, again.
Adam Fergusson (When Money Dies) is so, so careful not to be tarred with the James Turk sensationalist brush, so careful...but, the facts he sees are the facts, again:
http://www.youtube.com/watch?v=sqffE6pDXuA (half hour, well worthwhile).
People demanded that the politicians do it in Weimar, so it happened. People are again demanding it...
Clarification: Negative interest rates keep the capital gains on bonds going...
Wait SRoche, I haven't said I can't imagine 0% interest rates, only I can't imagine that without TSHTF. . .
Although in the end it wouldn't shock me ... already, the fact that Big Players would rather lend money for ten years at 1.5% than buy gold or silver is mind boggling to me. I guess there are storage costs, but otherwise, there's a lot of faith in the system. I wonder to what extent they're just deluded, and to what extent there's insider knowledge of something or other buttressing that faith. I'm glad there are enough big gold buyers among "connected" types (who aren't explicitly in the PM business- like Jim Rickards, Marc Faber, Jim Rogers, Kyle Bass, Einhorn etc.), or I'd have to doubt the wisdom of any gold allocation just out of principle.
GMJ,
I think as long as there are capital gains to be had, the party continues. So, I think negative interest rates could be part of the continuum, rather than solely part of the SHTFuum. They already are negative in Germany and Switzerland.
One of you Pro-Simians, (nota bene, you are being called The Twilight Gang over at TFMR for some reason), quoted Adam Smith the other day, "There is a lot of ruin in a nation", so, so true.
Japan seems to be leading the pack, Europe a close second...so the US might just have to wait its turn as both of those events may see a flight to the USD.
One former insider I know bought all his gold at Brown's Bottom and believes at some stage physical gold will be unprocurable. I've been to big-time invite only investor-fabs as his guest, he is the most respected there and yet, when they ask and he tells them only to buy gold, they politely return to the complex business at hand...thinking inside the box. They have not got a clue, they all think the same which means most of
them are not thinking.
The faith in the system is the key, it is all they know but it is failing them.
When she blows it'll be big!
The main point I am trying to make is that negative interest rates allow for more capital gains. Happy Days!
Speaking of unprocurable gold, many years ago, in an interview with Maret Wizards author Jack Schwager, the great trader, Ed Seykota, said, in so many words, that one day there would be a world wide run into the yellow metal.
For some reason, perhaps it was the context of the interview, or the manner of the remark, I thought Seykota was just joking. I no longer think so.
that should have read, Market Wizards.
Ed: - A simplistic "Cash is King" doesn't cut the Mustard my friend, it's way tricker than that.
This current systemic demise is unique, and "how" it goes (under) will shock and amaze pretty-well everyone.
Once nominal dollar interest rates are consistently negative, as I understand it, gold will have an incentive to indeed go into hiding. By the way, this is how the USG may be able to choose the timing themselves - the Fed can certainly 'make it happen'.
Victor
Say the 10-yr yield/CCI ratio keeps falling at a similar slope even after nominal yields have become negative. Then the CCI will have to undergo deflation for the ratio to get smaller (numerator held constant of course).
Isn't this like going through the sound barrier the first time? Before Chuck Yeager did it was thought he might have to reverse the controls on the other side.
OBA,
I didn't just say, "cash is king." What I wrote...
"Yes, OBA, cash will be king...until it just flat out gets beheaded."
was an attempt to summarize your position which was not clear to me.
And now, since you offered this:
"This current systemic demise is unique, and "how" it goes (under) will shock and amaze pretty-well everyone"
I am content to let this conversation end.
VtC: - Yes mate - "Au = Unobtaineum" beyond $T-bill parity fits the bill I think.
The bulk the Gold "community" can't seem to grasp the subtle but very real differences when discussing gold as it relates to the System.
Most are happy with their concept of (lets call it) Fiat-Gold, or Faith-Gold, perhaps Investment-Gold (aka Paper-Gold) ...being the extent of the subject matter.
REAL Gold - representing it's raison-d'etre is as Chalk compared to Cheeze in relation to the above.
...and so (IMHO) Gold (in the latter context) has no place in "Monetary" discussions.
Very interesting GM, thanks for posting.
Milamber
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