Coming Bond Market Crash

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Re: Coming Bond Market Crash

Postby magician » Tue Jan 08, 2013 7:09 pm

athrone wrote:
magician wrote:If not, then return to my original question: devaluation (of USD) with respect to what?


Everything outside of the USD... such as Gold or Euros in my example. How else do you measure a devaluation if not with respect to all other things? If the price of Gold in all currencies doubles overnight, then all currencies are depreciating wrt to gold. If Euros/Gold/Oil/All Other Currencies/Etc. double overnight wrt to the USD, then only the USD is depreciating.

I don't understand the point you are making. It seems to be that you don't care about Gold or Euros because you don't think those things affect you.

First, I never said (nor intimated) that I don't care about euros; that's your construct, not mine.

The point I'm making is that your example sounded as if the price of gold would double with respect to USD and nothing else. You presented that as an appreciation of gold, which it isn't; it's a depreciation of the dollar.

So your original statement boils down to this: if the dollar depreciates (with respect to everything), that would likely indicate an instance of dollar devaluation. A true statement, of course, but not particularly profound.

However, an overnight doubling of the price of gold in USD without a similar price increase in every other currency is . . . well . . . unlikely to say the least. And if all that's happening is that the price of gold is doubling with respect to everything else, that's not a big deal. (Sure, the people who own a bunch of gold will be pleased, if they sell the gold to get twice as much of the everything else (which means that they do so before the price of gold declines again), but I'm never going to own enough gold that losing that opportunity will be a catastrophe. Nor will the lion's share of the investing public.)
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Re: Coming Bond Market Crash

Postby athrone » Tue Jan 08, 2013 7:38 pm

magician wrote:However, an overnight doubling of the price of gold in USD without a similar price increase in every other currency is . . . well . . . unlikely to say the least.


You must be talking about the price increase of other currencies in Dollars (aka EUR:USD), in which case you are just re-iterating my previous comments. If the Dollar [alone] devalues, why would the price of Gold in Euros necessarily increase [alongside a price increase of Gold in Dollars]?
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Re: Coming Bond Market Crash

Postby Rodc » Tue Jan 08, 2013 8:00 pm

athrone wrote:
magician wrote:If not, then return to my original question: devaluation (of USD) with respect to what?


Everything outside of the USD... such as Gold or Euros in my example. How else do you measure a devaluation if not with respect to all other things? If the price of Gold in all currencies doubles overnight, then all currencies are depreciating wrt to gold. If Euros/Gold/Oil/All Other Currencies/Etc. double overnight wrt to the USD, then only the USD is depreciating.

I don't understand the point you are making. It seems to be that you don't care about Gold or Euros because you don't think those things affect you.


If all currencies stay the same one to the other, and gold prices double in each, why do I care? What in my life changes? Maybe I skip buying my wife a gold bracelet and get a silver one instead, or buy her a coach bag instead of jewelry.
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Re: Coming Bond Market Crash

Postby athrone » Tue Jan 08, 2013 8:14 pm

Maybe some numbers will help.

January 2013
EUR:USD = 1.31
Gold:USD = 1660
Gold:EUR = 1268

In my hypothetical
EUR:USD = 2.62
Gold:USD = 3320
Gold:EUR = 1268

If this happened overnight, this would indicate a 50% dollar devaluation, would it not? Namely, a "Bond Crisis" ala this thread's namesake, where fixed income assets realized 50% losses in 24 hours...

Call it unlikely if you want -- if by unlikely you mean it only happens a couple times per century. The last time was 1968, so by some standards, you might consider us "overdue." The last two instances were in 1934 and 1968, 34 years apart. Another 34 years later from that puts you in 2002 -- interestingly enough, a year with a 24.96% increase in Gold and the start of the recent 10 year Bull Market. History never repeats, but it often rhymes from time to time...

If there is anything to takeaway from this discussion, it's that nobody truly understands all of the world's markets.
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Re: Coming Bond Market Crash

Postby Rodc » Tue Jan 08, 2013 8:22 pm

athrone wrote:Maybe some numbers will help.

January 2013
EUR:USD = 1.31
Gold:USD = 1660
Gold:EUR = 1268

In my hypothetical
EUR:USD = 2.62
Gold:USD = 3320
Gold:EUR = 1268

If this happened overnight, this would indicate a 50% dollar devaluation, would it not? Namely, a "Bond Crisis" ala this thread's namesake, where fixed income assets realized 50% losses in 24 hours...

Call it unlikely if you want -- if by unlikely you mean it only happens a couple times per century. The last time was 1968, so by some standards, you might consider us "overdue." The last two instances were in 1934 and 1968, 34 years apart. Another 34 years later from that puts you in 2002 -- interestingly enough, a year with a 24.96% increase in Gold and the start of the recent 10 year Bull Market. History never repeats, but it often rhymes from time to time...

If there is anything to takeaway from this discussion, it's that nobody truly understands all of the world's markets.


But what does gold have to do with anything here? That is what I am missing. I might care about EUR:USD = 1.31 going to EUR:USD = 2.62, especially if this includes many other currencies as well. But I don't see where I care about gold.
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Re: Coming Bond Market Crash

Postby STC » Tue Jan 08, 2013 8:26 pm

Rodc - [Inappropriate comment removed by admin LadyGeek]
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Re: Coming Bond Market Crash

Postby athrone » Tue Jan 08, 2013 8:26 pm

Rodc wrote:But what does gold have to do with anything here? That is what I am missing. I might care about EUR:USD = 1.31 going to EUR:USD = 2.62, especially if this includes many other currencies as well. But I don't see where I care about gold.


Gold doesn't matter more than any other currency, I just didn't feel like typing out all the world's currencies so I'm using Gold and Euros as an example for "all the world's currencies other than the US dollar"
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Re: Coming Bond Market Crash

Postby Joe S. » Tue Jan 08, 2013 8:30 pm

Nicho_1978 wrote: As an example, the five biggest increases in interest rates occurred in 2009 (58% average increase), 1999 (35% average increase), 1994 (37% average increase), 1987 (21% average increase),
and 1978(18% average increase).

FinancialDave wrote: So the fact that the 10 year treasury yield is up close to 20% in just a few months, and the total return for the last 52 weeks is -2.93% doesn't bother anyone??
fd

You are using the wrong terminology. The 10 yield was 1.65%, now it is 1.98%. That is a change of 0.33%

Now what you are doing is saying 1.98%/1.65% =1.2, than a 20% increase! That is not how you calculate the change in the yield. You subtract the one number from the other, you don't divide.

Now a ten year bond has a "duration" of ~9 years. If the yield rises overnight by .33%, The Bond should drop in value by .33% X 9, or 3%.
If the yield rises over 1 year, the bond still drops in value by 3%, but you get the interest payments that partially compensate for your loss.

Now what's worse for bond value a rise from 0.05% to 0.40% or a rise from 10.0% to 12.0%?
The first rise is only 0.35% the second rise is 2.0% so it is worse.

I am oversimplifying things I now, but this is roughly correct. The mathematician will point out the duration of a bond decreases slightly as the interest rate rises, so my explanation is not perfect. If someone has a better explanation, please give it.

Definition of "duration" from the Vanguard site:
A measure of the sensitivity of bond—and bond mutual fund—prices to interest rate movements. For example, if a bond has a duration of two years, its price would fall about 2% when interest rates rose one percentage point. On the other hand, the bond's price would rise by about 2% when interest rates fell by one percentage point.
https://personal.vanguard.com/us/glossa ... ontent.jsp
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Re: Coming Bond Market Crash

Postby patrick » Tue Jan 08, 2013 8:34 pm

athrone wrote:Maybe some numbers will help.

January 2013
EUR:USD = 1.31
Gold:USD = 1660
Gold:EUR = 1268

In my hypothetical
EUR:USD = 2.62
Gold:USD = 3320
Gold:EUR = 1268

If this happened overnight, this would indicate a 50% dollar devaluation, would it not? Namely, a "Bond Crisis" ala this thread's namesake, where fixed income assets realized 50% losses in 24 hours...

Call it unlikely if you want -- if by unlikely you mean it only happens a couple times per century. The last time was 1968, so by some standards, you might consider us "overdue." The last two instances were in 1934 and 1968, 34 years apart. Another 34 years later from that puts you in 2002 -- interestingly enough, a year with a 24.96% increase in Gold and the start of the recent 10 year Bull Market. History never repeats, but it often rhymes from time to time...

If there is anything to takeaway from this discussion, it's that nobody truly understands all of the world's markets.


The simple answer is no -- it would not necessarily indicate a 50% dollar devaluation (in the sense that matters, namely in purchasing power). The historical examples you mention in fact demonstrate this. Neither 1934 nor 1968 involved 50% losses in purchasing power in 24 hours -- not even close. There was little inflation at all in the immediate aftermath of the 1933 and 1934 gold policy changes -- it took until the 1950s for prices to double! There was a bit more inflation after 1968 but even then it took a decade for prices to double.

Edited to add: I do realize that neither historical event is a perfect match for your hypothetical event, but they are probably the closest matches in actual history.
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Re: Coming Bond Market Crash

Postby magician » Tue Jan 08, 2013 8:35 pm

athrone wrote:
magician wrote:However, an overnight doubling of the price of gold in USD without a similar price increase in every other currency is . . . well . . . unlikely to say the least.


You must be talking about the price increase of other currencies in Dollars (aka EUR:USD), in which case you are just re-iterating my previous comments. If the Dollar [alone] devalues, why would the price of Gold in Euros necessarily increase [alongside a price increase of Gold in Dollars]?

It wouldn't.
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Re: Coming Bond Market Crash

Postby Rodc » Tue Jan 08, 2013 8:42 pm

athrone wrote:
Rodc wrote:But what does gold have to do with anything here? That is what I am missing. I might care about EUR:USD = 1.31 going to EUR:USD = 2.62, especially if this includes many other currencies as well. But I don't see where I care about gold.


Gold doesn't matter more than any other currency, I just didn't feel like typing out all the world's currencies so I'm using Gold and Euros as an example for "all the world's currencies other than the US dollar"


Thank you.
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Re: Coming Bond Market Crash

Postby magician » Tue Jan 08, 2013 8:45 pm

Joe S. wrote:
Nicho_1978 wrote: As an example, the five biggest increases in interest rates occurred in 2009 (58% average increase), 1999 (35% average increase), 1994 (37% average increase), 1987 (21% average increase), and 1978(18% average increase).

FinancialDave wrote: So the fact that the 10 year treasury yield is up close to 20% in just a few months, and the total return for the last 52 weeks is -2.93% doesn't bother anyone??
fd

You are using the wrong terminology. The 10 yield was 1.65%, now it is 1.98%. That is a change of 0.33%

Now what you are doing is saying 1.98%/1.65% =1.2, than a 20% increase! That is now how you calculate the change in the yield. You subtract the one number from the other, you don't divide.

1.98% - 1.65% = 0.33% is the absolute yield spread.

1.98% / 1.65% = 1.20 (= 120%) is the yield ratio.

0.33% / 1.65% = 0.20 = 20% is the relative yield spread.

All three are valid measures of yield differences.

It isn't that FinancialDave is calculating it wrong; he's calculating a different measure. To say that "you subtract . . . you don't divide" is only correct if he's calculating the measure you want him to calculate; apparently he wanted to calculate a different measure. There's nothing wrong with that.
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Re: Coming Bond Market Crash

Postby Rodc » Tue Jan 08, 2013 8:47 pm

STC wrote:Rodc - [Inappropriate comment removed by admin LadyGeek]


Good point to keep in mind, especially on the internet, and [response to inappropriate comment removed by admin LadyGeek].
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Re: Coming Bond Market Crash

Postby Rodc » Tue Jan 08, 2013 8:53 pm

magician wrote:
Joe S. wrote:
Nicho_1978 wrote: As an example, the five biggest increases in interest rates occurred in 2009 (58% average increase), 1999 (35% average increase), 1994 (37% average increase), 1987 (21% average increase), and 1978(18% average increase).

FinancialDave wrote: So the fact that the 10 year treasury yield is up close to 20% in just a few months, and the total return for the last 52 weeks is -2.93% doesn't bother anyone??
fd

You are using the wrong terminology. The 10 yield was 1.65%, now it is 1.98%. That is a change of 0.33%

Now what you are doing is saying 1.98%/1.65% =1.2, than a 20% increase! That is now how you calculate the change in the yield. You subtract the one number from the other, you don't divide.

1.98% - 1.65% = 0.33% is the absolute yield spread.

1.98% / 1.65% = 1.20 (= 120%) is the yield ratio.

0.33% / 1.65% = 0.20 = 20% is the relative yield spread.

All three are valid measures of yield differences.

It isn't that FinancialDave is calculating it wrong; he's calculating a different measure. To say that "you subtract . . . you don't divide" is only correct if he's calculating the measure you want him to calculate; apparently he wanted to calculate a different measure. There's nothing wrong with that.


The issue is a broader one: folks often mistake percentages as meaningful or useful when they are not. Magnitude often matters. A 100% increase in a tiny number is still a tiny number, but that is often lost when folks get to talking about percentage but forget percent of how much. I happened to recently listen to someone argue against a zoning change because it would cause a huge 50% increase in traffic (on a road with hardly any traffic). The focus on 50% made something trivial seem big. Same sort of thing is at play here. A yield say for a T-Bill of 0.10 percent could go up 100% and it would make hardly any difference; the magnitude not the percentage is what really matters if the issue what the effect on bond value will be.

The other values may be valid, and may even be useful in some other context.
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Re: Coming Bond Market Crash

Postby athrone » Tue Jan 08, 2013 8:54 pm

patrick wrote:Neither 1934 nor 1968 involved 50% losses in purchasing power in 24 hours -- not even close. There was little inflation at all in the immediate aftermath of the 1933 and 1934 gold policy changes -- it took until the 1950s for prices to double! There was a bit more inflation after 1968 but even then it took a decade for prices to double.


Patrick,

In 1932, Gold and the Dollar were synonymous: one in the same and exactly interchangeable. Imagine a saver today with $1000 in their checking account. In 1932, this is the same situation as someone with a savings of 48oz of Gold. The value of the Dollar was revalued overnight from 1.5grams/$ to 0.87grams/$ by presidential decree. That is a 70% loss for anyone with their savings in what was at the time, equivalent to modern day Cash.

One thing you may want to reconsider is the assumption that inflation occurs immediately and irrespective of the current credit/money situation.
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Re: Coming Bond Market Crash

Postby magician » Tue Jan 08, 2013 9:12 pm

Rodc wrote:
magician wrote:
Joe S. wrote:
Nicho_1978 wrote: As an example, the five biggest increases in interest rates occurred in 2009 (58% average increase), 1999 (35% average increase), 1994 (37% average increase), 1987 (21% average increase), and 1978(18% average increase).

FinancialDave wrote: So the fact that the 10 year treasury yield is up close to 20% in just a few months, and the total return for the last 52 weeks is -2.93% doesn't bother anyone??
fd

You are using the wrong terminology. The 10 yield was 1.65%, now it is 1.98%. That is a change of 0.33%

Now what you are doing is saying 1.98%/1.65% =1.2, than a 20% increase! That is now how you calculate the change in the yield. You subtract the one number from the other, you don't divide.

1.98% - 1.65% = 0.33% is the absolute yield spread.

1.98% / 1.65% = 1.20 (= 120%) is the yield ratio.

0.33% / 1.65% = 0.20 = 20% is the relative yield spread.

All three are valid measures of yield differences.

It isn't that FinancialDave is calculating it wrong; he's calculating a different measure. To say that "you subtract . . . you don't divide" is only correct if he's calculating the measure you want him to calculate; apparently he wanted to calculate a different measure. There's nothing wrong with that.


The issue is a broader one: folks often mistake percentages as meaningful or useful when they are not. Magnitude often matters. A 100% increase in a tiny number is still a tiny number, but that is often lost when folks get to talking about percentage but forget percent of how much. I happened to recently listen to someone argue against a zoning change because it would cause a huge 50% increase in traffic (on a road with hardly any traffic). The focus on 50% made something trivial seem big. Same sort of thing is at play here. A yield say for a T-Bill of 0.10 percent could go up 100% and it would make hardly any difference; the magnitude not the percentage is what really matters if the issue what the effect on bond value will be.

The other values may be valid, and may even be useful in some other context.

In short: one has to understand what's being measured.

We agree.
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Re: Coming Bond Market Crash

Postby magician » Tue Jan 08, 2013 9:19 pm

athrone wrote:In 1932, Gold and the Dollar were synonymous: one in the same and exactly interchangeable. Imagine a saver today with $1000 in their checking account. In 1932, this is the same situation as someone with a savings of 48oz of Gold. The value of the Dollar was revalued overnight from 1.5grams/$ to 0.87grams/$ by presidential decree. That is a 70% loss for anyone with their savings in what was at the time, equivalent to modern day Cash.

A 70% loss with respect to gold (and to any currency that hadn't been revalued similarly and simultaneously).

That would be a big loss . . . if your savings were to be used to buy gold or goods denominated in one of those other currencies. I'd argue that the typical consumer in the US in 1932 likely felt little loss in purchasing power for the goods they normally purchased which were by-and-large domestically produced. Certainly their loss in purchasing power wasn't 70%; if they could afford ten eggs before the change, there's no reason to believe that after the change they could afford only three.
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Re: Coming Bond Market Crash

Postby patrick » Tue Jan 08, 2013 9:22 pm

athrone wrote:In 1932, Gold and the Dollar were synonymous: one in the same and exactly interchangeable. Imagine a saver today with $1000 in their checking account. In 1932, this is the same situation as someone with a savings of 48oz of Gold. The value of the Dollar was revalued overnight from 1.5grams/$ to 0.87grams/$ by presidential decree. That is a 70% loss for anyone with their savings in what was at the time, equivalent to modern day Cash.


Falling from 1.5 to .87 is only a 42% decrease (a 70% decrease would take it down to .45). Anyway, it was only a 42% decrease if you were only concerned about how much gold your checking account equaled. If instead you wanted to use your checking account to pay for regular consumer goods and services, then the value to you didn't suffer.

athrone wrote:One thing you may want to reconsider is the assumption that inflation occurs immediately and irrespective of the current credit/money situation.


What makes you think I had such an assumption? I am not the one who brought up the idea of "fixed income assets realized 50% losses in 24 hours" -- I just pointed out that, historically, such a thing didn't happen in the US in the past century, at least not if you are considering losses in terms of purchasing power. If your hypothetical example was actually meant to suggest that something might happen overnight that would cause 50% losses over the next 10 or 20 years, that's a different matter -- I suppose that could have happen but it would be hard to prove what the cause was (for instance, I suspect that the 1940s inflation was more due to World War II than the 1930s gold policy changes).
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Re: Coming Bond Market Crash

Postby nisiprius » Tue Jan 08, 2013 9:33 pm

magician wrote:I'd argue that the typical consumer in the US in 1932 likely felt little loss in purchasing power for the goods they normally purchased which were by-and-large domestically produced. Certainly their loss in purchasing power wasn't 70%; if they could afford ten eggs before the change, there's no reason to believe that after the change they could afford only three.
(Shrug) The data isn't hard to find.

Image

One of the worst periods of inflation took place just after World War I, despite being on the gold standard and despite private ownership of gold being legal.

Not much happened following the Gold Reserve Act of 1933.

Another bad period of inflation took place just after World War II, despite no changes in respect to gold policy.

Another bad period of inflation took place after Nixon took us off the gold standard, which also happens to be just after the Vietnam war.

It's all very ambiguous and people will read what they want to read into it, but it's a) not a clear pattern, and b) postwar inflation is at least as clear a pattern as any connection with gold or governmental gold policy.
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Re: Coming Bond Market Crash

Postby Jack » Tue Jan 08, 2013 10:25 pm

athrone wrote:If you wake up tomorrow and EUR:USD is 2.62 would you consider that a devaluation of the U.S. Dollar?

I would say "hallelujah," especially if the devaluation also was with respect to the renminbi and yen. It would mean the instant end of the trade deficit. It would also mean an end to the recession and the beginning of an economic boom and full employment in the U.S. as domestic manufacturers geared up to export cheap goods and services around the world. It also means the end of the U.S. debt problem since by definition, a trade surplus is equal to the net private and government savings.

So bring it on!
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Re: Coming Bond Market Crash

Postby steadyeddy » Wed Jan 09, 2013 12:38 am

This is a problem without a solution for Bogleheads because current economic policy is meant to punish savers for the benefit of spenders. The "technically" optimal way to preserve purchasing power is to purchase stuff now with your savings. Unfortunately, my goal is not to afford the largest quantity of goods over the course of my life, but to smooth my consumption of any quantity of goods over the course of my life. I have resigned myself to the fact that the current economic policy will be a headwind for me as a saver no matter what I invest in. It doesn't change my behavior or asset allocation because no other course or commodity will better help me meet my individual goals--this headwind slows all boats.
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Re: Coming Bond Market Crash

Postby Joe S. » Wed Jan 09, 2013 8:32 am

magician wrote:
Joe S. wrote:
Nicho_1978 wrote: As an example, the five biggest increases in interest rates occurred in 2009 (58% average increase), 1999 (35% average increase), 1994 (37% average increase), 1987 (21% average increase), and 1978(18% average increase).

FinancialDave wrote: So the fact that the 10 year treasury yield is up close to 20% in just a few months, and the total return for the last 52 weeks is -2.93% doesn't bother anyone??
fd

You are using the wrong terminology. The 10 yield was 1.65%, now it is 1.98%. That is a change of 0.33%

Now what you are doing is saying 1.98%/1.65% =1.2, than a 20% increase. That is not how you calculate the change in the yield. You subtract the one number from the other, you don't divide...
...my explanation is not perfect. If someone has a better explanation, please give it.

1.98% - 1.65% = 0.33% is the absolute yield spread.
1.98% / 1.65% = 1.20 (= 120%) is the yield ratio.
0.33% / 1.65% = 0.20 = 20% is the relative yield spread.
All three are valid measures of yield differences.

It isn't that FinancialDave is calculating it wrong; he's calculating a different measure. To say that "you subtract . . . you don't divide" is only correct if he's calculating the measure you want him to calculate; apparently he wanted to calculate a different measure. There's nothing wrong with that.

Thank you for the additional information. Retrospectively what I should have said is that the relative yield spread does not correlate well with bond price changes. the absolute yield spread correlates better.
I may also add that the absolute yield spread is the method most commonly used by commentators, charts, and websites. However, that doesn't mean other methods are wrong.

Addendum: Using absolute yield spread, the years of greatest yield rise appear to be 1979, 1980, and 1981. Does anyone have data on how well bonds did during the 70's and early 80's, both nominally and inflation-adjusted.
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Re: Coming Bond Market Crash

Postby nisiprius » Wed Jan 09, 2013 9:02 am

steadyeddy wrote:This is a problem without a solution for Bogleheads because current economic policy is meant to punish savers for the benefit of spenders. The "technically" optimal way to preserve purchasing power is to purchase stuff now with your savings. Unfortunately, my goal is not to afford the largest quantity of goods over the course of my life, but to smooth my consumption of any quantity of goods over the course of my life. I have resigned myself to the fact that the current economic policy will be a headwind for me as a saver no matter what I invest in. It doesn't change my behavior or asset allocation because no other course or commodity will better help me meet my individual goals--this headwind slows all boats.
+1.

Nobody ever promised us a rose garden. There are good times and bad times. And peoples' experiences are imperfectly correlated--all economic shifts produce winners and losers. These are relatively bad times for risk-averse, "mass affluent" savers. (But isn't it nice that we have savings and/or the ability to save?)

I am not sure what the best response is to low returns on low-risk investments is.

I think "stuff happens, suck it up, wait it out" is an acceptable response.

I think flailing around looking for answers that are not there, i.e. pretending that dividend-paying stocks are not really all that different from an FDIC-insured bank account, is a bad response. Dangerous, even, because there are con artists out there, and if we search too hard for "opportunity," eventually we may find them--or they may find us. You know the saying "There ain't a horse that can't be rode, and there ain't a rider that can't be throwed?" I try to remember that there are people out there capable of gulling me.

There may be some truth in saying that "The Government" wants to to invest in higher-risk investments. Well, I cultivate high sales resistance. Just because "The Government" is pushing me does not automatically mean that my best option is to give in.
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Re: Coming Bond Market Crash

Postby NYBoglehead » Wed Jan 09, 2013 9:19 am

steadyeddy wrote:This is a problem without a solution for Bogleheads because current economic policy is meant to punish savers for the benefit of spenders. The "technically" optimal way to preserve purchasing power is to purchase stuff now with your savings. Unfortunately, my goal is not to afford the largest quantity of goods over the course of my life, but to smooth my consumption of any quantity of goods over the course of my life. I have resigned myself to the fact that the current economic policy will be a headwind for me as a saver no matter what I invest in. It doesn't change my behavior or asset allocation because no other course or commodity will better help me meet my individual goals--this headwind slows all boats.


+2

People always like to think "they'd never do that" but it is as plain as day. If you punish savings and don't make it worthwhile, people will spend now, which will grow the economy. The new trend now seems to be do whatever is necessary to make today better and to hell with years down the road. Not sure what the alternative is, but I wouldn't recommend anyone keep more in cash than their emergency fund requires.
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Re: Coming Bond Market Crash

Postby Call_Me_Op » Wed Jan 09, 2013 9:39 am

NYBoglehead wrote:
steadyeddy wrote:This is a problem without a solution for Bogleheads because current economic policy is meant to punish savers for the benefit of spenders. The "technically" optimal way to preserve purchasing power is to purchase stuff now with your savings. Unfortunately, my goal is not to afford the largest quantity of goods over the course of my life, but to smooth my consumption of any quantity of goods over the course of my life. I have resigned myself to the fact that the current economic policy will be a headwind for me as a saver no matter what I invest in. It doesn't change my behavior or asset allocation because no other course or commodity will better help me meet my individual goals--this headwind slows all boats.


+2

People always like to think "they'd never do that" but it is as plain as day. If you punish savings and don't make it worthwhile, people will spend now, which will grow the economy. The new trend now seems to be do whatever is necessary to make today better and to hell with years down the road. Not sure what the alternative is, but I wouldn't recommend anyone keep more in cash than their emergency fund requires.


I agreed with everything you said, until the very end. I see nothing wrong with holding a lot of cash right now, as long as you are holding some equities to help the overall portfolio keep-up with inflation.
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Re: Coming Bond Market Crash

Postby Village Idiot » Wed Jan 09, 2013 11:23 am

What does gold, dollar, and foreign cerrencies have to do with the coming bond crash?
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Re: Coming Bond Market Crash

Postby athrone » Wed Jan 09, 2013 12:24 pm

Village Idiot wrote:What does gold, dollar, and foreign cerrencies have to do with the coming bond crash?


These are the things that a coming bond crash would be measured in.
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Re: Coming Bond Market Crash

Postby Jack » Wed Jan 09, 2013 1:07 pm

steadyeddy wrote:This is a problem without a solution for Bogleheads because current economic policy is meant to punish savers for the benefit of spenders. The "technically" optimal way to preserve purchasing power is to purchase stuff now with your savings. Unfortunately, my goal is not to afford the largest quantity of goods over the course of my life, but to smooth my consumption of any quantity of goods over the course of my life. I have resigned myself to the fact that the current economic policy will be a headwind for me as a saver no matter what I invest in. It doesn't change my behavior or asset allocation because no other course or commodity will better help me meet my individual goals--this headwind slows all boats.

Conditions are not unfavorable to savers. They are only unfavorable to a certain kind of saver that wants relatively riskless, non-volatile assets -- fixed income. Savers who are buying equities are doing fine.

The reason that bonds yields are low is very simple. Nobody wants your stinkin' money. Sorry, that's just the way it is. Nobody "owes" you a return for storing your money unless they want it more than you do. Right now, they do not. There are more scared savers demanding bonds than there are investors and borrowers who want to issue them. High demand and low supply for bonds means high prices (low yields). Until the economy recovers there is simply no demand for your money so no one is going to pay you high interest to borrow it. Meanwhile, fixed-income savers only have themselves to blame for demanding so many bonds and driving down prices. That is their self-inflicted punishment.
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Re: Coming Bond Market Crash

Postby STC » Wed Jan 09, 2013 1:22 pm

Village Idiot wrote:What does gold, dollar, and foreign cerrencies have to do with the coming bond crash?


Nothing. Some newer folks to this forum do not understand what inflation is, and miss-interpret it as some form of Forex risk that needs to be hedged.

Stick with the real issues in the "bond bubble" - which are interest rate risk and inflation risk. This convoluted story around Forex and Gold is not useful, nor well informed.

http://www.investopedia.com/articles/bo ... z2HV5A0RTF
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Re: Coming Bond Market Crash

Postby Rodc » Wed Jan 09, 2013 1:30 pm

Jack wrote:
steadyeddy wrote:This is a problem without a solution for Bogleheads because current economic policy is meant to punish savers for the benefit of spenders. The "technically" optimal way to preserve purchasing power is to purchase stuff now with your savings. Unfortunately, my goal is not to afford the largest quantity of goods over the course of my life, but to smooth my consumption of any quantity of goods over the course of my life. I have resigned myself to the fact that the current economic policy will be a headwind for me as a saver no matter what I invest in. It doesn't change my behavior or asset allocation because no other course or commodity will better help me meet my individual goals--this headwind slows all boats.

Conditions are not unfavorable to savers. They are only unfavorable to a certain kind of saver that wants relatively riskless, non-volatile assets -- fixed income. Savers who are buying equities are doing fine.

The reason that bonds yields are low is very simple. Nobody wants your stinkin' money. Sorry, that's just the way it is. Nobody "owes" you a return for storing your money unless they want it more than you do. Right now, they do not. There are more scared savers demanding bonds than there are investors and borrowers who want to issue them. High demand and low supply for bonds means high prices (low yields). Until the economy recovers there is simply no demand for your money so no one is going to pay you high interest to borrow it. Meanwhile, fixed-income savers only have themselves to blame for demanding so many bonds and driving down prices. That is their self-inflicted punishment.


Would seem not quite that clean of a story. The FED is working hard to distort the bond market; of course one can argue that is their job. But they have been working to depress bond interest rates in order to stimulate the economy. Later we may see them working hard to distort the market to contain inflation. Only time will tell.
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Re: Coming Bond Market Crash

Postby STC » Wed Jan 09, 2013 1:34 pm

Rodc wrote:Would seem not quite that clean of a story. The FED is working hard to distort the bond market; of course one can argue that is their job. But they have been working to depress bond interest rates in order to stimulate the economy. Later we may see them working hard to distort the market to contain inflation. Only time will tell.


Given that, I would recommend having an AA of Fixed income and Equities. And rebalance. lol it always comes back to that, doesn't it? :beer
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Re: Coming Bond Market Crash

Postby Jack » Wed Jan 09, 2013 1:51 pm

Rodc wrote:Would seem not quite that clean of a story. The FED is working hard to distort the bond market; of course one can argue that is their job. But they have been working to depress bond interest rates in order to stimulate the economy. Later we may see them working hard to distort the market to contain inflation. Only time will tell.

The Fed has been pushing mightily on a string to little effect. We can tell because every time the Fed ended one of their QE bond buying programs, everyone predicted rates to go up, and instead they have gone down. The banks and corporations are aslosh with cash and don't need to borrow more. The effect of the Fed purchases has been estimated at most to be 25 basis points. The Fed isn't the reason for low interest rates.
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Re: Coming Bond Market Crash

Postby Call_Me_Op » Wed Jan 09, 2013 1:54 pm

Jack wrote:
Rodc wrote:Would seem not quite that clean of a story. The FED is working hard to distort the bond market; of course one can argue that is their job. But they have been working to depress bond interest rates in order to stimulate the economy. Later we may see them working hard to distort the market to contain inflation. Only time will tell.

The Fed has been pushing mightily on a string to little effect. We can tell because every time the Fed ended one of their QE bond buying programs, everyone predicted rates to go up, and instead they have gone down. The banks and corporations are aslosh with cash and don't need to borrow more. The effect of the Fed purchases has been estimated at most to be 25 basis points. The Fed isn't the reason for low interest rates.


Correct. The reason is fear of risk assets, left over from the crash of 2008.
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Re: Coming Bond Market Crash

Postby STC » Wed Jan 09, 2013 1:56 pm

Jack wrote:
Rodc wrote:Would seem not quite that clean of a story. The FED is working hard to distort the bond market; of course one can argue that is their job. But they have been working to depress bond interest rates in order to stimulate the economy. Later we may see them working hard to distort the market to contain inflation. Only time will tell.

The Fed has been pushing mightily on a string to little effect. We can tell because every time the Fed ended one of their QE bond buying programs, everyone predicted rates to go up, and instead they have gone down. The banks and corporations are aslosh with cash and don't need to borrow more. The effect of the Fed purchases has been estimated at most to be 25 basis points. The Fed isn't the reason for low interest rates.


Dont forget the effects of regulatory capital requirements. Tier 1 capital for financial institutions is tightly defined, and Treasuries are one of the few instruments that meet that requirement. Basel III has forced financial institutions to hold a lot more capital reserves in Tier 1 then ever before. So it isnt just demand from the Fed that has held yields down, its financial institutions who need to maintain their license to operate as well...
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Re: Coming Bond Market Crash

Postby Jack » Wed Jan 09, 2013 2:15 pm

STC wrote:Dont forget the effects of regulatory capital requirements. Tier 1 capital for financial institutions is tightly defined, and Treasuries are one of the few instruments that meet that requirement. Basel III has forced financial institutions to hold a lot more capital reserves in Tier 1 then ever before. So it isnt just demand from the Fed that has held yields down, its financial institutions who need to maintain their license to operate as well...

Basel III capital requirements don't even start until 2014 and don't fully phase in until 2018, so, no, Basel III has nothing to do with low interest rates for the last four years. Banks have more reserves than they know what to do with right now. They don't need more.
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Re: Coming Bond Market Crash

Postby STC » Wed Jan 09, 2013 2:24 pm

Jack wrote:
STC wrote:Dont forget the effects of regulatory capital requirements. Tier 1 capital for financial institutions is tightly defined, and Treasuries are one of the few instruments that meet that requirement. Basel III has forced financial institutions to hold a lot more capital reserves in Tier 1 then ever before. So it isnt just demand from the Fed that has held yields down, its financial institutions who need to maintain their license to operate as well...

Basel III capital requirements don't even start until 2014 and don't fully phase in until 2018, so, no, Basel III has nothing to do with low interest rates for the last four years. Banks have more reserves than they know what to do with right now. They don't need more.


Not true at all. I work with the Big Banks. ALL are raising Tier 1 capital. Go read their annual reports, listen to their investor calls. Every one of them is doing it.

Some have enough. ENOUGH don't that the 2014 date was post-poned because it was an unachievable target.
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Re: Coming Bond Market Crash

Postby Jack » Wed Jan 09, 2013 3:17 pm

STC wrote:Not true at all. I work with the Big Banks. ALL are raising Tier 1 capital. Go read their annual reports, listen to their investor calls. Every one of them is doing it.

Some have enough. ENOUGH don't that the 2014 date was post-poned because it was an unachievable target.

Banks are awash in deposits and have too few borrowers. That is why interest rates are low. Banks are forced to lend to the only borrower available, the U.S. government and buy Treasuries. Nobody else wants all the money they have deposited. It is excess savings and the shortage of borrowers that is causing low interest rates, not the Fed and not Basel III capital requirements.

Keep in mind, deposits are bank liabilities. Loans to borrowers are bank assets, Tier 1 assets. Again, it is the excess of savers and the shortage of borrowers that is causing capital requirement problems for the banks. They are buying Treasuries because they can't find enough other people to lend to, not because Treasuries are required for Tier 1.
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Re: Coming Bond Market Crash

Postby STC » Wed Jan 09, 2013 3:30 pm

Jack wrote:
STC wrote:Not true at all. I work with the Big Banks. ALL are raising Tier 1 capital. Go read their annual reports, listen to their investor calls. Every one of them is doing it.

Some have enough. ENOUGH don't that the 2014 date was post-poned because it was an unachievable target.

Banks are awash in deposits and have too few borrowers. That is why interest rates are low. Banks are forced to lend to the only borrower available, the U.S. government and buy Treasuries. Nobody else wants all the money they have deposited. It is excess savings and the shortage of borrowers that is causing low interest rates, not the Fed and not Basel III capital requirements.

Keep in mind, deposits are bank liabilities. Loans to borrowers are bank assets, Tier 1 assets. Again, it is the excess of savers and the shortage of borrowers that is causing capital requirement problems for the banks. They are buying Treasuries because they can't find enough other people to lend to, not because Treasuries are required for Tier 1.



again. you are wrong. the rules around basel iii are more complex then you are trying to make them out to be. For instance, you assumption that loans to borrowers are considered tier 1 assets is completely false. you would do well to review this prior to making additional claims of understanding Basel III: http://www.federalreserve.gov/aboutthef ... 120607.pdf

In general, the following are considered acceptable for Tier 1:
Cash/Retained Earnings
Qualifying marketable securities from sovereigns, central banks, public sector entities, and multilateral development banks
Qualifying central bank reserves
Domestic sovereign or central bank debt in domestic currency
Domestic soveriegn debt for non-0% risk weighted sovereigns, issued in foreign currency


The one exception to the rule on consumer debt is mortgages, which were just recently approved to make up a VERY small portion of Tier 1 at a significant discount to face value. Of course, banks may just be paying my firm $10's millions to build out technology to manage this in error. Perhaps all they need is you and a calculator...
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Re: Coming Bond Market Crash

Postby Jack » Wed Jan 09, 2013 3:54 pm

STC wrote:again. you are wrong. the rules around basel iii are more complex then you are trying to make them out to be. For instance, you assumption that loans to borrowers are considered tier 1 assets is completely false. you would do well to review this prior to making additional claims of understanding Basel III: http://www.federalreserve.gov/aboutthef ... 120607.pdf

In general, the following are considered acceptable for Tier 1:
Cash
Qualifying marketable securities from sovereigns, central banks, public sector entities, and multilateral development banks
Qualifying central bank reserves
Domestic sovereign or central bank debt in domestic currency
Domestic soveriegn debt for non-0% risk weighted sovereigns, issued in foreign currency

You need to read your own document more closely. The assets you list above are a new requirement called the Liquidity Coverage Ratio, and has nothing to do with Tier 1 capital. The LCR is just a one-month emergency fund to handle a short term liquidity crisis. Yes, you need very liquid assets for this small emergency fund. That is not a big issue for banks because the amount is relatively small.

Tier 1, on the other hand, has much more comprehensive requirements for capital ratios and those capital ratios are computed from risk-weighted assets that include loans and has nothing to do with the LCR items you listed above. Loans are bank assets and they are considered Tier 1 capital assets for purposes of capital requirements. The loans for Tier 1 capital requirements are weighted according to risk. It is a shortage of Tier 1 borrowers that is causing the banks grief.
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Re: Coming Bond Market Crash

Postby Rodc » Wed Jan 09, 2013 3:58 pm

STC wrote:
Rodc wrote:Would seem not quite that clean of a story. The FED is working hard to distort the bond market; of course one can argue that is their job. But they have been working to depress bond interest rates in order to stimulate the economy. Later we may see them working hard to distort the market to contain inflation. Only time will tell.


Given that, I would recommend having an AA of Fixed income and Equities. And rebalance. lol it always comes back to that, doesn't it? :beer


Good idea! I think I'll do that!

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Re: Coming Bond Market Crash

Postby STC » Wed Jan 09, 2013 4:01 pm

Jack wrote:
STC wrote:again. you are wrong. the rules around basel iii are more complex then you are trying to make them out to be. For instance, you assumption that loans to borrowers are considered tier 1 assets is completely false. you would do well to review this prior to making additional claims of understanding Basel III: http://www.federalreserve.gov/aboutthef ... 120607.pdf

In general, the following are considered acceptable for Tier 1:
Cash
Qualifying marketable securities from sovereigns, central banks, public sector entities, and multilateral development banks
Qualifying central bank reserves
Domestic sovereign or central bank debt in domestic currency
Domestic soveriegn debt for non-0% risk weighted sovereigns, issued in foreign currency

You need to read your own document more closely. The assets you list above are a new requirement called the Liquidity Coverage Ratio, and has nothing to do with Tier 1 capital. The LCR is just a one-month emergency fund to handle a short term liquidity crisis. Yes, you need very liquid assets for this small emergency fund. That is not a big issue for banks because the amount is relatively small.

Tier 1, on the other hand, has much more comprehensive requirements for capital ratios and those capital ratios are computed from risk-weighted assets that include loans and has nothing to do with the LCR items you listed above. Loans are bank assets and they are considered Tier 1 capital assets for purposes of capital requirements. The loans for Tier 1 capital requirements are weighted according to risk. It is a shortage of Tier 1 borrowers that is causing the banks grief.


Please lonk a credible source for your position.
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Re: Coming Bond Market Crash

Postby Jack » Wed Jan 09, 2013 4:09 pm

STC wrote:
Jack wrote:You need to read your own document more closely. The assets you list above are a new requirement called the Liquidity Coverage Ratio, and has nothing to do with Tier 1 capital. The LCR is just a one-month emergency fund to handle a short term liquidity crisis. Yes, you need very liquid assets for this small emergency fund. That is not a big issue for banks because the amount is relatively small.

Tier 1, on the other hand, has much more comprehensive requirements for capital ratios and those capital ratios are computed from risk-weighted assets that include loans and has nothing to do with the LCR items you listed above. Loans are bank assets and they are considered Tier 1 capital assets for purposes of capital requirements. The loans for Tier 1 capital requirements are weighted according to risk. It is a shortage of Tier 1 borrowers that is causing the banks grief.


Please lonk a credible source for your position.

You cited it yourself above. It's your document. You need to read it more closely. LCR assets are entirely different from Tier 1 capital requirements.
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Re: Coming Bond Market Crash

Postby Doc » Wed Jan 09, 2013 4:14 pm

nisiprius wrote:Doc, what would you say to this:

There are two competing theories of how to use bonds in a portfolio.

Theory A investors use them as a low-volatility anchor, and a diluter of risk. Volatility is accepted only as a necessary evil in order to get the higher return. Theory A investors are content with Total Bond Market as an adequate one-size fits-all solution. Since we are counting on it as a low-volatility anchor, we are concerned about the possibility of a sharp crash, say >15%, in our holdings, but, beyond that, don't care much about the details. Low correlation is of interest only the very weak sense that they don't want their bonds to crash sharply at the same time as our stocks. Theory A investors are perfectly happy with the idea of substituting CDs for bonds if they can get the same return; the fact that volatility is lower is icing on the cake. (Zero volatility implies zero correlation, but there is no MPT benefit if there's zero volatility).

Theory B investors use them in accord with modern portfolio theory, taking positive advantage of the low correlation. They seek to use bonds to counteract risk, not just dilute it. Theory B investors prefer more volatility in their bond investments, because the optimum point on the efficient frontier comes at somewhat higher volatility than you get with something like Total Bond (I think that's correct but I haven't checked, I'm just handwaving here). They believe that they are getting a "rebalancing bonus" and, overall, enhanced risk/reward compared to what they'd get with a simple three-fund portfolio, and that the improvement is worth taking some trouble with, and paying attention to details of different behavior of different kinds of bonds, rather than just accepting the amorphous blob that forms the BarCap Aggregate index.

I follow theory A, you follow theory B. You're convinced that theory B is better, I'm convinced that theory A is good enough.
Sound about right?



No. I am saying that when these threads get started they seem to only be concerned with theory A - the TBM/CD, only worry about FI in isolation not as part of the entire portfolio. Thinking only of theory A I think is wrong and many people (like Swedroe?) agree. But there is no reason not to use both approaches together for many of us. If you have a 50/50 AA and want to have "bullets" to use in a 50% equity crash you only need about 25% of you bonds in theory B stuff. That leaves the other 75% in TBM/CDs if you that's what you want.

I do both in one portfolio. I use the Bar Cap 1-10 Government/Credit as a guide instead of TBM but that's another matter. I have a short term nominal bond ladder for the bullets, an intermediate term TIPS ladder for the intermediate Treasuries and short and intermediate investment grade ETFs for the rest. This gives me high quality bullets to kill the equity bear and also allows better tax efficiency by putting the shorter term FI assets in taxable and the longer ones in tax advantaged accounts. If one prefers TBM just add some GNMA's and you're there for all practical purposes. A+B = E[xecellent]
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Re: Coming Bond Market Crash

Postby STC » Wed Jan 09, 2013 4:18 pm

Jack wrote:
STC wrote:
Jack wrote:You need to read your own document more closely. The assets you list above are a new requirement called the Liquidity Coverage Ratio, and has nothing to do with Tier 1 capital. The LCR is just a one-month emergency fund to handle a short term liquidity crisis. Yes, you need very liquid assets for this small emergency fund. That is not a big issue for banks because the amount is relatively small.

Tier 1, on the other hand, has much more comprehensive requirements for capital ratios and those capital ratios are computed from risk-weighted assets that include loans and has nothing to do with the LCR items you listed above. Loans are bank assets and they are considered Tier 1 capital assets for purposes of capital requirements. The loans for Tier 1 capital requirements are weighted according to risk. It is a shortage of Tier 1 borrowers that is causing the banks grief.


Please lonk a credible source for your position.

You cited it yourself above. It's your document. You need to read it more closely. LCR assets are entirely different from Tier 1 capital requirements.


What I linked defined Tier 1 thus:

Under this proposal, a banking organization’s common equity tier 1 capital would be the sum of its outstanding common equity tier 1 capital instruments and related surplus (net of treasury stock), retained earnings, accumulated other comprehensive income (AOCI), and common equity tier 1 minority interest subject to the provisions set forth in section 21 of the proposal, minus regulatory adjustments and deductions specified in section 22 of the proposal.

How exactly are you interpreting that to mean that consumer loans are considered Tier 1? Link a credible source.
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Re: Coming Bond Market Crash

Postby Jack » Wed Jan 09, 2013 5:42 pm

STC wrote:What I linked defined Tier 1 thus:

Under this proposal, a banking organization’s common equity tier 1 capital would be the sum of its outstanding common equity tier 1 capital instruments and related surplus (net of treasury stock), retained earnings, accumulated other comprehensive income (AOCI), and common equity tier 1 minority interest subject to the provisions set forth in section 21 of the proposal, minus regulatory adjustments and deductions specified in section 22 of the proposal.

How exactly are you interpreting that to mean that consumer loans are considered Tier 1? Link a credible source.

Ah, I see what you've done. You edited your previous comment to change documents. That's not quite fair. I'm responding to your first link, while you are editing your previous comment to change to another link. But whatever.

The original document you quoted was this one:
http://www.moodysanalytics.com/~/media/ ... -FAQs.ashx

That is the basis for your mistaking LCR requirements for Tier 1 requirements where you said this:
In general, the following are considered acceptable for Tier 1:
Cash/Retained Earnings
Qualifying marketable securities from sovereigns, central banks, public sector entities, and multilateral development banks
Qualifying central bank reserves
Domestic sovereign or central bank debt in domestic currency
Domestic soveriegn debt for non-0% risk weighted sovereigns, issued in foreign currency

This is obviously wrong. That is not the definition of Tier 1 capital. It is the definition of Liquidity Coverage Ratio which is entirely different. This is made clear in the original document you linked above.

Now you are quoting this document:
http://www.federalreserve.gov/aboutthef ... 120607.pdf

Where you say:
Under this proposal, a banking organization’s common equity tier 1 capital would be the sum of its outstanding common equity tier 1 capital instruments and related surplus (net of treasury stock), retained earnings, accumulated other comprehensive income (AOCI), and common equity tier 1 minority interest subject to the provisions set forth in section 21 of the proposal, minus regulatory adjustments and deductions specified in section 22 of the proposal.

Now that is more like it. What do you think common equity capital instruments are? That is owner's equity, which by definition is assets minus liabilities. Assets include loans and liabilities include deposits. It's the bank owner's skin in the game. If the bank is unable to make sufficient loans, their assets fall which means their equity falls which means their Tier 1 capital falls.

---
The point of this whole diversion was your claim that Basel was causing banks to buy lots of Treasuries (even though Basel doesn't start until 2014 and phases in through 2018). Further you said that Tier 1 capital requirements means Treasuries. That is also not true. Other loans also add to Tier 1 capital through owner equity. Banks are buying Treasuries because there is a shortage of other borrowers. They need borrowers in order to increase assets.

As originally stated, interest rates are low because there are too many savers and too few borrowers.
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Re: Coming Bond Market Crash

Postby STC » Wed Jan 09, 2013 5:44 pm

Again. Post a link that defines Tier 1 instrument to include consumer loans.

I changed the link prior to your first reply in order to be far more comprehensive.

Hint Page 15: http://www.federalreserve.gov/aboutthef ... 120607.pdf

Past due exposure and high volatility real estate are a negative impact to Tier 1, which requires additional reserves... Corporate exposures don't count towards Tier 1. Etc.

On your point that banks don't need to comply till 2014... Correct on Basel III changes, however Basel and Basel II have been implemented for years. Changes in capital requirements, and more importantly the change in risk weighting a of what counts towards Tier 1 under Basel III HAS caused banks to increase treasury exposure WHILE improving the quality of their other loans. For example, if they have a lot of past due loans, the negative impact to Tier 1 capital needs to be counterbalanced by instruments like treasuries. Or if tier 1 under Basel II was comprised of instruments that got demoted in Basel III, the quality of the balance sheet would need to be improved. Net impact? Less low quality loans, more treasuries and retained earnings
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Bonds when yield rise ?

Postby Taylor Larimore » Wed Jan 09, 2013 6:16 pm

Bogleheads:

Anything can happen in the stock and bond markets. However this is what happened during a period when the the yield on the 10-year Treasury bond rose 7.3% from December 1975 to September 1981.
A hypothetical $10,000 investment (with all investment income reinvested) in the Barclays' Capital U.S. Aggregate Bond Index (the benchmark for the Vanguard Total Bond Market Index) made on December 31st, 1975 would have increased to over $13,500 by September 1981 and would have actually doubled to $20,000 by the end of 1983." -- Joe Davis, Vanguard Chief Economist

It is reassuring to know that the worst year for Vanguard's Total Bond Market Index Fund since its inception in 1986 was -2.66% in 1994 (it gained +16.0% in 1995).

My Boglehead recommendation: Select an appropriate stock/bond asset-allocation--then stay-the-course.

"The Only Thing We Have to Fear Is Fear Itself”--Franklin D. Roosevelt

Best wishes
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Re: Coming Bond Market Crash

Postby Jack » Wed Jan 09, 2013 6:18 pm

Sorry, STC. You are changing your comments and changing your claims minute by minute and then re-editing after posting them. It's difficult to respond to a moving target when even the words mysteriously disappear from the page. It is obvious that you are very confused about this issue and despite your multiple misstatements and re-edits, I've tried my best to help you out, but that is all I have time for now.
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Re: Bonds when yield rise ?

Postby athrone » Wed Jan 09, 2013 7:00 pm

Taylor Larimore wrote:It is reassuring to know that the worst year for Vanguard's Total Bond Market Index Fund since its inception in 1986 was -2.66% in 1994 (it gained +16.0% in 1995).

I agree it is reassuring, but what does it say about future worst years?

Also, if you consider Real performance, the worst year was -6.91% (1979). The worst four-year performance was also about -25% (1977-1980). Not as bad as stocks, but -25% Real over four years certainly paints a different picture than -2.66% Nominal over one year, doesn't it?
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Re: Bonds when yield rise ?

Postby Rodc » Wed Jan 09, 2013 9:37 pm

athrone wrote:
Taylor Larimore wrote:It is reassuring to know that the worst year for Vanguard's Total Bond Market Index Fund since its inception in 1986 was -2.66% in 1994 (it gained +16.0% in 1995).

I agree it is reassuring, but what does it say about future worst years?

Also, if you consider Real performance, the worst year was -6.91% (1979). The worst four-year performance was also about -25% (1977-1980). Not as bad as stocks, but -25% Real over four years certainly paints a different picture than -2.66% Nominal over one year, doesn't it?


Unfortunately bonds really can be awful. Maybe not as awful as stocks, and not a rapidly as stocks. (and yes this is some combination of rising rates and inflation, not a pure rising rate example example).

Looking at annual nominal returns year by year hides this fact because the problem is something that arises due to compounding, as shown in this example, or worse, 1950 to 1980 (or maybe even 1930-1980 as was posted by someone else, I have not calculated that).

I don't find the whole picture nearly as reassuring as suggested. Investments have risk, plain and simple. Some more and some less, but none are risk free over the long haul, though TIPS which seem to get ignored probably come closest. We should not try to convince ourselves otherwise.

I'm certainly glad I'm not a very bond heavy youngish retiree trying to generate income and looking years down the line. Neither nominal or TIPS are doing a very good job.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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