Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (52873)	2/6/2006 7:34:54 PM
From: bond_bubble	Read Replies (2) \| Respond to of 110194

Russ, What is the best way to play if 10 year is going to fall (in price)? Besides Rydex shorting on 10 years, are there leveraged way to play the bond price fall? I'm thinking of few grands in this bet - something like put calls in stocks. Thanks.

To: russwinter who wrote (52873)	2/7/2006 12:46:48 AM
From: mishedlo	Read Replies (2) \| Respond to of 110194

Check out this reply I received on the FOOL about Ron Paul. I have seen a lot of totally stupid posts but this one may just take the cake. here goes: Frankly Mish Ron Paul should not even be in office. Greenspan was right all along. Bush has policies I dont like, but thank god he is spending money hand over fist. The dollar will go down and down no matter what. US exports will increase over the next 15 years...and we will then start to run surplus........since every 50 years the surplus and debitor nations switch places. I wrote these ideas four and even five years ago and they have or will come to pass. Ron Paul just does not have a clue. dave

To: russwinter who wrote (52873)	2/7/2006 3:00:32 AM
From: shades	Read Replies (3) \| Respond to of 110194

econbrowser.com February 06, 2006 Gold and inflation What's behind the ongoing run-up in gold prices? One popular interpretation is that investors fear a resurgence of U.S. inflation. But that story just doesn't square with the facts. Data source: FRED The above graph shows the spread between the yield on standard 10-year U.S. Treasury bonds and the yield on 10-year U.S. Treasury inflation-protected securities (TIPS), whose coupon and principal both increase each year with the consumer price index (CPI). This spread is basically a measure of the expectations of inflation that are built into the TIPS yields. This expected inflation rate rose 100 basis points between 2003 and 2004, but has been virtually constant for the last year and a half at a value around 2-1/2 percent. Fears about a resurgence of inflation? Not in these bond yields. I often hear stories along the lines of, "the bond market doesn't expect inflation but the gold market does." But this makes no sense. Markets are fully integrated, and there's no reason why somebody with a particular world view wouldn't try to grab spectacular returns wherever they might be found. If you think that U.S. inflation is going to be substantially above 2.5%, there's no question that you want to go long TIPS and short the nominals. If gold and bonds are sending conflicting signals, it has to be due to some fundamental differences in the conditions under which the two assets will perform. For example, if you were worried about a surge in prices that was not that strongly correlated with the CPI-- perhaps a rise in the price of traded goods relative to nontraded goods-- that might do it. But the story then is not a fear that the Fed wouldn't do its job. On the contrary, bond yields are reflecting confidence that the Fed will keep the CPI proper under check. Or the gold market could be responding to concerns not about inflation per se but rather broader financial or political instability. Certainly there are concrete developments that could warrant heightened concerns about the latter over the last few months. Source: Institutional Economics Institutional Economics notes that the gold moves should also be seen as part of a broader trend. It seems a mistake to come up with a completely different story for gold, oil, copper, aluminum, zinc, and so on, when they've all been exhibiting similar behavior. To be sure, there are separate important factors in supply and demand that are unique to each one. But there is also something to be said for focusing on the factors that are common to them all. We've seen a pretty impressive surge in commodity prices relative to other prices. But that is not quite the same thing as inflation, in which the price of a broader basket of goods and services (such as the CPI) goes up at a faster rate. If you want to claim that the current gold price reflects a fear about the latter, you have to reconcile it with the way that nominal and inflation-indexed bonds are currently priced. --- Posted by: dryfly at February 6, 2006 03:35 PM So you see the base metals are going up 1:1 with gold and no reaction in bonds. What is your explanation? Are you sure the CPI numbers are correct, after all you see prices going up everywhere? Could it be that the gold bugs are right that gold leasibg is part of the carry trade. That would keep bond interest rates down and keep gold from registering a warning about inflation. Mover Mike Posted by: Hal at February 6, 2006 04:28 PM What if someone were "gaming" the bond market? That is, buying bonds at any yield, thus driving yields down for everyone. What if, say, a large nation, with a powerful central bank, which was suddenly flush with dollars, had nothing to do with them except buy bonds like this? What if this nation didn't care about inflation in the US dollar, or trade imbalance? What if they only cared about selling their goods abroad and industrializing at the most rapid pace the word has ever seen? What if they didn't care about the long-term consequences of these actions on the US economy? Seems to me like this would establish a bond market with degenerate behavior; one that would no longer act as a useful predictor of inflation. But, nah, not gonna happen. Therefore I deem the gold market insane. Posted by: Aaron Krowne at February 6, 2006 04:55 PM One last addendum. The situation would really be abysmal if the country wasn't democratic, and people couldn't respond to the negative effects of such a policy by voting out their government. But where's there a country like that in the world? Posted by: Aaron Krowne at February 6, 2006 04:58 PM So, the inflation story doesn't add up given the disconnect between commodity prices and bond yields. Perhaps we could look at the demand and supply dynamics in the bond market to help explain. For example, in the UK long real yields have been squeezed right down not due to a view on inflation, but due to restricted supply and super strong institutional demand. Given that the pension crisis is also an issue in the US I wonder if long yields are also being held down by institutional demand and are a false representation of the inflation outlook? If we assume a world of surplus liquidity, it is easier to explain high commodity prices. Bonds, equities, housing markets around the world, and bonds have all faced very strong demand. I wonder if the commodity market is just late to the party? We know for sure, that a lot of funds are moving in to this space, many with the preconceived notion of a new world of permanently high commodity prices. The other thing with gold is that the traditional correlation with the USD has inverted. Maybe this relationship can help square the circle? I'm not sure myself. Posted by: Abobtrader at February 6, 2006 05:10 PM Hal, the TIPS are indexed directly to the regular "headline" CPI, not to a CPI excluding food or energy.