tag:blogger.com,1999:blog-5908830827135060852.post4362347696835651267..comments2024-03-01T02:40:14.946-05:00Comments on Bond Economics: The 'Widowmaker' And Yen Crash TheoriesBrian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger16125tag:blogger.com,1999:blog-5908830827135060852.post-37611967393147401202016-03-09T14:12:34.349-05:002016-03-09T14:12:34.349-05:00This comment has been removed by a blog administrator.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-89313799205975520122015-08-06T19:18:21.296-04:002015-08-06T19:18:21.296-04:00Since "fair value" is an estimate of whe...Since "fair value" is an estimate of where the market thinks short-term rates will be, and the central bank administers the short rate, it is nearly impossible for a central bank not to manipulate bond yields. One could argue about a 30-year bond, but the 10-year tracks the trend in short rates.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-81735532964344453122015-08-06T13:59:47.331-04:002015-08-06T13:59:47.331-04:00Fair value means what prices would be if central b...Fair value means what prices would be if central banks were not manipulating bond prices. You can only estimate it, of course. <br />Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-60816567285480184572014-12-19T06:56:29.984-05:002014-12-19T06:56:29.984-05:00It's a squishy term, but it is usually the cen...It's a squishy term, but it is usually the central prediction of a model for the bond yield based on fundamental or even relative value factors. Of course, it varies from practitioner to practitioner. There was one strategist (luckily not a portfolio manager) I read who moved his estimate of fair value for the 10-year Treasury by about 300 basis points in one year - which was even more than the bond market moved.<br /><br />You can write "the 10-year bond will return to fair value next year" and everyone knows your intent, but everyone may interpret it differently.<br /><br />The interesting thing is that on most models, bonds are rarely near fair value. How this fits in with finance theory is frankly a mystery.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-63061264286305092702014-12-19T01:04:07.580-05:002014-12-19T01:04:07.580-05:00I'm curious what practitioners mean by "f...I'm curious what practitioners mean by "fair value."JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-54505534909895874872014-12-17T09:52:18.406-05:002014-12-17T09:52:18.406-05:00In my theory hyperinflation is a positive feedback...In my theory hyperinflation is a positive feedback loop. It is like an avalanche, earthquake, forest fire. We can tell when there is a high risk of the chain reaction but not exactly it is going to start. <br /> <br />http://howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html<br /><br />I will leave you alone. All the best.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-71477118989556170382014-12-17T09:32:07.339-05:002014-12-17T09:32:07.339-05:00As I have pointed out repeatedly, your theory impl...As I have pointed out repeatedly, your theory implies that we should have seen multiple hyperinflations amongst developed countries with floating currencies, and we have not seen any. Until an actual hyperinflation develops, all I can do is repeat that comment.<br /><br />Please note that although I would like to think of this web site as a modern Platonic Dialogue that will act to spread the Light of Knowledge over the Sea of Ignorance that is fixed income economics, it also has to fill the role of entertaining readers. <br /><br />I welcome debate and corrections from readers. But the comments section has to fit within the business role of the website. (Yes, there is one. This web site will be the platform for selling the books that I am in the process of slowly writing.) I am happy to answer questions, as other readers may have the same question. (There is typically a ratio of 100 readers for every comment; this ratio is even higher here, as I have not (yet) developed a community of readers who argue amongst themselves.) If people disagree with me or each other, the expectation is that it is done in a genteel manner (e.g., no cussing), and it is expected to be entertaining/thought provoking.<br /><br />Your comments show no sign of reading my article. The thesis is that people were wrong about Japan because they did not take into account stock-flow behaviour, in particular the tendency of Japanese to repatriate overseas assets. All your articles and comments make precisely that error. It is boring for me to repeat the same responses, and our conversations probably bore my regular readers. However, if I do not respond, I look bad in the eyes of any first-time readers, that would only see me ignoring you.<br /><br />If you want me to discuss "CMMT" again, read my response that I wrote earlier. Write a full length article on your web site that addresses my concerns. If you send enough traffic here, I would be forced to respond. I have a backlog of articles that I want to write, and topics have a considerable hurdle to meet before I write about them.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-66505646411736690682014-12-17T07:24:59.656-05:002014-12-17T07:24:59.656-05:00Read CMMT again and see if it does not explain Jap...Read CMMT again and see if it does not explain Japan and Russia very well:'<br /><br />http://howfiatdies.blogspot.com/2013/09/cmmt-cates-modern-monetary-theory.htmlVincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-555269353393978302014-12-17T07:07:12.840-05:002014-12-17T07:07:12.840-05:00From the point of view of someone inside Japan or ...From the point of view of someone inside Japan or Russia, almost every investment outside their country is going up fast. If your 5 year bond pays 0.1% interest per year and everything outside Japan seems to go up, measured in Yen, by 1% most every week, that seems better. It is not that they do or don't understand hyperinflation. <br /><br />The reason it is now is that the rush out of bonds has started. It is like an avalanche, once it starts it feeds on itself. The hard question was when it would start but we are past that now.<br /><br />You are not looking at the stock of money. As the central bank monetized bonds the stock of money goes up. As people see their currency dropping fast, they spend their money faster. The velocity of money goes up. You are missing velocity.<br /><br />Kyle Bass has been saying the Yen will go down. He too expected the central bank to hold interest rates. He has pointed out many times that if interest rates go up the interest on the debt would take all the taxes, and everyone (except some MMT types) would understand they were doomed.<br /><br />Debt in a foreign currency is just one way to get your spending higher than your taxes. It is not the only way. Provoking sanctions, having oil prices drop, lots of things hurting them and increasing the size of their deficit. It is the spending much more than taxes that is the real key metric in predicting high inflation.<br /><br /><br /><br />Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-38719903328275650432014-12-17T06:41:23.854-05:002014-12-17T06:41:23.854-05:00- Russia's problem appears to be that they hav...- Russia's problem appears to be that they have non-ruble liabilities. What is happening to them now is what MMT says could happen. <br /><br />- Japan has been running similarly-sized fiscal deficits for a very long time. Why is now any different? <br /><br />- You are looking at the flow of bonds, not the stock. There is still a very large stock of bonds held outside the BoJ. However, those holders have a good grasp of the Japanese economy, and know there is no risk of a hyperinflation or whatever.<br /><br />- You may not have expected JGB yields to rise. But it would be serious revisionism to argue that there were no Austrians running around screaming about "the short of the century". Kyle Bass was buying deep out-of-the-money payor swaptions, which only made sense if yields spiked. As soon as yields spike 30 basis points higher, there will be a lot of people proclaiming the imminent demise of the JGB market.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-84667145485518993032014-12-16T21:53:37.100-05:002014-12-16T21:53:37.100-05:00To be very clear, there is no sigificant dollar vo...To be very clear, there is no sigificant dollar volume of fools buying Russian or Japanese bonds. Almost all bond buying in the whole market is by the central bank.<br /><br />Also, we expected Japan's central bank to keep control of interest rates. If the central bank prints fast enough they can always do this, though the currency does fail.Vincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-89059277991595193762014-12-16T21:50:17.836-05:002014-12-16T21:50:17.836-05:00Brian, what you are missing is that Russia and Jap...Brian, what you are missing is that Russia and Japan are spending far more than they get in taxes. Their central banks have to keep making new money and buying bonds or the government will default. Governments never default on debt in a currency they can print, they print. Russia and Japan will keep printing and the currencies will keep going down. The Austrians make money and the Keynesians and MMT types are mystified. :-)<br />http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.htmlVincent Catehttps://www.blogger.com/profile/06502618776820144289noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-37228734401020934602014-12-16T11:00:17.190-05:002014-12-16T11:00:17.190-05:00Yes, currency traders have an interest in their po...Yes, currency traders have an interest in their positions running in one direction, and there is a huge amount of gross trading activity by these people. However, they have limited risk budgets, and currency speculators can only get a relatively small net position in any currency (although this net position can be very large for a small currency).<br /><br />The big net flows are for the purchase of financial assets. Although it is nice when your foreign currency asset appreciates, most investors rebalance and will thus harvest profits from positions that increased in value. <br /><br />In the case of the yen, Japanese investors make money on their USD assets, and will want to rebalance back to JPY. This keeps the currency from running too far.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-22814230901790362582014-12-16T10:33:07.220-05:002014-12-16T10:33:07.220-05:00My concept of yen-dollar trading is this:
America...My concept of yen-dollar trading is this:<br /><br />American currency trader decides to buy yen. This choice is a deference of spending. Mr. American has worked to earn money, been paid, and now will spend that money on yen.<br /><br />Japan currency trader decides to buy dollars. This choice is a deference of spending. Mr.Japan has worked to earn money, been paid, and now will spend that money on dollars.<br /><br />When the trade is complete, each trader has deferred spending. Each trader has an investment in property, identical to an investment in gold. Of course currency is not gold but currency is a share of ownership of any resource for sale (that uses the owned currency). <br /><br />It seems to me that each trader will have strong incentive to destabilize currency values over time.. When the trade is wound down, the base currency (meaning the trader's earned-currency) that has the <i> most expected inflation </i> will be the winner. <br /><br />An example: Japan is trying to create inflation. The market has moved the ratio of yen-dollar from about 76:1 in 2013 to a current 118:1. The yen seller in 2013 can repurchase his yen now and receive 118 for each dollar. The dollar seller in 2013 can repurchase his dollars now but it takes 118 yen to purchase one dollar - a big loss.<br /><br />So it seems to me.<br />Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-24283501163395656302014-12-16T06:53:32.305-05:002014-12-16T06:53:32.305-05:00I frankly am mystified by what is happening in Rus...I frankly am mystified by what is happening in Russia. Even with oil falling, I do not see why the currency is dropping a few orders of magnitude worse than what Canada (for example) is seeing. I thought that they had broken their foreign currency debt dependence. It may be that was just sell side propaganda, as I never look at their data.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-36294402586602519122014-12-16T00:46:27.773-05:002014-12-16T00:46:27.773-05:00I find these currency collapse scenarios completel...I find these currency collapse scenarios completely untenable. <br /><br />Ultimately in the currency market you still have to settle. And you have to do that every day at 10pm GMT for every open trade. This is an a decentralised market with no official market makers. <br /><br />The simple dynamics of that system mean that when something gets too high or gets too low then you get a pull back that reverses the trend as the system runs out of liquidity. <br /><br />Which means that you're always trying to create a scare story that is sufficiently believable that people will make a trade on fear rather than rational thought. That's where the liquidity has to come from to make the shorts stick in a crunch situation.<br /><br />Or you have a neo-classical influenced central bank that follows the standard script and actually ends up being the patsy in the market that everybody else trades off. The Russian Central bank being the current case in point which is doing the exact opposite of what is required. The Argentine central bank did the same. <br /><br />The Japanese position is the same as any net-export nation. To have net exports they have to create savings in foreign currencies. So lower is better from their point of view and the higher value of imports will be creating some of the 'inflation' that Abe is after. <br /><br />The Japanese will not dollarize like the Russians have. <br /><br /><br /><br /><br /><br />NeilWhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.com