tag:blogger.com,1999:blog-582368152716771238.post8495196429975998959..comments2024-03-29T05:46:24.412-05:00Comments on The Grumpy Economist: Operation Un-TwistJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-582368152716771238.post-35700117844072749432012-07-27T12:51:26.511-05:002012-07-27T12:51:26.511-05:00Good article, but one quibble. You wrote:
The Tr...Good article, but one quibble. You wrote:<br /><br />The Treasury is trying, a bit. But the Fed is undoing what the Treasury is trying with "twist."<br /><br />Although this is the general perception, it may not be true. The average maturity of the debt is increasing, but it's not necessarily because the Treasury is trying. In fact, the debt has a built-in tendency to lengthen. This sounds odd, but the portfolio is so front-loaded that the ongoing expiration of maturing securities (which are very short-term just before they mature) drives up the average maturity, just as throwing off ballast causes a hot air balloon to rise. The Treasury is actually selling very short securities. The average life of its May issuance was less than half that of the whole portfolio. It is selling few long maturities.<br /><br />The Treasury is not actively lengthening the debt, and it is not undermining the Fed.<br /><br />I discussed this in a recent presentation to the Global Association of Risk Professionals. The slides and a summary can be found at:<br /><br />http://welltemperedspreadsheet.wordpress.com/2012/07/24/garp-presentation-on-interest-rate-risk-and-the-treasury/Win Smithnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9966683155080328182012-07-16T15:10:15.540-05:002012-07-16T15:10:15.540-05:00I also agree but would just like to bring up the &...I also agree but would just like to bring up the "why waste a crisis" argument. If we did refinance with the intent of buying more time to fix our fiscal problems would anyone in DC actually act to fix the problems? I personally don't think so.<br /><br />We can see in Europe all the concessions Germany has gotten from the troubled European states (whether those concession will or will not happen or not is a different topic). Professor Cochran, As a concerned tax payer I would appreciate it if you stopped giving government officials ideas to avoid tough choices (said jokingly I love this blog).Rene A.https://www.blogger.com/profile/11257710543538207907noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-65749485793798550082012-06-27T21:31:33.274-05:002012-06-27T21:31:33.274-05:00Really? I invested heavily in gold when this regim...Really? I invested heavily in gold when this regime went into operation because I had seen the things they were trying to do done in the 1970's. I will wager I made a hell of a lot more profit than you did in the last three years. (an average of 34% per anum)<br /><br />Yes Obama certainly has had his crony capitalists but that hardly negates the utterly negative and destructive tone and polices of his administration as a whole.KyleNhttps://www.blogger.com/profile/15766641765942339253noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26803234489489631912012-06-24T12:10:10.409-05:002012-06-24T12:10:10.409-05:00The argument is not a bet, it's a risk managem...The argument is not a bet, it's a risk management issue. Buying fire insurance is not a bet that your house will burn down, really, it is paying a premium so that if it does burn down you won't be homeless. The case for a longer maturity structure survives if you think there are equal chances rates go up and go down. If they go down, yes, you paid a bit more to finance the debt. If a sovereign attack on US short-term debt breaks out, you're covered.John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66993973639891972332012-06-23T07:44:33.893-05:002012-06-23T07:44:33.893-05:00I heard that she followed David F. And became an a...I heard that she followed David F. And became an anarkist. Anarky is the reason she lived so long.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-84894089916727572322012-06-22T10:52:40.836-05:002012-06-22T10:52:40.836-05:00http://gregmankiw.blogspot.com/2011/05/bond-market...http://gregmankiw.blogspot.com/2011/05/bond-market-meme.htmlIndependentVoterhttps://www.blogger.com/profile/10978132678617731242noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7289640852798227062012-06-22T09:29:51.964-05:002012-06-22T09:29:51.964-05:00We have been advocating the change to longer matur...We have been advocating the change to longer maturity US debt for months now even though we acknowledge the useless attempt by the Fed to keep rates down for economic reasons, which we agree, are politically suspicious.<br /><br /> As to your question of who in their right mind is investing in T's at 1.50% - which we suspect is partly rhetorical - the answer is "nobody". That is, this are not "investors" but sovereign entities trying to park their assets temporarily until the storm passes.<br /><br />This means that the Obama administration is in a pickle; to win the election they must get a substantial improvement in US economic conditions, and for such conditions to arrive the European Debt crisis must unequivocally subside and improve. But if the European crisis goes away (unlikely) in the next 3 months, the so called "investors" of Treasuries will sell (take back their money) and compound those likely domestic sellers that will try to avoid the radical capital gains increases coming January 1st. <br />This double action will burst the Treasury bubble and cause an stampede from Treasuries bringing a major increase in interest rates, with all that it means for the deficits.<br /><br />The Fed is setting up a catch-22 that will hurt his boss.John Galthttps://www.blogger.com/profile/01341516141700687089noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-845977848993299452012-06-22T09:27:30.457-05:002012-06-22T09:27:30.457-05:00This comment has been removed by the author.John Galthttps://www.blogger.com/profile/01341516141700687089noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73061208568467096512012-06-21T21:42:56.356-05:002012-06-21T21:42:56.356-05:00i agree with 'IndependentVoter'...doesn...i agree with 'IndependentVoter'...doesn't Japan scarily show that US can sustain this senseless money printing for a very long time?<br /><br />For 2 decades, Japan has done all the wrong things that US is doing now. Economy has suffered but, absent inflation, politicians manage to keep rates low.<br /><br />Its probably due to the falling 'velocity of money' which unfortunately has lot more room to fall.<br /><br />Is that right?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-75419176283638265262012-06-21T16:55:28.367-05:002012-06-21T16:55:28.367-05:00"an American Administration ... hostile to co..."an American Administration ... hostile to commerce."<br /><br />The idea that the Obama administration is hostile to commerce is ludicrous. They have handled Wall Street in particular with kid gloves when forceful intervention was called for. <br /><br />As a personal investor I shifted to cash because I concluded that the Republicans are hell bent on destroying the economy.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60728852990407038922012-06-21T16:39:38.311-05:002012-06-21T16:39:38.311-05:00Anna Schwartz died today. She and Milton both had...Anna Schwartz died today. She and Milton both had unusually long lives. Maybe being a Monetarist is the key to longevity?KyleNhttps://www.blogger.com/profile/15766641765942339253noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-25135004813215468182012-06-21T16:35:57.943-05:002012-06-21T16:35:57.943-05:00Your last sentence is doubtful. The markets are re...Your last sentence is doubtful. The markets are reacting to pandemonium in Europe, and an American Administration that doesn't know anything about economics and is hostile to commerce. <br /><br />Not sure what will happen in Europe, but you might be surprised at the pent up demand which will be released in this country when the regime is changed. <br /><br />As to interest rates, You are correct the long term prime is usually in the 3-4% range, but because western nations have been operating with an average of 2-3% inflation in the post war years you have to add that on to the prime.KyleNhttps://www.blogger.com/profile/15766641765942339253noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-27814001007109426802012-06-21T13:02:37.018-05:002012-06-21T13:02:37.018-05:00John, but the problem with your logic is that you ...John, but the problem with your logic is that you are asking government bureaucrats to make a bet on the direction of the interest rates. Who says rates can't go lower ? 10yr yield in Japan is 0.82%. That's half of the 10yr rate in the US and Japan has twice the debt that we do and a WORSE trajectory for the debt than we do. Given this plain vanilla evidence, why do we need to make a bet now that rates will go higher? The reality is rates will go higher most likely if we have strong growth and not in any other scenario. And if we have strong growth, the budget situation will take care of itself.IndependentVoterhttps://www.blogger.com/profile/10978132678617731242noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-55005365699142147432012-06-21T09:36:01.900-05:002012-06-21T09:36:01.900-05:00Yes, I agree. But conditioned on all that, when bo...Yes, I agree. But conditioned on all that, when bond markets wake up I'd rather see a fall in long term bond prices than inflation or default. It at least would give us some time to clean things up.John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-54462497337980925612012-06-21T09:33:23.859-05:002012-06-21T09:33:23.859-05:00I'm almost flattered that they think I'm d...I'm almost flattered that they think I'm dangerous. Though free markets and political freedom are pretty well linked, as China is likely to discover soon. <br /><br />If anyone reading knows what settings might be unintentionally causing blockage, let me know. This is a pretty plain-vanilla blogger site.John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77808965239093119432012-06-21T02:15:04.535-05:002012-06-21T02:15:04.535-05:00Did you know your site is blocked in china. I just...Did you know your site is blocked in china. I just came back from vacation and I could not get your site while there. I don't think it is because they don't like you. I think you might be using something in your website setup that just switched it off. I am pretty sure they like you, but your not getting through. They are big fans of Chicago in Fudan University, please recheck your settings in your website. Also. Please spread some dirt on people who don't embrace technology. We are going to have a real crisis soon because of professors not addressing the real issues facing our society. The implications of technology, and growth vs. Development. There seems to be some serious missunderstanding in this area in academentia.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24496316282207592022012-06-21T00:28:33.031-05:002012-06-21T00:28:33.031-05:00Dr. Cochrane,
Great post as always, if only anyon...Dr. Cochrane,<br /><br />Great post as always, if only anyone in Washington would listen. <br /> <br />1) We should probably quote 11M (publicly held) as opposed to $15. You and I know entitlements are not getting better, but that is what we need to roll over as of now. http://www.treasurydirect.gov/NP/BPDLogin?application=np<br /><br />2) Who is long on 30 years? The yields in the face of budget and future deficits defy logic. I highly doubt I'll ever believe anyone can be more efficient than the market, but newsless idiosyncratic stock moves and the 30 year have me befuddled. I worry the explanation is the treasury knows that the demand is low, has issued very few (hence the short US debt maturity) and what is issued is bought by the fed, strong armed banks (by the fed), or some insurance or pension legislation we have not thought through. Potentially even at 0% rates, 30 years due to silly regulation may not have 0 demand. <br /><br />3) To add to your point about the minimal value of a 15 bp drop in the 30 year ... how can someone argue that that marginal drop will do more to spur investment than eliminating the giant uncertainty (See John Taylor - First Principals) Washington has hanging over American businesses. A simple thought experiment. We're management of a large fortune 500 evaluating the NPV of a long-lived risky investment and plan to finance it exclusively via debt. Is the largest issue in calculating our NVP in our scenario analyses the cost of debt, or is it the fact we have no idea what the US regulatory, legal or economic structure will be like in 1 let alone 5 years. Is 15 bps off my debt holding me from green lighting the project? Or am I worried about a war in Iran or a US Cap and Trade bill doubling my energy costs; How to calculate the actual cost of health care for my employees over a long term; Europe, the ECB, and Dodd Frank doing nothing (negative really) to give me any confidence in money market and other short term lending markets leaving me terrified of any additional debt that could contribute to an overhang in case there is another run; needing a legal immigrant who happens to be the smartest person in his field to work on my project, I likely can't get him in the country; I am terrified that at any point in time in the future some smart lawyer can sue my business out of existence if anything goes wrong ... I am really stunned Dr. Taylor's advice has not been scooped up by either party. <br /><br />Sorry for being long winded. Brevity is on my long to-be-learnt list for graduate school.<br /><br />Thank you,<br /><br />Parth<br /><br />2nd Year PhD Student <br />Finance, McCombs Business SchoolParth Venkathttps://www.blogger.com/profile/09830285782100016152noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39722354092080724012012-06-20T22:55:21.450-05:002012-06-20T22:55:21.450-05:00"I will admit that understanding such low rat..."I will admit that understanding such low rates is stretching my rational-investor efficient-market prejudices"<br />Scott Sumner: more Chicago than thou!TGGPhttps://www.blogger.com/profile/11017651009634767649noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77570879810442427572012-06-20T22:42:56.782-05:002012-06-20T22:42:56.782-05:00You can no longer convince me that we would be in ...You can no longer convince me that we would be in any way worse off if we fired Bernanke and the entire clown show at the Federal Reserve and went back to the gold standard. They clearly have no idea of what they are doing and no concept of trying not to gum things up. Letting economists run the banking system is like letting 14 year old boys run the bomb disposal unit. An explosion, and a nasty one that kills a large number of innocent bystanders, is not just highly probable, it is inevitable.Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-92165066945649127142012-06-20T21:13:31.995-05:002012-06-20T21:13:31.995-05:00You appear to be suffering cognitive dissonance be...You appear to be suffering cognitive dissonance between your theories and the evidence of the market. <br /><br />If interest rates are going to return to "normal" then "normal" is already priced in or the theories that you espouse are wrong.<br /><br />Personally I do not believe that normal interest rates are in the 5 to 6% range. Historically real risk free interest rates are more like 2% at the short end of the yield curve and 3 to 4% at the long end. <br /><br />The current very low interest rates may be because the market is predicting that the austerity policies now so widely promoted are going to destroy the world economy for decades to come.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-43864155561268233332012-06-20T15:43:23.987-05:002012-06-20T15:43:23.987-05:00I agree, it is a useful tactic if it would be done...I agree, it is a useful tactic if it would be done in conjunction with some spending cuts. But as it is now it just empowers further debt.KyleNhttps://www.blogger.com/profile/15766641765942339253noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26370395769708020862012-06-20T11:47:21.353-05:002012-06-20T11:47:21.353-05:00While I agree with the premise, it is hard to pala...While I agree with the premise, it is hard to palate another tool for governments to run massive deficits into perpetuity with no intention of ever paying off the debt except with infalted dollars...Public Libraryhttps://www.blogger.com/profile/00017383928897945054noreply@blogger.com