A Visit to the Insane Asylum

madhedgefundtrader's picture Submitted by madhedgefundtrader on 10/12/2010 10:36 -0500

AustraliaExchange Traded FundGlobal EconomyGross Domestic ProductIndiaInsane AsylumJohn Maynard KeynesMaynard KeynesNominal GDPPrecious MetalsTen year bondTurkeyYield Curve

Watching the ten year Treasury bond tickle a 2.36% yield yesterday, I thought it would be propitious to revisit the insanity that is going on in this market.

Historically, ten year bond yields matched the nominal GDP growth rate. So an average 3.5% GDP growth for the past decade added to a 2.5% inflation rate gave you a bond yield trading around 6%. Today the math is from a different universe. A 2.4% GDP rate added to 0% inflation is giving you the 2.4% yield you see glaring at you from your screen today. The market is essentially betting that inflation will remain at zero for another decade.

There is one honking great problem with this scenario. Rampant inflation has already broken out in great swaths of the global economy. Anyone who purchases precious metals, commodities, energy, food, health care, user fees of any kind, or a college education can tell you, not only that inflation is alive and well, it is flourishing. Residents of China (FXI), India (PIN), and Turkey (TUR) and other emerging markets, and the commodity producing countries of Australia and Canada, can also tell you a lot about inflation.

The last place you can expect this stealth inflation to appear is in government statistics, a deep lagging indicator. And don’t ever expect inflation to show its ugly face where you want it the most, in your wages, pension benefits, or 401k returns.

Given the strongly positive yield curve, where 30 year yields are trading at a 3.7% premium to overnight rates, this is probably the best time in four decades to sell Treasury bonds. With rates this low, the market is not telling the government that it is issuing too much debt, but that it is not issuing enough. Personally, I don’t understand why the Treasury isn’t floating more paper at the long end. Maybe it has something to do with politics. At this point I have to replay John Maynard Keynes most famous quote, which I keep glued to my computer monitor, “markets can remain irrational longer than you can remain liquid.”

So I wouldn’t be betting the ranch on Treasury bond shorts just yet. Better to limit yourself to cleaning out any last remnants of Treasury longs from your portfolio. When the turn does come, you’ll be wanting to jump with both feet into the 2X leverage short Treasury ETF (TBT), and day trade its younger, more athletic cousin, the 3X (TMV).

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at http://www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

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by alexwest
on Tue, 10/12/2010 – 10:53

you said u retired :(((((

# market is essentially betting that inflation will remain at zero for another decade.

arent u tired saying stupid things???

do you think u’are smarter than boys at PIMCO

hey stupid THERE’S A THING CALLED FEDERAL DEFICIT .. it’s running 1.7 trln $$$per anum.. so EVDERybody  w/  2 bits of brains understood eternity ago

that FEDS cant allow rates go up cause it will choke whats called recovery

and will increase debt servicing.. so IN THAT CASE fed wiLL BE forced to

print money aka QE v 2,3,4,…n


so whats the point  of NOT BUYING debt now

instead do it later..??? at least now its orderly everybody knows that..



please  shut up already….


Login or register to post comments by SheepDog-One
on Tue, 10/12/2010 – 11:29

‘Dont you know the Pimpco boyz are way smarter than you’! So said the silly little rabbit, right before hes dropped in the stew pot.

BTW silly rabbit, youll get no never-ending Q/E’s, as is the standard accepted wisdom among Hoium addicts such as yourself, and I bet you dont even see Q/E2.

Login or register to post comments by DonutBoy
on Tue, 10/12/2010 – 10:59

There is a treasury bubble to be sure.  My problem with TBT is that I don’t believe there are any 20+ year treasuries left – it’s becoming undefined.

My hypothesis for why they aren’t issuing any long treasuries is that they know the only buyer at this price is the Fed.  If they were to issue these in any quantity, beyond what the Fed is buying, then real inflation expectations would show up in the price.


Login or register to post comments by SheepDog-One
on Tue, 10/12/2010 – 11:26

Whole financial world just a big Hopium den.

Login or register to post comments by Cognitive Dissonance
on Tue, 10/12/2010 – 11:39

Excuse me, but I’d like some royalties on this title. You’ll be hearing from my lawyer. :>)

Shameless self promotion below.

Login or register to post comments by Waterfallsparkles
on Tue, 10/12/2010 – 11:45

Is it a coincidence that the FED does not include Food and Energy in their Inflation factors?  Food and Energy could go up 100% and it would not be considered by the FED as inflation.  I think they need to put Food and Energy back into the Inflation figures.  Just what is it outside of Food and Energy that the FED is trying to inflate anyway?

Login or register to post comments by El Hosel
on Tue, 10/12/2010 – 11:54

 “Just what is it outside of Food and Energy that the FED is trying to inflate anyway?”

    Housing, stocks, bonds, toxic assets…

Login or register to post comments by thepigman
on Tue, 10/12/2010 – 11:48

Actually, I think you’re wrong…I’m going

to short a big load of TBT in here.

Login or register to post comments by thepigman
on Tue, 10/12/2010 – 11:50

Madhedgefundtraders always forgets

the friggin wheels are coming off the global

economy. China next.

Login or register to post comments by thepigman
on Tue, 10/12/2010 – 11:53

And we’re friggin Japan

Login or register to post comments by ATG
on Tue, 10/12/2010 – 11:59

MHFT at least 50% underwater on TBT reco last year:


USB still targeting a third higher:



Login or register to post comments by thepigman
on Tue, 10/12/2010 – 12:04

And he keeps coming back for more,

same error made in Japan.

Login or register to post comments by thepigman
on Tue, 10/12/2010 – 12:05

That’s right, I’ll short you all the TBT

you want….Come and get me.

Login or register to post comments by ATG
on Tue, 10/12/2010 – 12:07


Login or register to post comments by ATG
on Tue, 10/12/2010 – 12:08


Login or register to post comments by ATM
on Tue, 10/12/2010 – 13:09

There is no market for Treasuries outside of the government itself. You have unlimited demand for treasury debt from the Fed so you have nearly unlimited upside to bonds as bond rates near absolute zero.

Why would anyone in their right mind bet against that? Rates are going to go as low as the Fed wants them to go. Housing is the big problem and the Fed has to do everything it can to boost housing prices because absent rising prices the banks are all broke, the government is completely broke and the fed itself is broke because it has assumed trillions of Fannie and freddie junk.

Selling USTs is suicide but so might buying them be. Better to bet the consequences – dollar worth nothing so you need real things and not stocks.

Kyle Bass made a great point that should shake the foundation of all sock purchasers. The number one stock market over the past 10 years has been Zimbabwe’s. Their stock prices have exploded just as their currency value has dropped to zero.

Real assets the the play – gold, land, farm commodities and anything thats value is tied to dollars or any fiat currency is worthless.   

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