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Old 06-08-2011, 01:16 PM   #41
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You obviously did not mis-spend your youth taking drugs or alcohol if you can make that statement with conviction!
Who said it was misspent?
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Old 06-08-2011, 01:24 PM   #42
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Clearly the bond market does not worry about the US defaulting on its debt. Bond yields have increased tremendously in Greece in response to a possible default. In the US, bond yields have come... down.

The way I see it, a default would be very damaging to a lot of generous political contributors. They will apply the right amount of pressure to make sure it doesn't happen.
Bond rates won't reflect the broader market while we have QE and this sort of activity:

New York Fed purchases $6.409 billion in Treasury coupons

Here they bought almost the entire issue of this note
912828QP8 T 01.750 05/31/16 5,955,000,000

Once the open market starts bidding on Treasuries we'll have a better picture.

Hey, maybe the Congresscritters just want to help out the widows and orphans with higher interest rates? It's hard to quantify crazy.
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Old 06-08-2011, 01:53 PM   #43
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it seems odd to think that the US government must allow hyperinflation for it to happen.
Exactly right, Ha. The govt didn't intend for the Great Depression to happen, or the Great Recession, or stagflation in the 70's, or any of a hundred other economic nasties. They just don't have any good way to control it -- especially when they're making idiotic policy decisions (e.g. massive deficit spending) that drive the economy in a bad direction.

The Weimar and Zimbabwe governments didn't intend for hyperinflation to happen, either. But when you try to paper over your bad policy decisions, when you try to print mountains of money to pay for your profligate spending, that's what tends to happen.

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Clearly the bond market does not worry about the US defaulting on its debt. Bond yields have increased tremendously in Greece in response to a possible default. In the US, bond yields have come... down.
It's a "lesser evil" thing. While the US economy is in a bad way and heading in a seriously bad direction, it looks a whole lot better than Greece. People perceive US debt as a much safer risk than Greek debt. That doesn't mean it's safe.
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Old 06-08-2011, 02:18 PM   #44
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The way I see it, a default would be very damaging to a lot of generous political contributors. They will apply the right amount of pressure to make sure it doesn't happen.
To a certain extent, this is my reason for being comfortable with Treasury debt.
It's not only the bonds they hold directly, but also the contagion effects on their other assets.
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Old 06-08-2011, 02:25 PM   #45
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It's a "lesser evil" thing. While the US economy is in a bad way and heading in a seriously bad direction, it looks a whole lot better than Greece. People perceive US debt as a much safer risk than Greek debt. That doesn't mean it's safe.
Thanks for the comment, Gary,
Regarding your concerns, how would you diversify out of US treasuries?
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Old 06-08-2011, 02:33 PM   #46
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It's a "lesser evil" thing. While the US economy is in a bad way and heading in a seriously bad direction, it looks a whole lot better than Greece. People perceive US debt as a much safer risk than Greek debt. That doesn't mean it's safe.
Did I say treasuries were safe? That's funny, because I think they carry plenty of risks (TIPS represent less than 5% of my portfolio and I own no nominal treasuries). Impending default is not one of those risks, IMO. The US carries a very serviceable amount of debt at this juncture and defaulting in the near future would be absolutely ridiculous.
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Old 06-08-2011, 02:43 PM   #47
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I am strongly considering 100% TIPS in a laddered format if the real rate gets to 2.25%. I can save enough such that my SWR would be equal to the real rate and I could never have to look at firecalc or pretty much any market condition ever again (or at least for 30 years).

Ok, maybe 99.99% TIPS and 0.01% guns and ammo, as the latter would definately be needed in the case of a US default.
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Old 06-08-2011, 02:56 PM   #48
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Did I say treasuries were safe? That's funny, because I think they carry plenty of risks (TIPS represent less than 5% of my portfolio and I own no nominal treasuries). Impending default is not one of those risks, IMO. The US carries a very serviceable amount of debt at this juncture and defaulting in the near future would be absolutely ridiculous.
I believe people oversimplify this problem. Once the world comes to accept that what they will get back will be worth very much less than what they put in, both the dollar and the bond quotes will plunge. It could happen abruptly, or it may not happen at all if credible steps are taken.

It's not like everyhing is fine and dandy and all of a sudden Mr. Geithner says "Sorry folks, no interest this period".

Ha
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Old 06-08-2011, 03:02 PM   #49
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Thanks for the comment, Gary,
Regarding your concerns, how would you diversify out of US treasuries?
Iraqi dinars.
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Old 06-08-2011, 03:03 PM   #50
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I believe people oversimplify this problem. Once the world comes to accept that what they will get back will be worth very much less than what they put in, both the dollar and the bond quotes will plunge. It could happen abruptly, or it may not happen at all if credible steps are taken.
Ha
This is indeed one of the risks I think treasuries carry. Treasuries have enjoyed very high investor confidence for decades, and playing games could easily undermine that confidence. And we have seen that, in the case of Greece, once investor confidence goes it's a death spiral.
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Old 06-08-2011, 05:36 PM   #51
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This is indeed one of the risks I think treasuries carry. Treasuries have enjoyed very high investor confidence for decades, and playing games could easily undermine that confidence. And we have seen that, in the case of Greece, once investor confidence goes it's a death spiral.
The time to worry will be IF (when?) the US $ loses its world reserve currency status. Until then all this is noise. Moreover, it makes no sense to draw any conclusions about the US's fate from that of Greece's current predicament.

Again all this is seperate and apart from the issue of whether US treasuries are "good" investments at these yields. IMHO, they are clearly not.
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Old 06-08-2011, 07:27 PM   #52
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Hi Everybody...

I would appreciate some input and opinions re: what we have in our Roth IRA accounts, which is a substantial portion of the total portfolio (40%)

Hers: Vanguard TIPS fund only
His: Vanguard Intermediate treasury fund only

I have safety concerns about treasuries because of the ballooning deficit. Maybe it's just me, but I have concerns about the economy as a whole

What do you think? How do you address the issue of diversification within your non-taxable accounts?
Relative to other investment choices, T-Bills are particularly suited to preserving principle, both in the past and will be in the future. It is also a strength for T-Notes/Bonds, but slightly less so than T-Bills.

They are taking a lot of heat because of both low yield, as well as the imminence of rising prime interest rate. But the alternatives aren't all that great either. A strong argument could be made that both domestic and foreign stock markets are overvalued, using a variety of metrics. My point is you've got to put your money somewhere. The choice is you might just have to end up picking the least of the evils.

If you're concerned about the economy, the first investment choice to fear is stocks, not any sort of bond.
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Old 06-08-2011, 09:51 PM   #53
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Such as? I would very much appreciate one or two to start with, Nords.
My point about "fringe voices" is that we don't realize that they're "on the fringe" until the debate is over and the history books have been written. When you're reading the newspaper headlines, and you don't know how the story ends, then it's very difficult to distinguish the fringe from the mainstream.

"Official history" is also full of "facts" that are not in the majority or even just plain wrong.

This is pulled from my list of library books that I've read over the last few years, so they should still be available. I don't have all the authors at hand but I think the titles are unique.

With that theme in mind there should be something here for everybody.

Start with my favorites:
Triumph of the Optimists by Elroy Dimson, Paul Marsh, and Mike Staunton
and
William Bernstein's "The Birth of Plenty" and "A Splendid Exchange".

Next would be:
"The Lords of Finance" by Liaquat Ahamed, about world fiscal policy during the 1920s... I won't spoil the story by telling you how it ends.

In no particular order there's:
"The Way We Never Were" by Stephanie Coontz, and her followup "The Way We Really Are"
AC/DC: The Savage Tale of the First Standards War. (Edison vs Tesla.)
Influence: The Psychology of Persuasion by Robert Cialdini
Founders at Work: Stories of Startups' Early Days [Hardcover] by Jessica Livingston
The Snowball: Warren Buffett And The Business Of Life by Alice Schroeder
"The Eleven Days of Christmas: America's Last Vietnam Battle" by Marshall Michel
Sudden Sea: The Great Hurricane of 1938, R.A. Scotti, the most destructive natural disaster in U.S. history that nobody remembers anymore
The "What They Didn't Teach You About" series-- particularly the Civil War, WWII, and the 1960s
Origins of the Crash: The Great Bubble and Its Undoing by Roger Lowenstein
Too Big to Fail by Andrew Ross Sorkin
The Big Short by Michael Lewis
BULL! A History of the Boom, 1982-1999. By Maggie Mahar.
1912: Wilson, Roosevelt, Taft, & Debs-- The Election That Changed a Country
Frank Lloyd Wright by Ada Louise Huxtable
"The Showman of the Pacific: 50 Years of Radio and Rock Stars", by Tom Moffatt with Jerry Hopkins
The Wal-Mart Effect, Charles Fishman
"Broken Trust: Greed, Mismanagement and Political Manipulation at America's Largest Charitable Trust", Samuel King & Randall Roth
Marc Freedman's "Encore" and "Prime Time", the parts about social programs of the 1960s and 1970s
iWoz by Steve Wozniak
"Complications" and "Better: A Surgeon's Notes on Performance" by Atul Gawande
The Illusions of Entrepreneurship, Scott A. Shane
Predictably Irrational: The Hidden Forces That Shape Our Decisions, by Dan Ariely
Panic: The Story of Modern Financial Insanity by Michael Lewis
50 Great Myths of Popular Psychology: Shattering Widespread Misconceptions about Human Behavior, by Scott O. Lilienfeld
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Old 06-08-2011, 10:00 PM   #54
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My point about "fringe voices" is that we don't realize that they're "on the fringe" until the debate is over and the history books have been written. When you're reading the newspaper headlines, and you don't know how the story ends, then it's very difficult to distinguish the fringe from the mainstream.
How insightful, Nords. Thank you for the list
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Old 06-08-2011, 10:03 PM   #55
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If there is any default, it will be an act in aid of domestic politics, not of economic reality. No country that issues debt in its own currency can default unless it chooses to. In my opinion, the pro-default crowd is playing with fire. In my years as a bankruptcy lawyer, I saw many companies think that they could stare down their creditors, only to find themselves in Chapter 11 and not entirely in control of the process or certain of their future existence. A default, even a technical one, triggers many rights on the part of bondholders. I would not take the chance. Even a near miss may result in a downgrade and raise borrowing costs in a manner that we do not like.
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Old 06-08-2011, 11:12 PM   #56
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In my opinion, the pro-default crowd is playing with fire.
Right up until mid-July, when they get a look at their latest polling numbers...
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Old 06-09-2011, 12:24 AM   #57
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That's an impressive list Nords! Would you suggest a book that I could obtain via inter library loan (ie isn't obscure) that explains what went on during the 1920's that lead to the crash in 1929? How about another book about what caused the depression? Is it possible to find 2 such books that aren't opinion but based upon actual facts? I'd like to understand what happened. I'm aware buying on margin was the cause of the collapse when people couldn't meet their margin calls. But what events lead to the depression and kept us there?

The only book on that list I read was BULL! A History of the Boom, 1982-1999. By Maggie Mahar, it was in my library. I felt the author was anti capitalist and anti wall Street but I read it anyway. I found it fascinating to read about the events that fueled the greatest bull market in modern if not all time. Can't say if it is more opinion than fact but it was interesting.
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Old 06-09-2011, 01:27 AM   #58
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"We must not let our rulers load us with perpetual debt. We must make our election between economy and liberty or profusion and servitude. If we run into such debt, as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our calling and our creeds...[we will] have no time to think, no means of calling our miss-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers... And this is the tendency of all human governments. A departure from principle in one instance becomes a precedent for[ another]... till the bulk of society is reduced to be mere automatons of misery... And the fore-horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression." - Thomas Jefferson

The current discussion has predictably splintered into a political bully session in the schoolyard as the ad hominem attacks of "crazy" and "fringe" are applied to those who would have the gall to intellectually debate whether default by the US Trsy may actually be a more prudent and optimal path to take then the course which leads to hyper-inflation and the ultimate debasement of the legal tender currency issued by the US Trsy. If I HAD to choose one of the two options - the US Govt is not quite at the point where we only have these two options today - I would choose to default. The US Govt owns more land assets, commodities, investments, etc. than it fundamentally should IMO while it continues to recklessly increase deficit spending on programs that are politically structured to grow geometrically - until they can't, of course. Rather than this wealthy entity, the US Govt, continuing to own it's assets while it forces higher taxes and a debased currency upon it's citizens I wouldn't consider it "crazy" or "fringe" to force the US Govt to maintain the value of the currency that it forces it's citizens to use by paying off it's debts through asset sales. It should be clear that default and recovery through asset sales would eventually lead to a stronger currency and an ability to ultimately borrow again in the future as opposed to political and economic policies which erode and debase the currency to the point of hyperinflation. Hyperinflation will destroy wealth for all citizens except those with hard assets, will make it impossible for the US Trsy to ever borrow again and will topple the democratic form of government: There is no other scenario since no other entity - not the IMF, the World Bank, Brussels, etc. - would have the resources nor the will to bail out the US Govt.

In a forum that is comprised of ER folks I would hope that many here would see that the dangers of hyperinflation far exceed that of a default. On a personal level, US Trsy default would probably keep you retired whereas hyperinflation would most likely not.


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Originally Posted by antmary View Post
Hi Everybody...

I would appreciate some input and opinions re: what we have in our Roth IRA accounts, which is a substantial portion of the total portfolio (40%)

Hers: Vanguard TIPS fund only
His: Vanguard Intermediate treasury fund only

I have safety concerns about treasuries because of the ballooning deficit. Maybe it's just me, but I have concerns about the economy as a whole

What do you think? How do you address the issue of diversification within your non-taxable accounts?
With regards to the original query in this discussion, imo, the best free lunch in the investment world - which rarely gives out free lunch tickets - is to invest in BAB bonds in your non-taxable accounts. The US Govt subsidized the taxable portion of the coupon to the issuer in order to create liquidity in the muni mkt but taxed those bonds as if they were regular taxable bonds to the investor. Therefore, by placing them in non-taxable accts, the investor is literally getting free yield for the same credit risk.

Of course, given this discussion, if you are worried about US Trsy default or hyperinflation then the muni mkt may seem like the Golden Nugget so even the free steak dinner and magic show coupon may not be enough to make you enter...

Good luck.
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Old 06-09-2011, 09:19 AM   #59
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Regarding your concerns, how would you diversify out of US treasuries?
I honestly don't know. Some very knowledgeable writers I follow claim the stock market is setting up for a major fall once QE2 comes to an end. Another writer (in the same newsletter group) says stocks are a better bargain now than they've been in 20 years, except for March 2009.

I am 100% certain that Treasuries will be a Bad Thing to hold. Interest rates HAVE to go up. Only the Treasury's massive buying of US debt has kept the rates artificially low. Once that huge demand leaves the market, the ever-increasing supply will flood the market, and you know what happens when supply exceeds demand. The only alternative is for the Treasury to keep buying up all the debt, and that way lies hyperinflation.

Consider that Bill Gross, the head of the largest bond fund in the WORLD, has fled the Treasury market. Gross is known as the "Bond King." As recently as last year he held almost $150 billion in US bonds. Now he's not only dumped all his bonds (a good trick with that big a pile), his Pimco Total Return fund is partially SHORT US bonds. Gross didn't get where he is by being dumb, and he thinks Treasuries are a bad bet.

I am *not* a guns-and-bomb-shelters kind of guy, but what I see coming scares the bejeezus out of me. I'm starting to think holding a nontrivial part of your assets in gold and silver might not be such a bad idea. I really wish I'd started collecting some several years ago, but ohwell.

The downside of that is that the hard commodities may take a fall, too. Much of the upward price pressure in gold, silver, oil, copper, etc comes from huge amounts of buying from China, and to a lesser extent India. China has decided they have WAAAYYY too much US debt, and they don't like the trend they see happening with that debt. They've pretty much quit buying our debt. Now when China receives mountains of US$ from selling us their lead-contaminated plastic crap, instead of buying Treasuries they're buying gold, they're buying up oilfields and natural gas fields, they're locking in commitments for oil and coal and uranium for decades. Which makes a lot of sense if they think the dollar is going into the toilet -- use their dollars NOW to buy hard goods before the dollar tanks.

BUT... China is not invulnerable. They've been overbuilding their overheated economy for years. A lot of people think they're setting up the biggest bubble in history, one that would make our 2008 crisis look like a teddy bear picnic. If that happens, then overnight the biggest buyer of gold, silver, etc might disappear from the market. Which could cause a major crash in commodity prices. Which could lead to deflation and even depression. (Ain't I just a cheery guy though??)

So what to do? I really don't know. I don't know if there IS any safe "buy it and forget it" asset any more.

See e.g. these articles from the past week:
You Owe $534,000
A Serious Warning: The Facts Behind America's Coming Collapse
The Beginning of the Panic
A Secret About U.S. Finances You Won't Read Anywhere Else
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Old 06-09-2011, 11:38 AM   #60
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It seems Godwin's Law applies equally well to Weimar Republic references as it does to Hitler references these days.

The U.S. of the 21st Century is not Germany of the 20th.

1) Weimar printed money to pay reparations denominated in gold or foreign currencies. Meanwhile all of the U.S. obligations are in its own currency.
2) Devaluing the currency increased the Weimar's real debt burden increasing the number of Marks that needed to be printed, which further devalued the currency; not so with the U.S.
3) Inflation in the U.S. actually shrinks the real debt burden for both the government and families.
4) We've learned a fair amount about monetary policy and the sources of inflation over the past 90 years. So yes, hyper-inflation would be a conscience choice.
5) Extraordinary low interest rates and moderate inflation in the face of massive federal deficits and a zero fed funds rate are not enigmas, they are predictions of liquidity trap economics. There is no reason to expect this to change until the situation that gives rise to the liquidity trap (in the U.S. case, an over leveraged consumer) is remedied. Which is 'funny' because inflation actually helps in that regard, but you can't manufacture inflation because of the over leveraged consumer - thus a 'trap'.
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