ladelfina
Thinks s/he gets paid by the post
- Joined
- Oct 18, 2005
- Messages
- 2,713
d, the Children are us and the US Treasury.. and the Parent is the Fed!? yikes.
My Pocket Just Got Picked
- Thread starter boont
- Start date
ladelfina
Thinks s/he gets paid by the post
- Joined
- Oct 18, 2005
- Messages
- 2,713
barbarus
Recycles dryer sheets
- Joined
- Aug 1, 2007
- Messages
- 433
Shifting the Burden
Shifting the Burden
"One question is, why investors have been historically willing to hold government bond instruments that have yielded not only relatively low but also highly volatile ex post real rates of return. This source of cheap finance can clearly give governments in advanced countries considerable latitude in postponing needed fiscal adjustment and ultimately shift the burden of future adjustment to holders of such long term instruments pension funds and baby boomers among them. Given the well-known inverse relationship between the bond rates and equity returns, such historically low real rates of return on advanced countries’ long-term bonds also suggests that, by and large, the equity risk premium puzzle effectively boils down to a low treasury bond rate puzzle. Fully explaining the latter thus could well be a critical task for analytical and policy-related work in international finance in the years to come."
Another consequence of low rate distortions occurs in the so called "carry trade".
In a carry trade, a trader borrows dollars from a bank, converts the funds into Icelandic krona, for example, and buys an Icelandic bond for the equivalent amount. If the bond is paying 15%, and the American interest rate is just 2.25%, the trader can make a profit off this differential, a whopping 12.75 percentage points.
Traditionally, the Japanese yen has been the currency of choice for a carry trade because the interest rate is close to zero. But as the Japanese currency has been strengthening, and the Federal Reserve continues to slash rates, investors are now looking at the dollar as a replacement currency. "It is pretty pathetic that the world's reserve currency is now being used as the carry trade currency," an investment strategist at Miller Tabac + Co., Peter Boockvar, said.
boont
Shifting the Burden
"One question is, why investors have been historically willing to hold government bond instruments that have yielded not only relatively low but also highly volatile ex post real rates of return. This source of cheap finance can clearly give governments in advanced countries considerable latitude in postponing needed fiscal adjustment and ultimately shift the burden of future adjustment to holders of such long term instruments pension funds and baby boomers among them. Given the well-known inverse relationship between the bond rates and equity returns, such historically low real rates of return on advanced countries’ long-term bonds also suggests that, by and large, the equity risk premium puzzle effectively boils down to a low treasury bond rate puzzle. Fully explaining the latter thus could well be a critical task for analytical and policy-related work in international finance in the years to come."
Another consequence of low rate distortions occurs in the so called "carry trade".
In a carry trade, a trader borrows dollars from a bank, converts the funds into Icelandic krona, for example, and buys an Icelandic bond for the equivalent amount. If the bond is paying 15%, and the American interest rate is just 2.25%, the trader can make a profit off this differential, a whopping 12.75 percentage points.
Traditionally, the Japanese yen has been the currency of choice for a carry trade because the interest rate is close to zero. But as the Japanese currency has been strengthening, and the Federal Reserve continues to slash rates, investors are now looking at the dollar as a replacement currency. "It is pretty pathetic that the world's reserve currency is now being used as the carry trade currency," an investment strategist at Miller Tabac + Co., Peter Boockvar, said.
boont
There's also the possibility that he's made his money by understanding the bond market, not economic policy, and that he's enriched himself by taking a few basis points of a big chunk of money while being the bond equivalent of a coin-flipping monkey. He'd be more like Bogle or Lynch than like Volker or Greenspan, and his writings are more marketing than post-doc thesis work.
Speaking of Greenspan, there's almost as much of a cult following trying to interpret what the heck Gross has said. I don't give smart guys extra bonus points for being obtuse or prolix-- only for explaining themselves clearly. Gross isn't in a position to have a policy-setting record like Greenspan and can only be judged on his writing, which is largely full of flawed analogies and semi-coherent metaphor.
I'm still waiting for his Dow 5000 prediction, too.
