Time to pay the piper - why inflation now? Why rate hikes won't save us? Why deflationary depression is coming.

[DarthTrader]

This is the most important chart I've spun-up, I think, ever. It's the 20 year bond etf used as a charting proxy for the yield, versus the dollar index. Since 2011 we've arrested a very necessary correction in the bond market. Why 2011 is important? 30 years prior is 1981, during the Volker rate hikes.

Whether you believe in Fibonacci retracements or not is irrelevant, there are clear support levels defined by them (call it self fulfilling prophecy if you want).

So why does this matter?

Bonds need to be refinanced, and when you lower yields you lower productivity requirements to refinance bonds. So as the 30 year began to mature and refinancing let's say ~15% yields, the only way to EARN A RETURN on the refinancing was if yields went higher than 15%.

Since they did not go higher than 15% because that would "crush the economy" of 2011, instead the dollar got stronger relative to the yields in a complex dance of fiscal and monetary policy. It's evident in the chart and in the bond yield.

The problem is that Japan and Germany both have experienced the same problems from their massive war debts.

Japan's bond bull market burst in 1990s and led to constant persistent deflation present even to this day.

Note the relationship that bond yields must come down, that currency must strengthen, and this is because productivity is being sacrificed against the requirement for refinancing to remain profitable. In layman's terms. On falling yields, corporate capital pushes into less productive higher risk in search of yield, think of miners pushing new explorations in search of bigger pockets of ore. When refinancing happens, the productive mines have to pay for the unproductive mines or default on debt.

Japan could only do that until negative rates, then it hit deflation.

The US could only do it until now, we basically hit rock bottom after COVID.

That is the spike in TLT versus Dollar that broke out of the channel. In trading we'd call that a "bull trap". It's a false bull trend that gets shattered once the liquidity runs out (the injection of money that caused the inflation).

Bonds massively reverted to trend in just a matter of weeks.

And the trend is deflationary depression just as Japan has suffered now for about 20 years.

 

[Donald H]

Can it all be traced back to China's rise?

This is the sort of economic collapse that leads nations to war.

Japan doesn't have the ability to go to war and certainly not the will. That's the reason why Japan will be very cautiious about being asked to become involved in this current war.

 

[Toddsterpatriot]

This is the most important chart I've spun-up, I think, ever. It's the 20 year bond etf used as a charting proxy for the yield, versus the dollar index. Since 2011 we've arrested a very necessary correction in the bond market. Why 2011 is important? 30 years prior is 1981, during the Volker rate hikes.

View attachment 640405


Whether you believe in Fibonacci retracements or not is irrelevant, there are clear support levels defined by them (call it self fulfilling prophecy if you want).

So why does this matter?

Bonds need to be refinanced, and when you lower yields you lower productivity requirements to refinance bonds. So as the 30 year began to mature and refinancing let's say ~15% yields, the only way to EARN A RETURN on the refinancing was if yields went higher than 15%.

Since they did not go higher than 15% because that would "crush the economy" of 2011, instead the dollar got stronger relative to the yields in a complex dance of fiscal and monetary policy. It's evident in the chart and in the bond yield.

View attachment 640407

The problem is that Japan and Germany both have experienced the same problems from their massive war debts.

Japan's bond bull market burst in 1990s and led to constant persistent deflation present even to this day.

View attachment 640408

Note the relationship that bond yields must come down, that currency must strengthen, and this is because productivity is being sacrificed against the requirement for refinancing to remain profitable. In layman's terms. On falling yields, corporate capital pushes into less productive higher risk in search of yield, think of miners pushing new explorations in search of bigger pockets of ore. When refinancing happens, the productive mines have to pay for the unproductive mines or default on debt.

Japan could only do that until negative rates, then it hit deflation.

The US could only do it until now, we basically hit rock bottom after COVID.

That is the spike in TLT versus Dollar that broke out of the channel. In trading we'd call that a "bull trap". It's a false bull trend that gets shattered once the liquidity runs out (the injection of money that caused the inflation).

Bonds massively reverted to trend in just a matter of weeks.

And the trend is deflationary depression just as Japan has suffered now for about 20 years.

So as the 30 year began to mature and refinancing let's say ~15% yields, the only way to EARN A RETURN on the refinancing was if yields went higher than 15%.

Ummm.....if the yield goes up, the price of the bond would go down, why would you need that?

Since they did not go higher than 15% because that would "crush the economy" of 2011,

They didn't need to go higher than 15%. Or to 4% even.

 

[DarthTrader]

So as the 30 year began to mature and refinancing let's say ~15% yields, the only way to EARN A RETURN on the refinancing was if yields went higher than 15%.

Ummm.....if the yield goes up, the price of the bond would go down, why would you need that?

Since they did not go higher than 15% because that would "crush the economy" of 2011,

They didn't need to go higher than 15%. Or to 4% even.

I really hate trying to educate you because you seem too ignorant of basics.

If bond prices go up as yields fall (as you said) then why is it that yield prices have lost value versus the dollar since 2011? (A rhetorical question, the answer is obviously that bond prices don't go up with yield, everything must be compared to the dollar. A person who trades bonds thinking bond prices go up forget the fact that the bond's price is relative to cash. Big mistake.)

Why is it that this 2011 happens to coincide with the PEAK interest rates that occurred EXACTLY 30 years prior, which is the paramount long term yield in the US?

The machinations of this is quite complex, I try to simplify the fuck out of it for you by showing you that anyone holding bonds since 2011 has been LOSING MONEY.

The reason is the SAME that Japan hit this same snag. When you have relatively large debt obligations issued at extremely high productivity rates (~15% yields for instance) the only way for the FINANCIER to make a return on the debt is to extract productivity - that is - to harvest capital from their debtors.

So, since peak yield in 1981, the US economy has been returning capital to the financier.

This is why it is actually deflationary, and why Japan, Germany, many countries even the USSR for instance (except it imploded), China in the 1990s (the whole Asian currency crisis) happened when it did.

For the world, refinancing took place on WW2 debt about the 1980s. (This is really obvious in net foreign asset account of the United Kingdom, which went from positive to totally negative during the refinancing period).

The peak yields crashed earlier than for the US.

The US also hit peak yield, but we haven't hit deflation yet because the US harvests money from its overseas dollars any time it raises rates. We have built a natural buffer to the system, but we are also a global empire.

But the problem is that doesn't matter anymore, we simply cannot harvest enough dollars to inflate our way out of deflation. That is EVIDENCED by the fact that just a 2% rise on bond yields caused the bond's value to lose 11 years worth of gains in a 3 month period.

The dollar has been "pushed down" by the inflationary effect of dollar harvesting, that is broken at these rate levels.

The US can barely raise rates without destroying the bond market.

 

[DarthTrader]

Basically what you're witnessing in Japan since 2004, and now in the US is a real margin call.

The equity value of the debtor's account can no longer sustain the debt and the financier will (mr. market) make the call.

This extraction of capital is as if the financier is given your working capital - a factory, a machine, etc. It all flows back to the financier. This is deflationary. Inflation is when there's monetary expansion and it is used to grow capital (build factories, farms, mines, etc.)

Deflationary depression is when money supply shrinks and the capital is returned to the bank.

Welcome to 1930 all over again. Your farm is given to mr. banker.

 

[DarthTrader]

Can it all be traced back to China's rise?

This is the sort of economic collapse that leads nations to war.

Japan doesn't have the ability to go to war and certainly not the will. That's the reason why Japan will be very cautiious about being asked to become involved in this current war.

I don't think so. I think this is more the result of WW2 financing finally coming full circle. The "West" has been a "refinancier" for 70 years. And various western countries or western aligned countries have fallen into depression/deflation at different rates with the US/UK being the stalwarts. But they were also the best positioned going into and exiting WW2.

Germany has negative rates, Japan almost has negative rates. Both have real monetary deflation.

I would argue that the problems with Soviet finances in the 1970s and 1980s was largely due to debt refinancing, which, yes, the Soviet Union had massive debts owed to the allies and massive traumas from WW2.

Through well managed decline of interest rates the US was able to float down like a feather for nearly 80 years. But we've finally come full circle.

 

[Donald H]

I don't think so. I think this is more the result of WW2 financing finally coming full circle. The "West" has been a "refinancier" for 70 years. And various western countries or western aligned countries have fallen into depression/deflation at different rates with the US/UK being the stalwarts. But they were also the best positioned going into and exiting WW2.

Germany has negative rates, Japan almost has negative rates. Both have real monetary deflation.

I would argue that the problems with Soviet finances in the 1970s and 1980s was largely due to debt refinancing, which, yes, the Soviet Union had massive debts owed to the allies and massive traumas from WW2.

Through well managed decline of interest rates the US was able to float down like a feather for nearly 80 years. But we've finally come full circle.

I've chosen to answer the question from an overall perspective.

As for the Soviets' problems they were due to the Cold war and the power of America held over them. The division of the territory of the defeated wasn't satisfactory to America.

Deflation/inflation comes and goes, but China's influence in the world is here to stay.

America needs to deal with that and then all financial and monetary issues are solved.

China/Russia/India/or the Brics plus most other countries standing in the way as a united force will mean World War in some form or another.

 

[DarthTrader]

I've chosen to answer the question from an overall perspective.

As for the Soviets' problems they were due to the Cold war and the power of America held over them. The division of the territory of the defeated wasn't satisfactory to America.

Deflation/inflation comes and goes, but China's influence in the world is here to stay.

America needs to deal with that and then all financial and monetary issues are solved.

China/Russia/India/or the Brics plus most other countries standing in the way as a united force will mean World War in some form or another.

Well the thing is that China isn't the financier. They have a very small amount of US over all debt.

The financier is the US people and Government. The problem is that the BUSINESSES and elites are who run the government, and it's against their interest to allow deflation to occur.

Other than the massive unemployment (which can be managed), deflation is a healthy part of the business cycle.

Businesses would rather have their financier reduce productivity into the dirt before giving up their gains. For many of them they will die old and rich because of it. But for the younger generation, now we need to surrender our capital back to the great vacuum of Mr. Market.

There is no stopping it and time has run out. Get into Gold and commodities if you want to trade it better. Or short the DJI.

DJI is 40% overvalued.

 

[Donald H]

Well the thing is that China isn't the financier. They have a very small amount of US over all debt.

The financier is the US people and Government. The problem is that the BUSINESSES and elites are who run the government, and it's against their interest to allow deflation to occur.

Other than the massive unemployment (which can be managed), deflation is a healthy part of the business cycle.

Businesses would rather have their financier reduce productivity into the dirt before giving up their gains. For many of them they will die old and rich because of it. But for the younger generation, now we need to surrender our capital back to the great vacuum of Mr. Market.

There is no stopping it and time has run out. Get into Gold and commodities if you want to trade it better. Or short the DJI.

DJI is 40% overvalued.

Good advice on the DJI and Gold? Maybe, depending on America's fortunes in the war against Russia?

I've chosen to look at the bigger picture, thank you.

It's almost a situation in which everybody is unaware of the reasons why a lare and powerful country goes to war.

That's because they've been convinced that it's for other altruistic reasons!

Hahahahaha! Imagine that!

Get with the program. I'm sure the fk not going to get with yours!

 

[Toddsterpatriot]

If bond prices go up as yields fall (as you said) then why is it that yield prices have lost value versus the dollar since 2011?

What in the actual fuck are you talking about?
Yield prices? LOL!

Toro

Will this clown make more sense if I start drinking?

 

[Toro]

What in the actual fuck are you talking about?
Yield prices? LOL!

Toro

Will this clown make more sense if I start drinking?

I'm drinking, and he isn't making much sense!

 

[Toro]

I really hate trying to educate you because you seem too ignorant of basics.

If bond prices go up as yields fall (as you said) then why is it that yield prices have lost value versus the dollar since 2011? (A rhetorical question, the answer is obviously that bond prices don't go up with yield, everything must be compared to the dollar. A person who trades bonds thinking bond prices go up forget the fact that the bond's price is relative to cash. Big mistake.)

There is an inverse relationship between bond pricing and yields. When yields go up, bond prices goes down, and vice-versa. That's basic math.

The value of a bond is not related to the value of the currency in the local currency per se. However, there is a relationship between the relative value of the currency pairs and relative bond yields of the two cross currencies.

But even such, the absolute value is not affected.

 

[Toro]

Well the thing is that China isn't the financier. They have a very small amount of US over all debt.

The financier is the US people and Government. The problem is that the BUSINESSES and elites are who run the government, and it's against their interest to allow deflation to occur.

Other than the massive unemployment (which can be managed), deflation is a healthy part of the business cycle.

Businesses would rather have their financier reduce productivity into the dirt before giving up their gains. For many of them they will die old and rich because of it. But for the younger generation, now we need to surrender our capital back to the great vacuum of Mr. Market.

There is no stopping it and time has run out. Get into Gold and commodities if you want to trade it better. Or short the DJI.

DJI is 40% overvalued.

If you believe in deflation, the last place you should be is in commodities.

 

[Toddsterpatriot]

If you believe in deflation, the last place you should be is in commodities.

He's confused about many things.

He claimed recent Russian inflation of about 9% was really deflation, because
they had interest rates of 20%.