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Realistbear

If The Market Is Always Right Deflation It Is

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http://blogs.telegraph.co.uk/finance/jeremywarner/100008271/why-government-bond-markets-have-gone-mad-and-bad/

The benchmark five year gilt yield fell to a new low of 1.43 per cent on Thursday, which astonishingly takes it to a 25 basis point discount to that of its German bund counterpart. The UK Government likes to think of the record lows to which gilt yields have sunk to be a vote of confidence by international investors in its plans for fiscal consolidation, and no doubt there is a small element of truth in this contention. But the main factors driving government bond yields ever lower, not just here in the UK, but in the US too, are much more worrying and have little to do with the bravery of George Osborne’s deficit reduction programme.
...../
So what’s really driving this dash for government debt? One possibility is that bond markets are already pricing in a depression, or at least a Japanese style lost decade of deflation. Despite ever more mountainous quantities of public debt, bond yields in Japan have been at abnormally low levels for years. Indeed, in Japan the abnormal is now normal. If you think the price of goods and services will soon be deflating, then even bonds on 1 per cent yields offer a healthy rate of return.
But no, the real reason lies in the market distortions that result from ultra easy monetary policy and the demands being put by regulators on banks to hold “riskless” assets. This is leading to a profound mis-pricing of government bonds, which now take virtually no account of significant medium term inflation risks.
If you think markets are always right, then bond prices are indeed signalling the inevitability of a depression, but if there is one thing we have been forced by the events of the last three years to relearn about markets it is that they are prone to episodes of extreme mispricing. The bond phenomenon is very likely one of them.

Is is likely that the market IS right and the deflatng bubbles are leading to deflation? Can prices continue to rise against a backdrop of rising unemployment, overcapacity and oversupply?

Yes and No. IMOOC.

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I have to say at the moment I tend to agree with this statement..

But no, the real reason lies in the market distortions that result from ultra easy monetary policy and the demands being put by regulators on banks to hold “riskless” assets. This is leading to a profound mis-pricing of government bonds, which now take virtually no account of significant medium term inflation risks.

But I guess time will tell... eating_popcorn.gif

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Sadly, the idea that the market in any way discounts the future is complete nonsense.

It was once said that the stock market prices in likely future events such as earnings.

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I'm no bond expert, but it seems to me that there's a desperation to find safe places to put money and a great deal of fear that some classes are bubbles (don't smile Gold, I'm talking to you too). Allied to bank capital requirements it's reasonable to see that bonds represent a "safe" investment with a guaranteed return.

As for deflation/inflation, I'm not sure that's meaningful any more. I can see commodity-driven inflation of living expenses, alongside deflation of assets, which would give us "inflation" against the normal measure but asset deflation. This is, of course, unless the printing presses are fired up and all that extra money goes running for cover, which is what I'm 100% certain will happen. If it does then I'd expect assets which yield but aren't dependent on direct returns from people of average wealth to do better - rents just won't provide a crutch for houses if people don't have jobs.

All roads then seem to lead back to bonds.

-------

By the way, amidst all the lying that underpinned the bubbles in housing, I never see any serious speculation about the risk that an awful lot of "Gold" is actually Tungsten. Would experts on the subject care to comment on whether this is lurking as a threat to that asset?

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Bond markets have missed every hyperinflation and high inflation ever.

They miss every war.

They miss every default.

Probably because even bondsters are programmed from birth to think that the State is perpetual and unchanging, kind of like a little child thinks of Mummy and Daddy. Well, exactly like that actually.

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If The Market Is Always Right Deflation It Is US and UK bond markets are pricing in deflation

Please sir, could it not also mean they anticipate that the cuts will allow the BoE to keep interest rates at artificially low levels whilst also indulging in more QE?

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I have to say at the moment I tend to agree with this statement..

But I guess time will tell... eating_popcorn.gif

I have to say that quote utterly confuses me.

The simple fact is that they cannot replace the dollars/euros/sterling that are being destroyed by deleveraging.

From a monetary sense this is deflation, and it will be on-going for years.

From an observational sense, I agree with Faber that the proof of deflation (in the USA) will be what happens to the USD.

Dollar increase, deflation. Dollar decrease, inflation.

However, gold is behaving like a currency again, and here we clearly see evidence of deflation.

We also see it in house prices. And we see it in Treasuries.

Deflation it is. I expect that the dollar will strengthen again quite significantly, and at least retest the highs of 2009. But this is a ways off.

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Deflation it is. I expect that the dollar will strengthen again quite significantly, and at least retest the highs of 2009. But this is a ways off.

Given the dollar has been in a long term downtrend since 1985 (165 down to 77) this would be nothing more than a countertrend rally IMHO. QE to infinity is the only choice for the damned yankees.

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Let's assume that there is deflation, then where do you hoard your hard earned shekels?

Everyone here expects houses to crash, so they're out.

Equities are akin to putting it on the lottery at the moment.

Gilts are fine as long as you disregard all the talk of sovereign default.

Commodities look and feel like a bubble (Joe public now discussing gold prices etc.).

Thankfully I don't have much to hoard, otherwise my back woulf be wrecked from having it under the mattress........ :rolleyes:

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By the way, amidst all the lying that underpinned the bubbles in housing, I never see any serious speculation about the risk that an awful lot of "Gold" is actually Tungsten. Would experts on the subject care to comment on whether this is lurking as a threat to that asset?

Not an expert on gold faking or gold itself but there seem to be a lot of reports of tungsten substitution for gold (mainy gold plating of the tungsten). It's a risk.

But considering all the fraud in all the other markets and the money involved what are the odds on the next £$trillions of fraud in the pipeline sequence of frauds being a fraud involving bullion stored in bank vaults around the world - evens maybe.

And as for gold sold to the general public through the banks of all places odds on as evidenced by their fraudulent activities on mortgages and securities etc.

The world is a far different place now with fraud by banks seemingly becoming commonplace..

Edited by billybong

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Not an expert on gold faking or gold itself but there seem to be a lot of reports of tungsten substitution for gold (mainy gold plating of the tungsten). It's a risk.

But considering all the fraud in all the other markets and the money involved what are the odds on the next £$trillions of fraud in the pipeline sequence of frauds being a fraud involving bullion stored in bank vaults around the world - evens maybe.

And as for gold sold to the general public through the banks of all places odds on as evidenced by their fraudulent activities on mortgages and securities etc.

The world is a far different place now with fraud by banks seemingly becoming commonplace..

Thank you for that.

I go with the rule that if I can think of it somebody is doing it. I have no doubt it is being faked all over the place. Bullion for sure, coins would be much less likely but as I can think of it..........

Goldbugs beware. You may have something a lot worse than an overpriced house on your hands.

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Not an expert on gold faking or gold itself but there seem to be a lot of reports of tungsten substitution for gold (mainy gold plating of the tungsten). It's a risk.

So you want us to speculate as to whether there is LESS gold than there appears to be?

The only risk that poses is to those with tungsten and those w/o any gold. Buy from a reputable dealer and you could find, if this is true, you have a massive bargain.

Edited by Sledgehead

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Goldbugs beware. You may have something a lot worse than an overpriced house on your hands.

And the same goes for property. I don't know a survey that was worth the paper it was written on. Most of our property stock does not conform to regs. The surveyers just say "so, twas built before the regs came in". But try extending / developing and suddenly the extra costs that arise from making good can double the cost of the build. That is a real cost and it's a cost that nobody will compensate you for. In the meantime, the price you paid was based on all the renovation and decor hopes of a generation.

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The Central Fund of Canada, which I've heard is the safest way to hold paper gold, trades at a premium of 6.5% to its net asset value. This seems odd considering the proliferation of ETFs tracking the gold price.

Don't know whether this reflects any concern over the quality of the gold that backs the ETFs. If indeed there is actual gold that backs the ETFs.

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As for the bond yields, most institutional investors have the lowest allocation to stocks in generations. They got burned in 2008 with many former high fliers like the endowment fund at Harvard taking losses in the 20 to 30% range.

These so-called professionals are just as bad as the individual investor in chasing performance as well so bonds are profiting from the momentum trade.

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And the same goes for property. I don't know a survey that was worth the paper it was written on. Most of our property stock does not conform to regs. The surveyers just say "so, twas built before the regs came in". But try extending / developing and suddenly the extra costs that arise from making good can double the cost of the build. That is a real cost and it's a cost that nobody will compensate you for. In the meantime, the price you paid was based on all the renovation and decor hopes of a generation.

It's a matter of degree. The equivilent is finding it's made of cardboard and the land it stands on is sliding into the sea.

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So you want us to speculate as to whether there is LESS gold than there appears to be?

The only risk that poses is to those with tungsten and those w/o any gold. Buy from a reputable dealer and you could find, if this is true, you have a massive bargain.

In my post I didn't want you to do anything nor was I taking any view on the direction of the gold price merely pointing out that there's a risk of some gold bullion being sold that's fake and I imagine that's especially so for the general public and the fakes do seem to be "good" ones. There's no change in the amount of gold but maybe it's distribution isn't exactly as thought or as claimed in some gold vault accounts..

I'm not posting anything new the risk has been known about for some time, there's plenty about it on youtube as I've recently discovered.

How much testing do suppliers/dealers do. Unlikely that they test every piece and bullion that's gold plated tungsten looks good but it's almost worthless

That's a risk of gold, you might be right about bargains but nothings certain anyone just needs to look at what's happened with all the mortgage securities fraud by the banks to see that. It would just be another of their tricks.

To be fair most of the bars in this link do look fake and they throw them around like bits of polystyrene :lol:

Edited by billybong

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It's a matter of degree. The equivilent is finding it's made of cardboard and the land it stands on is sliding into the sea.

You are right, but you miss the point.

All those houses that are being given up to the sea dimish the supply of housing. This is positive for house prices.

Houses that are shoddily built are an entirely different issue.

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I suppose it is pretty easy to get away with 'fake' gold due to the fact that once it has been shipped around a few vaults it is probably very difficult to prove where it came from, let alone to prove that the bank who sold it to you 3 or 4 banks back actually were the ones cheating you.

They could always shrug and say "Nothing to do with us, by the way the cash you gave us is lovely.".

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  • 142 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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