Tuesday, February 26, 2013

A. Gary Shilling and the Prospect of a 1% Ten Year

Mr. Shilling was better when he was younger but is still worth listening to.
He currently has a couple predictions that aren't looking too good. From Wikipedia:
...In June 2011, he predicted a 20% drop in housing in 2012 with a resulting global recession.[5] In October 2012 he predicted a global recession in 2013 [6]
Steve Forbes did a very lengthy interview with Shilling who is a Forbes columnist.
From Forbes:

...Forbes: Let’s hit first long treasuries. The yield now on the 30-year bond is 3%?
Shilling: 3%.

Forbes: The ten-year, 1.6%, 1.8%? Pick a number. When we last talked it was 4.5% on the 30-year, which seemed low at the time and was almost 3% on the ten. How much more is there and how long can it last?

Shilling: I’m suggesting 2% on the long bond and 1% on the ten-year.

Forbes: Time frame?

Shilling: One of the great forecasters said, “You know, you either forecast what’s going to happen or when it’s going to happen, but not both.” I would say over the next year or so, and that’s assuming that this grand disconnect does get closed. If we go from 3% to 2% on the long bond that’s a total return, assuming it takes place over a year so you get a year’s worth of interest. That’s a total return of about 16% and it’s about 25% on a 30-year zero coupon bond. That’s pretty attractive, relative to what I think would happen in stocks, which would be on the negative side.

Forbes: And the ten-year is going to go down to?

Shilling: The ten-year, but you don’t get nearly as much bang per buck in the ten-year. The shorter duration, the shorter maturity makes a huge, huge difference. That’s why I’m one of those guys who still likes a 30-year bond, even though the ten-year is sort of the standard by which the whole world judges government debt.

Forbes: Sounds like with a 30-year you don’t have to really leverage to get a good kick.

Shilling: No, you really don’t. You get even more bang per buck with the zero coupon. Unfortunately, it works both ways. If rates go up you lose more money in the zero than the coupon bond. But, you know, as you know, Steve, I’ve never, never, never bought treasuries — and I started buying them in 1981, when the yield was 15.21% — I’ve never bought them for yield. I couldn’t care less what the yield is, as long as it’s going down. That means the price is going up. It’s the same reason most people buy stocks....MUCH MORE
Here's page 1 of the 5 page transcript. 

HT: World Beta
We've been babbling about deleveraging for a while now. Here are some selected posts:

Hedge Funds: Halfway Through with Deleveraging, Halfway Through with Redemptions
Commodity funds gird for more deleveraging
The Great Deleveraging (and what it means)
Credit Contraction, Deleveraging and the Coming Interest Rate Cut
Magnus: Deleveraging and its two big deflationary forces
and from one very, very bad day:
September 15, 2008 
Fed Adds Most Reserves Since 9/11 Attacks as Banks Hoard Cash
The credit contraction we've seen and will see is massive. The credit card companies are already cutting limits, prime brokers are pulling in unused lines from hedge funds, upside down mortgages that have to be written off, it's in the Trillions, maybe tens of trillions. The Fed, the Treasury, the Bureau of Engraving can't reliquify as fast as we're contracting.
Irving Fisher, Deleveraging and the Lessons for Europe of 1873
"Has Derivatives Deleveraging Fueled the Stock Rally?"
America's Deleveraging Still a Long Way to Go
Bridgewater's Ray Dalio on Beautiful Deleveraging

And many more in-between those two endpoints.