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> Somebody is on the wrong side of this trade in a big way.

The reason why European yields are so low is because financial institutions are forced to own govt bonds. That is it.

Europe is one of the only markets where you really see this, yields in the US could certainly move higher or lower but they trade at a rational level. In Europe, the price is just wrong (because no-one is doing the trade to be right or wrong, they are doing the trade because of regulations).

Also, making some kind of linear prediction for rates based on the drop over the last 40 years makes no sense. Rates are actually stationary, but the reason they have trended strongly over the past four decades is because of changes in inflation expectations and aging of society which has brought down the natural rate of interest significantly. Outside of this, the underlying properties of rates are stationary...the same as every other valuation measure.

> The reason why European yields are so low is because financial institutions are forced to own govt bonds. That is it.

Same in the USA. All bank deposits need to be balanced out with a certain number of US Treasury bonds / notes as a reserve.

There are also huge institutions, such as the Social Security Trust Fund, who was forced to buy US Bonds from the 1980s through 2000s to prepare for the baby-boomer retirement cycle. So lots of groups are in fact, "forced" to own US Treasury bonds.

No, it isn't the same in the US.

Reserves are vault cash plus deposits at the Fed. You cannot use USTs to count towards your reserves (and it wouldn't matter if you could, the reserve ratio isn't a binding monetary policy tool, excess reserves in the US banking system are close to $1trn).

You are right that pension funds own a lot of bonds...this makes sense because there are very few long-dated securities that can be used to match liabilities...but the US pension fund system is relatively dynamic, and has a big allocation to alternatives. The European savings market is also totally different to the US: outside of govt bonds their financial markets are essentially non-existent relative to the US, lots of people save by putting their money into banks who then invest in govt bonds (the reasons for this are slightly complex, but loan demand in the US is relatively strong in the US, and non-existent in Europe so banks own a ton of govt bonds there), insurance sector is far larger (and Solvency II means govt bonds...lots of them), and there are more DB than DC schemes...so pension funds are far smaller proportionally (and the demand for non-bond assets is, typically, smaller). Pension funds are always going to own a lot of USTs but you just don't see the same pressure on US yields.

Again though, don't take my word for it...look at the price. The Italian 10yr has traded under the US for the past five years or so...that clearly makes no sense.

Can you expand on that? What regulations require European banks to hold government bonds? If it's obvious to everyone that Euro bonds are too expensive, why don't American hedge funds short them?

I was under the impression that Euro-zone bond rates were so low mainly because the market is expecting economic stagnation and a too-hawkish ECB.

Why would you short them? That sounds like a terrible trade. I am not sure why they would have to be "American" either.

Hawkish??? The ECB? They own 50% of the govt bond market. They have been throwing literally trillions at banks. Because of the Draghi "whatever it takes", they are the most dovish central bank in the world by far, it isn't close. They were doing massive QE worth trillions when growth was 2-3%, permanent QE. Definitely, the ECB is a big reason why rates are low though, because they have removed 50% of the supply of risk-free assets ("risk-free"...some European govts are obviously insolvent so..."risk-free" is a somewhat unclear concept).

And no, Europe isn't economically stagnant...it is a difficult to be brief but the main issue with any high-level comment about Europe is that you have a collection of countries that are almost totally economically dissimilar. So everything is just totally imbalanced, and there is no real way to balance things (the ECB is making this worse). So you can't really talk about European growth being stagnant or rates being affected by growth...because they are just totally separate, ECB policy is appropriate for maybe four countries in the EU, and no-one else...so it is difficult to apply any kind of logic to that process.

There is no way to be brief. But the EU-level regulations are solvency ii, bank capital rules (some of these rules are national, but there are EU-level rules too), and the saving culture of Europe (i.e. no financial markets, suspicion of capitalism, suspicion of decentralization). A lot of the rules that relate to pension funds are only relevant at the national level (because the structure of pension funds/savings vary by country)...again, it is tricky to generalise because the economies in the EU are generally nothing alike each other.

I use Bitcoin to satisfy my inflation-hedging appetite. I wonder to what extent cryptocurrency enthusiasm is suppressing gold prices, as increasing number of people view Bitcoin as a viable inflation hedging alternative to gold.

If Bitcoin didn't exist, I would probably own more gold.

Something that might move hundreds of percentage points in either direction in a given year seems like a poor hedge against inflation to me.

I'll be the pedant to point out it can't move more than 100% on the downside. Which since it has risen more than 100% in less than a year seems like a decent deal although fraught with risk to be sure.

Yes, in the short term, neither gold nor even gold is a good hedge. Cash will always be superior in the short term unless we're in a hyperinflationary situation. However, on a long enough time scale, gold and bitcoin can function as great inflation hedges. I say this with a little bit of caution especially for bitcoin because it's only a few years old but we know for this short 12 year period that no one has lost money by holding bitcoin for more than 4 years.

I think I'm against this argument, and instead present of Warren Buffet's. If you think gold is a good hedge against inflation, a consumer staple with a safe position (ie. Coca-Cola) is a better inflation hedge.

The same argument would apply to a whole lot of companies in the "necessities" department. They provide every bit of inflation hedge value Gold provides, but also provide dividend and stock appreciation.

I would be very surprised if Bitcoin moved more than 100 percentage points downwards :-P

But on a more serious note, this bet is based on the idea that if/as USD hegemony collapses (in ~decade time scale), inflation will accelerate and there is an increased chance that Bitcoin becomes world reserve currency. I believe Bitcoin volatility will decrease as price grows (it already has to an extent), and once it has about one more ~10x increase (reaching roughly market cap of total earth gold supply) the bubble/bust pattern will break and it'll become more stable.

But who knows. I recommend keeping 1-5% of net asset value in cryptocurrency (BTC, ETH, maybe ADA if you like risk, roughly weighted by market cap and ignoring long tail of unproven coins), but it is certainly a very risky investment and securing them has unique technical challenges that make them less suitable for non-technicals.

There are just two years in Bitcoin's history when it had a negative return: https://stats.buybitcoinworldwide.com/yearly-candles/

That's what Ponzi scheme sales person would proclaim, until not true.

Discussing historical performance is ubiquitous among all asset classes.

If you're going to try to argue that Bitcoin is a Ponzi scheme, at least put some effort into the argument. This is just lazy and simplistic.

> If Bitcoin didn't exist, I would probably own more gold.

Do you have any evidence that gold is a hedge against inflation, or are you simply following financial folklore?

> We find little evidence that gold has been an effective hedge against unexpected inflation whether measured in the short term or the long term. The gold as a currency hedge argument does not seem to be supported by the data. The fluctuations in the real price of gold are much greater than FX changes. We suggest that the argument that gold is attractive when real returns on other assets are low is problematic. Low real yields, say on TIPS, do not mechanically cause the real price of gold to be high. While there is possibly some rational or behavioral economic force, perhaps a fear of inflation, influencing variation in both TIPS yields and the real price of gold, the impact may be more statistically apparent than real. We also parse the safe haven argument and come up empty-handed. We examine data on hyperinflations in both major and minor countries and find it is certainly possible for the purchasing power of gold to decline substantially during a highly inflationary period. When the price of gold is high in one country it is probably high in other countries. Keynes pointed out “that the long run is a misleading guide to current affairs”. Even if gold is a “golden constant” in the long run, it does not have to be a “golden constant” in the short run. Conversely, current affairs are possibly a misleading guide to the long run.

* http://www.nber.org/papers/w18706

If gold is not the mainstay of inflation hedgers why would it not be; maybe because people don't know with certainty that they aren't buying gilded tungsten or that virtual gold purchases could disappear at any time? Maybe crypto is the gold that gold could never be?

I don't find this persuasive at all.

Seems like they looking at this from an institutional perspective of hedging a single currency, looking for tight correlations over a short time periods. I don't care if there is a year or 5 of lag in either direction, or if gold outperforms currencies in a period in a non-correlated way. Funny that they quote Keynes because it seems like a superlatively Keynesian perspective on gold.

I'm concerned about the simultaneous inflation of all fiat currencies that arises from adversarial currency wars to game trade flows and reckless Fed policy devaluing what's in my bank account as a hidden tax on saving.

I want an asset that is resistant to devaluation of money and the historical examples of governments leaving the common man as bag-holders when a currency fails. I want something I could bury in the ground and feel confident that it'll be worth more when my grandchildren dig it up.

Maybe in a pedantic sense, "gold is a hedge against inflation" is "folklore" because the correlation is loose over short time periods, but over long time scales it works pretty well. Until asteroid mining is prevalent (and possibly beyond that) an ounce of gold will likely continue being enough to buy a good suit.

> I don't find this persuasive at all.

IMHO you have the burden of proof backwards. Gold being a good hedge against inflation has been (hard money) dogma that's been repeated over and over, but what examination of this claim has there been?

> I want an asset that is resistant to devaluation of money and the historical examples of governments leaving the common man as bag-holders when a currency fails. I want something I could bury in the ground and feel confident that it'll be worth more when my grandchildren dig it up.

Is there evidence / supporting documentation that gold is that asset? If you believe that gold is that asset, why do you believe it? Is it just a matter of trust/faith of what you've heard, and the authorities that you heard it from, or did you examine some data to come to this conclusion?

Gold has been valuable for about as long as recorded history. It has more evidence of value and a longer history of that evidence than probably any other asset in existence.

Since you're just tasking me with asking a bunch of easily google-able questions, I'm not sure what the point you're trying to make is. Are you just being contrarian, or is there a different asset that you think is a better durable store of value, or do you disagree with the concept of durable value?

Feels like you have a dogmatic repulsion to gold, and I don't understand why.

Gold has been used as money in many places for a long time. It hasn't been the only form of money, and people stopped using it and went back to it at times (China flip-flopped).† But it is generally no longer used as money in the modern world: who uses it to buy groceries, or cars, or land? It's mostly used as a store of value: people generally trade cash/fiat for gold because they think they'll get cash/fiat back for it at some later date. There is little in gold as gold that is useful to most people (maybe some industrial process).

As the papers that the podcast pointed to indicate, there is nothing special about gold in protecting against inflation. The price fluctuations of gold, relative to USD, seem to be more crazy than any inflation most people have seen or are likely to see. Most people aren't going to experience crazy inflation unless there's some other crazy things happening in their country/area:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

Per the research done for the podcast, there doesn't seem to be anything special about any asset class that would protect you better than any other asset class.

I think aurum is a fine element, as are argentum, cuprum, platinum, etc. It's just whenever finance (and especially inflation) comes up there's all this talk about gold and I have no idea why. Just because it was used as money in the past, and there was for a time a link between modern cash and gold (as a kind of 'compatibility' layer), does not mean there is any point in treating it as special now. It certainly can be used as a store a value, but why is it better than anything else?

† The Aztecs didn't find it anything too special: it was shiny and flexible, so they used it simply for personal adornment (jewelry).

> Somebody is on the wrong side of this trade in a big way.

There's an old adage that equity traders are the short-bus riders and bond traders are riding the long bus. I tend to think there's something to this and thus I tend to think the bond traders are more likely to be right here.

> The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast.

It's going into real estate.

> It's going into real estate.

Some of it is likely going to Bitcoin / crypto as well, even if not everyone agrees on the legitimacy of that space.

Some is going there too, but it's a much smaller piece of the pie. Real Estate also has utility - you can live in it. Gold's utility is much lower - sure you can make jewelry out of it's used in small amounts in electronics. Crypto basically has no utility.

> Crypto basically has no functionality.

Transferring payments across the world is functional, and yes, the traditional financial system also does this, but it doesn't mean crypto has no functionality.

Edit: Previous statement I was responding to has changed. I still don't agree that crypto has no utility though. I agree with almost everything I was responding to except that part. Yes, real estate has more utility, for sure. To me it doesn't matter that crypto has some overlap with traditional finance. This is an iteration on technology, which has its own pros/cons, but some folks are trying to come up with something better. Time will tell if that succeeds or not. IMO, it's too early to tell. You can also see that I wasn't the only person who responded to the parent comment that Bitcoin may be a competitor to capital flowing to gold as a potential inflation hedge.

Ok, but as you point out it's not a unique in transferrability - once you've transferred that crypto in the end it's still crypto - you can't live in it or even use it to make jewelry. Locking in your mortgage payment is an inflation hedge and you get a house to live in. Millennials are into the peak home buying years and are now the largest generational cohort. Add to this that we haven't built enough housing to keep up with population growth over the last dozen years or so and this is why housing has gone up so much.

My understanding is that foreign real estate buyers have also pushed real estate prices up. That said I think you make a lot of good points and crypto is about the only thing I disagree with you on.

Money itself is not "functional" in this sense; the point is that real estate provides value and a function other than value.

This is like saying that a rock is functional because it can be transferred from one place to another. Sorry, "being transferred" is not a function that is performed by the object that is being transferred.

If you have technology that can transfer a rock across the world in seconds then I would be interested in that. Same w/ crypto (with the added benefit of crypto not requiring a centralized entity to do so).

My main point is let's wait and see how this new technology evolves instead of just shooting it down. I don't think everything about traditional finance is perfect. Negative interest rates in some parts of the world are one sign of that.

I think we can iterate on traditional finance as well as explore other potential solutions. The aversion to cryptocurrency as a technology, when Bitcoin has only been around for a bit over a decade, seems premature to me.

There have been comparisons of cryptocurrency to the internet, which everyone may not agree with, but what if we just shut down the internet before it really took off? Well, we wouldn't be having this conversation.

I don't think after a decade it is "premature" to jump to conclusions. If someone hasn't been able to figure out bitcoin by now, they probably never will (in my opinion, it takes about 20 minutes to a person of an average intelligence).

When something's too big and heavy to move you turn it into a financial instrument anyway and change (e.g. yap stones) the ownership.

I still think there's something a little bit special about bitcoin. It simultaneously has the properties of modern electronic currency BUT has some elements of "permission-less-ness" like cash or gold.

You could live in the same real estate 10 years ago, when its price was 3 times lower. So 1/3 of real estate price comes from utility, and 2/3 is pure fiction. More precisely, 2/3 of real estate price represents its utility as a storage of wealth.

The utility of money is the ability to trade it for any utility that is for sale. Money itself shouldn't have any inherent utility, other than being able to reference any other utility in the amount that the money holds value. It's like a magic wand that can make a wish true. The medium of money is just there to store and transfer the information for the amount of magic you can wield. This is why money is always overvalued compared to the medium's inherent utility.

There are many other things that are overvalued, such as real estate - because there's an expectation that they can be used to trade for something else later. In other words, they're bought solely because they're expected to hold their buying power, i.e. they're used as money. The reason why this happens is because modern fiat money doesn't have this property - it's expected to not hold its buying power.

Now, there is money that holds its buying power - bitcoin. It's expected that in the coming years most of the value from real estate and other overvalued assets will transfer into bitcoin, because there's no reason any more to own them other than for their utility.

> There are many other things that are overvalued, such as real estate

I'm not sure RE is overvalued. There's a shortage of houses at a time when Millennials (the largest generational cohort so far) are hitting peak household formation.

> Now, there is money that holds its buying power

Bitcoin peaked at around $64K in April 2020. Now it's currently at $38K - it was down to about $30K a month ago. Seems pretty volatile for something that "holds it's buying power".

Isn't it less there being a shortage of houses, and more there being no way to dislodge market jams and speculators?

I know the claim recently was that there were more unoccupied homes than homeless people. Even if you factor out the undesirable/impractical ones, I'd expect if we had some means to unlock that capacity, it would glut and crash the market down to (much closer to) affordability.

It feels like this is one of many problems that are trivial to solve in the abstract, but intractable as long as we worship private-property rights. A simple fix would be an >100% annual value tax on unoccupied dwellings. The vacant-50-weeks-a-year vacation house, or the 'investment property' you're holding to sell in a few years, becomes an instant financial grenade, where it's better to hand the deed over to your pizza delivery guy as a tip than to be not living in it when the tax bill comes due.

> Real 30-year yields are steeply negative in the US as well, with nominal yield at 1.85% and year-over-year CPI above 5%.

year-over-year CPI is backward looking: it compares one year ago to today.

Treasury yields are forward looking: If I tie up money now, how much more will I get one year from now.

Last year was pretty unusual. People expect the next year to be different.

One of the losers in the short bonds trade is Alphadyne, a hedge fund that lost 1.5B shorting bonds: https://www.streetinsider.com/dr/news.php?id=18762011&gfv=1

> Somebody is on the wrong side of this trade in a big way.

My understanding is that banks get negative interest on deposits in the banking system over night from many European central banks. So if you pay say -0.x% on deposits then 1.85% over 30y is a bargain.

The fundamental problem with your hypothesis is the time-value of money: overnight deposits can be moved around, well, overnight, but a 30yr bond (for the bondholder, ignoring secondary markets) locks up capital for decades. A bondholder can't take advantage of future preferential interest rates when their capital is already locked up in low-yielding bonds.

This is why bond price and bond yields have an inverse relationship.

>The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast

my guess would be people are putting that money into bitcoin

> This is part of a multi-decade trend in ever lower 30-year yields stretching back to the Regan administration.

Interest rates have been going down, at least in Western countries, with some gyrations, since 1310 AD:

* https://www.bankofengland.co.uk/working-paper/2020/eight-cen...

* https://www.visualcapitalist.com/the-history-of-interest-rat...