Bond crash across the world as deflation trade goes wrong | Hacker News Reader

Bond crash across the world as deflation trade goes wrong

telegraph.co.uk

79 pointsadventured56 comments

Strong language for a piece of financial news.

> ... crash ... horribly wrong ... clear warnings ... catching fire ... vengeance ... violent ... epicentre ... horribly wrong ... drama ... capitulation ... a lot of pain ... crash ... accident ... hammer ... crushing force ... shock ... vigilantes ...

Looks well set up to trigger sentiment analysing trader bots.

Your comment is even better set up. I can imagine in future articles will have "(bots ignore)" in the articles ;)

Ambrose Evans-Pritchard has been accurately described as "never the calmest man in a room", so the first cut of such a bot would be really simple ^_^.

Seriously, he's been lots of fun to read since the start of the Clinton administration, but after a while you learn to apply a mental filter. For that matter, much of the British press is way more ... passionate than ours, that's one of its charming qualities. Along with oddities like the tabloid Daily Mail doing a lot of good reporting along with the celebrity articles, often better for US events than US media.

>the tabloid Daily Mail doing a lot of good reporting

Pardon?

Seriously!

In the example I'm best acquainted with, the 2011 Joplin, Missouri tornado, their early reporting was as good as anyone from the outside. In my personal photo gallery http://www.ancell-ent.com/1715_Rex_Ave_127B_Joplin/images/ the before and after pictures of my apartment complex at the end were grabbed from the Daily Mail. (EDITED from Daily Mirror.)

In general, in events where photos matter they're really good, and their copy, once you filter out the "passion" as I put it above is pretty good, especially since they don't overly try to force things into irrelevant narratives. More straight reporting than US we pretend to be objective "journalism".

I suggest you try them a few times when a "breaking" event happens, e.g. a hostage situation.

Are the Daily Mirror and the Daily Mail associated? You're citing an example from the Mirror to illustrate why the Mail is not bad, which I don't quite understand.

The photo is also credited to AP (which makes it's appearance elsewhere coverage more than reporting).

That's a rather fine line, or at least I consider the job of "reporting" to include gathering and selecting from all things that are relevant, which would of course include 3rd party wire photos.

It's certainly pedantic, my point is more that coverage is a clearer description of the process of printing stuff off the wire, not so much that reporting is the wrong word for it.

Oops, I spazzed and substituted Mirror, which I don't read, for Mail; corrected above.

I was wondering that too, but I have also been amazed at how long bonds have been hammered. My Swiss friend once said "Try imagining all the QE money being removed from the economy over a short (less than 1 year) period." It makes me wonder what the 2020 market is going to look like.

Trigger warning: imminent rate hikes. Sentiment analysis bots, you might want to avert your eyes.

Nitpick: What's with those charts trying to predict economic quantities such as debt ratios for decades into the future (as the last chart in the article does)? Such predictions are entirely impossible, and their only conceivable purpose is to mislead the reader.

There should be some kind of media best practices against that sort of thing.

(Speculation about the far future is fine, but then your visualizations have to make it entirely obvious how uncertain the future is, by showing the full range of scenarios and how wildly they always differ.)

Love that sentence:

[...] 'narrow' M1 money in the eurozone has been growing at a rate of 16.2pc (annualized) over the last six months. You do not have to be monetarist expert to see the glaring anomaly.

Even though you do not have to be a monetarist expert, it's probably easier to see the glaring anomaly, when you understand some of the concepts mentioned. :)

You need the previous paragraph to see the anomaly:

"a small army of hedge funds and 'prop desks' trying to squeeze a few last drops out of a spent deflation trade"

You probably know about inflation (prices going up) and probably have heard of hyper-inflation, where the government just keeps printing more money, so there is too much money for the economy. As happened in the Weimer Republic or Zimbabwe. Perhaps you've heard the old joke of someone having to take a wheelbarrow full of money just to buy a loaf of bread, leaving it unattended for a moment, and returning to find someone had dumped out all the money and stolen the wheelbarrow.

Deflation is the opposite, where there is a shortage of money.

M1 money is the money you can spend. It's a subset of M2 money which is the money you can spend in a bit. Which is a subset of M3 money which is the money rich people can use without spending, plus all your money.

So, the traders have been trying to make money from deflation, a shortage of money, when money has been growing at 16.2%. That's the glaring anomaly.

The trader explains this as, "We're too dogmatic". This is trader talk for, "We're a bunch of barely numerate halfwits who have no idea what we're doing. None of us do. We're just trying to get out of this shitty business as multi-millionaires before we die of a heart-attack aged 40."

Hope that explains it OK.

I see. Thank you for the explanation.

Thank you, good sir, for elucidating.

Has the deflation dragon been Slain? Let's see. My perspective is that there have been many false dawns in Japan, even after more than 20 years there is still no clear way out. Of course Japan is a special case: as close as it is to China. As long as PRC growth slows, the developed world may get some respite from deflation. Which is intended as observation, not judgement. Good wishes to the Chinese economy.

Japan isn't special. Japan is a taste of what's to come.

Well, no, Japan is a taste of what's to come if we do what Japan did and if the circumstances are the same.

To say that Japan is the inevitable end result, no matter what we do... I'll just say "Objection, your honor. Assumes facts not in evidence."

> Well, no, Japan is a taste of what's to come if we do what Japan did and if the circumstances are the same.

Have an aging population and birth rate contraction? Because that's the fate (which ISN'T A BAD THING) of all developed countries.

That's a VERY BAD THING if your aging population can't be supported by a too small younger demographic. One of Japan's solutions has been in part to simply lose a lot of their old age pension records in a conveniently incompetent computerization effort for the less powerful, the ones in the high risk, low reward sector of the economy (not the salarymen). Another has been what sure looks like unsustainable borrowing.

But eventually present consumption by definition has to come from present production, and that looks unsustainable, at least while keeping everyone at First World levels.

Addressing AnimalMuppet's point a bit, a welfare state is incompatible with unrestricted immigration by people with low earning potential, as we're experiencing today. It makes the welfare state all the more unsustainable, and at least one side of the isle ought to be concerned that it noticeably strengthens capital's hand.

I don't agree at all. You're assuming you need people to support an aging population, while at the same time everyone is crying out that automation and software are going to make everyone redundant.

Has anyone not imagined these two points intersecting?

I don't see it happening soon enough for a whole bunch of reasons. The suppression of nanotech development for an "ultimate" solution, the current VC, IPO etc. situation which is anything but hardware friendly, in sharp contrast to the, oh, pre-mid-90s or so, to just how darn hard this stuff is.

My mother was a RN, my father managed the business affairs of a lot of doctors, one of which was his primary hunting partner, my youngest parent is almost 80, this is not stuff you can automate now at any level beyond say lab work, and I don't see that changing in time.

I, at least, and not "crying out that automation and software are going to make everyone redundant" prior to some nanotech utopia, which is some years out from even achieving the first levels of Drexler style nanotech.

> I, at least, and not "crying out that automation and software are going to make everyone redundant" prior to some nanotech utopia, which is some years out from even achieving the first levels of Drexler style nanotech.

Then I think we have much work to do.

That's the fate of all developed countries... except possibly the US. Immigration may save the US (or may not, depending on what happens with immigration policy...)

>Well, no, Japan is a taste of what's to come if we do what Japan did

We are already doing what they did. Perpetual ZIRP and neoliberal reforms in a vain attempt to escape a liquidity trap and return to growth.

Now we can watch as our birth rate tumbles, too.

I would be grateful is someone could turn this into lower-level language!

When you buy a bond, you are making a loan. You have agreed to hand over a bunch of money today and in return you get scheduled payments from the lendee. The quarterly or biannual or yearly payments are set in a specific currency.

If you recall the stories told about Germany after WW1, they jacked up their inflation because their repayment (pmts were to France, I believe) amounts were set in Deutsche Marks. Because the German gov't could print marks, they could raise inflation arbitrarily. Inflating the volume of deutsche marks in circulation makes each individual deutsche mark less valuable.

So in the late 20s or early 30s, the German got had cut themselves a sweet deal handing worthless deutsche marks over to the French and the german people would buy loaves of bread with wheelbarrows of Deutsche marks, according to the tales.

Inflation is not only the result of printing extra money. If workers become more valuable, their salaries rise and they have extra money to spend, the merchants they trade with can raise prices as well, etc.

So from a naive, freshman macroeconomics view (ie mine), increased trade, increased demand drives inflation in the currency. By that same token, decreased economic activity, laid off workers etc drives deflation. In that scenario, money is worth more and more because many people don't have it. That's when someone on the street in the Great Depression trades a pound of apples for a nickel, when currency is scarce and valuable.

So betting on deflation can be tantamount to betting the U.S. economy at large will tighten up and times will be rough. It is my understanding of the Telegraph headline that many traders bet on an economic downturn that never got as bad as they had hoped for.

My finance buddies have been waiting for the bomb to blow up for a decade. It's really a game of musical chairs.

The less pessimistic view of this (which my aged father holds) is that the saving grace of the US is while we have problems, China + Japan + Europe have awful demographics and we're stealing many of their best youngsters. And our popular culture is amazing- nobody else is even close. Unfortunately, this means we probably won't address our problems in a timely manner. A Chinese meltdown makes the US a more attractive place to put money.

>A Chinese meltdown makes the US a more attractive place to put money.

You're totally right.The slowdown in emerging markets relative to their strength in the wake of the financial crisis could be the lion's share of the dollar's strength.

The fact that we haven't had a government shutdown in a while could be playing a big part. This stuff is so complicated.

> Inflation is not only the result of printing extra money. If workers become more valuable, their salaries rise and they have extra money to spend, the merchants they trade with can raise prices as well, etc.

I don't think this part is quite right. The workers become more valuable when they produce more. (This is different from the workers command more dollars because their wages went up because the cost of living went up.)

If the workers are producing more, they can also buy more, and both supply and demand go up, and people are better off, regardless of whether they are seeing the same number of dollars, more, or fewer. (If they produce more but wages do not go up, there's more stuff for sale but only the same number of dollars chasing it, so prices go down. The workers are still better off, because they can buy more stuff with the same number of dollars.)

So increases in productivity are not inflationary. They tend to be deflationary, because they drive the cost of goods down.

He said nothing about productivity. Workers can become more valuable by virtue of worker shortages that lead to higher wages and thus lower productivity which leads to higher prices for goods.

Worker shortages lead to higher wages. OK, I buy that. I also see that here's no raised productivity. But how is productivity lowered?

Unless by "lowered" you mean "lowered compared to the hypothetical situation where we had more workers". But the way you said "worker shortages that lead to higher wages and thus lower productivity", you sound like you mean that the higher wages cause lower productivity, and I can't see how that cause-and-effect is supposed to work.

   Workers won't put in the same effort if they know that the employer has no replacement so the worker productivity will go down.

I thought the reparations were paid in gold?

Essentially, a lot of investors bought bonds at tremendously low interest rates because they believed an extended period of deflation could happen. What appears to be happening instead is inflation of the money supply.

If you buy a bond that yields 1.00% and inflation is negative 1.00% (i.e. deflation) then your real yield is positive 2.00%. On the other hand if inflation is positive 1.00% then your real yield is 0.00%.

As data is coming out is showing that inflation is occurring and not deflation, investors are selling their low yield bonds. This lowers the market price of the bonds and since a bond's yield moves inversely to its market price, it raises the yield.

EDIT: mild inflation is really what you want with our monetary system, not deflation. So this is not a bad thing for the economy per se but some investors that bought low yield bonds will lose money or opportunity as interest rates rise.

Yeah, it doesn't break my heart that some gamblers guessed wrong and will get burned by it. I'm more concerned if they manage to wreck the regular (non-financial-sector) economy again.

Seconded! Something bad is happening or is about to happen. But for the life of me I couldn't tell you what it is or what the ramifications both globally and locally are.

Is he basically saying that the shit is about to get real? If so, what is the shit?

edit: apologies for swearing, but I thought it was appropriate here given the _very_ strong language of the article. And I hate using/(being subjected to) aster*sks.

The shit is that those who have lent money to others through long dated bonds lose money if inflation rises faster than expected, because bonds pay a fixed interest rate for a fixed period of time. As no one wants to lose money, they sell the bonds and bond prices crash, leading to more losses.

People who can afford to lend money to others for extended periods of time are the wealthy and those with a lot of money in pension funds. So the losers' side is skewed towards the wealthier and the older.

On the winning side are heavily indebted governments and corporates as well as people with fixed rate mortgages. As government spending has a redistributive effect and wages tend to rise with (moderate) inflation, the less well off, younger, working people are on the winning side as well.

So there you have your political dividing lines. Newspapers who cater to those on the losing side (such as the Telegraph) are going to get hysterical at the sight of even the slightest whiff of inflation.

There are global implications as well. Money flows where interest rates are higher. If interest rates rise in the US and in Europe, money will flow there from countries like India, Brazil or Indonesia. The currencies of those countries will fall versus the dollar because they are being sold, and as they are indebted in dollars, their debt load increases.

In previous episodes that has lead to defaults among poorer countries. But this time, these countries are not as heavily indebted as back in the 1980s and 1990s. Some of them are under pressure from low commodity prices though.

I am also waiting for a well informed adult to give us a summary. But from what I know of the bond market, bonds have been trading at an absurdly low rate for the past 20 years or so (please correct me if I'm wrong). This is an overdue correction, and is definitely bad for some people who have taken out an irresponsible number of bonds. But, possibly, will be very good for bond investors? I think?

And please correct me if I am wrong but when you own a bond someone owes you money. Thus the low rate of interest. (Very low risk vouchsafed by nation states.) If bond rates start going up then...? Bad for governments looking to finance services? As you can see, I'm really trying to understand from whence the article's tone. Who's gonna get burnt? Probably Joe Schmoe again, huh.

Correct, I should have said "issued an irresponsible number of bonds", not "taken out".

And yes, I would also like to know who gets burnt. It isn't very clear.

A story about a global "bond crash" that only appears in the Telegraph? The Telegraph which is bought and paid for by HSBC?

"They always thought there would be some other sucker to buy at an even higher price. Now we are returning to sanity."

Great quote. It's interesting that stocks are up over the past couple of days, despite the fact that they're already at record highs. It'll be even more interesting to see what happens when the Fed starts unwinding its QE bond holdings.

Rising interest rates make it unattractive to hold long-term bonds. For example, when interest rates jump from 3% to 4%, the net present value of 10-year bond drops by 10%. So as soon as investors believe that the turning point has come, the rational reaction is to sell bonds, amplifying the raise in interest rates even more.

But where will they put that money instead? Letting it sit around in cash is not a wise idea because oftentimes, rising interest rates come hand in hand with inflation. Your best bet is to buy something of "real" value, be it gold, real estate, or stocks. In my opinion, this could explain the growing divergence between stocks and bonds. At least for a while, I would expect this to continue and stocks to go up with bonds falling, or at least stocks not fall as much as bonds.

Then again, it is very hard to predict such things.

> Rising interest rates make it unattractive to hold long-term bonds. For example, when interest rates jump from 3% to 4%, the net present value of 10-year bond drops by 10%. So as soon as investors believe that the turning point has come, the rational reaction is to sell bonds, amplifying the raise in interest rates even more.

The rational reaction for a trader that believes they know more than the market and are looking to realize gain today. On the other hand, if an investor knows they have liabilities that match what a long term bond offers and are fully funded, and they don't care for second-guessing every other day, they're likely to not move out, or to move out a bit only.

> Then again, it is very hard to predict such things.

Indeed. Though as / when / if interest rates rise, how they do so at different points on the yield curve can suggest interesting things.

Just as long term bonds are at unnaturally high prices, I postulate that stocks are too, based on PEs over the past 10 decades or so (very Shiller). Might be worth looking elsewhere. Inexpensive (not cheap) real estate makes a huge amount of sense, especially in developed countries where a huge inflow of capital is flowing, and with easy visa deals, will continue to.

But according to the fed model [1] stock prices decline when interest rates rise. How do you account for that?

[1] http://en.wikipedia.org/wiki/Fed_model

It depends on the real interest rate.

Suppose you buy a long term bond yielding 5%, inflation was 2%. Now rates of bonds w/ comparable maturity and credit go up to 7% and inflation goes up to 4%.

Your bond is going to be worth a lot less now, but stocks could be (in reality not necessarily...) more robust to this change.

People are less willing to borrow money to buy stocks at higher interest rates.

The Greater Fool theory is an at least somewhat formal concept, see https://en.wikipedia.org/wiki/Greater_fool_theory for a start.

I find it to have a lot of explanatory value.

Ben Bernanke: Why are interest rates so low?

https://news.ycombinator.com/item?id=9289612

Bad week to buy a mortgage.

If you mean as an investor that you buy someone's existing mortgage, yes, it probably is a bad week to do so - unless you get it at a discount.

If you mean, buy a house using a mortgage, though, it's a great week to have done so - if you had a lock on last week's or last month's rate. It still might be a good time to do so.

And if you haven't refinanced and have a high rate, well, it looks like that ship is just about to sail. Do it now if it makes sense, because you won't have the opportunity to do so much longer...

Raising interest rate will limit number of people that can/are willing to take a mortgage, which will limit the demand, which will make house prices to go down.

Raising interest rate will limit the investments, jobs, salaries, which will make more people default on their houses. Which will boost the above effect.

So yeah, you can buy a house for X, with a nice tiny interest rate, but your house soon might be worth 3/4 * X or even 1/2 * X.

The time to take mortgages is when rates are being lowered, not when their being raised. The rate itself is not very important. When interest rates are high, the prices are lower. When interest is lower the prices are higher. It's the dynamic (change in interest rate) that is important. You want the person you can sell the house to, be able to pay you more than you paid.

* Note, I'm not an expert, I might be wrong. This is not a investment advise.

Yeah, the effect you describe is very real. It's because the demand price curve for houses is set by the monthly payment, not by the total price, and the monthly payment depends on both the price and the interest rate.

So what you ideally would like to do is buy when the interest rates are high (and prices low), then refinance as the rates drop, and get both lower payments and increased total value.

But rates aren't going to drop for quite a while, so now what do you do? It seems to me that prices are low for how low the rates are, so buying is still (to me) a reasonable decision.

> * Note, I'm not an expert, I might be wrong. This is not a investment advise.

Ditto. Also note that I already own a house, so I'm not taking my own advice, either.

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