MONTHLY RESEARCH COMMENTARY - 2-mo FREE trial subscription:  read it now BEFORE you start - click here      
"MACRO ANALYTICS" Video Discussions - Every Saturday

Bookmark and Share       

Investments of any kind involve risk.  Please read our complete risk disclaimer and terms of use below by clicking HERE

HOME   ||   Today's Tipping Points   ||  Audio/Video   ||  Slide Presentations   ||   Commentary   ||   Understanding Abstraction   ||  Meet Gordon   ||  Subscriptions
 
 
JOHN RUBINO'S
LATEST BOOK
Read More
CHARLES HUGH SMITH'S
LATEST BOOK

Read More

NEW SERIES RELEASE

 

"DOW 20,000 "
Read the Series...

NOW SHOWING

HELD OVER

Currency Wars

Euro Experiment

Sultans of Swap

Extend & Pretend

Preserve & Protect

Innovation

Showings Below


  

 

"Extend & Pretend" Read the Series...

"SULTANS OF SWAP"
Read the series...

archives open in new window

ACT I
Sultans of Swap: Smoking Guns!

 

"EURO EXPERIMENT"
Read the series...


archives open in new window
 
EURO EXPERIMENT: German Steel or Schmucks?

"UR all PIGS from HELL

FREE COPY...

Current Thesis Advisory:
"EXTEND & PRETEND"

PDF, 62 pages
Published November 2009


Click to view Index

CONTACT US
Use Promo Code: INTRODUCTION
in the Email Subject


Bookmark and Share


"INNOVATION"
Read the series...


archives open in new window
  
INNOVATION: America has a Structural Problem!

 

"PRESERVE & PROTECT"
Read the series...

archives open in new window
 
PRESERVE & PROTECT:  The Jaws of Death

 

ANALYTIC

INSIGHTS

Follow Our Updates

on TWITTER

https://twitter.com/GordonTLong

AND FOR EVEN MORE ON RETAIL

https://twitter.com/sobata416

STRATEGIC MACRO INVESTMENT INSIGHTS

2014 THESIS: GLOBALIZATION TRAP

NOW AVAILABLE FREE to Trial Subscribers

185 Pages


What Are Tipping Poinits?
Understanding Abstraction & Synthesis
Global-Macro in Images:  Understanding the Conclusions


Reading the right books?
No Time?

>> Click to Browse <<

We have analyzed & included
these in our latest research papers Macro Analytics videos!

OUR MACRO ANALYTIC

CO-HOSTS

John Rubino's Just Released Book

Charles Hugh Smith's Latest Books

 

 

Our Macro Watch Partner

Richard Duncan Latest Books

MACRO ANALYTIC

GUESTS

F William Engdahl

 

 

 

 

 

OTHERS OF NOTE

Book Review- Five Thumbs Up
for Steve Greenhut's Plunder!

 

 

THE CONCEPT OF "REAL RISK-FREE" TOTAL RETURNS

IN AN ERA OF FINANCIAL REPRESSION

Published 01-29-15

HOW FINANCIAL REPRESSION LEADS TO

MISPRICED RISK

CULTURE OF RISK

The financial system is based on debt. US Treasuries, the benchmark for an allegedly “risk free” rate of return, is the asset against which all other assets are priced based on their relative riskiness. This “risk free” rate has been falling steadily for over 25 years.

The Wall Street Journal estimates that a third of traders have never witness a rate hike. However, the real problem is far greater than this. Bonds have been in a bull market for over 30 years. Forget rate hikes… an entire generation of investors and money managers (anyone under the age of 55) has been investing in an era in which risk has generally gotten cheaper and cheaper.

FINANCIALIZATION & RISE IN LEVERAGE

This, in turn, has driven the rise in leverage in the financial system. As the risk-free rate fell, so did all other rates of return. Thus:

investors turned to leverage or using borrowed money to try to gain greater rates of return on their capital.

The ultimate example of this is the derivatives market, which is now over $700 trillion in size. This entire mess is backstopped by about $100 trillion (at most) in bonds posted as collateral.

ASSETS CAN NO LONGER BE ALLOWED TO FALL - Deleveraging is Misinformation

This formula of ever increasing leverage works relatively well when the underlying asset backstopping a trade is rising in value (think of the housing bubble, which worked fine as long as housing prices rose). However, if the asset ever loses value, you very quickly run into trouble because you need to post more as collateral to backstop your trade. If you can’t do this easily, the margin calls start coming and you can find yourself having to unwind a massive position in a hurry. This is how crashes occur. This is what caused 2008.

Despite all of the rhetoric, the world has not deleveraged in any meaningful way. The only industrialized country to deleverage since 2008 is Germany.

This is not unique to sovereign nations either. As McKinsey recently noted, there has been no meaningful deleveraging in any sector of the global economy (the best we’ve got is households and financial firms which have basically flat-lined since 2008).

In the simplest of terms, the 2008 collapse occurred because of too much leverage fueled by cheap debt. This worked fine until the assets backstopping the leveraged trades fell in value, which brought about margin calls and a selling panic.

REHYPOTHECATION

The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients.

In rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades. While rehypothecation was a common practice until 2007, hedge funds became much more wary about it in the wake of the Lehman Brothers collapse and subsequent credit crunch in 2008-09. That has all changed as has the re-emergence of Cov-Lite, PIK Loans et al.

Since the Financial Crisis everyone has become even MORE leveraged than they were in 2008. And they did this against an ever-smaller pool of quality assets (the Fed and other Central Banks’ QE programs have actually removed high grade collateral from the financial markets).

Thus, we now have a financial system that is even more leveraged than in 2007… backstopped by even less high quality collateral. And this time around, most industrialized sovereign nations themselves are bankrupt, meaning that when the bond bubble pops, the selling panic and liquidations will be even more extreme.

Excerpts above taken from a note from Graham Summers, Phoenix Capital Research

THE CONCEPT OF "RISK FREE"

DEFINITION: Risk-free interest rate is the theoretical rate of return of an investment with no risk of financial loss. One interpretation is that the risk-free rate represents the interest that an investor would expect from an absolutely risk-free investment over a given period of time.[1] Since the risk free rate can be obtained with no risk, any other investment will have additional risk. In practice to work out the risk-free interest rate in a particular situation, a risk-free bond is usually chosen that is issued by a government or agency where the risks of default are so low as to be negligible.

As my MACRO ANALYTICS Co-Host writes in The Surprising Consequences Of The Global Frenzy For Positive Yield

As the dollar soars, so does the real yield on bonds denominated in dollars.

As central banks rush to depreciate their currencies and push yields into negative territory, what's becoming scarce globally is real yield in an appreciating currencyReal yield is yield adjusted for inflation/deflation: if inflation is 3% and bonds yield 2%, the real yield is negative 1%. If inflation is negative 1% (i.e. deflation), and the yield on bonds is .1%, the real yield is 1.1%.

What's the real yield on a bond that earns 1% annually in a currency that loses 10% against the U.S. dollar in a year? Once the foreign-exchange (FX) loss/gain is factored in, the investor lost 9% of his investment.

Needless to say, the real yield must include the foreign-exchange loss/gain. An investor earning 10% in a currency that's losing 20% annually against other currencies is losing 10% annually, despite the apparent healthy nominal yield.

An investor earning 1% in a currency that's appreciating 10% annually against other major trading currencies is earning a yield of 11%.Clearly, the nominal yield is deceptive; the real yield can only be calculated by factoring in both inflation/deflation in the issuing economy and the appreciation/depreciation in the issuing currency against major tradable currencies.

Now we understand why what's scarce globally is real yield in an appreciating currency: the only major trading currency that's appreciating is the U.S. dollar. Any nominal yield on bonds issued in euros or yen turns into a loss when measured in U.S. dollars. Even the Chinese renminbi, which is pegged to the U.S. dollar, has slipped against the dollar as Chinese authorities have responded to the devaluation of the Japanese yen and other Asian-exporter currencies.

One result of the global scarcity for real yield is high demand for U.S. Treasuries, which are denominated in U.S. dollars. High demand pushes bond yields down, effectively replacing the Fed's quantitative easing (QE) bond-buying programs, which the Fed ended last year.

The U.S. gets the benefits of strong demand for its bonds (i.e. low interest rates) without having to issue new money (QE).

Another factor is the reduced issuance of new Treasury bonds as the U.S. fiscal deficit declines. This effectively reduces supply as demand remains strong.

This is a self-reinforcing feedback loop: as the U.S. dollar strengthens and the U.S. fiscal deficit declines, the Fed has no need to buy Treasury bonds (with freshly issued money) to keep interest rates low. Since the U.S. central bank isn't issuing new money while every other major central bank is printing massive amounts of new money to depreciate their currencies, this pushes the U.S. dollar even higher.

And as the dollar soars, so does the real yield on bonds denominated in dollars. That may not surprise everyone, but few can support a claim of predicting this a few years ago.

REAL RISK FREE TOTAL RETURN

This is THE trick of FINANCIAL REPRESSION in financing the US Government Debt

Savers lose but the US Government & International Banks win.

 

 

Signup for your FREE copy of the GordonTLong.com 2015 THESIS PAPER

184 Pages of Charts & Facts on where the "Fiduciary Failure" crisis will lead in 2015-2016


No Obligations. No Credit Card.

AVAILABLE IMMEDIATELY TO TRIAL SUBSCRIBERS

Request your FREE TWO MONTH TRIAL subscription

 PUBLIC RELEASE - FEBRUARY 2015

 

 

Gordon T Long    
Publisher & Editor
general@GordonTLong.com     

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments.

© Copyright 2013 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.

 

  HOME  ||  Today's Tipping Points  ||  Audio  ||  Commentary  ||  Understanding Abstraction  ||  Meet Gordon  || Subscriptions  
TERMS OF USE

Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.

THE CONTENT OF ALL MATERIALS:  SLIDE PRESENTATION AND THEIR ACCOMPANYING RECORDED AUDIO DISCUSSIONS, VIDEO PRESENTATIONS, NARRATED SLIDE PRESENTATIONS AND WEBZINES (hereinafter "The Media") ARE INTENDED FOR EDUCATIONAL PURPOSES ONLY.

The Media is not a solicitation to trade or invest, and any analysis is the opinion of the author and is not to be used or relied upon as investment advice. Trading and investing  can involve substantial risk of loss. Past performance is no guarantee of future returns/results. Commentary is only the opinions of the authors and should not to be used for investment decisions. You must carefully examine the risks associated with investing of any sort and whether investment programs are suitable for you. You should never invest or consider investments without a complete set of disclosure documents, and should consider the risks prior to investing. The Media is not in any way a substitution for disclosure. Suitability of investing decisions rests solely with the investor. Your acknowledgement of this Disclosure and Terms of Use Statement is a condition of access to it.  Furthermore, any investments you may make are your sole responsibility. 

THERE IS RISK OF LOSS IN TRADING AND INVESTING OF ANY KIND. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Gordon emperically recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, he  encourages you confirm the facts on your own before making important investment commitments.
  

DISCLOSURE STATEMENT

Information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

Please note that Mr. Long may already have invested or may from time to time invest in securities that are discussed or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.

 

FAIR USE NOTICE  This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental, political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.

 

If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.   

COPYRIGHT  © Copyright 2010-2011 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or recommendation you receive from him.