Thursday, July 7, 2016

Which Option Sounds Better?

  • Silver puts. Marginal cost and all-in cost are around $10 plus or minus a couple bucks, and the spot price is back to almost $20 with speculators record long futures and commercials very short. A 2018 $13 put can be had for under 50 cents, make 5x if the price goes back to $10.
  • 30-year treasury puts. Fiat debt from banana republics is garbage, not a "magic sword of necessity" - the yield was twice as high as recently as the end of 2014. That would be $95 on TLT, a decline in value of about a third. The Jan 2018 $100 put for TLT is about 80 cents.


Stagflationary Mark said...

How are interest rates supposed to rise when there is a deposit glut?

Banks are flooded with deposits. Flooded.

Like water levels below a broken dam in a rainstorm, money levels only go up. That's why it's becoming harder and harder to make money off of money. That's why yields have fallen. There's too much of it.

If everyone you know is a balloon salesman, then you can't make money selling balloons.

Too many balloons can't make money. Too much money can't make money.

Are long-term interest rates attractive right now? Of course not. There is no guarantee that they won't just keep getting worse though.

The 30-year TIPS yield was 0.88% last time I commented here. It's now 0.54%. There are no guarantees that it must stay positive. There are no guarantees that long-term investments in our "banana republic" must keep up with inflation. Sigh.

Want bond prices to really fall? Stop printing so much money that can buy bonds. Good luck on that. :(

This will not end well. I'm 52. I'm hoping that I die of old age before all those cans we've been kicking come back to haunt us.

The Roman Empire took a long time to fall, and fortunately for us, the other modern empires make us look better than we should, at least by comparison.

Just opinions of course, from one banana republic believer to another. Shorting long-term treasuries is a bit too much like shorting a monetary printing press to me. That's not to say you can't make money. It's a huge risk though, if the past 35+ years are any inducator.

Stagflationary Mark said...

* indicator

CP said...

The 10 year yield started falling in July 1981. At that point the yield was 16% and your mortgages/deposits ratio was 0.8x.

Why did the 10 year yield then decline as the M/D ratio rose to 1.6x?

Stagflationary Mark said...


Perhaps the M/D ratio mainly rose because interest rates were falling?

Perhaps our credit boom needs/needed constantly falling interest rates?

So now we're stuck with credit no longer growing like it once did even with deposits growing and interest rates extremely low.

That's how we could end up with a deposit glut. Credit growth slows a lot but deposit growth doesn't slow much.

In the days right before the housing bust, Washington Mutual was willing to pay me 4% on my checking so they could loan more to others. They really wanted my money. Those days are over.

Doesn't help that we export a lot of dollars through our massive trade deficit. Those dollars have to end up somewhere. Bury them in the backyard. Deposit them. As a saver, it's starting to look about the same these days. Sigh.

Just a theory. I might be wrong thinking this through, of course. That's why I'm always interested in the opinions of those who might think differently.

That said, I still believe that savers will not be soon rewarded again. Maybe never, like Japan after their housing bust in the early 1990s.

Am I wrong to think there's a deposit glut? And if I'm not wrong, how much longer will there be one? If it's going to be 30 years or more, then the 30-year TIPS still looks good to me. *shrug shoulders*

I would love to be able to look ahead 30 years to know the answers with certainty.

AllanF said...

Granted this is hardly a unique opinion, but I am loathe to extrapolate from Japan starting 35 years ago to the US starting 8 years ago.

Japan had:
very high human cognitive capital,
one go-along-to-get-along race,
functionally one political party (but then again so is the US, arguably),
an aging population with zero to negative population growth
a world-wide productivity boom driven by wide-spread technology adoption

US has:
bi-modal distribution of human cognitive capital,
3+ mutually antagonistic races, with no clear majority in the near future,
two very mutually antagonistic political parties (about all they agree on is that constituents are sheep for the fleecing),
an aging and numerically stagnant population among the high cognition demographic, and a relatively young and rapidly increasing population among the other,
a productivity boom long in the tooth, with the low hanging fruit all picked, and then some,
a world in upheaval due to rapid population growth in all the places least able to afford it,

Hey, what could go wrong? 30 years without a hiccup? It's 2046 and private, state, local, territory, and Federal pensioners are all being paid the nominal dollars they are due, T-bills are being rolled at 0.1%, and 90% of the population has not had a raise in real-terms since ~2006.

Again, I realize skepticism is the crowded trade on this one, but, well, are people really putting that trade on, or just mouthing it?

AllanF said...

Meant to say Japan starting 25 years ago.

Stagflationary Mark said...


My money is stored either in a bank or figuratively under my mattress. That's all that really matters.

If I take money from my bank and use it to buy something from you, then you can either put it right back in your bank or you can stuff it under your mattress.

You can repeat the process and buy something from someone else. They will then have the same problem. What to do with the money? Bank or mattress?

United States. Japan. It's all the same if there is a deposit glut.

In order for rates to rise, we need to see a deposit shortage. Could happen. The public could go on a massive borrowing spree again. Banks could scramble for more deposits. That's not my base case though.

Deposit gluts aren't good for savers, especially if inflation ever picks up. Banks don't pay savers interest based on inflation. They pay based on how much they need the money. These days, banks clearly don't need the money very much.

AllanF said...

OK, OK... So you're taking the SLV put? ;)

The public could go on a massive borrowing spree again.

Not exclusively the public. Sovereigns are fully capable as well. Sure, they have the wind at their back now, but they don't seem to be using it wisely.

Stagflationary Mark said...


Governments have a nasty habit of buying their own debt with the money they don't have. Cheaters! ;)

Still leaves us with the problem of where to put the money we do have. Banks? Mattresses? Not many options.

Looks like we may be trying to fire up another silver bubble. I'm agnostic. Some day, one of them will actually stick. The "Fiat Currency Lasts Forever" theory has a horrible track record. In my opinion, it's all a question of timing. I might invest differently if my lifespan was a thousand years.

That said, I own a house. History shows that, atvthe very least, a natural disaster will level it at some point. I bought anyway in 1997. A big earthquake could easily make me regret it. Timing. Sigh.

High Plateau Drifter said...

"The only rational owner of a negative rate bond is a pure return seeker; there are zero income seekers holding negative rate bonds. Why is this a problem? Because income seekers will continue to own bonds even if the price goes down (for a while, anyway; at the very least, they are sticky owners). Return seekers, on the other hand, are not sticky owners at all. They will only own a bond if they think that the price is going up – meaning in this case that yields will continue to become even more negative, i.e., that there’s a greater fool (probably in the form of a Central Bank) willing to pay higher and higher prices for these income-destroying bonds – and they will sell in a heartbeat if they think this dynamic is changing.

There is, to cop a phrase from the People’s Bank of China, a massive “one-way bet” on negative rate sovereign debt today. The momentum trade has crystallized to perfection in negative rate bonds, which has grown to become a $10+ trillion (yes, that’s trillion with a T) asset class. I think it’s the most crowded trade in the world from a behavioral or investment DNA perspective, and the moment you get even a whiff of the ECB or BOJ backing down from or reaching its limit of greater foolishness, you are going to get a rush to the exit on ALL sovereign bonds that will shake global capital markets to their core."

And folks, it ain't just negative rate bonds that attract "pure return seekers." My guess is that half the bonds outstanding are held by "return seekers" betting that central banks will remain stupid for quite a while. My futures account that has been gathering dust for several years is primed and ready for the turn.

High Plateau Drifter said...


Since about 80% of silver production is a byproduct of base metal mining (zinc, copper, lead), I would assume that with the mining industry suffering from lower prices, that the production of silver should be falling right now. But after significant looking I can find no current, 2016 date on silver production.

Also, it is clear that most gold mining companies produce massively more base metals than gold or silver, but call themselves gold miners to attract the volatility of the herd, and the opportunity for out-sized option rewards at price extremes. There doesn't appear to be any guideline level at which a mine's gold production qualifies that company to call itself a gold miner.

Stagflationary Mark said...

High Plateau Drifter,

In the United States, is there a deposit glut?

If no, then why not?

If yes, then when will it end?

In my opinion, the deposit glut is like the crazy aunt in the attic that few, but me, seem willing to talk about. And yet, if we want to know when interest rates will eventually rise then we must talk about it.

It's not enough to say that interest rates will rise simply because they should. I want to know the mechanism that will cause it. What's going to force banks to start rewarding savers? Maybe I'm missing a key piece of the puzzle, but I don't see it.

I'm retired. I'm a net spender from here on out. Money comes out of the banks to fuel my lifestyle. On the surface, this sounds like it will reduce the depost glut. It won't, any more than it did in Japan.

That money that I spend simply moves to the next person who is then stuck with it. What do they do with it? Well, it goes right back in the banks, from my account to their account. That money did not vanish from the banking system. It was simply transferred from one bank account to another. Perhaps the markets have finally figured that out?

One way to reduce the deposit glut would be for that new person to use my money to borrow more money, say to buy a house with a large mortgage. How many years away are we from that being normal again? I suspect many years, at best. We'll be very lucky if we don't get another recession first. Sigh.

As a related side note, all those cash only housing purchases in recent years did nothing to solve the deposit glut. Nothing. It too was just shuffling money from one banking account to another.

High Plateau Drifter said...

@Stagflationary Mark

The mechanism is an increase in velocity of money (deposits) as people seek to move cash to inflating assets, just as they are buying inflating bonds and, paradoxically, gold and silver right now.

As you correctly note, somebody has to get stuck with the cash, but then velocity increases with escalating pressure to escape cash into some appreciating asset, and in the final stage, appreciating consumables such as food.

Stagflationary Mark said...

High Pateau Drifter,

I'm probably the poster child of slow money velocity since 2006. I put 1/3rd of my retirement nestegg in gold and silver in 2004. Sold on the next parabola in 2006. Made 50%. Done doing that. I've geen riding long-term TIPS to maturity ever since (and going back to 2000). Unlike most investments, I'm not requiring a buyer. No greater fool needed. Right or wrong, that's my plan and I'm sticking to it.

Further, falling interest rates encourage me to spend less, not more as intended (in order to compensate for the potential lack of future interest when my bonds mature).

Hyperinflation would ruin me even in inflation protected treasuries due to the continual taxation of the inflationary gains, as it would ruin most other investors. That's the primary risk I run. Could happen.

I don't think hyperinflation is a very likely outcome in my remaining lifetime though. I'm much more concerned about a long-term deposit glut and/or peak consumer credit.

In any event, may we live in interesting times? Been there, doing that. Sigh.

High Plateau Drifter said...

@Stagflationary Mark

Watch the link below:

The drop in velocity is slowing but has not yet turned. Gold and silver seem to be anticipating.

We shall see.

Stagflationary Mark said...

High Plateau Drifter,

I've written about the velocity of money many times on my blog. You might find this interesting.

March 2, 2014
The Bond Yield Bubble of 2013

The following chart compares the velocity of MZM money stock (in black, right scale) to the 10-year treasury yield (in blue, left scale).

As for gold, it hasn't been a very good predictor of future bond yields, future inflation, or the future velocity of money.

Gold was very cheap in 2000. That was a great time to buy long-term treasuries. That was the first year I bought I-Bonds. I still own them. Those pay 3.4% over inflation and will do so for 14 more years.

Gold was very expensive in 2011. That was also a great time to buy long-term treasuries. I converted my entire IRA to one 29-year TIPS. That bond pays 1.9% over inflation and will do so for 24 more years.

Locking in yields with intent to hold to maturity has been very good to me. Now I'm mostly just in autopilot mode. I swung for the fences in the 80s and 90s and it retired me. I'm done doing that. I don't really need my savings to grow. I don't have kids. I intend to live off savings and die mostly broke. My personal velocity of money is therefore more like a low pressure soaker hose than a high pressure firehose from here on out.

Perhaps I'm not alone? As many have said before, there will come a time when return of capital becomes more important than return on capital. That point happened in 2004 for me, 5 years into retirement. My mindset has permanently altered. I do not have a job to fall back on if I swing for the fences and strikeout.

CP said...

Guys, I did the math in a post a long time ago. When the local, state and federal governments are trying to borrow a few trillion a year to cover their ponzis PLUS roll over a few trillion in debt that isn't termed-out (oops) it'll end the bond bubble and consequently also the asset bubble.

While we haven't reached that point yet, it's anyone's guess when the bond market will figure it out, and you're not getting paid to take the chance.

Stagflationary Mark said...


Perhaps the bond market, of which I am a participant, knows that it will not end well someday but is also looking at the deposit glut and, in Bernanke's paraphrased words, a monetary printing press that allows the government to produce as many U.S. dollars as it wishes to buy its own bonds at essentially no cost.

It's been almost 12 years since his deflation speech in November of 2002. 10-year treasuries bought then, with a yield of 4.1%, have already matured. Those who purchased and held to maturity have few complaints.

Timing is everything. Buyers of 10-year treasuries today, who intend to hold to maturity, know what they'll be getting. Maybe, when compared to other inflated assets and their expected returns going forward, they're okay with locking in that dismal performance.

That said, I intend to buy EE savings bonds this year, again. They are guaranteed to double in price if held 20 years. That's 3.53% annualized. It's a relative bargain compared to today's 1.73% 20-year treasury bond yield. Time will tell if it is a bargain overall though. I mostly want bonds with inflation protection.

I guess that's just my way of saying that most small buy and hold retail investors, such as my myself, should probably not be buying the 20-year treasury this year with intent to hold to maturity, or a bond fund filled with 20-year treasuries (like TLT).

That's certainly something we can agree on. There's at least one alternative out there worth considering.

High Plateau Drifter said...

The key difference between the U.S. today and Wiemar in the early 20's is that the entire developed world is cooperating (so far) in expanding their money supplies (within broad bands) along side the U.S. Wiemar was alone, hated, and under financial attack after WWI from all sides. Thus far, all the significant players are allowing the U.S. to be the relative "hard money" source as it imports goods and resources and exports bonds denominated in that relatively hard currency, despite the fact that the U.S. has neither manufacturing output nor resources that the rest of the world needs. If Russia and China were to set up a hard and appreciating currency backed by substantial exportable resources and real competitive manufacturing prowess, then the dollar and dollar denominated bonds are in real trouble. Money will move massively to the new strong and rising currency and to bonds denominated in that currency.

I should also add that the attacks on police and the escalating costs of welfare to keep peace in the U.S. are likely to cause flight of U.S. enterprise and capital to other, safer countries as the U.S. becomes more like Mexico, Brazil and Argentina.

My point is that trouble for the dollar and dollar denominated bonds could come from many different sources, domestic and foreign.

High Plateau Drifter said...

Could this be a five day island top in the bond?

Waiting and watching!

whydibuy said...

Look at all the scare bears comforting each other while missing the new leg of the bull.
After basing for 18 months, off we go to new highs.
CP likes music videos so I suggest Rita Coolidge "All time high" from the Bond movie Octapussy. Its perfect for us bulls.

High Plateau Drifter said...

"Look at all the scare bears comforting each other while missing the new leg of the bull."

Yup! All bull markets are riskless, especially when they have already run up for 7 years and are heading into year one of a new presidential administration.

CP said...

Down to 70 cents for that TLT puts.

CP said...

And the SLV put down to 40 cents.

CP said...

TLT puts traded at 66 cents today.

CP said...

That $100 put traded at 57 cents.

CP said...

The SLV put down to 35 cents.