Thread by @hussmanjp

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 1/ … Collum slightly opens Pandora's box.

Ok. Step one, when central banks buy interest-bearing bonds & pay for them with zero-interest base money (reserves+currency), someone has to hold it til it's retired. Each holder tries to pass their hot potato. T-bills are chased first

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 2/ Now, suppose it's not "zero-interest" money. Because the Fed now pays interest on reserves, investors don't chase T-bills as aggressively. The y-axis then has to be "T-bill yield over-and-above interest on reserves," but the same relationship between base money & rates holds.

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 3/ Now, as Prince sang, "lets go crazy. let's get nuts." Having created a mountain of monetary hot potatoes, the ECB and BOJ actually *charge* interest on the base money hot potatoes they've created. The struggle by each successive holder to get rid of it produces negative rates.

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 4/ Now if, when you sell your T-bill, you think the central bank will lower the rate on the cash you're getting (either by cutting interest on excess reserves IOER or charging more as the ECB and BOJ does), you may only sell your T-bill at a rate *below* the prevailing CB rate.

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 5/ Of course, T-bills are only the first stop on the yield-seeking chase. Successively longer-term bonds are next, because they are the closest substitutes. So the yield curve compresses sequentially. Dave's question is why this doesn't seem to stop at some still-reasonable yield

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 6/ My view is that yield-seeking speculation often doesn't stop at "reasonable" yields because the focus of investors becomes fixed on yield-comparisons rather than total-return. This requires a "carry-trade" mentality. What investors forget is that this mentality can also vanish

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 7/ The carry-trade mentality is already beginning to wobble in stocks, which are less direct substitutes for fixed income. In bonds, you can see the carry-trade mentality in the tendency to directly compare yields without adjusting for risk, which is why junk yields are bananas.

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 8/ Meanwhile, the idea of "matching the duration" of assets and liabilities in a low- or negative-yield environment essentially says. "We've neutralized our duration risk, but unfortunately, we've done it by locking in returns that literally ensure our future bankruptcy."

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 9/ Another aspect is that investors have assumed inflation away because QE hasn't produced it. But that misjudges what causes inflation in the first place. QE just swaps one govt liability for another. It's *fiscal policy* that ultimately drives inflation. hussmanfunds.com/comment/mc1908…

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 10/ So to answer Dave's question, we've got: a) QE driven yield-seeking speculation; b) a carry-trade mentality that wobbles only as investors consider capital losses; c) mindless duration-matching that overlooks solvency risks, and; d) a misguided belief that inflation is dead.

@DavidBCollum @RaoulGMI @MarkYusko @pboockvar @ttmygh @EpsilonTheory @Jkylebass @jessefelder 11/ Oh, and Dave...