Visual Guide to Deflation

Excellent example of how economics doesn't always have to be that complicated: check out this visual guide to deflation from Mint.com via Ritholtz. I can't add much to it, so just click already.

Cointerpoint to the Bonds-as-Bubbles Argument

Shortly after that last post, I found this post from Pragmatic Capitalism (via Reformed Broker). Interesting, if not long-winded, argument against the bond-bubble theory.

One thing I notice upon first glance, though, is that he seems to be a bit picky about the definition of a bubble. Would there ever be decrease on par in magnitude with the Dutch Tulip Bubble of the 1800's? No.

But, will you be pissed off if the long duration piece of your fixed income portfolio gets needlessly smoked because your portfolio manager is worried about underperforming a benchmark by a few bps?I would bet so.

Still, he has an excellent point that perhaps we are throwing around the term 'bubble' a bit haphazardly. Perhaps there is another term that will succinctly (and with a bit of colloquialism) describe an asset that has significantly outrun its fundamental, rational price parameters and is due for a fall? Perhaps I'll just call it Sisyphus at the top of his slope.

US Treasuries as a Bubble?

Like many inflated asset prices, US treasuries have been dealing with the bubble question for awhile now. It feels like a crowded trade and we're heading into historic low yields based on everyone having similar thinking. While I'm not saying everyone is wrong (I fear the US is already deflationary, per previous posts), I'm just saying the upside potential from here is very limited (could the 10 year go sub 2%??), whereas a mean reversion would be a disaster for anyone with long duration.

Barry Ritholtz has a good post at The Big Picture regarding Bloomberg's Chart of the Day from yesterday. It puts the US Bond price appreciation in a perspective I think almost anyone can understand: the dot-com bubble. Enjoy.

MacroMan on Deflation v. The Bond Bubble

In this post, TeamMacroMan make a few good points:

1. The smart corporates are issuing debt (IBM sub 1%). The good companies usually issue debt at the lowest possible interest rate (duh)
2. fixed income trades seems very crowded (by both mainstream media and trader positioning standards)

I agree with their thought that these factors (plus the greatly appreciated likely absence of Fiscal Stimulus 2.0) could result in a very brutal snap to the upside for interest rates.