
Bond crash across the world as deflation trade goes wrong - adventured
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11666355/Bond-crash-across-the-world-as-deflation-trade-goes-horribly-wrong.html
======
tveita
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.

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

~~~
hga
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.

~~~
crdoconnor
>the tabloid Daily Mail doing a lot of good reporting

Pardon?

~~~
hga
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/](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.

~~~
EdwardCoffin
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.

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

~~~
hga
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.

~~~
maxerickson
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.

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nhaehnle
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.)

------
w23j
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.
:)

~~~
phaemon
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.

~~~
w23j
I see. Thank you for the explanation.

------
lovemenot
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.

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

~~~
AnimalMuppet
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."

~~~
toomuchtodo
> 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.

~~~
hga
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.

~~~
toomuchtodo
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?

~~~
hga
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.

~~~
toomuchtodo
> 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.

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

~~~
bgilroy26
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.

~~~
meatysnapper
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.

~~~
bgilroy26
>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.

------
pjc50
A story about a global "bond crash" that _only_ appears in the Telegraph? The
Telegraph which is bought and paid for by HSBC?

------
jackgavigan
_" 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.

~~~
Hermel
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.

~~~
mrfusion
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](http://en.wikipedia.org/wiki/Fed_model)

~~~
blahblah3
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.

------
ExpiredLink
Ben Bernanke: Why are interest rates so low?

[https://news.ycombinator.com/item?id=9289612](https://news.ycombinator.com/item?id=9289612)

------
tootie
Bad week to buy a mortgage.

~~~
AnimalMuppet
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...

~~~
dpc_pw
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.

~~~
AnimalMuppet
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.

