Why in the world would you own bonds? • Hacker News Board

Re: Why in the world would you own bonds?

#121

Post by nemothekid » Wed, Mar 17, 2021, 5:35 AM UTC

JumpCrisscross wrote: post #80

vecinu wrote: post #20

The conclusion kind of scares me, especially coming from Dalio. > so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected. Who truly believes this is a likely scenario? A number of folks I know are already considering fleeing the US but if this was to pass, that number would skyrocket…

> Who truly believes this is a likely scenario? The United States is the only major power with a strong ideological belief in unrestricted capital flows. The EU and China have both implemented capital controls in the modern era, sometimes repeatedly. (U.K. currently stands out, too.) All it takes is a populist “the rich are fleeing with their capital” trope to take hold on the far left and/or the right, and the centr…

>Put another way, do you really think you couldn’t get a lot of people in e.g. San Francisco to sign onto a mandate that requires the rich to register outgoing capital flows?

Your example is poor; there are 10s of millions of people in California who have been trying to get healthcare reform passed for nearly a decade now and the trend so far has been Obamacare being slowly unwound. It's unclear if the far left/right is anything more than a boogeyman at this point considering the glacier pace of the Senate in the last 20 years. The media would have you believe the democrats are well on their way full blown communism, but the reality is the party self-sabotaged their own $15 minimum wage proposal and managed to be less generous than Trump on stimulus checks.

If the Federal Reserve decided to implement capital controls, I doubt it would happen democratically. It's more likely that you would wake up one day and all the major banks would have limits on how much gold you could purchase in a year for "liability reasons". I'm sure a Senator or two would scream, but the next week there would be the next culture war story with Ted Cruz complaining about MTV.

Re: Why in the world would you own bonds?

#122

Post by ping_pong » Wed, Mar 17, 2021, 5:38 AM UTC

People like Ray Dalio keep saying this, and scores of others have been talking about how fiat currency will fail, but it won't. Globally, no one that matters wants it to fail, therefore it won't. People like Paul Tudor Jones have been saying that the USD will fail for decades and people should buy gold. Even Peter Schiff has been talking about gold and hyperinflation since before the Great Recssion.

All the bears have been completely wrong, except for short periods of time. And they will continue to be wrong. Again, no one that matters wants the USD and UST to fail. Bond vigilantes can't defeat the Fed.

Re: Why in the world would you own bonds?

#123

Post by fspeech » Wed, Mar 17, 2021, 5:39 AM UTC

every wrote: post #97

ericd wrote: post #85

Earlier quoted context omitted.

Haven’t munis had negative real (ie after inflation) returns for a while now?

I don't know. Have we averaged greater than 3.5 to 4.0 percent inflation recently? Those are the current returns from my munies, not counting the tax exemption...

You are likely confusing yield with coupon. The current yield of munis are below inflation. However their coupon rates are determined at time of issue so bonds issued a while ago tend to have coupon rates above inflation. What this means is one can sell these bonds now significantly above face value (and possibly incur capital gain tax). What it also means is that new investors in today's bonds will get below inflation return. This last point is what matters and is what people mean when they say that bonds have negative real yield.

Re: Why in the world would you own bonds?

#124

Post by neilwilson » Wed, Mar 17, 2021, 5:40 AM UTC

zby wrote: post #115

Some loose threads: The main difference between bonds and cash is mostly based on the fact that cash is the means of settlement. But in fact what we call cash can also have two main forms: federal reserves (debt of the feds) that can be dealt with only by banks and regular bank depositories (debt of the particular bank). And there is even a third layer of Euro Dollar which is debt of non-US banks who cannot hold fede…

"Non rhetorical question: are there any scenarios where the US defaults on their debts?"

No. Since it is just a bond swap. To anybody not in the US (like me), the US dollar is just a 0% permanent bearer bond. When a bond matures it is swapped for central bank reserves (floating debt). When one is sold it is swapped back (fixed rate term debt).

The monetary system is reflexive. No financial institution is going to hold central bank reserves when there is a near identical government bond available paying a higher interest rate.

Re: Why in the world would you own bonds?

#125

Post by AYBABTME » Wed, Mar 17, 2021, 5:42 AM UTC

nostrademons wrote: post #90

vecinu wrote: post #20

The conclusion kind of scares me, especially coming from Dalio. > so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected. Who truly believes this is a likely scenario? A number of folks I know are already considering fleeing the US but if this was to pass, that number would skyrocket…

I actually believe something far scarier. I think we're going to see a worldwide disintegration of governments and then sort of a feudal anarchy - basically the Syrian Civil War, but spread across the globe. People will stop taking the government seriously and just go do what they want, with a lot of local bullies and warlords springing up to take their place. The financial picture Dalio paints is the first stage of…

While interesting, I have a feeling that your prediction may be subject to recency and availability bias. If I picture myself looking from within the US, your scenario sure resonates. But looking from outside, I'm not convinced it does. From the other side of the planet, it looks like the US is having a moment but the other governments aren't sitting idle and letting entropy increase.

I'm also not sure that 50 years from now, the Capital Riot will be recorded as being a majorly significant event in US history. It'll probably be mentioned in history books but I'm doubtful it'll be referred to as a pivot point in US history.

Migration crisis: I feel there's been larger migration events in the past. Doubtful the climate crisis will actually be creating a massive scale migration crisis.

I do think climate change will change the dynamic in various areas.

I otherwise also agree on the paradigm shift in military technology.

Re: Why in the world would you own bonds?

#126

Post by nostrademons » Wed, Mar 17, 2021, 5:42 AM UTC

ZephyrBlu wrote: post #40

adeelk93 wrote: post #22

Earlier quoted context omitted.

Great counterpoint. I knew the Fed was purchasing a lot of bonds, but I had not grasped the scale of it. I didn’t think it would be that much higher than 08. The Brigewater article would have been a lot stronger with that $7 T figure.

I believe that every dollar the Fed has "printed" went into bonds because that is how the US financial system works. The government gets money from the Fed by selling them bonds in exchange for cash.

That's not how the U.S. financial system works. The government doesn't "get money from the Fed" - it gets money from the Treasury, which either collects it from taxes or issues government debt to raise funds.

The Fed participates in open market operations, and one of the markets they participate in is the Treasury bond auction. But they participate in others as well: notably, they've recently been major participants in mortgage-backed securities and corporate debt markets. When they participate, they effectively inject cash into the system, since the amount they can pay is unlimited and subject only to their mandate to get full employment and limited inflation.

There's a lot of other subtleties involved as well; this isn't intended to be an exhaustive explanation.

Re: Why in the world would you own bonds?

#127

Post by pascalxus » Wed, Mar 17, 2021, 5:44 AM UTC

ISL wrote: post #118

mc10 wrote: post #30

Earlier quoted context omitted.

This is not a guarantee at all; if inflation is sufficiently high then you could be actively losing money holding a bond that fewer and fewer people want.

A $1000 T-Bill will yield $1000 at maturity, every time.

that may be so but most people can't have a 30 year commitment so they buy ETFs. And ETFs need a buyer for that bond to have value. if those buyers don't exist then the bond could be worth a lot less than 1000$. this is what the author was talking about with the comparison to run on the banks for bonds.

Re: Why in the world would you own bonds?

#128

Post by ericd » Wed, Mar 17, 2021, 5:44 AM UTC

nostrademons wrote: post #90

vecinu wrote: post #20

The conclusion kind of scares me, especially coming from Dalio. > so they could very well impose prohibitions against capital movements to other assets (e.g., gold, Bitcoin, etc.) and other locations. These tax changes could be more shocking than expected. Who truly believes this is a likely scenario? A number of folks I know are already considering fleeing the US but if this was to pass, that number would skyrocket…

I actually believe something far scarier. I think we're going to see a worldwide disintegration of governments and then sort of a feudal anarchy - basically the Syrian Civil War, but spread across the globe. People will stop taking the government seriously and just go do what they want, with a lot of local bullies and warlords springing up to take their place. The financial picture Dalio paints is the first stage of…

I’m curious, since you seem to have thought a lot about this - any suggestions for defensible locations with plenty of natural resources? I’m guessing suburbia generally doesn’t meet that definition.

Re: Why in the world would you own bonds?

#129

Post by pascalxus » Wed, Mar 17, 2021, 5:46 AM UTC

ycombinete wrote: post #29

pascalxus wrote: post #8

What i find particularly scary is the run on the banks scenario the author outlines. this really smashes the idea that bonds are the safe thing to get your money back. I know a lot of bonds have been selling, that's why the fed needs to buy so much every month, to make up for all that selling people are doing. Personally, i'm surprised even more people haven't been selling bonds. With the threat of inflation looming…

where do risk averse investors go these days? On the market I'm invested in to total market index, as well as a global government bond index.

i mostly invest in inflation protected assets. there's really only 4 categories of investments: equities (stocks), fixed income (bonds), real estate and commodities. And, one of those categories (bonds) has been eliminated by the governments and feds of the world. So, that only leaves: equities, real estate and commodities (gold and bitcoin).

Re: Why in the world would you own bonds?

#130

Post by shostack » Wed, Mar 17, 2021, 5:49 AM UTC

ac29 wrote: post #31

nlh wrote: post #24

One thing I've learned about professional investors is that no matter what, at the end of the day they're talking their book. So whether you buy these arguments or not, Ray Dalio is simply promoting a position that Bridgewater no doubt has taken. So when he says: "I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix tha…

The book he has coming out this year The Changing World Order: Why Nations Succeed and Fail certainly seems to touch on some similar themes from the brief description I found online.

Yes, it seems he's betting against the Western financial growth and stability. I wonder if he thinks the days of the dollar's reserve currency status are numbered.