naked capitalism

doc holiday says:

I can't help but laugh at the headline I just read, which is related to CDS implosions:

Treasury Secretary Henry Paulson called the financial crisis now plaguing the world economy a "once or twice" in a 100 years event, even as he warned Thursday against imposing too-strict regulations to prevent a repeat calamity.

>> This is funny, because this did all happen with Paulson and Bernanke and Bush and all the crap these people did, to push us to this 100 year event — and now he steps back like this is not related to his pathetic abuse of The Constitution and the spineless Congress that sat back like the puppets they are; what crap! i also think Paulson and Bernanke at times seem to be working for China as they make every possible attempt to undermine the stability of America, and that used to be called Treason not too long ago!

Anonymous says:

Markets are forward looking discounting mechanisms. It’s time to stop blaming the village idiot from Texas and start looking at the False Messiah from South Chitown.

I notice the incoming adminstration has announced they’re sticking to their plans to bankrupt 75% of the US electric grid. This is through imposing vast “carbon taxes” justified by a global warming junk science whose numbers are dicier than securitized sub-prime mortgages.

It’s a reasonable indication of coming mass defaults.

River says:

anon of 4:08 PM…Shrub is still the president, the captain of the ship. As long as Shrub is on watch he is responsible for what ever happens. Get over it.

Anonymous says:

doc holiday? I have a question…..

I would consider myself a “layman” in every sense of the word when it comes to finance and economics.

However, I do feel that I have a tremendous amount of common sense and this is why I religiously read this blog as well as the RGE Monitor….the postings from Yves and readers as yourself make A LOT of sense to me (they are the main reason I pulled completely out of stocks back in July of 2007).

Anyway, to my question…..

What is the big picture meaning of short term treasuries at .0005?

Also, if the return is so small, why would an investor purchase these? Is it because of the “safety” of these?

Thank you in advance for your insight.

Andrew Foland says:

Anonymous @ 4:08

I cordially invite you to display your understanding of molecular absorption in the infrared through the near UV, how differential absorption over this spectrum interacts with the thermal photon blackbody spectrum of far-out-of-equilibrium heat sources, and your clear understanding of the extent to which the greenhouse metaphor is or is not appropriate to said scientific issues.

Once you have displayed that, maybe we can judge your competence to declare global warming “junk science.”

doc holiday says:

Anon@ 6:09

Re: What is the big picture meaning of short-term treasuries at .0005?

IMHO, the future value of money is decreasing, depreciating and decaying in relation to current value. I’m trying to understand this as well, so this is just a bunch of thinking out loud and some background info. I’m also thinking about how a 3-month period acts as a discount factor, but there are lots of directions to go on this, so this info may or may not be accurate, but maybe something to improve later.

The Treasury Curve is a depiction of money value across a time spectrum, spanning between 13-week Treasuries and 30 year Bonds. The short-term drop to zero probably represents deflation and is not something in any model or represented in standard curves for valuation.

Here is some background from Wiki related to yield curves: The main disadvantage is that, under Vasicek's model, it is theoretically possible for the interest rate to become negative, an undesirable feature. This shortcoming was fixed in the Cox-Ingersoll-Ross model. The Vasicek model was further extended in the Hull-White model.

http://en.wikipedia.org/wiki/Vasicek_model

The standard deviation factor corrects the main drawback of Vasicek's model, ensuring that the interest rate cannot become negative. Thus, at low values of the interest rate, the standard deviation becomes close to zero, cancelling the effect of the random shock on the interest rate. Consequently, when the interest rate gets close to zero, its evolution becomes dominated by the drift factor, which pushes the rate upwards (towards equilibrium).
http://en.wikipedia.org/wiki/Cox-Ingersoll-Ross_model

>> So then, why did the standard deviation correction factor fail to correct the plunge to zero and why have we returned to .0005 (today)??

The Vasicek model apparently implies that interest remains constant in the absence of shocks, but then, The Cox-Ingersoll-Ross model “apparently” fixed that potential glitch by adding in a standard deviation factor, which cancels the effect of random shocks on interest rates that are close to zero, because the evolution of the rate becomes dominated by the drift factor, which pushes the rate upwards (towards equilibrium).

In terms of factor shocks, they seem to be referring to supply and demand relating to inventory exchanged from auctions of new issues and maturity and expiration things. The assumption about the gamma term is different for each one-factor model. It is assumed zero in Vasicek (1977) and ½ in Cox, Ingersol, and Ross (1985) models. Chan, Karolyi, Longstaff, and Sanders (1992)’ estimate of gamma is 1.5. According to the results of ordinary regressions, constants associated with the quantity shocks of 13-week and 26-week bills are always significant. A very big concern now has to do with failed auctions.

See: Treasury Market Practices Group Endorses Several Measures to 
Address Widespread Settlement Fails 
November 12, 2008 
http://www.ny.frb.org/tmpg/PR081112.pdf

Special collateral repo rates cannot exceed the Treasury general collateral repo rate. As a 
result, settlement fails across a variety of CUSIPS can similarly become widespread and persistent when the Treasury general collateral repo rate is near zero – as is currently the case. 

The underlying problem is the Treasury market contracting convention that a seller can deliver securities after the originally scheduled 
settlement date at an unchanged invoice price, i.e., without incurring any penalty. Introduction of a dynamic fails penalty with a finite cap 
rate would remedy this problem.

Also See: The 2-yr yield just dropped below 1% for the first time

Back to Wiki: A positively sloped yield curve has not always been the norm. Through much of the 19th century and early 20th century the US economy experienced trend growth with persistent deflation, not inflation. During this period the yield curve was typically inverted, reflecting the fact that deflation made current cash flows less valuable than future cash flows. During this period of persistent deflation, a 'normal' yield curve was negatively sloped.

>> However, IMHO, the current yield curve is adjusted and factored in a way to not accommodate a deflationary model. I have also posted in the past that I think GDP has been over-stated and manipulated and adjusted to falsify economic growth and thus distort the valuation of money. Thus, when you look at the yield curve today, it looks like the economy is ready to go into a huge growth spurt, but obviously that doesn’t make sense if the short-term Treasuries are crashing to zero.

The actual reason as to why yields are falling is because there is a wide spread money hoarding by banks and financial institutions, who are bailing out of over-valued equities that have dividends that are out-of-step with the current deflation. Obviously the majority of Joe The Plumbers are doing the same thing too, because no one in the world has any confidence for the future. Hence, everyone at the same time is jumping into short-term bills and crashing the system by taking money out of longer-term future investments.

This is also a self-fulfilling catch-22 feedback loop that is fueled by more and more expensive Treasuries, which yield less and less. We are well beyond the point of bubble-like overvaluation with Treasuries, and this is now the equivalent of buying a share of dotcom garbage with a P/E of over 2000. Valuation and fundamental reason are no longer priced into the reality of this chaos, because it is panic, and the models are broken!

This situation is like taking $1000 to a bank and getting nothing for your investment, for three months. The only thing you can do is to accept zero for 3 months, or move into longer-term bills and then freeze your cash. This is somewhat like a liquidity trap, but in reality the money isn't trapped, it just will have less and less value in the future.

doc holiday says:

Maybe this is another clue?

Estimating a Latent Trait Model by Factor Analysis of Tetrachoric Correlations

http://ourworld.compuserve.com/homepages/jsuebersax/irt.htm

We consider here estimation of a fully Gaussian latent trait model. “Fully Gaussian” means that both the latent trait and measurement error are assumed to be normally distributed. This model, equivalent to what Item Response Theory (IRT) terms a two-parameter normal (2PN) model with a normally distributed latent trait, is often used in educational testing, social science research, and, increasingly, in health research. It is also useful–perhaps one of the best methods–for binary data factor analysis.

doc holiday says:

Projecting the invariants into the future
http://www.symmys.com/ AttilioMeu…tion_Sample.pdf

1. “the standard deviation of the change in yield to maturity in a given time span is
the square root of the time span times the annualized standard deviation of
the change in yield to maturity”

2. Since by definition an estimate is only an ap-
proximation to reality, the distribution at the investment horizon cannot be
precise. In fact, the farther in the future the investment horizon, the larger
the effect of the estimation error. We discuss estimation risk and how to cope
with it extensively in the third part of the book.