QE Forever: Short Treasuries? But what about Japan?
QE forever certainly makes me think that I should put my entire net worth (all $5 dollars in my piggy bank) into gold bars.
Q: Who would own treasury bonds at 2.7% when the Fed is printing money forever?
A: Japanese investors faced with QE forever.
Here’s a chart of the infamous JGB. The graveyard for hedge fund managers who decided that fighting a massive government was sensible.
But Treasury bonds are a terrible investment, right?
The Japanese Government Bond hit 1.80% in April of 1998. The government was engaging in QE forever, but it was a failed monetary policy, as despite repeated efforts to break the deflationary cycle, consumption and investment remained weak and the economy remained stagnant (sound familiar?).
Over the next 14+ years the bond returned a meager 2.02% compound annual growth rate, but with a 10.30% maximum drawdown. Not spectacular.
The S&P 500 returned 3.69% CAGR with a 50.2% maximum drawdown; the TOPIX index churned a -2.27% CAGR and 56.23% maximum drawdown. FUGLY!
Yeah, but this time is different, right?
Possibly, but you simply never know. And the Japanese experience has taught us that “logic”–i.e., how can a government print massive amounts of money and not create insane inflation and run-away bond yields?– doesn’t always equate to knowledge. During the 1990s, Japan’s ZIRP had never before been tried on such a scale, yet in hindsight it was arguably too timid. Additionally, there was debate about whether in a sustained deflationary environment policy rates of zero could even be effective. The intersection of macroeconomics, animal spirits, and deflation/depression economics are impossible to pinpoint in my mind. I will admit ZERO confidence on any prediction in this space.
And what asset can take on trillions when the proverbial sh$% hits the fan?
- Stock markets? Nope, they blew up, who wants to own them?
- Emerging markets? Nope, they blew up and everyone wants USD.
- Gold? Nope, not enough capacity and not enough liquidity.
- The US Treasury? Yep, liquid, massive, and backed by the country that has solid contract law, respects property rights, and sits on massive resources. Yes, we aren’t perfect BY A LONG SHOT, but which country in the world (with trillion$+ size) is even close when you really think about it?
QE forever really strains the brain.
On one hand, it seems inevitable that printing money forever cannot be sustainable and hyper-inflation is right around the corner.
On the other hand, the Japanese experience and the US Great Depression highlight the importance of understanding the counter-intuitive nature of zero-interest rate deflationary macroeconomic situations.
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