Rogers took an unfair shot at Chanos a few months back ... "the folks who call China a bubble couldn't even spell China 10 years ago". Now Chanos feels he has to respond, and he's been tossing out that zinger for a few months. My guess is that if you got both of them in a room, they would be in agreement on pretty much everything as far as China goes. China may be a heavily state-controlled economy, but I completely agree with another of Rogers' comments - "China is more capitalist than California". One of the bets I wanted to make this year was a purchase of call options on June 11 or later Aussie 90 day bank bills, as the Oz economy would take a big hit from a construction slowdown in China. I even went as far as setting up an account with a broker who could buy/sell anything on the SFE. Sadly, the options on these contracts really do not trade. A market maker would have been happy to sell me the options, but then there would be the question as to how I could get out of the trade when the time came, so I never executed the trade. I would note that the June 11 Oz 90 day futures have been in rally mode since the last rate hike in Oz.
We do have a couple of past examples of ballooning deficits and debt loads, combined with non-existent inflation - USA in the 1930s, and Japan from 1990 to present. In both cases there were secular bull markets in bonds that drove 10 year bond yields to the 2 lowest readings in recorded human history - 1.5% and 0.5% respectively. Admittedly the 1930s was on the gold standard until 1933, but Japan wasn't. So if the bear case on bonds is that there are ballooning deficits and debt burdens - well, that has been proven to be irrelevant before compared to the inflation outlook. Which means the bear case rests on inflation outlook alone. What is interesting is that most of the bears, e.g. Marc Faber, just assume inflation, rather than explaining why it will happen. Their reason is "money printing" by the Fed. But that isn't the cause of inflation. The cause of inflation is credit creation in the banking sector. If credit creation remains weak - and there are a host of financial, economic, social, and regulatory reasons to think that banks will be reluctant to return to the aggressive lending of the past - then the inflation case is a bust. IMO the bullish case is robust, based on historical precedent and apparent fundamentals. With 10 year yields now close to 4%, if the bulls are right then you are looking at real yields of 4% for the next decade. Clearly if inflation goes to zero (or negative) then bond prices will soar and nominal yields will fall to 2% or lower, as they did in Japan. As for the downside - that is also appealing. If the bull case is wrong, and inflation returns, we will find out in the next 12-18 months in the data. Technically, bonds have just retested their summer 2009 lows - but despite the huge stock and risk rally since then, they haven't decisively broken below support, which is what you would expect if an inflation/robust recovery story were happening. So there is a bit of a message from the market there, bonds are acting quite resilient despite the apparent flight into risky assets and away from safety. Finally, valuations are actually not too bad. Let's say the recovery is solid, what inflation rate would we expect, maybe 2%, 2.5%? Treasury 10 years were yielding 4% just a short while ago. 1.5-2% real yield is not great but it's not terrible either. Are we really to expect that inflation will be higher than in the 2004-2006 period? If you look at 30 year yields, right now they are 4.75% - compared to 4.5% in 2005-2006. In other words, bonds are actually reasonably priced today even if the economy is healthy. Even the wildest bull has to admit that the economy in 2010 has more apparent problems than the market thought it had in 2005-06. As long as you do not believe the "Zimbabwe Fed" interpretation (which no one other than Faber and the tinfoil hat brigade take seriously), then bonds have low downside, an inherent low-risk/long gamma positive carry, and a significant upside capital gain potential in the event of a secular decline in bank lending and inflation over the next 5-10 years. Basically you are getting paid 2% real returns per annum to hold a free option on long-term mediocre growth, and as long as Ben doesn't bring out the helicopters, the chances of major loss are very small indeed. In the worst case, if 10 year yields rise to 4.5-5% and for some reason Bernanke thinks that a robust recovery is the perfect signal to start a hyperinflationary spiral, you can always take your moderate single digit % loss and exit the trade.
Also, you have to understand who Rosie's clients are. They're not guys looking to bet on which direction the next 50bp move is in the long bond. He's speaking to asset allocators and long term holders, and he's saying that the 30 year yielding 5% or the 10 year yielding 4% in a deflationary environment, with money rates around 0% is a damn good return. As the post above alludes to, one should spend some time in a library or on Google, and read contemporaneous accounts of prognostications (how about those 2 words) on the Japanese bond market from the mid-90s on. Folks were using the EXACT same language to argue that rates could only go in one direction and that shorting the JGB was the "trade of a generation". You could also read Graham's Diary of the Great Depression and read about the constant fear among the masses from 1930 on of the inevitable hyperinflation. It never came, and bonds yields sank until the mid 1940s.
Lending to the US government is also a carry trade - borrow at 0.25%, lend at 4%. And unlike the ones you suggested, it is long gamma instead of short. Considering the VIX is at 16 and stocks are up 80% from the lows, I personally would not want to be long risk unless I was being extremely well compensated. IMO the time to go long risk is when everyone is scared of it, not when it is priced at a premium valuation. NLY could be a good pick though - I'm just concerned how it would perform if mortgages started getting hammered again.
The US 30's had a lower debt to GDP ratio at the start of the process, furthermore it had a massive deflation that is unlikely to be repeated. I dont have data on this but I would not be surprised if the global real rates went up during that period given that the banking crisis was followed by a GSD crisis(and you would expect the premium charged by the market to go up during the crisis) As far as japan goes, I emailed Rosenberg back and forth and of course he brought out the japanese card again. Greece is in a disinflationary enviroment and yet its bonds tanked, japan had the same and it didnt. The thing is, japan is the exception(how many countries have that much debt without being shutdown by the market?not a lot)Its a russian roulette with 5 bullets to stay long during massive fiscal problems My point is that there are safer ways to play the disinflation/deflation theme, by staying in the front end through eurodollars and fed futures. The long end should suffer during a GSD as competing debt will be increasing their premiums and that should take USTs with them(or maybe there will be a flight to safety and compression in the US, point is, nobody knows), that could or not be offset by a decline in inflation. The uncertainty is much greater in the back end
Greece is a borderline 3rd world country. I don't think you can compare them to Japan or the US. Despite Japan's problems, they are a wealthy and important economy. If Greece disappeared tomorrow, would anybody but a bunch of Europeans on holiday even notice? Better to compare Greece to Argentina or Mexico then to the US and Japan.
People say Thailand or Bear Stearns were relatively insignificant as well like Greece today yet acted as prime catalysts for respectively the Asia crisis or the crisis of 08 nevertheless.
SS was invented in the 30's. US is like Lehman repo 105's today in steroids, around $50T in hidden debts, you just never know when the market will wake up. A GSD crisis certaintly wont help in the regard
Being long eurodollars or long eurodollar options is not any more short gamma than being long bonds. We're talking about the same thing. The only decision to make is at what point on the curve you want to buy. Right now, my preferred point is about one year out. I am also long call options at this point - I fail to see how that is short gamma.
I didn't say that to mean that its collapse would be insignificant, but to mean that you can't believe that their difficulty in getting financing would mean that Japan or the US would necessarily run into the same trouble.