Earlier this week I asked Societe Generale’s Dylan Grice which chart he watches for part a larger feature Business Insider ran titled The Most Important Charts In The World.
Grice said he thinks treasuries are very risky at these yield levels because governments are manipulating their numbers:
“I guess the idea I’m getting at is that buying Treasuries is dancing with the devil. Aside from locking into a real negative return, you’re doing so from a position of weakness. You have no idea how negative the return is likely to be because you have no idea what inflation over the period (let’s say 10 years) is likely to be.
What you do know is that the worse the fiscal position, the more likely the Fed are to print the money required, and so the more negative your real returns are going to be.
So what this chart illustrates is really what we all know (or all should know), which is that the official fiscal position of the US government understates the true position (and I don’t mean to pick on the U.S since they’re not the only one misrepresenting their fiscal position, the Europeans and Japanese are doing the same thing). One line shows an estimate which includes accruals in the deficit calculation, the other (official one) doesn’t.”
Grice has previously warned that safe haven assets like government bonds are not actually that safe. For a more accurate picture he thinks measures of the federal deficit should include accruals since they indicate future liabilities.
Here’s the chart from Grice:
Photo: Dylan Grice / Societe Generale