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Investors in levered short treasury ETFs may be setting themselves up for disaster (Pt2)

Most of the AUM allocated to levered short treasury ETFs is in TBT equity There is $7.4BN in AUM allocated to levered short ETFs of which $6.4 BN is allocated to the ticker TBT (Proshares Ultrashort 20+ Yr ETF). This ETF’s underlying is the Barclays’ 20 Yr Bond Index, whose historical chart is shown below. The next chart shows two hypothetical paths that the underlying follows from now to 6 months into the future. Which of the two paths do you think leads to a positive payoff from buying the 2x short levered ETF and holding it for the entire duration? The answer is neither. In Path #1, the underlying returns -3.5% over the time horizon, but a 2x levered

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What can cause the banking system to break down?

Summary Describes a number of things that can cause the banking system to stop functioning. This includes a liquidity crisis when depositors demand their money back immediately, or insolvency when a banks assets are worth less than its liabilities. This video also addresses the common conception that during the Gold Standard era every dollar in circulation was backed fully by gold. Videos to watch before How did the banking system come into existence?

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How did the banking system come into existence?

Summary Explains how society evolved from using Gold coins for transactions to having a banking system that creates credit/loans from the savings/deposits of others. The banking system described is similar to the banking system under the Gold Standard (i.e when currency was backed by a commitment by the government to exchange each note for a fixed amount of gold). Videos to watch before None needed

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How do interest rates affect the money supply?

Summary This video discusses how interest rates determine the money supply in an economy. An interest rate increase causes a tightening of lending by causing money to be loaned to those who are most likely to produce a higher returns. The interest rate also affects the incentives of savers to keep money in the bank as opposed to spending/investing it. Videos to watch before How did the banking system come into existence?

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How did the Gold Standard limit gov’t spending?

Summary A look at an advantage of the Gold Standard system. We examine how a commitment to the Gold Standard meant that governments could not print/spend money indiscriminately. Because people holding a currency could redeem gold for their currency at any time, any loss in confidence in a currency would cause gold reserves held by a central bank to become quickly depleted and undermine the currency they were attempting to print/spend. Videos to watch before What can cause the banking system to break down? What restrictions did the Gold Standard impose on member countries?

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Why did the Gold Standard make it hard to create jobs?

Summary This video talks about a disadvantage of the Gold Standard. Specifically we discuss how a country with high unemployment often found itself with some unpleasant options to choose from when trying to stimulate job creation. The most common way to decrease unemployment was to first decrease wages in an economy such that exports were made cheaper, creating more demand for goods and leading to an inflow of gold, which ultimately lead to an increase in employment. This first step of decreasing wages was often extremely difficult for governments to do. Videos to watch before What restrictions did the Gold Standard impose on member countries?

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