Treasury Yields: Quick Update
What about the Treasury Yields? A few charts by Doug Short.
What’s New: I’ve updated the charts through Friday’s close. The S&P 500 closed the week at a new interim high. The index is now up 16.55% for 2012. From a longer-term perspective, the S&P 500 is 116.7% above the March 2009 closing low and 6.3% below the nominal all-time high of October 2007. I’ve tweaked some of the charts below to include the new round of quantitative easing. Interestingly, the 10-year yield rose 15 basis points over the past week and is up 45 basis points (a 31.5% rise) since the historic closing low on July 25th.
Here is a snapshot of selected yields and the 30-year fixed mortgage one day after the Fed announced its latest round of Quantitative Easing.
Silver on Fire
Is Silver about to totally explode? A few thoughts via Gold SIlver Worlds.
We are a long-time fan of John Embry, as we consider him one of the most experienced people in the precious metals world. In his latest interview on King World News, he confirmed once again what is happening particularly with silver: manipulation of silver prices is still going on but signs of shortage in physical silver are increasing by the day and hence a silver price explosion is almost unavoidable.
Manipulation vs opportunity
Just like several other precious metals experts, John Embry is confirming the ongoing suppression of the gold and silver prices. This is what he had to say on King World News in yesterday’s interview: “Two days before the QE announcement they dropped the price of silver about $1.50 in a nanosecond. It’s the same games being played by the same people, and it’s going to end horribly because all the manipulation is doing is creating wonderful buying opportunities for the Chinese, the Russians, and the rest of the central banks that know full well what’s going on. “
Spain, Bad Banks, Assets, Losses and Lies
The Trader has written extensively with regards to the Spanish economic disaster. Here is a must read piece by Golem XIV.
I thought it might be a good moment to take a broad look at Spain’s financial troubles and outlook. For those of you who tire of details, the executive summary is that is that it is bad and without a doubt going to get considerably worse over the next 6 – 18 months despite Spanish government and EU claims to the contrary.
Here’s why.
On Friday (31st Aug) the Spanish Government passed what it said would be Spain’s definitive banking reform. This is actually the third such ‘definitive’ reform. The previous two were more blather than action. All the talk in this reform centres around the creation of a so called ‘bad bank’. Which, it is being claimed, will sort Spain’s ailing banking system once and for all. This despite the fact that Spain already has a bad bank, a really bad one, Bankia. I say this only half in jest. I’ll come back to Bankia in a moment.
First let’s deal with what a bad bank actually is and does.
The Shape of 40 Years of Inflation
Guest post by Azizonomics.
I have written before that there is no single rate of inflation, and that different individuals experience their own rate dependent on their own individual spending preferences. This — among other reasons — is why I find the notion of single uniform rate of inflation — as central banks attempt to influence via their price stability mandates — problematic.
While many claim that inflation is at historic lows, those who spend a large share of their income on necessities might disagree. Inflation for those who spend a large proportion of their income on things like medical services, food, transport, clothing and energy never really went away. And that was also true during the mid 2000s — while headline inflation levels remained low, these numbers masked significant increases in necessities; certainly never to the extent of the 1970s, but not as slight as the CPI rate — pushed downward by deflation in things like consumer electronics imports from Asia — suggested.
This biflationary (or polyflationary?) reality is totally ignored by a single CPI figure. To get a true comprehension of the shape of prices, we must look at a much broader set of data:
Confidence and Enthusiasm (is this time different?)
John Hussman of Hussman Funds shares his latest thoughts on the markets.
The present confidence and enthusiasm of investors about the ability of monetary policy to avoid all negative outcomes mirrors the confidence and enthusiasm that investors had in 2000 about the permanence of technology-driven productivity, and in 2007 about the durability of housing gains and leverage-driven prosperity. Market history is littered with unfounded faith in new economic eras, and hopes that “this time is different.” Those periods can be difficult, at least for a while, for investors who are less willing to abandon evidence and lessons of history, not to mention basic principles of economics and valuation. We endured similar discomfort in periods like 2000 and 2007, before hard reality set in.
Investment notes
The recent market cycle has required two changes to our hedging approach. One was in 2009, when our existing approach was dramatically ahead of the S&P 500, but I insisted on making our methods robust to the worst of Depression era data. The other was earlier this year, when we imposed criteria to restrict the frequency of defensive “staggered strike” option positions in Strategic Growth Fund, requiring not only strongly negative expected returns, but also either unfavorable trend-following measures or the presence of unusually hostile indicator syndromes. There’s little doubt that massive central bank interventions have pushed off economic and market difficulties that might have occurred more quickly. The tighter criteria help adapt to that reality, without foregoing the benefit that defensive option positions would have historically had over the course of the market cycle.
Global Japan & the Problems with a Debt Jubilee
Guest post by Azizonomics.
Bill Buckler critiques the notion of a debt jubilee:
The modern “debt jubilee” is characterised as “quantitative easing for the public”. It has been boiled down to a procedure where the central bank does not create new money by buying the sovereign debt of the government. Instead, it takes an arbitrary number, writes a check for that number, and deposits it in the bank account of every individual in the nation. Debtors must use the newly-created money to pay down or pay off debt. Those who are not in debt can use it as a free windfall to spend or “invest” as they see fit.
The major selling feature of this “method” is that it provides the only sure means out of what is called the global “deleveraging trap”. This is the trap which is said to have ensnared Japan more than two decades ago and which has now snapped shut on the whole world. And what is a “deleveraging trap”? It is simply the obligation assumed when one becomes a debtor. This is the necessity to repay the debt. There are only three ways in which a debt can be honestly repaid. It can be repaid with new wealth which the proceeds of the debt made it possible to create. It can be repaid by an excess of production over consumption on the part of the debtor. Or it can be repaid from already existing savings. If none of those methods are feasible, the debt cannot be repaid. It can be defaulted upon or the means of “payment” can be created out of thin air, but that does not “solve” the problem, it merely makes it worse.
A Waiting Game
A few thoughts on why the Banks are not lending. By Golem XIV.
Governments, so they tell us, want the banks to lend into the real economy to get people working, earning, buying and paying both their taxes and their debts. Problem is, I do not think the financial industry shares this desire. They say they do. They say they are doing their bit. But they are not. The abject failure of the UK’s 2011 ‘Project Merlin’ is a good example. Project Merlin was the voluntary agreement between UK banks and government to set and meet targets for lending to small and medium businesses. The big five UK banks all agreed to lend. The data showed, however, that they all lent less in every quarter. I talked to the CEO of a UK bank which specializes in raising capital for medium sized businesses and he told me there was less and less funding around. He said the big banks and the big funds simply didn’t want to know. They had other plans.
The Bubble and Beyond
Michael Hudson’s latst book is a must read. Here is an excerpt.
This summary of my economic theory traces how industrial capitalism has turned into finance capitalism. The finance, insurance and real estate (FIRE) sector has emerged to create “balance sheet wealth” not by new tangible investment and employment, but financially in the form of debt leveraging and rent-extraction. This rentier overhead is overpowering the economy’s ability to produce a large enough surplus to carry its debts. As in a radioactive decay process, we are passing through a short-lived and unstable phase of “casino capitalism,” which now threatens to settle into leaden austerity and debt deflation.
This situation confronts society with a choice either to write down debts to a level that can be paid (or indeed, to write them off altogether with a Clean Slate), or to permit creditors to foreclose, concentrating property in their own hands (including whatever assets are in the public domain to be privatized) and imposing a combination of financial and fiscal austerity on the population. This scenario will produce a shrinking debt-ridden and tax-ridden economy.
Fuzzy Wuzzy was a Bear
I read report after report that pointed out the Bear Case. The Demise of Europe, Hard Landing in China, and Fiscal Cliff dominated the analysis, roughly in that order.
I agree with a lot of the Bear case. I can see it. I can argue it, heck, since much of it is focused on the bond market, I think I could argue it better than most. The problem with the bear case isn’t that it isn’t compelling, just that it hasn’t worked.
So what is wrong with the Bear Case?
For one, the bear case, in many instances is done with as much “fluff” as cheerleading bull arguments.
If Spain rolls 1 billion of debt, no new debt was created. Sometimes, the “debt on debt” argument is devolving into a rant. If a country can replace 4% average coupon debt with 2% average coupon, that is useful. It decreases current deficit. It reduces how much money has to be borrowed to pay interest. I’m not convinced this will happen, and I am concerned that the focus is on the short end, but average coupon does matter, access to cheap debt to roll old debt does matter. So this is one area where the bears are potentially too pessimistic.
No Such Thing as Risk?
As central banks continue dictating the Markets, Hussman of Hussman funds shares his views.
The enthusiasm of investors about central-bank interventions has reached a pitch that is already well-reflected in market prices, and a level of confidence that with little doubt, investors will ultimately regret. In the face of this enthusiasm, one almost wonders why nations across the world and throughout recorded history have ever had to deal with economic recessions or fluctuations in the financial markets. The current, widely-embraced message is that there is no such thing as an economic problem, and no such thing as risk. Bernanke, Draghi and other central bankers have finally figured it out, and now, as a result, economic recessions and market downturns never have to happen again. They just won’t allow it, printing more money will solve everything, and that’s all that any of us need to understand. And if it doesn’t solve everything, they can just keep doing more until it works, because there is no consequence to doing so, and all historical evidence to the contrary can finally, thankfully, be ignored. How could anyone ever have believed, at any point in history, that economics was any more complicated than that?
Unfortunately, the full force of economic history suggests a different narrative. Up to a certain point, which seems to be about 100-120% debt-to-GDP, countries can pull themselves from the brink of sovereign crisis through a combination of austerity (spending reductions), restructuring (putting insolvent financial institutions into receivership and altering the terms of unworkable private and public debt), and monetization (relief of government debt through the permanent creation of currency). Austerity generally reduces economic growth (and corporate profits) in a way that delivers less debt reduction benefit than expected, restructuring is often stimulative to growth because good new capital no longer has to subsidize old misallocations, but is politically contentious, and monetization of bad debt produces clear but often quite delayed inflationary pressures. None of these choices is simple.
Latest comments