MIKE

Posts Tagged ‘Bond Bubble’

Posted: Apr 20 2011
By: Dan Norcini

There is only one way to describe what is occurring to the US Dollar; its future as the global reserve currency is in serious danger of disappearing forever. Under the “leadership” of the US Federal Reserve, and thanks also to the reckless and incredibly short-sighted spending occuring at the Federal level, the Dollar has run out of friends.

It’s decline this morning has opened the door for gold to push past $1500 and silver into what looks to me like the beginning of a “MELT UP” mode. It has also send further speculative money flows into the commodity sector with the result that the CCI, the Continuous Commodity Index, is within a whisker of matching its all time high.

What many of us have feared could happen but were hoping to see avoided, is becoming increasingly likely the further the Dollar descends into this abyss. As a citizen of my nation who cares deeply for its future for the sake of my own children, I am both disgusted and grieved at what those who were charged with preserving the integrity of its currency have done to our birthright.

A pox on these scurrilous men who have sold out our nation for political expediency. Their only loyalty is to their own pocketbooks and their crony pals who could give a rat’s ass what happens to the nation as long as they can profit from it all. This plague of locusts is stripping us bare.

Click charts to enlarge in PDF format with commentary from Trader Dan Norcini

For further market analysis and commentary, please see Trader Dan’s website at www.traderdan.net

Read the original article HERE.

By Burton Frierson
NEW YORK | Sun Mar 13, 2011 4:38pm EDT
Reuters

(Reuters) – Shaken by the prospect of nuclear meltdown after a devastating earthquake and tsunami, Japanese investors will dump overseas assets on Monday and bring their money home to help finance reconstruction.

Positioning for this could send the dollar plummeting versus the yen on Monday and lead to a sharp slide in Treasuries since U.S. government bonds are a favorite asset of Japanese investors, market analysts said.

Stocks also are likely to come under pressure.

Japanese insurers will probably sell some of their most liquid foreign assets such as U.S. Treasuries so they can respond to the worst disaster since World War Two.

The crisis could lead to insured losses of nearly $35 billion, risk modeling company AIR Worldwide said, making it one of the most expensive disasters in history and nearly as much as the entire worldwide catastrophe loss for the global insurance industry.

Traders braced for just such an outcome on Friday, when the yen surged and Treasuries fell. The Bank of Japan probably will add money to the system to limit the liquidation of assets. But the big question remains of how much follow-through selling is yet to come.

Dan Fuss, the vice chairman of $150 billion Loomis Sayles, told Reuters on Sunday that his best guess is that Treasuries will continue to see losses.

Because Japan is the second-biggest holder of U.S. government debt and they have nearly $900 billion in dollar reserves, Fuss said Japan will likely use reserves for rebuilding.

“A big buyer of bonds is taken out of the market,” Fuss said, adding that Japan “will be less able to add to their reserves and less able to buy Treasuries.”

TAKING STOCK

Japan’s crisis may also provide a new reason to press on with the long-awaited retreat in stocks.

A lot will depend on the price of oil, which fell on Friday on concern that the Japanese earthquake would hit global economic sentiment. It came off recent highs reached on the revolts in North Africa and the Middle East, but upheaval in the region over the weekend continued — notably with a protest in Saudi Arabia.

Investors will also engage in the grim exercise of determining which companies will benefit from helping the world’s third largest economy rebuild.

“You could expect to see industrial infrastructure companies do better. As for the overall markets, I don’t see it having any long-term negative impact,” said Paul Hickey, co-founder of Bespoke Investment Group.

“I remember after the last big tsunami in Indonesia there was a widespread view that it would be devastating, but there were no big impacts. Granted this is a much more developed region and certain insurance companies will have bigger exposure than others but outside of that region business will continue to go on.”

Equities have generally remained relatively resilient amid a wide range of risk factors in recent weeks. World stocks .MIWD00000PUS have come off highs, but are still clinging to year-to-date gains, thanks primarily to the developed markets.

Prime Minister Naoto Kan described the crisis as Japan’s worst since 1945, as officials confirmed that three nuclear reactors were at risk of overheating, raising fears of an uncontrolled radiation leak.

The disaster may also put some pressure on the Bank of Japan, which said it was cutting short its upcoming two-day meeting to just Monday.

It can do little with rates per se, even if it wanted to, because the current target is just 0.05 percent. It has, however, promised to ensure market stability.

Read the entire article HERE.

By JAMES GRANT
New York Times
Published: November 13, 2010

BY disclosing a plan to conjure $600 billion to support the sagging economy, the Federal Reserve affirmed the interesting fact that dollars can be conjured. In the digital age, you don’t even need a printing press.
This was on Nov. 3. A general uproar ensued, with the dollar exchange rate weakening and the price of gold surging. And when, last Monday, the president of the World Bank suggested, almost diffidently, that there might be a place for gold in today’s international monetary arrangements, you could hear a pin drop.

Let the economists gasp: The classical gold standard, the one that was in place from 1880 to 1914, is what the world needs now. In its utility, economy and elegance, there has never been a monetary system like it.

It was simplicity itself. National currencies were backed by gold. If you didn’t like the currency you could exchange it for shiny coins (money was “sound” if it rang when dropped on a counter). Borders were open and money was footloose. It went where it was treated well. In gold-standard countries, government budgets were mainly balanced. Central banks had the single public function of exchanging gold for paper or paper for gold. The public decided which it wanted.

“You can’t go back,” today’s central bankers are wont to protest, before adding, “And you shouldn’t, anyway.” They seem to forget that we are forever going back (and forth, too), because nothing about money is really new. “Quantitative easing,” a k a money-printing, is as old as the hills. Draftsmen of the United States Constitution, well recalling the overproduction of the Continental paper dollar, defined money as “coin.” “To coin money” and “regulate the value thereof” was a Congressional power they joined in the same constitutional phrase with that of fixing “the standard of weights and measures.” For most of the next 200 years, the dollar was, in fact, defined as a weight of metal. The pure paper era did not begin until 1971.

The Federal Reserve was created in 1913 — by coincidence, the final full year of the original gold standard. (Less functional variants followed in the 1920s and ’40s; no longer could just anybody demand gold for paper, or paper for gold.) At the outset, the Fed was a gold standard central bank. It could not have conjured money even if it had wanted to, as the value of the dollar was fixed under law as one 20.67th of an ounce of gold.

Neither was the Fed concerned with managing the national economy. Fast forward 65 years or so, to the late 1970s, and the Fed would have been unrecognizable to the men who voted it into existence. It was now held responsible for ensuring full employment and stable prices alike.

Today, the Fed’s hundreds of Ph.D.’s conduct research at the frontiers of economic science.“The Two-Period Rational Inattention Model: Accelerations and Analyses” is the title of one of the treatises the monetary scholars have recently produced. “Continuous Time Extraction of a Nonstationary Signal with Illustrations in Continuous Low-pass and Band-pass Filtering” is another. You can’t blame the learned authors for preferring the life they lead to the careers they would have under a true-blue gold standard. Rather than writing monographs for each other, they would be standing behind a counter exchanging paper for gold and vice versa.

If only they gave it some thought, though, the economists — nothing if not smart — would fairly jump at the chance for counter duty. For a convertible currency is a sophisticated, self-contained information system. By choosing to hold it, or instead the gold that stands behind it, the people tell the central bank if it has issued too much money or too little. It’s democracy in money, rather than mandarin rule.

Today, it’s the mandarins at the Federal Reserve who decide what interest rate to impose, and what volume of currency to conjure.

The Bank of England once had an unhappy experience with this method of operation. To fight the Napoleonic wars of the early 19th century, Britain traded in its gold pound for a scrip, and the bank had to decide unilaterally how many pounds to print. Lacking the information encased in the gold standard, it printed too many. A great inflation bubbled.

Later, a parliamentary inquest determined that no institution should again be entrusted with such powers as the suspension of gold convertibility had dumped in the lap of those bank directors. They had meant well enough, the parliamentarians concluded, but even the most minute knowledge of the British economy, “combined with the profound science in all the principles of money and circulation,” would not enable anyone to circulate the exact amount of money needed for “the wants of trade.”

Read the entire article HERE.

James Grant, the editor of Grant’s Interest Rate Observer, is the author of “Money of the Mind.”

November 17, 2010

Berkshire Hathaway Inc. (NYSE: BRK-A) has recently released its quarterly holdings and the changes were more than in any recent quarter. This morning CNBC has been interviewing Warren Buffett about his opinions on taxes, future taxes, QE2, currency, stock market levels and the bond market. This morning’s interview was after Buffett wrote an op-ed “thank you note” in the New York Times.

There is one standout. In the interview, CNBC’s Becky Quick and Joe Kernen asked many questions but the one that stood out the most was whether or not the U.S. was in a bond bubble after QE2 has started. You know Buffett will leave himself wiggle room, but this was about as close to an overwhelming “YES” answer as the Oracle of Omaha will give:

* “I think short-term and long-term bonds are a very poor investment at the present time.”

He might not use the word “BUBBLE” but that is close enough. The 10-Year Treasury yield is roughly 2.83% and the 30-Year Treasury’s Long Bond yields approximately 4.27% this morning. So far we are seeing a slight gain in the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) as it is ‘double short’ the 20+ year Treasury Index. It closed at $36.59 yesterday and is around $36.80 in early bird pre-market trading. The iShares Barclays 20+ Year Treas Bond (NYSE: TLT) is indicated lower as well. After a $96.14 close, it is indicated around $95.95, but it lacks the leverage and therefore lacks the volatility.

Buffett did note that he would rather be in stocks over bonds at the present time. He also noted that the tax code should hit those making more harder. He did note something a tad less damning on the bond bubble, and that is that the dilutive effect of QE2 won’t be huge.

Read the entire article HERE.