Category Archives: bonds

The Global Dow needs to crash some more.

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Last fall, Dow Jones launched the Global Dow index, composed of 150 stocks from around the world. A quick glance at its 10-year chart shows that stock prices have only so far blown off the froth from 2006 and 2007:

Source: wsj.com

Stocks are driven by mood, and mood today seems to be highly coordinated around the globe, so rather than scrutinize the twists and turns in the Dow, DAX or Nikkei, perhaps this new index is the best reference.

What is most striking about this picture, as opposed to that of the S&P500, Eurostoxx 50, or Nikkei, is that stock prices are only 2/3 of the way back to the 2002 lows, as opposed to right upon them.

This says to me that even this first stage of the crash has further to run. Fundamentals are deteriorating with blazing speed, but market participants remain in secular bull market mode. Too many are still buying the dips, or at least ignoring their losses and hoping for a rebound. The stock market is still viewed by most Americans as the best way to save for retirement, and the myth persists that if only your time horizon is longer than a decade or so, stocks will always beat cash.

This wave off of the November lows is looking weaker and weaker. We had our chance for a strong bounce like the one after the crash of ’29 (the Dow was up about 45% from November ’29 to April ’30), and all we could muster was about 20%.

Today’s action is a pretty strong indication that panic has been lurking just below the surface. With the sell-off in bonds possibly having run its course, precious metals stalling out at resistance, and a very low put/call ratio indicating extreme trader optimism, the news of the Great Pork Package and latest bankers’ bailout may be just the catalyst we need for a sell-off. Hope is fading fast.

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Oh, and it is worth mentioning that John Mauldin reports that a contact at S&P told him that the latest quarter’s earnings are apparently coming in at a NEGATIVE $7 for the index. I have been saying all along, that if this is a depression (it is), PE’s should bottom out at well under 10 and even dividend yields should be in the double digits. Whatever figure you come up with as a final bottom target for the S&P, it should be a very low multiple of very low earnings.

Finally, time to short the long bond (for a trade).

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Here’s a two-year view of my proxy for the US 30-year Treasury bond, TLT:

Source: Yahoo! Finance. Click to enlarge.

It seems as though the mother of all Treasury rallies has run out of steam for now. I’m stepping in to play a possible correction, with a target exit range of 100-105 on TLT, corresponding to about 3.5 – 4.0% yields.

I also expect the dollar to regain lost ground at the same time, and for the Euro and Swiss franc to retrace the gains of the last three weeks.

Gold should also fall in such a scenario, as it’s price in Euros and Francs has barely changed since departing the 750 dollar level.

Whether or not to short the long bond has been the most consistent question posed by friends. I have advised against it until now, having called for sub-3% yields as early as last August. I still think this topping process needs at least another year to play out, but when nearly everyone is on one side of a trade, it is time to take the other. Simple as that.

Shorts have been burned all the way from 5.5%, and most have now given up in frustration. The news that the Fed will start buying is the perfect cherry of bullish fundamental news to complement a market top. What more could you ask? With every schmuck of a money-losing manager finally talking up bonds on Bloomberg, who else is yet to come on board?

I’m an options guy, but another way to play, besides futures, is to simply buy TBT, an ultrashort ETF.

Why do I think that yields will stay this low for over a year? Because this is the top of a 28-year bull market, and we’ve only been under 3% for a few weeks. At the last Treasury top, the 1940s, yields held under 3% for nearly a decade, even as inflation hit 10%. Market prices don’t have to make sense, in any sense other than as a reflection of mass psychology.

Disclaimer: Don’t trade like me. Don’t trade at all. It’s too dangerous out there, and this is very risky stuff, especially shorting in anticipation of a countertrend move.

The next bubble: cash.

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This is deflation, a contraction of money and credit. Hardy anybody argues about that anymore. So what happens next? Will Obama and the bailout maniacs inflate a new bubble in green energy in their new, green deal? Maybe, but it would only be a limited bubble, not the worldwide craze in any and all non-dollar assets that we saw the last time around.

Don’t assume that any new bubbles at all will form for a long, long time. The mood has shifted from risk to hoarding. Now that people have been burned by everything from dot-coms to gold miners and are scared to death of losing their jobs, they are going to hang onto the one thing that still works: Washington Wallpaper, the little notes that promise, “I owe you nothing but more of these IOUs.

Deflation will rage, until it doesn’t. We are still early in this phase, since among the public there is still a healthy fear of the dollar and paper money in general. But over the next year, as commodities and foreign currencies slide still lower and consumer prices stay solidly and noticeably negative, people will forget about the deficit and the $100 trillion in debt at just the wrong time.

This is the rule of maximum pain for the maximum number. The dollar is not yet ready to fail because it is too feared and despised. But when people let their guard down and sell for $450 the Krugerrands that they are paying $900 for today, take all that they have, because then the real fun will begin.

Just as the public will get too complacent about holding I-owe-you-nothings (Doug Casey’s phrase), Congress and Obama will get too complacent about printing them up, and the whole debt-based money system will come crashing down. I don’t pretend to know how it will play out (hyperinflation or just plain-old, “sorry, we can’t pay” default), but it will be visibly ugly, and I am glad I’ll only be watching it on TV. This won’t be pretty anywhere, but the US is not a civilized country anymore, and it has a most uncivil government.

T-bill update: 90 day at 0.16%

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So this is what an old fashioned panic feels like. I think this is the beginning of the plunge that will take us to near 9000 on the Dow within a few weeks. But that won’t be the end. I’ll consider the possibility once we’re under 4000 or 2 ounces of gold per Dow unit, at least 2 years from now. Anyone who is unsure about their stock holdings should get out immediately. I don’t care how big and “defensive” a stock is, all equities are going down.

Click for sharper view. Source: Bloomberg

The Fed can’t hold at 2% if T-bills stay this low for long. Watch for a surprise cut.

The Bond Bubble is in Munis, not Treasuries

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Investors looking for bonds to short should look here:

Source: bloomberg.com

Not here:

Source: bloomberg.com

Talk about all risk and no reward! Township and state revenues are falling through the floor, and politicians are exceedingly reluctant to cut bloated budgets. Next year, I bet the default rate on Munis will be as high as the Florida mortgage default rate (well into the double digits). Vallejo California was just the canary in the coal mine. Not every town pays their firemen $250k, but most pay $55-70k with full benefits and retirement by age 48. Here’s a look at firemen in Vallejo making 200-300k per year. This is too absurd not to publish:

Source: sfgate.com

Yes, the federal government is just as broke, but its powers of taxation are practically absolute, and it has a central bank to print up any shortfalls. Hence, US debt is the ultimate near-to-intermediate term safe-haven. This Treasury rally is no bubble. This is what a good, hard, deflation looks like.

Hard Currency? Hardly. The Swiss Franc is the Euro.

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That’s what the market thinks anyway, and yours truly is feeling like a dope for not checking out some long term charts before trading dollars for Francs last spring. Here they both are against the dollar via CurrencyShares ETFs (Euro in red, Franc in blue):

Click for larger view. Source: Yahoo! Finance

Here’s a 10-year shot (courtesy of Index Mundi. Ignore the spikes, must be a data feed error):

The market can barely tell them apart. From ’02 to ’07 the Euro dashed up about 50 US cents, but it only gained 20 Swiss cents, since the Franc was rallying too. Now that the European economy has turned and lower rates loom, a great reversal may be underway. But Switzerland never ran very hot, its real estate only appreciated by low single digit compound rates, and its bond rates have been puny for years, so there is no gap to be closed with the dollar. On the contrary, dollar rates have fallen to meet those of the Franc, so one would expect the scales to tip the other way.

So much for rewarding the prudent. Americans bring ruination on themselves but the ensuing deflation drives a powerful rally in their inherently worthless and ultimately doomed script. It will be very interesting to see how far this goes. Sentiment is still very anti-dollar, so we could easily get back to parity with the Euro in 2-5 years.

So here I have fallen victim to the rule that the market inflicts the maximum pain on the maximum number. In my haste to get out of a horribly flawed currency, I ran to the Franc on its reputation as the paper that has best held its value in the decades since the end of gold convertibility. I like the Swiss, and I still think they play the fiat game better than anyone, but currencies are all just slips of paper in the winds of public opinion, and public opinion doesn’t often follow the ‘fundamentals’ of financial analysis. It has its own natural patterns, which are not so easily formulated as interest rate differentials and purchasing power parity.

 

 

 

 

 

 

 

Out of the Woods? Treasury market isn’t buying it.

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30-year treasury yields in blue, S&P 500 in red:

Click image for sharper view. Source: Yahoo! Finance

Talk about a non-confirmation. Treasuries rallied on Monday when stocks tanked, but they have failed to sell off since then as stocks have rebounded. Treasuries remain solidly in their 26-year bull market, and I suspect that we will soon enter the crazy phase when a bull runs far outside of fundamentals (in this case the solvency of the creditor).

The Jaws of Death

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Today’s word to the wise comes from John Hussman’s weekly market comment:

Years ago, Larry Williams used to look for a situation he called the “Jaws of Death” – noting that when bond prices were weakening but stock prices were strengthening, the two differing trends opened a set of “jaws” that tended to snap shut, usually due to abrupt weakness in stocks. On that note, Bill Hester sent a chart over the weekend noting “I thought this was an interesting graph. The blue line is the 5-Yr Swap Spread, and the red line is the VIX. Credit investors are getting very nervous while equity investors are mostly whistling Dixie. It looks like a variation on the jaws of death that you’ve mentioned to me before….” Nothing like a good picture to complete the story (thanks Bill).

As Hussman notes, a compressed VIX in the face of rising Treasuries and an overbought market that has still not acknowledged the recession signals choppy waters ahead.

Now we know what the strong dollar policy is

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Paulson meant that he was waiting for the US-lead depression to catch up with the rest of the world and bring down rates in Pounds, Euros, Yen and Australian dollars. He’s a genius after all. It’s working:

Source: http://quotes.ino.com/chart/?s=NYBOT_DX

Even gold, that running vote of confidence in paper money, has backed well off the disconcerting 4-digit level:

Source: Kitco.com

How could people suddenly have such a preference for the dollar again? Don’t they know that it, like the Constitution, is just a goddamned piece of paper? Well, Paulson won’t admit this part of the policy, but you may have heard lately about people and companies going broke. Broke means no money (such as dollars). Since dollars accounted for a huge share of the bad loans made in the bubble, the implosion of that debt is akin to a shortage of dollars.

The dollars were never really there, just debt, but when you get a loan, it sure feels and works like money. And when it comes time to pay it back, money is what you need. Right now, nobody seems to have much of it, so those who do are getting the sense that they should hang onto it. That means a slower velocity of money (the pace with which it changes hands), which is deflationary by even by mainstream economists’ definition (M V = P Q).

So, who wants to guess how much longer Peter Schiff can hold out with his inflation case?

Bullish on the biggest deadbeat’s debt

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I have come around 180 degrees from last summer, and I’m bullish on long bonds now. The trend is clear over the past 12 months. The yields are moving with stocks.  The old correlation still holds, despite the dropping dollar and recently soaring commodities. The final flameout for the dollar is coming, but not just yet.

Dropping US, UK and Swiss government bond yields signal deflation and depression. I think they are a great speculation, particularly the Swiss bonds, since the country and currency are strongest.

Whatever you do, I wouldn’t buy one of those inverse bond funds, except for an inverse junk bond fund (such as RYIHX). In Depression #1, Treasuries soared and corporates were decimated.  And clearly, municipals are burnt toast. Sucks to be a government that can’t print money (sorry, Panama).

How to play it? I like 2010 calls on TLT.