Why not sell German bonds?

The German 30 year bond is yielding 2.8%:


The US 30 year bond is yielding the same:

Yahoo Finance

There is no margin of safety in Germany debt against the strong likelihood that the country will be forced (by Merkel and other banker tools) to absorb the losses of the rest of Europe.

Of course, there is no margin in safety in US bonds either at this price, certainly not enough to compensate for the probability of trillion dollar deficits forever. I expect yields to stay low through this cyclical bear market, but not much beyond that. Bonds will continue to be a good short at times when they are overbought, and we may be approaching such a time.

Ignore all this supercommittee talk

Today’s ad-hoc explanation of market action seems to be the failure of the US Congress’ “supercommittee” to come up with a deal to slightly shrink the 2nd derivative of budget growth over 10 years. What a joke! Europe was down over 3.5% today – does anyone there know or care about the supercommittee? What about the Russians (-5%) or traders in Hong Kong last night (-1.5%)? There is a deficit of over a trillion dollars a year, and this committe was talking about spending a trillion less over 10 years than they would at the current pace of growth, as if Congress ever sticks to previous budget plans anyway.

Nobody but journalists has cared about this noise, since it is clear that Congress and the executive will do nothing to meaningfully address the budget gap until the bond market forces their action. If we are in another strong wave down in the secular (post-2000) bear market, this will buy the government (and probably those of Japan, Germany, France and the UK) another year or more before interest rates start to creep higher and force defaults and spending cuts. This outcome is inevitable, since the welfare state Ponzi schemes must collapse and screw the later generations of entrants, as in all Ponzis.

So why is the market down today? Because we’re in a bear market, and Oct-early Nov relieved the oversold condition that had built up by the end of September (lowest, longest-sustained DSI bullishness since 2009). Since before it started, I have viewed this rally aspossibly similar to what we experienced from mid-March to late-May 2008. If the corollary holds, we will be back under SPX 1100 by the New Year.

Journalists are lazy and make up explanations for market action without any empirical evidence, always assuming that correlation equals causation. If every day you magically had the next day’s news headlines, I doubt it would offer much if any trading advantage.

Kyle Bass and Hugh Hendry on shorting Japan

Two good interviews here with these fund managers.

EDIT: The Bloomberg interview of Kyle Bass is no longer playing, and I can’t find it on youtube, so I’ll just post a couple of other links:
All I could find was this on his new fund:
Here he is talking inflation last October:

Hugh Hendry on the rationale for shorting Japanese corporate credit (extremely low yields, overexpansion, China crash & contagion)

FYI, I think talk of inflation is still premature, since there is still too much credit to be liquidated before currency creation overwealms credit destruction. Significant inflation is more likely to appear towards 2020 than 2012, and we could easily see another episode of deflation in the next year or two.

Max Keiser on Greece: No alternatives to higher taxes? How about insurrection?

Kaiser’s not one to hold back (he comes in about 3:20):


Best line in here is when he asks those Greek economists who favor higher taxes, “Why are you selling your countrymen down the road?”

“Get rid of the financial terrorists from your country.”

He could have done a better job here by keeping his cool and more clearly advocating repudiation, but maybe his approach is better suited for the state of Greek temperment at the moment.

Default, Greece, default.

All government debt is a racket, and should be repudiated.


Widely read investment advisor John Mauldin favors the continued enslavement of the Greek public to corrupt politicians, greedy unions, and German banks. He had this to say today in his email publication:

…if Greece defaults it does not necessarily mean they have to leave the EU, any more than if Illinois defaulted they would have to leave the United States. Greece could still use the euro and life could go on. EXCEPT. The markets would no longer lend the Greek government money at anything close to a livable rate. Greece would be forced to balance its budget. Since they are part of the euro, devaluing the currency is not an option. The results of controlling their fiscal deficit would not initially be pretty and would almost insure a serious prolonged recession or depression in the Greek area, with fall out in the region. It would be a sad decade for Greece. But in the long run, it is a better option than default.

Further, and more important to the rest of Europe and the world, the results of a Greek default would be financial turmoil. 250 billion euros (and maybe 300!) of Greek debt is in international bond funds, pension and insurance companies, and above all at banks. Think German banks. Already undercapitalized banks. Also, think of all the investment banks who have been selling relatively cheap (given the apparent risk) credit default swaps on Greece, in an unregulated market, exposing their balance sheets. What should be a simple, if sad, matter for the Greeks, becomes a problem for the world, just as subprime debt in the US caused a world credit crisis. And the risk of contagion from Portugal, Spain, et al is serious. 2 trillion euros of debt could get downgraded by the bond market in very short order. It could be a replay of the last credit crisis, just with new actors as the prime problem.

Bailing out Greece without serious and credible deficit reductions by their government over the next few years would simply delay the problem, and it is not altogether clear the bond markets would go along for very long. At the end of the day, it may be the bond market which forces the Greek government and its people to take some very bitter medicine. Stay tuned. This is just the beginning of what will be a series of sovereign debt crises over the coming decade. It is important for the world that we get this one solved right, or the consequences will be quite severe.

I respectfully disagree with Mr. Mauldin. I believe that default would be the best outcome for the Greek people and the rest of Europe, as well as the financial system. It is ironic that Mauldin does not support this outcome himself, since he claims to be a fan of von Mises, Hayek and Rothbard, all of whom would be appalled at the prospect of perpetuating the racket in Athens. Rothbard specifically advocated the repudiation of government debt, since it serves only the interest of politicians and special interests at the great expense of the society at large:

In the famous words of the left-Keynesian apostle of “functional finance,” Professor Abba Lernr, there is nothing wrong with the public debt because “we owe it to ourselves.” In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whether—slicing through the obfuscatory collective nouns—one is a member of the “we” (the burdened taxpayer) or of the “ourselves” (those living off the proceeds of taxation)…

If sanctity of contracts should rule in the world of private debt, shouldn’t they be equally as sacrosanct in public debt? Shouldn’t public debt be governed by the same principles as private? The answer is no, even though such an answer may shock the sensibilities of most people. The reason is that the two forms of debt-transaction are totally different. If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don’t pay I am robbing him of his just property. But when government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours. This is a horse, and a transaction, of a very different color.

For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation.” …

The public debt transaction, then, is very different from private debt. Instead of a low-time preference creditor exchanging money for an IOU from a high-time preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people’s property, and both deserve the back of our hand. The public credit transaction is not a genuine contract that need be considered sacrosanct, any more than robbers parceling out their shares of loot in advance should be treated as some sort of sanctified contract.

I highly recommend reading the whole Rothbard essay on Mises.org, since the ideas therein have never been more timely for the US, among a great number of other countries.

It is almost always in citizens’ best interest for their government to repudiate the debt it has accumulated in their names. Politicians take out debt to spend more than is prudent or ethical, in order to buy votes, very often union votes. This is the case in Greece, where repeated strikes by teachers, dockworkers, farmers and others have been met with greater and greater pay and benefits. This system is a racket that rips off the silent majority of taxpayers.

Why should generations have their earnings stolen (make no mistake, taxation is theft, the involuntary taking of property under threat of force) to continue to support politicians, bankers and union thugs?

A default would indeed cripple the government’s ability to borrow, and would thereby end the racket. Politicians would no longer be able to offer something for what seemed like nothing: if they wanted to raise union pay, they would have to raise taxes at the same time, not at some future date beyond the next election.

Yes, a default would hurt bondholders. Duh. That’s perfectly just, since Greek (and Italian, Portugese, Spanish and Irish — GIPSI) bonds pay higher yields than those of Germany or Switzerland. These investors took a gamble, as did those who wrote default swaps on such debt. They deserve to lose money, and frankly, the astute buyers of default swaps deserve it more than they. Besides, as Rothbard makes clear, the creditors are a party to theft, guilty of receiving stolen goods.

I am tired of this nonsense that somehow banks and investors losing money means the end of the world. That is a fiction fed to a credible and ignorant public in order to justify the transfer of their assets to the most powerful banks. What is the end of the world?  War: the uniquely governmental institution of cities and industry bombed to rubble, crops burned, and whole generations enslaved, blown up, starved and displaced. A banking crisis? My god, that’s nothing, unless the government turns it into prolonged stagnation through theivery (and even worse if they take advantage of the resulting conditions to agitate for war). Factories, roads, bridges, and offices still stand; and human beings still have their lives, talents and freedom to use them. Assets change hands, that’s all. Nobody needs to starve, and unemployment only needs to be brief, unless of course the government prevents the defaults necessary to transfer assets to productive ownership by shifting the losses to the public. In that case, capital is wasted, assets stay idle and jobs disappear.

The Greek public should send a message to their politicians: “We won’t pay. Default away.” If unions can stike, why can’t taxpayers? The fact is, the debt is unpayable anyway, because the taxes necessary to service it would cripple what’s left of enterprise in that socialist economy. Just get it over with and don’t sign up for the lost decade(s) club.

Watch out for the dollar


UUP (dollar bull ETF) and SPY:


Bonds were also up today, of course. Given the extreme degree of consensus we saw during the latest highs in stocks and lows in the dollar, today’s rally could be nothing more than a standard correction (at 40-odd percent, that is all the retracement is so far). It was to be expected (I went long SP futures and QLD Friday to hedge dollar longs and my equity and silver options). The test is whether we break to new highs on new reflation impulses. Precious metals, copper, oil, bonds and currencies say, “don’t press your luck.”

This is it: we have a major top this week.

Frequent readers know that I watch sentiment and put a lot of stock in Investor’s Intelligence and Daily Sentiment Index surveys, and that when extremes in sentiment match with extremes in price, it is as good a trade as the market ever provides. Well, we have 3% dollar bulls today. The dollar is going to blast off from here and kill the stock and commodity rally and blow credit spreads wide open. It also appears that emerging market (including Chinese) stocks have already started stair-stepping lower.

The dollar vs. the euro, pound, Aussie and Loonie — a loaded springboard:

Chart from Yahoo!

I see three clear waves up from March in stocks and commodities (three is what you need for a complete countertrend move), with big B-wave moves down in the dollar and bonds, which now have the potential to blow right through their highs from last winter’s deflation trade. In stocks and commodities, the sell-off into early July was the b-wave (of 2 of C), where the hobby bears jumped in, and the rally since has crushed all but the most disciplined, patient and deep-pocketed shorts. On the cusp of the big 3rd wave down, this is definitely not the time to lose religion.

Commodities’ last gasp (indexes here):

Credit: Bloomberg.

Watch for VIX liftoff as well to add extra oomph to put portfolios.


I’m sitting on puts on oil, silver, stocks, the euro and pound and calls on Treasuries. There are no guarantees in the market, so anything could happen, but I’ve never felt better being short (my puts are comfortably long-dated, of course). A sharp pullback might set us up for new highs, though I doubt it. I’m expecting a typical rollover at first, with increasingly jagged price movements (remember when almost every day saw 3% swings?), but not necessarily full-on crash conditions for several weeks to months.

Don’t trade like me (I’m a wild man), and good luck out there.


Here’s the much mentioned analogue to the ’29-’30 post-crash rally (image from D. Rosenberg at Gluskin Sheff — sign up for his free letters here):

Holding dollars, profits taken on bonds

That was one heck of a reversal in bonds today off a beautiful double bottom Wednesday and Thursday. Here’s TLT:

The move was so extreme for bond-land that I sold all of my June 90 calls bought under 91, though I’m holding my unlevered TLT.

The dollar extended its decline, though it is looking every bit like the terminal stages of a panic. Just look at the spike tops being formed in the Euro, Pound and silver. I’m also eying crude suspiciously, though the rally has not quite formed a spike.

Fade the reflation trade

Another short post here.

Within a week or two I expect a correction or change of trend regarding this “reflation” theme we are seeing. The bond panic is coinciding with toppy looking activity in oil, precious metals and grains. I’m buying puts on crude today with the July contract at 65.33.

The dollar is also a buy here against the Euro, Swiss Franc and likely the Pound and Aussie. I’m long UUP, the dollar bull ETF, along with Treasuries.