about markets is that if any of us really had a lock on the future the
last thing we would be doing was writing about it. We would be trading
it and getting rich.
At the end of last week I wrote that the dollar would be on the weak
side for the balance of the month. That the bad news from the US would
trump the bad news elsewhere. That proved to be a dumb idea. Having been
humbled once again, I looked at the screens and confided to myself that
I really could not make a compelling case on either side of the bond,
stock or currency markets. So I sought out the thoughts of a friend who
actually buys and sells paper for a living. He does not write about it.
He just does it. His thoughts:
We’re
digging an ever deeper hole here, the EU problems have not gone away by
any means. And after I saw the amount of sov debt the European banks
own, I have conviction the EURUSD rally is a headfake. Those banks
will go down as they are forced to take the haircuts on the sov debt…
unlike in the US, where the gov’t could borrow to bail out the losses on
private securitized debt, the Euro banks’ ‘toxic problem’ is the gov’t
debt itself… it’s a tight closed loop… or spiral, as it were…Stocks are nearly out of accounting tricks, imo…. The final demand is
not there and won’t be. Trading on fwd P/E when the ‘E’ is pure fantasy
will not end well. Everyone seems to say “stocks have gone nowhere in
10 years” as the ultimate sign of how poor stocks have done…. actually
S&P is down over 25% in the last 10yrs. And it continues as we
de-lever.If we think fund flows into bonds / out of stocks are significant now,
just wait til we get another big leg down in stocks this fall… I think
we see banks (and individuals to a lesser, but significant degree) go
all in UST… every day there’s less and less hi-quality, non-UST bonds –
eventually, if it has not already happened, the yield premium for
taking incremental risk in high-grade f/i over USTs withers to a level
that is not meaningful, and the UST bid from banks and mom/pop begins,
and then feeds itself… the proverbial towel will be thrown in.We sell a lot of product to banks. Community banks used to own a large
amount of USTs outstanding – today they own almost nothing – but that is
beginning to change. From a bank portfolio perspective, you’re just
not getting ‘paid’ to try to outsmart the market in anymore… (the one
exception is the non-agcy mbs mrkt, but they are not making those
anymore; it’s dying…) GSE MBS is rife with headline/pre-pay risk from
executed and potential gov’t ‘fix’ programs/experiments – it used to be
that the ‘base-case’ scenario in GSE MBS was the ‘worst-case’… today
it’s the ‘best-case’ and if the stars don’t line up, you can get SMOKED.
Just ask holders on GSE MBS that saw 70-80% cpr during the buy-out
months this spring and summer… and for taking on this ‘the rules can
change at anytime’ risk on your massively negatively convex portfolio,
you’re barely getting paid 1% over UST… risk >>> reward…
look at it this way: in a GSE ‘modification’ or ‘principal reduction’
or whatever program, the investor receiving immediate par back on mbs
holdings with a $108 book price is a BIG hit – 8 points will take 3-4yrs
to recoup at today’s rates…My fear was that a potential big QE2 would give another huge leg up in
stocks etc and drag this out…. But over the last 3-4 weeks, it’s amazing
the sentiment change – I think the market sees straight thru another QE
program and says “oh shit – it’s as bad as we feared”….I’ve said since many months back 2.25% 10y and 7000 DOW by 12/31…. My
only change from that thought is that the trend continues in 2011 – and
we see 1%-handle 10yr and 2%-handle 30yr at some point. And yea, I’m
aware that we are building a fiscal hole we’ll probably never get out of
– and we’ll deal with the huge consequences of that down the line, no
doubt… but for now, the US situation is the worst, except for all the
others.
I still agree with the idea that things are bad in the US, but the past two years I've been short the market when its gone up, and out of the market when its gone down, so I've gotten out to focus on my day job (fortunately have the opposite track record there).
That said, in the US we are far from the 'shutdown' economic conditions of Oct2008-March2009. It ain't pretty, but it isn't that. Another shock to the system will put the patient under I fear, so all moves appear directed at preventing that shock.
CogDis has rightly championed the idea of being part of the solution... to that end my wife and I turned down an offer on our house (yes, I know - crazy to buy a house; but we are very conservative) when we discovered the offer was from folks who would put only 10% down and have to liquidate assets. We stuck with a lower offer with stable financing. The ironic part right now is banks apparently aggressively pressuring appraisers in the *opposite* direction than during the bubble - trying to push prices down to build a cushion a priori on LTV. Apparently banks have NOT learned their lesson...
“oh shit – it’s as bad as we feared” .... says it all
Nice post Bruce. The actual number is $1.4 Quadrillion, which will allow the Fed to purchase all current deriviatives at 200% of their notional value. You can find it on the Treasuy's web site. Oh sorry that's the Treasure Chest's web site.
Nice summation.
A few points:
Risk appetite duration upon sovereign debt market flee into USTs. How long will it take to see the same structural weaknesses in the US as defaulting UERO nations. Beyond trade needs at what point will the market demand an equitable risk/return profile.
I think back to a time when banks actually loaned money. Now they have to scrap along the bottom with UST yields. Indeed a fish out of water.
We look at MBS issuance and wonder, without Government support would this market adjust to its true equity. Perhaps 5 cents on the dollar? What do you say to a market based on no price discovery, only the implied worth through the Governments ability to absorb bad debt with borrowed money.
The accounting tricks are not over as such. They are just being factored into real earnings beyond the balance sheet analysts questions. Financials the most exposed here. These reporting calls should be entertaining for Q3 and onward. Everyones BS meter will be pegged. There is a trend to the filings now and the strategies understood. The con game is over for upper management. A few well placed questions, and its ENRON time.
QE2 would try in desperation to once again increase real estate price. The problem here is that there no is plausibility of purpose for another similar type buy program. The asset QE1 buy failed, what will the FED say to try another similar program. No the next move is up to Congress. The FED is done for now.
Mark Beck
http://www.nfb.ca/film/paperland/
.
here, what appears to be a clue? systematic
destruction of the individual as a refined artform.
aka civilization. ?
.
Paperland: The Bureaucrat ObservedMany thanks Bruce!
It is often difficult to get any view nowadays from "someone on the ground".
I always try to keep in mind that "where the b.s. ends reality begins" - and that's usually about the point where the rubber hits the road.
I'm buying UUP here.
Traders only call them as they see them, that's what he is doing. Its the TV clowns and the gov't idiots that are trying to "sell" you their views. Some like Dennis Gartman or Marc Faber cross over to the dark side a bit, and start "selling" their book. One wonders about Pimco sometimes too.
Notice also how this trader is paying attention to what is going on around him over time, and absorbing it into his outlook. He is not fighting the tape which is what so many pundits do. You gotta bend but not break in this biz, and that is why he is not trying to change the world, just survive and prosper in it as it is handed to him. Thats what being a successful trader is all about. I'm glad he is willing to talk, I got some good stuff from him today.
China will keep buying US treasuries but at a diminishing quantity just to keep us gasping. Meanwhile the hoard of US $s will be used to buy commodity, energy and raw material producing assets overseas thus converting useless and declining US$s into something usefull for the Chinese economy. Hey, its free global enterprise and capitalism that we promote so how can we object to the new empire. Problem is the global economic model no longer works for developed economies
Great post! Very cool the way you own your mistake. I always read your stuff. Thanks.
I don't think stocks will crash unless yields (dividends) will turn significantly down. UST's are high partly because of search for yield, and holding SPY still gives you what around 2% per year. It's with equity risk but it's yield anyway, and I'm not entirely sure which ones have a bigger downside risk per market price, equities or UST's!
Someone actually holds SPY for yield? A years worth of dividends can be wiped out in an hour. SPY is the ultimate buy-and-hold strategy.
The same can happen to UST's, so what's your point?
Dividends are part of the total profit.
2 year bill yield is a massive 0.55% right now. SPY yields around 2%.
You can hedge partially by selling ATM calls and buying puts for what you can afford with the proceeds, it won't be ATM due to put premiums (perceived downside risk) but pretty tolerable overall, if you're equities minded.
I very much agree with this guy, except for one big variable: China.
We've already heard what Chinese elites really think of the reliability of US government debt from that new Chinese rating agency.
China has immediate interests in having the central bank scarf up so many dollars from exporters: to tax consumer imports and subsidize exports and raw-materials imports. I suppose those are at least as important as its long-term interest in having some value in the central bank's huge stockpile of foreign exchange reserves, which is largely in Treasuries and a very big part of the bid. And China's not in the same position that foreign buyers of Greek debt were early this year: China can't just dump its holdings and walk away, as the holdings are too big and the repercussions on the US and the global economy and thus on China's exports would be too severe. So China seems trapped in a cycle of stockpiling more and more Treasuries, waiting for some other part of the market to make the decision when it all stops. They've got to be very aware of how weak a position that is. They've got to have some alternative plans of action.
Moreover, China's domestic financial system looks to be in big trouble. I'm hearing bad loans in the hundreds of billions of $, likely to reach trillions if the market is allowed to play out with the resulting contraction of new lending and ensuing recession and domino effect. Of course it will play out in some uniquely Chinese way that I would never try and predict. So I treat China as a big, ominous unknown hanging over all the major financial and commodities markets.
And don't feel bad Bruce. Go find a Bloomberg story based on their monthly surveys of top analysts on the dollar's direction. There should be a sentence near the end which states the historical accuracy of the survey's predictions. I think you will find it is 50%.
http://keynesianfailure.wordpress.com/
You gotta be kidding. China is a major player in this Ponzi scheme and once you're in it, you can't get out.
That's what everybody assumes from China. As the Ponzi scheme heads towards blow-up, they're stuck ante-ing in till the end, the inevitable victims, the weakest hand at the table. All I'm saying is it's not a completely safe assumption. They are trapped but they're not stupid.
The building financial blow-up over there is going to force them to take radical steps of some kind or another.
Why would bond bears wait till the next Armageddon happens ? Its possible he is right but wonder if they will let 10 year hit 2.25 .. At the rate at which US businesses are closing down inflation could be here sooner than we can all think it will - check www.dailyjobcuts.com
where else would you invest 20-30 billion you have in each of those hedge funds
PM markets are quite illiquid compared to currency and equity markets
Total liquid money in equities is 7-10 trillion whereas PM markets are 30-40 billion in daily turnover
too much digital money has been prited already; difficult to co align with gold standard now
When charts and past performance go haywire I leave the markets. That was in 2001!
It has been a great ride since then focusing on the precious metals and high end collectibles.
I see the outlook has changed -- it has gotten worse.
Your first statement is brutally honest, thank you and why I look at all who ahem, forecast the future direction of the markets as purely talking their book or the book they want to see happen with no skin in the game.
I know one of the camps is right,and that they can both be right but at different times which is the same a being wrong when it comes time to hit the buy or sell key.
But what's the difference between that and flipping a coin?
Not a thing.
I think that all of the apathy concerning the situation probably stems from the fact that it's completely unrepairable. When Congress has sold out to their large financial donors who are locked in a combination circle-jerk/game of "Asshole," the average worker is facing either pay reduction or the withering wasteland of seemingly perpetual unemployment, and the fucking Fed apparently doesn't even know what the hell is going on (inflation, deflation, WTF?), then we've simply reached a point, by a combination of greedy machinations, magical accounting tricks, and wishful thinking that the entire economy right now, in the context of our monetary and financial systems, resembles nothing so much as a hundred-car freight train loaded with explosives careening down a mountainside, completely out of control. Some people pray that the brakes will still work, and others just figure that it's probably better to evacuate and let the fucker crater once and for all. Perhaps it requires the collapse of the entire works to convince us as a whole, once and for all, that it was either a bad system or one that was made bad by gluttonous banking institutions and stupid, ineffectual politicians who have missed the point every fucking time.
"900,000 tons of steel, made to roll.
The brakes don't work and this grade's so steep, the engine's sure to blow.
Well, I have prayed to God this ain't the death of me.
I've done 'bout everything, 'cept try dragging my feet!" -- Grateful Dead
Well stated!
My only nit is that the Fed DOES know what's going on, and that's that it really has no ability to just snap its fingers and fix things. The reality is that it's competing with other nations and their currencies, in which case telegraphing (true/desired) intent just isn't a wise thing to do. The ENTIRE games is about what nature is about, and that's deception. The Fed is hoping to reel in the bigger fool, and the bigger fool has to come from outside its domain in order for there to be success: all inside the US domain are just along for the bumpy ride.
Economics has morphed into an Organized Religion, full of all the characters and mysteries of all O.R.s.
We have the equivalent of the Commandments, The Bible, the Torah, the Koran and whatever the Confucians, Hindi, and Buddhists use for their daily read.
We have gods who control the destiny of 6.7 billion people. We have apostles, jihadists, suicide bombers, priests, shamans, rabbis, ministers and billions of sinners.
And like all Organized Religions, utter bullshit.
So is YOUR "unorganized" religion bullshit too?
Each to their own . Sorry you musta got burned somewhere along the line
"‘the rules can change at anytime’ risk on your massively negatively convex portfolio, you’re barely getting paid 1% over UST… risk >>> reward"
F**KING NO SH*T! Like a wind blowing smoke from my eyes. That's the quote of the month for me! Thanks for the post TD!
Agreed. And the deflation theme will work and work...until it stops working at all.
Indeed. The long end has the comfort & safety of a lobster trap.
Thanks.
This is an excellent report containing
very appropriate data.
It contains no right vs. wrong, how
things should be fixed or judgmental
views.
Very insightful, thanks.
That is the basic Deflationist view - eloquently stated.
iam not so sure it is wise to plough into long duration Treasuries at this juncture. Not prepared to under-estimate Bernanke's ability to keep announcing more QE type stuff. I mean the Fed explicitly wants inflation and they are dtermined to get there. Not sure it is wise to fight it.
More focused on protecting myself against the inevitable inflation, commodity bubbles etc that is likely coming.
Enjoyed the post Bruce. Reggie Middleton could learn a thing or two from you.
Yeah, Reggie could learn a little humility. Always praising himself for past calls that he gets correct. Don't hear too much about those that don't pan out.
Reggie is a little "black" in his style. I think it's a good thing. Different, anyway. Throw in a few fist-pumps! He's got the analysis to back it up. Not just getting lucky.
Interesting article. The point about people getting torched on agencies is well taken, although I find it hard to be too sympathetic toward those who pay a premium for debt that's callable tomorrow at par. Certainly if the name on the note were "Coca-Cola" instead of "Joe Six-Pack," you wouldn't try it.
About a quadrillion or retail money has gone into bond funds this year. They are the ones who will be smoked on this.
Bruce, always enjoy your posts and thoughts. Here is a question:
There are a few countries that weren't dominated by the financial services industry to the same extent as the USA. Some of these are a better credit risk than America - what happens when a ratings agency (I know- a joke) downgrades the US or creates a new AAAA+++ category because the current ratings are not correct?
quadrillion is a thousand trillion.
How much really?
TIA
I stand corrected. I checked the number. It is 2.37 umpteenuncountable cagillions.
I love zero hedge. Thank you Bruce.
I think we go to brazillian after that because it's nothing but painful hair cuts involving ripping the folicles out.
You can't burn cedar. It must come out at the roots.
"How was the trading today?"
"Got waxed"
Hey, its only money, there's more where that came from. No ????
Still plenty of forests left with which to feedstock the printing press!
Chump change.
Bruce, your honesty and humility are refreshing. I always enjoy your posts and insights--keep up the good work.
Ditto, good info and no bs.
Good job Bruce.
if he's right my view is that the leg down will be quick. seems like the market wants to reward those bears that can stand the heat the most as the market ceeps up and then falls 50 s&p points in a day or two.
It's called a bear hug on a bear rug. We have been skinned so often that every 50 point hug feels sooo good.
I really appreciatete your posts, Bruce.
But I'll emphasize as well, that this is just one man's opinion. I wouldn't go shorting every thing in sight- or buying more Treasuries- based on those comments though.