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Bill Gross' Latest: "Rates Face A Future Bear Market"
PIMCO's boss says the world's biggest bond fund remains underweight on Gilts, and to avoid the UK as the "bed of nitroglycerin must be delicately handled." Bill's three conditions for whether a country will be attacked by bond vigilantes:
1) Can a country issue its own currency and is it acceptable in global commerce?
2) Are a country's initial conditions (outstanding debt, structural deficit, growth rate, demographic balance) moderate and can it issue future public debt as a substitute for private credit?
3) Can a country's central bank be allowed to reflate via low or negative real interest rates without creating a currency crisis.
The conclusion is not pleasant for Greece. And some very troubling observations for the US, and how the just passed healthcare reform is one big deficit-reducing lie.
In the US in addition to the 10% of GDP deficits and a growing stock of outstanding debt, an investor must be concerned with future unfunded entitlement commitments which portfolio managers almost always neglect, viewing them as so far off in the future that they don't matter. Yet should it concern an investor in 30-year Treasuries that the Congressional Budget Office estimates that the present value of unfunded future social insurance expenditures (Social Security and Medicare primarily) was $46 trillion as of 2009, a sum four times its current outstanding debt? Of course it should, and that may be a primary reason why 30-year bonds yield 4.6% whereas 2-year debt with the same guarantee yields less than 1%.
The trend promises to get worse not better. The imminent passage of health care reform represents a continuing litany that will add, not subtract, to future deficits and unfunded liabilities. No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer as asserted by Democrats and in fact the CBO..."Fantasy in, fantasy out" writes Doouglas Holtz-Eakin who held the CBO Chair from 2003-2005. Front-end loaded expenses promote the fiction that a program that will cost $950 billion over the next 10 years actually reduces the deficit by $138 billion. After all the details are annualized, Mr. Holtz-Eakin's numbers affirm a vigilante's suspition - it will add $562 billion to the deficit over the next decade. Long-term bondholder beware.
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Moin from Germany,
this might explain todays weakness in the long end ......
Who knows?! The markets are obviously moving in a totally irrational way as far as I can see. Currencies are collapsing and are trending by 1% a day. On top of this, Germany is balking at bailing out Greece...which should make the Euro stronger. But does this happen? NO. And, despite a general lack of confidence in all currencies, gold is falling and the dollar, which is printed with impunity, is skyrocketing.
It's a manipulated Casino world we're living in. Who knows what's going to happen?
One way to manage the situation is to decide on an investment/trading thesis and stick with it. If there's a better than zero chance you're right, it could happen.
Nonsense! This is the buy and hold BS that the CNBC pumpers were pushing all through the 90's. What did this do to the baby-boomers retirement savings? It pisses me off when all assets in this world are on the card-table every day!
That's why I used the word manage. No condition for buy and hold exists anymore, you're right. I think you get into more trouble chasing market direction. Point being, if you you think and believe valuations are stretched, they might be. If you think rates should rise, they could etc...
Germany is balking at bailing out Greece because it makes the entire Eurozone look weaker, resulting in a weaker Euro, which Germany needs for its export based economy.
But this is a double edged sword. If Germany doesn't bail out Greece, it could kill the Eurozone. And yet if they do bail out Greece, the rest of the PIIGS will be at the trough post haste, and that could kill Germany.
Oh the joys of being painted into a corner, eh? And none of that considers what happens if the US starts its next leg down and China does the same thing.
.
Puts some numbers to the Healthcare lie.
http://fedupusa.org/2010/03/20/
It appears Gross has flipped to his bearish Janus face with this missive. He is correct & at some time the price will be paid for the current governmental policies. Today may mark the predicted minor hiccup in UST's predicted by Martin Armstrong to occur in February/March time frame with a major turning point in May or June for 30yr bonds. Til then, the rocking horse teters back & forth til the decision point.
The idea of HC reform is sound, even if in practise it fails. All of the questions are rhetorical. Is there enough growth to justify the taking on of further debt, growth being like collateral in a home loan, an ARM or an interest only loan, it doesn't do anything, it just gets the money flowing. In that regard you could declare the entire Greek nation a global treasure and borrow against its climate, its beaches, its history. The real point is that there is no economic growth at the end of the rainbow, and refinancing our debts is the most prudent course. The US is certainly better positioned to refinance their debt, because there is way to much waste and fraud in the system.
Any civic organization which spends let's say a million dollars on energy, might consider selling renewable energy bonds which reduce that cost to say, half a million. that makes sense..
Healthcare reform might have worked, if it had been real reform with the public option. Additionally with interest rates at zero what should an individual do? Buy solar panels? Send your nephew to medical school? Buy a second home in a country where health care is good and afforable?
Any civic entity, or sovereign nation which cannot raise money is stuck with its old debt, ( watch out for Republican budget balancing acts and Libertarian tricks?) The speed at which new debt becomes old debt is going to determine who survives, as the deflationary forces take hold. Deflation should be worst in the US, places like China should have some inflationary pressures, which slows the process down to a rate of change that is more acceptable.
If you look at Calfornia right now, they refinanced their debt once before, and paid for those bonds with an added sales tax (the fine print says they can dip into the general fund to pay the interest) but the number of times you can roll this kind of debt over is limited, especially if the debt is being downgraded. The cycle turns more or less slowly.
Public option? That would end up as the fannie mae and freddie mac of the insurance industry. There are plenty of ways of reforming the system that would subtract, not add, government bureaucracy and market distortions. But, I'm sure when this new system fails they'll find a way to blame the markets again.
yeah i never thought of it that way, the public option as the insurer of last resort for the uninsurable. perhaps we can buy a boatload of foreign doctors and grant them citizenship if they work for the government for several years.
Watch out folks....the same people who just did a legislative coup de tat are bringing you a VAT to pay off the bazillion dollars of debt. We go the way of Euro land in a boink. Once you've seen the frenchie girls underpants, you will never go to the barn again.
Well, when you put it that way, I'm tempted to be on board with the VAT!
Yeah I hadn't heard about the whole 'underpants' thing. Please tell me more.
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