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My Ex Bonds and Ben Bernanke
Three-four years ago I had a nice bond portfolio. For a guy who should
have know better I completely boinked it up. I fell prey to the worst of
errors. I let disbelief guide my choices.
I had a bunch of high coupon NYS GO Muni’s. Almost all of them have been
called. I had 5 and 5 1/2% Agency MBS. I knew that was subject to
prepay, but I never expected to get 80% cashed out. The corporate’s were
high yield so I kept the maturities short. Most have been paid off.
Net-net my fixed income is down a cool $150, 000. I have managed
equities and at my age I am not going overboard on that. I think all
preff stock is junk. I will not buy JNJ for a 3% yield and lose a 1/3 of
my equity. And I am not going out far on the curve when there is no
payback. So I am screwed. Losing this much income makes it hard to plan
for expenditures. Relying on the equity market to earn a stable income
is not possible.
So if you lose that much income what do you do? I cut fixed and variable costs.
-I left my high-end golf club. Saved $30k on that. Last I checked there
were 70 out of 270 members looking to do the same thing. Talk about a
leading indicator.
-I had my eye on a new A-6. Call that $30k with the trade. I nixed that
plan so a few folks in Wolfsburg have a car less to build.
-My farm pickup has gone to work six days a week for the past 12 years.
The help, the rust and the big loads have beaten it to pieces. I need
something that will push snow, so that is another $40k. Screw that, we
will drive the piece of crap until it dies.
-I was thinking of asking a lady to come with me for a few weeks to
Europe. Saved at least $10k there when I never brought the topic up.
Funny thing is, she’s there now with another guy. Possibly he does not
have a “duration” problem.
-I have an endless list of trades working for me. Plumbers, carpenters,
masons, electricians. I usually budget 30k for this. These guys are all
calling me up to see if I am okay and do I have some work? I tell them,
“Next year”.
-My apple orchard needs pruning and the tree guy came over to talk about
it. I also told him next year. The risk is we have heavy wet snows and I
will lose trees so I am taking a gamble. Another 10g saved.
-I give 10% of my income to various forms of charity. I am not doing so
this year. $15k to the plus, but I don’t feel so good about it.
That adds up to $165,000. But I know something will break and I am
hoping to come in at the $150,000 that I lost to the bond market. If
nothing breaks I will find something “good” to do with the extra.
Ben Bernanke does not give a rat’s ass about me. Nor should he. There
are plenty of situations that are screaming for help that are much more
important than I am. I have no problem with those priorities.
Ben is probably going to be working on his speech as he flies out to
Jackson Hole. It will be an important presentation that many will focus
on. I am sure that he will acknowledge the weakness in the economy. He
will point to the recent steps he has taken and he will promise to do
more “as necessary”. In other words, ZIRP will be with us for a long
time yet to come.
Bernanke has a better handle on the numbers than anyone. He knows we are
hitting an economic wall. But he can’t figure out what to do so he
looks in a college textbook and reaffirms his belief in Keynesian
economics and voodoo monetary policy. The only medicine he understands:
zero interest rates. The poor guy must be wondering why his efforts have
failed so miserably. He is now looking at a questionable future. If he
steps on the gas with QE2 and fails, he will go down in the books as the
worst fed governor in history. I think is going to fail miserably.
How many people look like me? A million? Three million? Five million? It
is many more than you might think. If it is 3mm then it translates to a
drop in consumption of $450 billion or 3-¼% of GDP. So without the me’s
of this country contributing to consumption we have a tremendous drag.
We need 3-1/4% growth or the social obligations/debt will eat us alive
in a few years. We’re not going to see that growth. QE is the culprit.
And Bernanke does not get it.
Note: The NY Times
had a front-page story by Sewell Chan that spelled out his thoughts on
the dilemma Bernanke faces. He started the column with these words:
Bernanke to Offer Outlook as Fed Weighs Bolder StepsOn Friday Ben Bernanke will offer his outlook on the economy and explain the Fed’s recent modest move.
This is a dangerous understatement by Mr. Chan. Until very recently
Bernanke and the bulk of the board members had been signaling that the
next move in monetary policy was going to be a return to normalcy. The
Fed’s recent move to initiate the first step in QE-2 is a 100% u-turn on
what has been said/promised for the past year. There is nothing modest
about that step. The markets have shown they don't like it. Every
additional measure that Bernanke takes will lead to more
dissatisfaction. Ben can’t connect these dots. He thinks the solution to
our problem is to create free money so the commercial banks can
generate big income to absorb the big losses. It is a dead end policy
for the real economy.
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And you think your Mom's "bonds" will have any value once the dollar collapses?
You think that the 'system' is going to make people like your mother fabulously wealthy, while continuing to throw working people under the proverbial bus?
You believe in the long term viability of the US banking system which depends on the bond market remaining in the current condition?
Give your head a shake, your Mom's portfolio of bonds is insanely risky right now. You've been sold a completely wrong bill of goods insofar as 'risk' is concerned. Basically, your Mom's source of income collapses the moment US Treasury bonds cannot be rolled over. An investor in equities of viable industrial firms, mines, oil and gas, etc. doesn't have that problem to anywhere near the same extent because those assets can be used to generate hard currency.
And your equities will be worth the sun and the moon?
Go away friggin' clueless moron.
Firms that have hard and tangible assets underlying them can use those hard assets to generate 'hard' currency to import things. Plus, the debts of those companies will be devalued.
Whereas, if you're a bondholder, you're a bagholder.
Go read some of the other articles on ZH about hyperinflation, either in Chile, Argentina, or Russia. Bond millionaires were reduced to the soup kitchens once everything played out.
When the Debt Money Ponzi collapse happens, your firms with physical assets will have no cashflow and they'll be as bust as the bonds in my mother's portfolio. You are clueless. Think it thru.
In the mean time, until Mad-Max comes to visit, she needs income, steady, reliable income. Getting that from dividend paying stocks? JNJ gonna pay band-aid dividends? Pfizer paying meds dividends? And when all assets values are cut in half? Or go to zero?
I'm prepped for Mad-Max, 19 ways to Sunday, and she moves in with me. You have no situation context or understanding of my and her big picture, until you do, go back to playing your video games. Quit being a Troll, go back under your bridge.
"your firms with physical assets will have no cashflow and they'll be as bust as the bonds in my mother's portfolio. You are clueless. Think it thru."
Hardly. My firms with physical and productive assets (think oil, gas, food, mining) will simply find some other medium of exchange other than FRN notes. Maybe I'll receive a dividend coupon exchangeable for cows, or ounces of gold if/when the FRN system finally collapses. Who knows. But the existence of the firms in which I invest are not dependant on the continued existence of FRNs. In fact, they will prosper once the dollar is wiped out.
"In the mean time, until Mad-Max comes to visit, she needs income, steady, reliable income. Getting that from dividend paying stocks? JNJ gonna pay band-aid dividends? Pfizer paying meds dividends? And when all assets values are cut in half? Or go to zero?"
Sounds very myopic to me, unless you think she's going to kick the bucket in the next couple of years, which is a lot less likely than you may think.
Calling me a troll isn't very productive either.
pitz -
you're halting your thought experiment a few steps too soon. when the UST market crashes, corporations with debt on the balance sheet will be leaned on by creditors, who will be panicking as the benchmark evaporates. the credit markets everywhere will freeze and all your productive assets will be unable to access financing at the very moment they need it most. this impairment in cash flow will be more than enough to bankrupt many formerly productive stocks. throw in a little leverage and its not even close. how is pfizer gonna pay you when the fed govt (read medicare/medicaid) stops paying for their drugs? without a bond market we cannot fund govt entitlements. are the masses of the unemployed gonna buy pills with their non-existent cash?
i dont think your stocks will go to zero, but they will go way down. if you think the UST market will fail, why not invest in gold bullion?
Actually, I think Pitz has a good point. All those thinking there will soon be a huge crash in the sharemarket are the clueless ones. The dynamics are different to 2008, credit spreads in the 'corporate' money market (of which I include equities) are waaay wider than pre 2008, when the stockmarket etc were 'booming'. Currently, stockmarket is not being manipulated higher.
The bubble is elsewhere. I agree with Doug Noland, the government & government backed debt market is where the danger now lies.
Here in Australia (as elsewhere) the government has been issuing bonds (not bills) like there's no tomorrow, yet yields still fall. If that's not a classic sign of a bubble, then bubbles don't exist.
Why would refinancing be needed? Productive companies with productive assets don't need refinancing. And what will give creditors the right to lean on firms to pay anything more than their legal obligations in a worthless currency?
this impairment in cash flow will be more than enough to bankrupt many formerly productive stocks.
The Ponzi stocks (ie: firms that rely upon continuous financing) for their existence will be wiped out. Is that exactly a bad thing? And why would cash flow be impaired?
And if I were on the board of one of those (oil, gas, food, mining) companies, I'd tell the existing (poorly armed, disorganized) shareholders to f**k off, and pledge my returns and equity to any and all warlords (that would include the rump government entities) to protect my business.
"Shareholders" will be as screwed as anyone.
Armageddon is not a tradable event.
Better go buy some bullets then. Its only my suggestion that shareholders will be less screwed than bondholders.
Massive risk to both. Get out the game and put your wealth in what you NEED.
Thats a home , water/food supply , energy and money (fiat or metal , hedge accordingly)
you can do this without risking being at the back of the queue of creditors.
You wont have to pay capital gains either if you do that.
The new normal means no gains for anyone but the big sharks , unless youre prepared to get off yo ass and get all "political".
deal with it.
Possibly he does not have a “duration” problem.
ROFLMAO!
I was wondering if there was a little double entendre going on with that comment.
Bruce, Thanks for another great piece. As always you are spot on. We are cutting back too btw. eventually cash flows (or lack thereof) will catch up to this whole charade and it will be over. Zimbabwe Ben will be viewed as a traitor within 5 years.
Oh cry me a river. Your portfolio, if indeed it had a strong amount of fixed income in it, has outperformed pretty much everything else for the past decade. Its portfolios like yours that need to be destroyed in order for the economy to get back on track. Grow a pair and take some risk instead of expecting the government to fund your unnecessary and extravagant toys, while risk takers have lost everything over the past decade.
JNJ at a 3% yield is like a gift from God himself. Dow 10,000 is maybe 1/3rd of its true value. You should be writing articles counting your lucky stars that some fools are calling your bonds and paying you back in full today, when it is quite likely that there will be default or hyperinflation tomorrow. Just wait and see..
Check into the major malfeasance that JNJ engaged in w its OTC drug line. Then ask if you want to be a minority shareholder of a business that needs to engage in that sort of behavior. to make the Street's numbers.
Umm... what?!
You really don't think this stock market is being manipulated up, do you? More like manipulated down by the HFTs, trying to snap up as much dirt cheap stock as they can before hyperinflation sets in.
... umm ... okayyyyy ...
You, my friend, are a phucking moron.
i concur my friend from the future, only you spelt it wrong.
And why might that be? Certainly, if the government wanted the stock market to be high, they could make it so. They don't -- they want the bond market to be high, so they're manipulating that up, and, by implication, manipulating the stock market down.
2, 5, 10 years from now, we'll be scratching our heads and wondering, "who were those morons buying Treasuries at 2% a few years ago", or "why on earth did we call that 5% debt, now we can only issue at 10%"
Seriously, think about it, what happens when interest rates go very high? Equities become very valuable because new competitors and new firms have a very difficult time borrowing.
You think the stock market is down on a strong bond market, wait 'till you see what it does in a weak one.
You certainly have an interesting view.
Certainly inflation and interest rates will have an effect on stock prices - and there is a reasonable argument for a positive component to those forces.
Emphasis on the word component.
Because there will be many, many other components of force on stock prices which will be negative.
Therefore my only objection to your view is the certainty with which you present it, which is unwarranted at best.
In fact, certainty is everywhere and always unwarranted.
Certainly.
Good piece, Bruce.
I haven't had a dime of debt - no mortgage, car payment or credit card bills - for 8 years now. You can never be so arrogant as to declare what you won't do, but I'll never willingly take on debt for the rest of my life. I am totally unsympathetic to the problems of either debtors or lenders. Any problems need to stay totally between them.
I live in a house that cost about 1.4x my income. My car has 160K miles on it and gets 36 miles per gallon. I shop at a bag-it-yourself grocery store that saves me 25%. I buy lots of generics and cook my own meals - I might eat out twice in a year, and not in 25 years at an ammoniated pink slime fast food place.
I own one (12 year old) television and don't have cable. I don't have a landline phone - I have a $50 cel plan on a plain-vanilla 3G phone.
I live in a state blessed with beautiful mountains, forests and water. My hobbies are outdoor activities, which cost nearly nothing. I have a $30 a month gym membership, attempting to forestall some of the health problems in my awful genetic heritage.
Because I wasn't greedy, neither the 2000 nor the 2008 bear market took a dime from me.
It all comes down to jobs and employment security. I work in tech, which has been the life of Wesley for a decade now. Your job could be gone any day, any moment. Roach Motel jobs - once they go to India or China, they never come back. Without globalization, I'd be willing to spend something, possibly commit to something. As it is, the only people who should be spending money are guys with no-cut contracts, like, say, a tenured professor.
As it is, the only people who should be spending money are guys with no-cut contracts, like, say, a tenured professor.
Or public sector employees. Throw in the lawyers and you've got pretty much the entire high-end Left.
The perpetual debt negative growth multiplier. Not really a Keynesian concept.
AND
"Ben Bernanke does not give a rat’s ass about me."
Well Ben has priorities. First is preservation of profits and wealth transfer for the BHCs which control the FED through FRBNY. Second is the same as the first.
The power intrusted to the FED is control over our money. This is the only thing that creates any need to listen to Ben. Also when you can finance Trillons of dollars in bad debts from the same banks that control the FED and not go out of buisness, or lose your house, or go to jail, makes you novel. To do this within the law, is truely unique.
Imagine today, you (yourself) can finance in real labor, a Trillion dollars in worthless paper with no ramifications. With this kind of power you do not need politicians to represent the people.
The FED from a policy standpoint is now just more overhead. There is no value add. It is an unneeded cost to give the illusion that our debts will be paid.
Overlay the fiscal effects with what the FED proposes and you see that the pattern is set. When the FED says that rates will stay low for an indefinate period, it means until destruction of the currency. (Which is an ongoing strategy, it is not a one day event)
Why is this hard to acknowledge? What will have to happen to change the FED's primary role of buyer of US debt?
Fundementally, in the presence of massive debt financing, in a debt de-leveraging world, the control of rates is the same as monetizing the debt. Ben knows this. It is his last great act.
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On US sovereign debt a word to Mish.
I read Mish every day. But, Mish somehow cannot reconcile the Treasury Bond falling rates with debasement of the currency.
Mish, at some point deflation will morph into default. How do you repair the debt without destroying the bonds?
Could it be, today sovereign bonds are broken.
I would submit that the mechanism of bonds require a structual framework, beyond which the dynamics no longer apply, the idea of bond investment breaks down.
What are the necessary adjustments for bonds long term?
To talk about Japan as a potential risk and assume that after a Japan debt "restructure" the market will not learn? Why will these lessons not be applied to US sovereign debt?
Mark Beck
He's shrill, I can't listen some pieces of it. But one part that Mish got absoutely right was the observation that, while Bernanke can print as much as he wants, he can't force citizens to consume or banks to lend.
Meanwhile the crooks have millions to hire the best lawyers to defend them. Simply amazing:
Lawyers for jailed Texas financier R. Allen Stanford and two of his former executives on Thursday tried to shoot down claims by a fraud examiner that their clients took part in the massive Ponzi scheme that authorities say helped bilk investors out of $7 billion.
Bruce, great stuff as always.
The bad news is that, at these levels, income is too risky to purchase.
The good news is that these levels won't last.
I'm putting together a shopping list for the Fall Sales Event.
Leo, You are absolutly right about Ben and Alan. In this same vain I had a true life experience even tough it was trite. I once ran into Greenspan at a Wash. reception .While he was chatting with me he was intently gazing about the room to spot more important notables to impress. I realize it was a putdown but thats what Wash. is all about, and Ben is no different. I wonder if he ever looks at Andrea or vice versa ?
Bruce, your writings are always good. I have a large preferred portfolio, mainly high quality REIts with great cash flow, and great balance sheets. I bought bonds a month ago and have made a boat load of money so far. I have been sitting smug in my foresightfulness until today when I realised that if treasuries are going to 2%, 2.5%, 2.9% for the ten, twenty, thirty year bonds, companies that can, are going to issue debt at 2% to 5% and call all preferreds above 7%.
We might all have to buy bullet proof blue chippers like Merck with a 4.4% yield, suffer the stock price declines, and write options on bouncebacks to survive.
Just a thought
If all that 'expensive' debt is replaced with 'cheap' debt on corporate balance sheets, what exactly happens to stocks?
Think about it.....
M, Tks. I actually have money working doing this. I don't do it. It is very time consuming. At the end of the day there is risk in this as you know. What if you have a flash crash that does not recover? What are the odds that this could happen?
I am trying to pay some bills here. I don't want to bet on this. I want a 5% muni for this. Today capital has no value unless it as the WS casino. That has never been the case before in history. I suffer, okay. The people who work for me and now don't have jobs? That is small business. Everything spins from that. The car companies I did not buy from? That is plain old GDP.
The people who work for me and now don't have jobs? That is small business. Everything spins from that. The car companies I did not buy from? That is plain old GDP.
The people running Washington will deny this is happening. They think 'Trickle-Down' economics is some kind of elitist wealth grab. You and others like you can get by without that new stone wall for a while. Your mason though, not so much.
Bruce, consider inverting your active management.
I had pros managing bonds the last 4 years and I've done OK. I'm still getting decent income. Apparently the managers knew what they're doing.
Stocks? Where's the dispersion? Where's the alpha?
Buy dividend oriented ETFs, and trade around them with options to goose the returns and bound the risk.
Understand that Bruce, so buy GO munis or treasuries (TLT, EDV), and a little VXX, CEF. Having worked at a hedge fund for 4 years, you have to work to insure the income stream. Income will be the next ten years scarce resource, so as the interest rates go down, you need to make it up with principle gains, to hold the income stream steady.
It is going to be a battle to find relatively safe income for the next ten years - thinking it will be a full time job for this cowboy.
Sir, stay away from VXX. You will thank me. I wont even charge you 5bps for this wealth protecting advice.
Magua, another idea - fat coupon callable bonds that are trading to call.
The problem is that long rates don't reflect real interest rate risk.
So buy a fat coupon long term bond trading to a near term call - as a cash alternative. More yield than a CD. If interest rates rise suddenly, and the call doesn't happen, you still have the fat coupon longer term.
To pick up on your "just a thought" - I've had the idea of synthesizing dividend payments from blue chips by writing put options.
Say you don't want to buy KO at 55, but would you'd be fine with buying at 45. Write some puts. Worst case you get your stock at deep discount to todays market - closer to fair value.
Once your KO gets put to you, start writing calls at 45. Etc.
If by some miracle the market doesn't crater, and nothing ever gets put to you, well, you are still yielding 3-4 percent on your cash, but with a 90 day (option) term instead of 30 year rate exposure.
Just an idea, admittedly half baked.
Thanks lewy - actually that is a great way to start it off. Thanks for the idea.
I have a friend who does exactly this with a system, not a lot of work but definitely some. He claims low dbl digit returns steadily for yrs and yrs. Just don't sell a put on AIG!
Separately, I read an entire book about a decade ago by a math nerd who using the available data thought that the single best investment strategy on a risk-reward basis came from selling deep out of the money LEAP puts on high-quality stocks.
Perhaps that would still work, esp given that perhaps those types of options might (I dunno) even be a little higher-priced given increased attention to tail risks.
Outstanding post, Bruce. And no, you are most certainly not alone. Since the confessional is open and misery loves company, I'll admit to dropping a little over $100k when I cleverly surmised that prodigious supply guaranteed a drop in long Treasury prices in Q4 of '08. So short ZB did I, and I still cringe when I think about it. Take a look at the chart: I may not have lost quite as much, but I'll bet I lost it faster.
This week in my morning tour of the country via newspaper websites I saw a 'senior job fair' in Orange County, California, another in Tampa, Florida and a article on how the senior citizens in Houston were hitting the food banks and meals on wheels programs as never before.
If ZIRP is inconveniencing the affluent it is killing the senior citizen who depended on some modest interest income to supplement their SS pension. Not doing me a whole lot of good either but my truck is a 2008 and my car is healthy too so only Ameritrade is calling me to make sure I'm OK.
I'm with ya, Bruce. My old PU with 260K miles just died and I cried like a baby because of her death but more so because I had to spend money on a new 10yr old vehicle instead of PMs.
Yeah, well, Europe's been way, way, way too hot - or pouring with rainl with about eight hours of balmy weather in between, for the whole of August.
The Chairman made policy adjustments based on broad macro- trends; implenting changes in M3 -is a big thing, it causes turbulence. For my money, the Fed should not have gone the whole hog, if it has used less money it would have had to stimulate wanted turbulence with the assumption of controlled risk...but the banks didn't play along. There's no question they milked the cow first chance they got. And the the HFT thing - how does that fit into 'trying to inspire confidence into the market'?
-have you bargained with the tradespeople,
Always read your posts Bruce. You often include personal anecdotes, and this takes it to another level. Thanks and good luck!
There are signs around that the whackos are stirring, isolated incidences of mob violence, growing racial tensions. Bruce and I and others can afford to take some "hits", but there is now a permanent class of under- or unemployed. Tent cities springing up around the country. The cauldron is bubbling. Major crime down, but petty crime up. Be careful everyone.
Nice piece Bruce. You have a very similar situation to mine and a lot of my friends. And they are mostly doing what you are doing: cutting where they can, ditching expensive toys and refusing to play Ben's game.
Of course, Leo has it right: the Authorities want us to speculate. I woul rather put it under the mattress.
This is what happened during the 30's. While business and the affluent get bashed, they refuse to invest. Ben Bernanke thinks about zero rates. Capitalists think about risk and return on their marginal investment. Economics happens at the margin. Returns are low at the margin and risks are high. Why bother?
Thanks Bruce
Willard, but the problem is ZIRP- cheap endless funds financing the criminal enterprises while robbing the savings from the middle class.
While I have been cutting as much out of my personal expenses as possible, the worst for me was laying off 30 employees.
We do not need cheaper debt, or debt of any kind, we need a revival of demand.
Obee promised new, clean energy jobs and failed. All funds from the Fed and the Treasury were provided to criminal and political bagmen and the rest the American public were stiff-armed.
No matter how sweet the words from the teleprompter puppet, there is nothing behind those words. Another brainless politician prancing around pretending to be a leader.
Ultimately, people are cutting out of necessity.
And the Wall Street criminals remain oblivious to their crimes.
BONUSES ALL AROUND GENTLEMEN, BONUSES ALL AROUND.