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The Irony Of Bubbles
Via Peter Tchir of Brean Capital,
The one market seemingly everyone "knows" is a bubble is the treasury market. That is the market that just made new low yields on the 30 year bond for the year. The curves have flattened and there has been extremely strong support for the long bond and the 10 year (which I have been on the wrong side of for the last point). This is on the back of the strong dollar and global deflation fears.
At the same time, 5 year yields, remain well above their average for the year. In our end of September presentation, we highlighted the curve, and have seen that the prior 2 times that we had very steep curves, they reverted to extremely flat. What looks like "policy error" to me. Are we headed down that path again? This Fed seems far too dovish to make that mistake, but history does tend to have a way of repeating.
GTAT, which is the first true "jump to default" I have ever seen looks exactly like a "bubble" popping. With 20/20 hindsight the story seems obvious. One customer, loans from that customer, dwindling cash, weak cash flow, other debt, etc. Yet somehow the market didn't see it coming. If that isn't the actual definition of a "bubble" popping, then I don't know what is.
So I continue to believe that the bounce in high yield is over and that the GTAT situation, while almost exclusively a convertible arb, rather than HY bond, play, is spurring the rethinking of where the risk is in high yield. With some leverage allegedly creeping back into the market, I expect us to hit new lows on high yield.
Along with high yield, the stock market should see some pullback. This is a rude awakening on the stock front that not all stories end with a multi billion buyout from one of the big tech companies with lots of cash. So i would expect continued weakness, led by tech.
Then we have the real wildcard - OIL. Black Gold. Texas T. Or in this case, more specifically WTI. I have read several technical pieces. Some with compelling reasons WTI is a buy and headed to 95. Others, equally compelling, that it is a sell and is headed to 84.
Getting this one right is crucial as it has so many potential repercussions in the E&P space but beyond that too. Even the "shale miracle" is being questioned - prematurely, but I am seeing it be questioned.
This sector is where secured financing meets equity valuations and the story could get ugly as cost to finance increases and ability to finance decreases, in what can be a rapid spiral for smaller weaker companies who rely heavily on short term credit.
This would likely impact miners who are also facing pressure as commodities like Cooper are down 4% in a month.
So I am bearish high yield and U.S. stocks here and my model portfolio reflects that.
...
This is all extremely difficult in markets that seem to have somewhere between 0 and no liquidity. No one seems to be willing to take the other side and reverse big moves in EITHER direction. As a bear I am just as worried that there is no liquidity when the market decides it is time to turn, and maybe that has already started, but for now I would be selling any bounce.
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everything asset is in a bubble. which one do you want to be in?
Swiss Franc bubble? That one seems safe.
All I know is you never short a bubble........too unpredictable.
Buy a lottery ticket instead.
GTAT, which is the first true "jump to default" I have ever seen
Wait, what was the name of that mortgage co. to go out of biz after never having a losing quarter? New Century?
If the "treasury", which is mostly made up of Usury....see that ....U sorry, we sorry, U pay.....is full of debt, can an oxy moron be far behind the ass?
You have to pay rent for living on this Earth, no?
That is not the natural condition of the Universe, however, that is the state of things currently.
Printed money causes bubbles, it has to go somewhere, but I will try to act totally surprised at this revelation.
For months the major world currencies have traded in a narrow range as if held in limbo by some great force. This has allowed people to think we were on sound footing as central banks across the world continued to print and pump out money chasing the "ever elusive growth" that always appears to be just around the corner. Recently some currencies have made multi-year highs or lows depending on the match-up .
Because of weak demand for goods and most of this money flowing into intangible investments inflation has not been a major problem, but the seeds for its future growth have been planted everywhere. John Maynard Keynes said By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known. Weakness in the value of the Yen, Pound, and Euro must not go unnoticed. More on why this may be a signal that currency trading is about to get very wild in the article below. Please note, this may also be sending a signal that the whole system is unstable and the stock market is about to drop like a stone.
http://brucewilds.blogspot.com/2014/09/caution-alert-currencies-may-get-wild.html
china, like everywhere, has serious systemic and overlevering problems,
But the yuan's pricing has simply made no sense.
This is the dollar's steroid era, and Uncle Fed's balls are starting to atrophy.
It plainly means a great ramping up of the various concocted me threats, if not outright world war.
Well, the choice is simple it sems; do you want Dollars or do you want ISIS?
good one
The Yuan is not a floating currency, its worth whatever the Chinese say it is. Though if they really do start Yuan trades with the EU that will have to end.
By any chance, do you have a link to your blog where we might learn more about what you think about this?
Oh, wait, I found it.
right here: http://www.zerohedge.com/news/2014-10-06/10-reasons-why-reserve-currency...
and here: http://www.zerohedge.com/news/2014-09-30/eurozone-inflation-drops-fresh-...
Sell the f-ing rip.
It's old news, but important news... this is what a debt bubble looks like.
http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...
And this is where the 10 YR Treasury is headed:
http://www.globaldeflationnews.com/10-yr-treasury-index-yieldelliott-wav...
Surely FB, GoPro and Tesla are not bubbles?
Right?
Anyone?
I for one would love to be in the Supreme Court chambers to hear how the Fed Heads came to the conclusion that AIG just had to be bailed out or the world was going to end...where did they get their info from...GS..who was owed money by AIG..or was it by some Economic principal that people cant ever fail.....my bet it was GS who said give us the money or we will cry
The message was: Give us the money or you will cry.
Don't agree with the herd that US Treasuries are a "bubble". GTAT was a bubble, so to me the definition of a bubble is something that eventually bursts. If I owned a five year T-note at a yield of 1.65% and the five year rose in yield to whatever percentage you want to pick, as long as the US government doesn't default on their obligations, I will be paid par for my 5 year when it returns.
If I reinvest my rediculous 1.65% annual payment at signficantly higher rates I will earn 1.65% plus because the YTM assumes a reinvestment rate of the YTM and higher reinvestment rates impact the total return more than one would anticipate. So what I have lost is opportunity cost.
If the government defaults and all the unions get paid and I get GM'd, then like GTAT, that would be a bubble. If that happens, I should be long more 308 ammo.
I'm spending my time looking for much higher probability bubbles...
I very much agree S&S. See my post below
We've got a champagne economy with bubbles everywhere...
Im not sure treasury's are in a bubble that will pop anytime soon.
A good friend of mine sold his mortgage company to Draper & Kramer in 07 (good timing) and still works there as part of his 10 year buy out. He said now, they typically do about 350 loans a week. He said when rates recently jumped up to 4.75 that they did 4 loans that week. So we can assume if rate rise or just even normalize it will crush everything. Everything will just stop. If the "overpriced" stock market starts to roll over, I think you will get a mad rush to bonds.
The Fed has created the makings of a deflationary depression in my opinion. Sure the Fed could somehow lose control of the bond market but with commodities falling, demand drying up globally Im not sure treasury's get crushed. Not yet anyway and if they do start to collapse I think it is short lived as nothing will be able to function. We shall see.
First of all 4.75 is not a high mortgage rate. During the 70's and 80's, you were lucky to get a 9.25 rate and 9.5 was standard. Houses were selling like hot-cakes and home prices were soaring.
The current rates are only "high", because all the jobs were off shored.
I've never understood why ZH nevers provides the meaning of acronyms at least once in an article. It is the standard method in any type of writing. GTAT would mean?
36th rule of Fight Club, you Google your own acronyms.