by Addison Wiggin & Ian Mathias
- The recession’s over? Not so fast, says the bond market
- Rob Parenteau unveils a serious threat to the faux-recovery
- Patrick Cox on the possible – and atypical – future home of biotech
- FDIC mulls a Treasury bailout… Dan Amoss on how stocks could suffer as a result
We hear from every corner of Washington that the recession is over. According to the stock market, a recovery is under way. But did someone forget to tell the bond traders?
Here are two recent U.S. Treasury yield curves — June 2009, when the recession (we’re told) was just beginning to end, and today, supposedly in the early stages of recovery.
We admit we’re not bond experts… but isn’t the yield curve supposed to grow and steepen when recovery is on the horizon? If Ben Bernanke is right and the recession is over, why are bonds in more demand now than three months ago?
“We remain concerned that little or none of the turn in the economy appears to be reflected in the Treasury bond market,” adds our macro adviser Rob Parenteau. “Treasuries have benefited of late from large purchasers who invest with little or no macro view — namely, the Fed, which has been rebuilding its Treasury holdings while slightly shrinking its balance sheet; foreign central banks, which have fled agencies and replaced them with Treasuries; and commercial banks, which have begun riding the yield curve with their mountain of excess reserves.
”If the short end of the Treasury curve begins to rise, the interest expense line item of the budget deficit will start to climb, as the Treasury has financed much of the recent public debt issuance at the very short end of the yield curve. Similarly, if the long end rises, mortgage rates are likely to follow, and any housing revival will get snuffed out in short order.
“So far, we have avoided these outcomes as the Fed, foreign central banks and commercial banks have placed the requisite bids for Treasuries, but we suspect this gets tougher in Q4 as the Fed’s quantitative easing comes to an end and the foreign central bank portfolio shift winds down.”
We’re filing this bond bit in a folder that has become immensely overstuffed, thanks to Addison’s latest project. He just finished his latest special report, the title of which says it all:
The Great American Recovery Rip-Off!
The defiant yield curve is certainly no fault of the U.S. Treasury… they are pumping record amounts of U.S. debt into the system every month. Not satisfied with last month’s record $109 billion auction of two-, five- and seven-year notes, the Treasury will sell $112 billion worth of the same debt this week.
“The Treasury sees that $109 billion was taken up a month ago,” notes Chuck Butler, of EverBank fame, “and just like a baseball pitcher that gets a strike called for him on the outside of the plate, he’ll just throw it a couple of inches further outside and see if the umpire will call that a strike too. The Treasury is simply pushing the strike zone… what’s another $3 billion?
"‘The foreigners will take them,’ you can hear the Treasury dudes saying. Hmmm… when do you think foreigners will simply say, ‘No mas’? I really don’t think the Treasury, or the current administration, believes that will or can happen, so why not continue to push the deficit higher and higher?”
“Dealing with the blow of the international financial crisis and maintaining stable and relatively fast economic development is arduous," said Chinese President Hu Jintao yesterday. Warning his fellow Chinese that the country faces more “unstable and uncertain factors,” we can’t help but ask the same question as Chuck… how long until the well runs dry in China?
Regardless, don’t be surprised if some revolutionary biotech advancements come out of China, says our breakthrough technology analyst Patrick Cox.
“American companies, which readers of Breakthrough Technology Alert own, have developed the technologies needed to deliver truly breakthrough medical therapies. For example, the implementation of advanced stem cell therapies is actually relatively simple. Unlike the incredibly expensive and technically precise processes involved in cloning, stem cell propagation and potentiation can be done in a well-equipped high school lab.
“So what have we been waiting for? The answer is A) the will and B) permission. The will exists, but the permission, in America at least, has to come from the FDA — an organization that is, apparently well-meaning, but actually behaves like a protection racket for the existing pharm industries.
“Well, that doesn’t work anymore. We live in a new globalized world with instant communications, a relatively free flow of capital and high economic growth where it never existed before. You can’t stop the signal. You can’t stop technological and medical process, though you can drive them offshore.
“China has capital, drive and no guilt at all about economic growth and the so-called ‘income disparity’ that is driving our current administration and crippling our economy. The Chinese are playing catch-up right now, furiously running to advance technologically and economically. Look for American biotechs to explore collaborations outside the U.S.”
One such company in Patrick’s portfolio is doing just that… read here for what he’s calling “the news release that changed the future.”
Heh, and it looks like another government arm will soon be knocking on the Treasury’s door: “We are currently considering all options, including borrowing from the Treasury,” said FDIC chairwoman Sheila Bair. As we’ve forecast many times, the steady collapse of banks around the U.S. has put an irreparable dent in the FDIC deposit insurance fund.
Now likely less than $10 billion strong and with more bank failures sure to come, the FDIC faces two choices: Raise their taxes on banks to bolster the fund or tap the Treasury. Given the health of the U.S. banking system and the tendencies of our government over the last decade, you can probably guess which Bair will chose. Here’s another hint… Barney Frank, leader of the House Financial Services Committee, has already publicly opined on what Bair should do.
The FDIC has the authority to borrow as much as $500 billion through 2010.
Another bank failed late Friday, bringing the 2009 total to 94. Irwin Financial bit the dust this time, costing the FDIC’s deposit insurance fund another $850 million.
“Stock market bulls aren’t concerned about the inevitable acceleration in bank failures — at least for now,” Dan Amoss told his Strategic Short Report readers just before Irwin’s failure. “Even though deposits will be insured against loss, the loss of local banks will still have a depressing effect on hundreds of small communities. These communities are going to lose their only access to business credit when their local zombie banks — loaded with toxic construction or commercial real estate loans — are liquidated or merged into other weak banks.
“Meanwhile, the latest monthly figures show that commercial bank balance sheets are shrinking at a fairly rapid rate, due to a combination of several factors: loan charge-offs, older loans being paid back at a faster rate than new loans are being made and regulators pressuring banks to build larger capital buffers.
“So credit-fueled growth in consumption or investment is not occurring. Combine this with stagnant or declining wages and corporate profit margins and it becomes hard to imagine how GDP will rebound on a sustainable basis.”
Is your portfolio prepared for a recovery fizzle? Get some downside protection — and serious profit potential — by checking out Dan’s Strategic Short Report.
The stock market will be very Fed-centric again this week. Last week, Ben Bernanke’s declaration that the recession is “technically” over helped the S&P up 2.5%. This week, the market will get a more formal analysis from him and the FOMC. They’ll get together over the next few days and provide their ruling Wednesday afternoon… until then, we don’t expect much from major indexes.
Opening this morning at 1,068, the S&P up 58% from the March low.
The dollar continues to trend up today. After falling for most of September, the dollar index arrested its slide late last week and has been gently rising since. It’s at 76.7 as we write, about half a point above its 2009 low.
That’s putting the hurt on gold. The spot price is down about $15 from last week’s high of $1,020. This isn’t helping, either:
The IMF promised to sell $13 billion worth of gold reserves this weekend. That’s about 403 metric tons!
Playing fiscal EMT to the world, the IMF needs to shore up its books and has decided to exchange about an eighth of its gold stockpile — which is the third largest in the world. While the agency has promised to “avoid disruption in the gold market,” it’s hard to envision this being a good thing for gold prices in the short term.
“Being from Venezuela,” a reader writes, “I took particular amusement with the news regarding the lack of funds for a competition of 30 beauty pageant candidates. It’s my understanding that the pageant belongs to the Cisneros family, arguably one of the richest families in Venezuela. However, the Cisneros have formed a ‘bond’ with the Chavez regime, and who knows what’s going on behind the scenes.
“Whatever the case, despite the factory-ness of the of the ladies, we continue to be blessed with a tremendous number of natural beauties. You’re likely to see even better-looking ones at a wedding or a beach than at those pageants (although yes, the surgeries are a bit out of control).”
“The overwhelming reason to tax sugary foods and drinks,” a reader writes, responding to the rumor that the Obama administration might tax sugary sodas, “is that those of us who do not consume them bear much of the huge medical costs generated by those who do. I don’t care what anyone chooses to do with their own health, but I want them to pay for the expensive consequences, not I…
“Why should my tax dollars go toward government subsidies for products proven in hundreds of studies to cause serious health consequences? It’s no mystery why U.S. health care costs are so high when we ‘enjoy’ one of the worst diets in the world. The good news is that other countries are rapidly changing to a similar diet, so their health care costs will skyrocket and eventually make ours look more reasonable.”
“From what little I know,” another reader writes, “the large amount of ‘sugar’ in sodas comes from ‘high-fructose corn syrup,’ not processed cane or beets. If there is a cause to be evaluated, it is the high-fructose corn syrup content in a lot of products. I believe it is proven that a teaspoon of cane sugar has fewer calories and is less harmful to the body than an equivalent amount of high-fructose corn syrup. I do not believe that a tax is the solution to better health. If anything, companies should be encouraged to use healthier sweeteners in products. This would have a better economic impact than making Joe Six-pack pay more for his sodas.
“As for sugar, salt or other additives as they relate to health, moderation is the key.”
Cheers (in moderation),
Ian Mathias
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