Addison Wiggin – March 15, 2012
- “When fundamentals finally win”: Did yesterday signal the Mother of All Asset Bubbles is bursting?
- Key market indicator hits a one-year low… (nearly)… where it goes from here…
- Goldman honcho comes clean: Fry, Ritholtz on whether the “Muppet confession” is the beginning of the end…
- Uncle Ben’s new Twitter account… more tales of insurance woe…. Tide thefts, an epidemic?… and more!
The epic dumping of Treasuries we noted real-time during yesterday’s episode appears to be taking a breather today.
The yield on a 10-year note touched 2.33% this morning, and has now fallen back a bit. So with a pause in the action, it’s a good opportunity to sit back and take stock.
As we pointed out in the new issue of Apogee Advisory, Treasuries are a perverse sort of insurance policy — protecting you in the eventuality that the endless interventions of Bernanke and Geithner will continue to work their magic longer than you’d ever reasonably expect.
But we remain fast in our belief that Treasuries remain the Mother of All Financial Bubbles.
“Two things are true of bubbles always and everywhere,” writes author John Rubino: “They tend to go on longer than a reasonable analyst believes possible. And they burst when fundamentals finally win out.”
“Treasuries will go the way of all bubbles someday and, just maybe, [yesterday was] that day.”
Or not. Treasury yields were already moving up steadily before going ballistic yesterday. The 5-year note was 0.7% at the start of February. As of Monday, they were 0.97%. Yesterday, 1.1%. Technicians will tell you they’ve goon up too far too fast.
Another sign the rise in rates is due for a rest: Foreigners are buying again. The Treasury is out this morning with its monthly Treasury International Capital or TIC report.
Net purchases in January totaled $83 billion, compared with net selling of $15 billion in December. China’s holdings rose fractionally after a precipitous drop in December… while Japan’s holdings hit a record $1.079 trillion. At this rate, Japan might overtake China as Uncle Sam’s No. 1 foreign creditor.
But how long can either country keep buying? China racked up a trade deficit the first two months of this year. And according to a Treasury survey released last month, China’s holdings of U.S. Treasuries made up 54% of its foreign exchange reserves as of last June 30. That’s down from 65% a year earlier.
And Japan? They’re recovering from the earthquake/tsunami/nuclear disaster. As such, they registered a record monthly trade deficit in January. What’s more, Japan’s aging population — which bought Japanese government bonds for decades — will have to start selling them for income.
At that point, Japan will have to start finding foreign buyers for its debt… and competing with Uncle Sam.
So back to the main question: Is this a pause or a turning point for Treasuries? “They’re certainly not ‘fairly valued’ on fundamentals,” says John Rubino.
“The long bonds of any country with government debt and total debt exceeding, respectively, 100% and 350% of GDP are an automatic short, just on simple math. But the U.S., as the printer of the world’s reserve currency, is a special case in terms of timing. When trouble strikes elsewhere, people still come here to hide.”
“So even in the face of ridiculous, Greek-like numbers, the dollar continues to function as money and Treasuries continue to find a bid.”
Until they don’t. “The bond market doesn’t act merely on what it sees,” writes Bloomberg columnist Amity Shlaes. “It acts on what it expects of the Fed or the government.”
“And our own Fed has let us know it’s capable of just about everything, which includes inflationary monetary policy.”
“Eventually,” adds Dylan Grice, the analyst at Societe Generale, “there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability.”
“Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalizations as to why such inflation will make everything OK.” And the Mother of All Financial Bubbles will continue to grow.
We’ll stick to our call yesterday that the air will come out before Jan. 2, 2013. Prepare accordingly.
Major U.S. stock indexes are once again going nowhere fast today. But the Dow has crested 13,200 and the S&P is on the verge of cracking 1,400.
Stock market volatility as measured by the VIX fell below 15 this week for the first time since the market’s last peak in late April-early May.
At levels like this, “investors are getting antsy about just how much further stocks can run in this rally,” says Penny Momentum Trader’s Jonas Elmerraji.
“But according to research from the folks at Bespoke Investment Group, when the VIX has been below 15, the S&P 500 has typically rallied hard.”
The question is will the current mellow levels of the VIX last? Options Hotline’s Steve Sarnoff isn’t counting on it. “Volatility has faded down to 2007 levels, but is making rumblings of a return,” he wrote readers last night. “We may start to see negativity creep back into the stock market.”
Tomorrow has at least the potential for fireworks. It’s a quadruple witching day… with stock options, stock futures, index options and index futures all expiring.
Goldman Sachs stock has recovered about half of the losses it suffered yesterday when a former executive resigned publicly via an Op-Ed in The New York Times.
“It makes me ill,” wrote Greg Smith, “how callously people talk about ripping their clients off. Over the last 12 months, I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail.”
“Obviously,” writes Eric Fry in today’s Daily Reckoning, “conning Bert and Ernie out of their money can be an extremely lucrative business for years. In fact, it has been. But the supply of Muppets with money is not unlimited. Eventually, even Big Bird grows tired of being completely plucked over by his financial ‘adviser.’”
On the other hand, “GS may have lost $3 billion in market cap yesterday,” says our friend and Big Picture blogger Barry Ritholtz, “but I doubt they will lose many clients. Where are they going to go, to the choirboys who work at Morgan Stanley or to the philanthropic organization known as Deutsche Bank?”
Barry has become a crowd favorite every year at our Symposium in Vancouver… and Eric has graciously agreed to emcee the event once again. Hard to believe the next one is only four months away. We’d love to have you join us… Early registration is already available at a special rate.
If traders were looking for direction from the economic numbers out today, they didn’t get it. Let’s go to the tape…
- First-time unemployment claims: Turning back down again, to 351,000 last week
- Wholesale prices: Up 0.4% in February, according to the Bureau of Labor Statistics. That’s mostly rising energy prices. Still, the year-over-year increase is down to 3.3%, lowest in 18 months
- New York state manufacturing: Modest improvement, according to the New York Fed Empire State survey. Indeed, the best reading since mid-2010. But within the numbers, new orders and shipments are slowing
- Mid-Atlantic business conditions: Also improving, according to the Philly Fed. But once again, new orders are slowing.
One anomaly we see among the last two numbers: The “prices paid” component of the Empire State survey doubled in a month. That would signal a severe squeeze to profit margins. But the same component in the Philly Fed survey fell 50%.
This leads to an inevitable, if not very useful, conclusion: The guys at the New York Fed and the Philly Fed don’t talk to each other.
Oil prices are tumbling as we write, as word is leaking out that both the United States and Great Britain will tap their strategic petroleum reserves.
“Details of the timing, volume and duration of the emergency drawdown have yet to be settled,” according to a Reuters report citing two British sources, “but a detailed agreement is expected by the summer.”
Nothing political about this, right? No…
Just this whiff of a rumor of a possibility has driven West Texas Intermediate down to $104.23 — the lowest in nearly a month.
Gold appears to have found a floor for the moment. After another sell-off yesterday and the day before, the bid has settled in at $1,647. Silver’s up to $32.29.
In the base metal space, copper is up nearly 1% today, to $3.862 per pound.
That’s a continued positive sign for the “mock trade” suggested by Abe Cofnas on Monday. As long as copper stays above $3.745 at the close tomorrow, it means a gain of up to 21%.
Abe’s trading service, Fear & Greed Trader, follows the fast-moving binary options market, unique among North American advisories. To learn how Abe helps you take advantage of traders’ emotional swings and pocket weekly profits, give this a look.
If you want more transparency from the Federal Reserve, you’ll have to settle for tweets instead.
The Fed has set up @federalreserve on Twitter to “post messages about its press releases, speeches, testimony and reports to Congress — even its weekly balance sheet,” according to Bloomberg.
Yes, we know. You can hardly contain your excitement. Nor can Jamie Lissette. “I have a hard time believing that the Fed is going to break news on it,” says the founder of Hammerstone Group, which runs online discussion forums for investors.
Unless, of course, the Mother of All Financial Bubbles really does start to deflate… in which case we can expect something like this:
“Bernanke can continue to run the presses, as needed, to buy whatever
no one else does,” writes a reader. “He can continue to do that until the pressure blows the lid off the cooker. That can take years.”
“In the meantime, savers get screwed while the banks profit from the ‘spread.’”
“So how can you expect interest rates to rise if Bernanke does not want that to happen?”
The 5: The answer lies in your question. The pressure will blow the lid off the cooker.
Of course, the timing is the tricky part. They’ve gotten away with it for far too long. And for reasons we spelled out yesterday, we’re pretty sure we’re looking at something only nine months out.
“I have had little problem with getting insurance over the years,” writes a reader carrying on our thread about insuring rental property, “but I’ve had issues with the values placed on the rentals in the past.”
“The last couple years, I’ve had more issues with insurance rate increases due to credit score problems, and now rate increases due to natural disasters and loss of their portfolio income.”
“Hope to survive the coming county, state and fed tax increases in property, income, sales and any other oppressive taxes they think of!”
“Great letter, keep up the good work!”
“We have 10 properties around Birmingham, Ala.,” writes another, “and our rates have skyrocketed the past three years. Notice, this was before the April 27, 2011, tornado disaster.”
“We were listed ‘uninsurable’ because of two claims in one year on 10 properties. Never had a claim before! Had nothing to do with storms; both were claims for stolen air conditioning units.”
“Don’t know if theft of AC units is local, but the rates are surely outrageous. Only way to be reinsured was to raise the deductible threefold, and still the rates are going up, up, up!!!”
“Love The 5!!”
“I recently got a new washing machine,” writes a reader who caught our item about the thefts of Tide. “The manual says to use only HE (high-efficiency) detergent.”
“The only HE detergent I was able to find was Tide. This is in the Los Angeles area. Could the nanny state be responsible for high-efficiency washing machines thus leading to the popularity of Tide among shoplifters?”
The 5: “The driving force here is a war on the dollar,” suggests Laissez Faire Books executive editor Jeffrey Tucker in today’s Whiskey & Gunpowder.
“Carrying around vast amounts of cash raises questions among the authorities. It is increasingly difficult to ‘wash’ the money through the banking system. And, in any case, dollars are always losing value. So it makes sense to look for other ways to facilitate exchange.”
“This is hardly unusual. The digital economy is getting ever better at bartering services and software as an alternative to letting dollars change hands.”
Cheers,
Addison Wiggin
The 5 Min. Forecast
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