Tag: finance

Submitted by Lance Roberts of STA Wealth Management,

In yesterday's post, I showed several charts that "Market Bulls Should Consider" as the mainstream media, analysts and economists continue to become more ebullient as we enter the new year.  This weekend's "Things To Ponder" follows along with this contrarian thought process particularly as it appears that virtually all "bears" have now been forced into hibernation.

David Rosenberg recently penned a piece for the Financial Post discussing his views on why the market in 2014 still has room to run.  While his arguments of stronger economic growth via increased fixed capital investment (discussed in detail here), a steep yield curve and rising leading economic indicators (LEI) are certainly compelling; it is worth noting that the last two arguments have been directly impacted, to a large degree, by the interventions of the Federal Reserve.  The article is well worth reading as it provides the context behind today's missive.

 

1) The US Is The Most Expensive Developed Market In The World via Zero Hedge

"The chart speaks for itself, but for those greatly rotating their 'cash on the sidelines' into stocks; JPMorgan points out that US equities are 2 standard deviations rich to their average valuation and are in fact the most expensive in the developed world…"

 

[Note:  The reference to "cash on the sidelines" is part of Cliff Asness' 10 Pet Peeves which is a must read for any investor.]

For more charts from JP Morgan on market valuation go here.

 

2) The Biggest Redistribution Of Wealth From The Poor To The Rich by Shane Obata-Marusic (@sobata416)

While the current administration has continued to promote the "war on poverty" the reality is that, as stated by Robert Rector, it has been less than successful.

"Fifty years and $20 trillion later, LBJ's goal to help the poor become self-supporting has failed."

Shane's most recent study discusses the ongoing impact of the Federal Reserve's "quantitative easing" programs as a wealth transfer mechanism from the poor and middle class to the rich.  The implications of this transfer effect, as shown in the chart below, on an economy that is nearly 70% driven by personal consumption expenditures suggests that the real "wealth effect" of the Fed's interventions has been a negative rather than a positive.

 

3) 5 Questions On The Economy To Be Answered In 2014 via The Wall Street Journal

Economic forecasters are counting on 2014 to be a breakout year. But whether the economy finally moves past its sluggish growth will rest on several forces playing out differently than they have since the recovery began. Some of the key questions that must be answered in the coming year are:

• Will businesses finally shed their caution?
• Will Washington's tentative truce continue?
• Will the Fed's path out of the bond buying get bumpy?
• Will housing adjust easily to higher interest rates?
• Will the rest of the world cooperate?

While the WSJ gives their assessment the importance of the questions, and how you personally answer them, are critical as to how you structure your current asset allocation.

 

4) How To Lose Money In A Hurry by Mark Hulbert; WSJ MarketWatch

Mark Hulbert wrote a great piece discussing the most often forgotten phrase by investors; "Past performance is no guarantee of future results."  As he states:

"'This phrase, ubiquitous in the small print of financial products, often falls on deaf ears,' according to Adam Reed, a finance professor at the University of North Carolina at Chapel Hill. 'Investors have a tendency to rush into those funds that are at the top of the previous year's performance rankings,' he says, citing numerous studies.

 

They shouldn't. The evidence is that last year's top performers will lag the market in 2014 — if not lose a lot of money."

This is clearly shown in the following periodic table of returns by Callan.  While it is entirely possible that chasing the stock market in 2014 could yield a positive return, it is also likely that an unloved asset class like "bonds" could just as well rise to the surface.  Just food for thought.

 

5) The Death Of Long Term Thinking (1800-2013) an Obituary by Morgan Housel

I have written and articulated many times in the past that the "long term investor" is dead.  In a market driven by artificial interventions, high frequency and program trading and a "casino" mentality by individuals the age old axioms of "buy cheap and sell dear" have all but been forgotten.  This idea was brilliantly opined in this obituary of "Long Term Thinking."

"Long-Term Thinking died on Tuesday. His last true friend, Vanguard founder Jack Bogle, was at his side. He was 213 years old.

 

Long-Term Thinking lived an illustrious life since the start of the Industrial Revolution, when for the first time, people could think about more than their next meal. But poor incentives and the rise of 24/7 media chipped away at his health. The final blow came Monday, when a trader on CNBC warned that a 10% market pullback — which has occurred on average every 11 months over the last century — could be 'devastating' for investors. 'That's it,' Long-Term Thinking whispered from his hospital bed. 'There's no more room for me here.' He died soon after Bloomberg published its daily tally of how much the net worths of the world's billionaires changed in the previous 24 hours."

And on that sad note I leave you to ponder the risk in your portfolio, the potential for 2014 and how the "evolution of cats explains why they are grumpy."

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/nEPXU9hALDk/story01.htm Tyler Durden

Submitted by Lance Roberts of STA Wealth Management,

In yesterday's post, I showed several charts that "Market Bulls Should Consider" as the mainstream media, analysts and economists continue to become more ebullient as we enter the new year.  This weekend's "Things To Ponder" follows along with this contrarian thought process particularly as it appears that virtually all "bears" have now been forced into hibernation.

David Rosenberg recently penned a piece for the Financial Post discussing his views on why the market in 2014 still has room to run.  While his arguments of stronger economic growth via increased fixed capital investment (discussed in detail here), a steep yield curve and rising leading economic indicators (LEI) are certainly compelling; it is worth noting that the last two arguments have been directly impacted, to a large degree, by the interventions of the Federal Reserve.  The article is well worth reading as it provides the context behind today's missive.

 

1) The US Is The Most Expensive Developed Market In The World via Zero Hedge

"The chart speaks for itself, but for those greatly rotating their 'cash on the sidelines' into stocks; JPMorgan points out that US equities are 2 standard deviations rich to their average valuation and are in fact the most expensive in the developed world…"

 

[Note:  The reference to "cash on the sidelines" is part of Cliff Asness' 10 Pet Peeves which is a must read for any investor.]

For more charts from JP Morgan on market valuation go here.

 

2) The Biggest Redistribution Of Wealth From The Poor To The Rich by Shane Obata-Marusic (@sobata416)

While the current administration has continued to promote the "war on poverty" the reality is that, as stated by Robert Rector, it has been less than successful.

"Fifty years and $20 trillion later, LBJ's goal to help the poor become self-supporting has failed."

Shane's most recent study discusses the ongoing impact of the Federal Reserve's "quantitative easing" programs as a wealth transfer mechanism from the poor and middle class to the rich.  The implications of this transfer effect, as shown in the chart below, on an economy that is nearly 70% driven by personal consumption expenditures suggests that the real "wealth effect" of the Fed's interventions has been a negative rather than a positive.

 

3) 5 Questions On The Economy To Be Answered In 2014 via The Wall Street Journal

Economic forecasters are counting on 2014 to be a breakout year. But whether the economy finally moves past its sluggish growth will rest on several forces playing out differently than they have since the recovery began. Some of the key questions that must be answered in the coming year are:

• Will businesses finally shed their caution?
• Will Washington's tentative truce continue?
• Will the Fed's path out of the bond buying get bumpy?
• Will housing adjust easily to higher interest rates?
• Will the rest of the world cooperate?

While the WSJ gives their assessment the importance of the questions, and how you personally answer them, are critical as to how you structure your current asset allocation.

 

4) How To Lose Money In A Hurry by Mark Hulbert; WSJ MarketWatch

Mark Hulbert wrote a great piece discussing the most often forgotten phrase by investors; "Past performance is no guarantee of future results."  As he states:

"'This phrase, ubiquitous in the small print of financial products, often falls on deaf ears,' according to Adam Reed, a finance professor at the University of North Carolina at Chapel Hill. 'Investors have a tendency to rush into those funds that are at the top of the previous year's performance rankings,' he says, citing numerous studies.

 

They shouldn't. The evidence is that last year's top performers will lag the market in 2014 — if not lose a lot of money."

This is clearly shown in the following periodic table of returns by Callan.  While it is entirely possible that chasing the stock market in 2014 could yield a positive return, it is also likely that an unloved asset class like "bonds" could just as well rise to the surface.  Just food for thought.

 

5) The Death Of Long Term Thinking (1800-2013) an Obituary by Morgan Housel

I have written and articulated many times in the past that the "long term investor" is dead.  In a market driven by artificial interventions, high frequency and program trading and a "casino" mentality by individuals the age old axioms of "buy cheap and sell dear" have all but been forgotten.  This idea was brilliantly opined in this obituary of "Long Term Thinking."

"Long-Term Thinking died on Tuesday. His last true friend, Vanguard founder Jack Bogle, was at his side. He was 213 years old.

 

Long-Term Thinking lived an illustrious life since the start of the Industrial Revolution, when for the first time, people could think about more than their next meal. But poor incentives and the rise of 24/7 media chipped away at his health. The final blow came Monday, when a trader on CNBC warned that a 10% market pullback — which has occurred on average every 11 months over the last century — could be 'devastating' for investors. 'That's it,' Long-Term Thinking whispered from his hospital bed. 'There's no more room for me here.' He died soon after Bloomberg published its daily tally of how much the net worths of the world's billionaires changed in the previous 24 hours."

And on that sad note I leave you to ponder the risk in your portfolio, the potential for 2014 and how the "evolution of cats explains why they are grumpy."

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/nEPXU9hALDk/story01.htm Tyler Durden

Treasury yields collapsed 10-12bps today with the largest decline since 9/18/11. Treasury yields in general slipped back to the lowest level in 3 weeks. The USD was slammed lower (except against CAD which pushed lower – down 2.5% on the week!). JPY strength was offset by AUD and the cross provided the ammo to lift equities back to day-session highs in the last hour (104 USDJPY was defended aggressively). Stocks broadly bounced immediately after the knnjerk selling off the NFP print, then leaked lower until 3pmET when a decidedly low volume meltup took NASDAQ and Russell back to almost unchanged on the year. Trannies outperformed, Dow underperformed (TRAN +0.65%, DOW -1% YTD). Silver and gold surged back into the green for the week with the latter closing above its 50DMA for the first time since October and its highest in a month. VIX tumbled to 12.2% as hedges were lifted and recoupled with the S&P.

 

From the US open, AUDJPY was in charge of stocks today…(as USDJPY 104 was defended aggressively)

 

Which lifted stocks handsomely back into the green (apart from the Dow)… but Trannies are the major outperfomer…

 

As Healthcare takes over the top-spot post-Taper (with a huge day for homebuilder and Utilities are rates tumbled)….

 

Gold (and silver) rallied back into green for the week.. gold closed back above its 50DMA…

 

But today's big news was in the Treasury complex… as bonds ripped lower in yield…

 

Spot the odd one out in FX land… CAD is getting slammed…

 

VIX dumped back to recouple with stocks as hedges were lifted…

 

Charts: Bloomberg

Bonus Chart: ICPT – you just gotta laugh eh?!

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/pecga2u16mc/story01.htm Tyler Durden

Submitted by Bill Bonner via Acting-Man blog,

Somehow, like it or not, the world turns. Today's hegemon becomes tomorrow's also-ran. Today's reserve currency becomes tomorrow's wallpaper. Today's cock o' the walk becomes tomorrow's dinner.

Hey, we didn't create this system. We don't even especially like it. But that's just the way it is.

Whether you already have made a fortune, or are trying to build one, you need to be very careful about what currency… or currencies…  your wealth in denominated in.

 

 
The End of History?

Governments were set up to take control. Ruling elites – by force of arms – established laws, protocols and armies to try to prevent anyone from taking their place.  Their wealth, power and status were to be preserved – at all cost. But in the 18th and 19th centuries, firearms started to become ubiquitous. It was harder for elites to maintain their authority over the masses.

Every farmer on the American frontier had a rifle. A rag-tag band of insurgents in the American colonies (with the help of the French Navy) could defeat the best army in the world. An out-of-work actor could buy a handgun and pop off a president.

Unable to stay in control by force alone, governments had to resort to fraud. Ordinary citizens were allowed to vote on who would rule over them. They were also promised the fruits of others' labors, if they voted the right way. For a time, it looked as though this new model – social democracies run by flaming politicians and professional functionaries – had defeated all rivals.

The Soviet Union – which had relied on more old-fashioned blunt force to run its slave-driven economy – capitulated in 1989. Maoist China had thrown in the towel, more or less, 10 years earlier when the country's "paramount leader," Deng Xiaoping, announced, "To get rich is glorious." (Historians now claim he never uttered those words. But the phrase accurately captured his vision for China.) And Francis Fukuyama – hallucinating – wondered if the "end of history" was at hand.

If the end of history were at hand, the dollar, the Fed and federal finances would have nothing to worry about. But between history and the greenback, if we were taking bets, we'd put our money on history. Most likely, history will trundle forward. And the renminbi will join (or replace) the dollar as the world's leading currency sometime before the 21st century comes to a close.

But how, exactly, will that happen? No one knows … but few imperial elites give up the No. 1 position without a fight. As they see their power, their status and their wealth challenged, they typically find a casus belli, hoping to stomp the newcomer before it is too late.

 
Thucydides' Trap

The phenomenon is known to historians as the "Thucydides' Trap." Political scientist Graham Allison explains:

“When a rapidly rising power rivals an established ruling power, trouble ensues. In 11 of 15 cases in which this has occurred in the past 500 years, the result was war. The great Greek historian Thucydides identified these structural stresses as the primary cause of the war between Athens and Sparta in ancient Greece. In his oft-quoted insight, "It was the rise of Athens and the fear that this inspired in Sparta that made war inevitable."

Note that Thucydides identified two factors: a rising rival and fear of that rise. China is rising. The US power elite fears its rise. And for good reason. Having the world's reserve currency is an "exorbitant privilege," as Charles de Gaulle described it. It allows Americans to buy things from overseas without ever really paying for them. Instead, we send over pieces of paper. That paper is then held in foreign vaults as reserves. Or it is lent back to us.

From an economic point of view, the system (established by Richard Nixon in 1971) is loopy. The Chinese pretend they have good customers. Americans pretend they have good credit. And everyone pretends to get richer … based on promises to settle up sometime in the future.

In practice, nobody wants the day of reckoning to come. Because they all know that there are vastly more claims on tomorrow's output than tomorrow can satisfy. Between 1971 and today, roughly $10 trillion more has been received by Americans in goods from overseas than has been shipped to foreigners. That money is an outstanding claim on US existing wealth and future output.

There is also (with some overlap) about $17 trillion worth of US government debt … also a claim on future American output. And this is just part of the total credit market debt of $55 trillion. (Not to mention the feds' unfunded liabilities.)

To pay off these claims, the US would have to run a surplus. (When? How?) But instead of running a surplus, we run deficits. The federal government's deficit, for example, is expected to be $744 billion this year. And the current account deficit is running at about $500 billion. Neither is near a surplus.

 
Edging Toward a Reckoning

Instead of edging toward a reckoning, all major governments seem to want to make the situation worse. The US stimulates its people to buy more Chinese-made goods. And China stimulates its manufacturers to make more stuff for people who can't really afford it. Both are heading for trouble.

Americans are hooked on spending. They consume their wealth … and more. China is hooked on producing. As it adds productive know-how and capacity, it becomes more and more competitive. Not only can it produce more consumer output at lower prices, but also it can produce the latest in military hardware. It's a matter of time before that fighting gear comes out. At least, that's what history suggests.

If there is a military conflict, how will it turn out?

The US spends three times more than China on "defense." Advantage: Pentagon. But as the Persians discovered in their wars with the Greeks, having the biggest, best-funded army does not necessarily give you an edge. Instead, it invites sluggishness, complacency and overreaching.

The US military is arguably the fattest, most zombie-infested bureaucracy in the world. It suffers from an overabundance of resources. It supports troops (at a cost of $1 million per soldier per year) all over the globe. It builds weapons systems that are often obsolete before they are put into service. It coddles armies of lobbyists, contractors, consultants, retirees, hangers-on and malingerers. Like all bureaucracies, it looks out first and foremost for itself. Looking out for the security of the nation is a distant second.

Its 11 huge aircraft carriers, for example, may be marvelous ways to generate contracts, fees and expenses. They may also be great ways to throw US military muscle into two-bit conflicts around the world. But put them up against a modern, electronically-sophisticated enemy … Then what?

We will probably find out…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/xafNHbrWOXA/story01.htm Tyler Durden

Submitted by Bill Bonner via Acting-Man blog,

Somehow, like it or not, the world turns. Today's hegemon becomes tomorrow's also-ran. Today's reserve currency becomes tomorrow's wallpaper. Today's cock o' the walk becomes tomorrow's dinner.

Hey, we didn't create this system. We don't even especially like it. But that's just the way it is.

Whether you already have made a fortune, or are trying to build one, you need to be very careful about what currency… or currencies…  your wealth in denominated in.

 

 
The End of History?

Governments were set up to take control. Ruling elites – by force of arms – established laws, protocols and armies to try to prevent anyone from taking their place.  Their wealth, power and status were to be preserved – at all cost. But in the 18th and 19th centuries, firearms started to become ubiquitous. It was harder for elites to maintain their authority over the masses.

Every farmer on the American frontier had a rifle. A rag-tag band of insurgents in the American colonies (with the help of the French Navy) could defeat the best army in the world. An out-of-work actor could buy a handgun and pop off a president.

Unable to stay in control by force alone, governments had to resort to fraud. Ordinary citizens were allowed to vote on who would rule over them. They were also promised the fruits of others' labors, if they voted the right way. For a time, it looked as though this new model – social democracies run by flaming politicians and professional functionaries – had defeated all rivals.

The Soviet Union – which had relied on more old-fashioned blunt force to run its slave-driven economy – capitulated in 1989. Maoist China had thrown in the towel, more or less, 10 years earlier when the country's "paramount leader," Deng Xiaoping, announced, "To get rich is glorious." (Historians now claim he never uttered those words. But the phrase accurately captured his vision for China.) And Francis Fukuyama – hallucinating – wondered if the "end of history" was at hand.

If the end of history were at hand, the dollar, the Fed and federal finances would have nothing to worry about. But between history and the greenback, if we were taking bets, we'd put our money on history. Most likely, history will trundle forward. And the renminbi will join (or replace) the dollar as the world's leading currency sometime before the 21st century comes to a close.

But how, exactly, will that happen? No one knows … but few imperial elites give up the No. 1 position without a fight. As they see their power, their status and their wealth challenged, they typically find a casus belli, hoping to stomp the newcomer before it is too late.

 
Thucydides' Trap

The phenomenon is known to historians as the "Thucydides' Trap." Political scientist Graham Allison explains:

“When a rapidly rising power rivals an established ruling power, trouble ensues. In 11 of 15 cases in which this has occurred in the past 500 years, the result was war. The great Greek historian Thucydides identified these structural stresses as the primary cause of the war between Athens and Sparta in ancient Greece. In his oft-quoted insight, "It was the rise of Athens and the fear that this inspired in Sparta that made war inevitable."

Note that Thucydides identified two factors: a rising rival and fear of that rise. China is rising. The US power elite fears its rise. And for good reason. Having the world's reserve currency is an "exorbitant privilege," as Charles de Gaulle described it. It allows Americans to buy things from overseas without ever really paying for them. Instead, we send over pieces of paper. That paper is then held in foreign vaults as reserves. Or it is lent back to us.

From an economic point of view, the system (established by Richard Nixon in 1971) is loopy. The Chinese pretend they have good customers. Americans pretend they have good credit. And everyone pretends to get richer … based on promises to settle up sometime in the future.

In practice, nobody wants the day of reckoning to come. Because they all know that there are vastly more claims on tomorrow's output than tomorrow can satisfy. Between 1971 and today, roughly $10 trillion more has been received by Americans in goods from overseas than has been shipped to foreigners. That money is an outstanding claim on US existing wealth and future output.

There is also (with some overlap) about $17 trillion worth of US government debt … also a claim on future American output. And this is just part of the total credit market debt of $55 trillion. (Not to mention the feds' unfunded liabilities.)

To pay off these claims, the US would have to run a surplus. (When? How?) But instead of running a surplus, we run deficits. The federal government's deficit, for example, is expected to be $744 billion this year. And the current account deficit is running at about $500 billion. Neither is near a surplus.

 
Edging Toward a Reckoning

Instead of edging toward a reckoning, all major governments seem to want to make the situation worse. The US stimulates its people to buy more Chinese-made goods. And China stimulates its manufacturers to make more stuff for people who can't really afford it. Both are heading for trouble.

Americans are hooked on spending. They consume their wealth … and more. China is hooked on producing. As it adds productive know-how and capacity, it becomes more and more competitive. Not only can it produce more consumer output at lower prices, but also it can produce the latest in military hardware. It's a matter of time before that fighting gear comes out. At least, that's what history suggests.

If there is a military conflict, how will it turn out?

The US spends three times more than China on "defense." Advantage: Pentagon. But as the Persians discovered in their wars with the Greeks, having the biggest, best-funded army does not necessarily give you an edge. Instead, it invites sluggishness, complacency and overreaching.

The US military is arguably the fattest, most zombie-infested bureaucracy in the world. It suffers from an overabundance of resources. It supports troops (at a cost of $1 million per soldier per year) all over the globe. It builds weapons systems that are often obsolete before they are put into service. It coddles armies of lobbyists, contractors, consultants, retirees, hangers-on and malingerers. Like all bureaucracies, it looks out first and foremost for itself. Looking out for the security of the nation is a distant second.

Its 11 huge aircraft carriers, for example, may be marvelous ways to generate contracts, fees and expenses. They may also be great ways to throw US military muscle into two-bit conflicts around the world. But put them up against a modern, electronically-sophisticated enemy … Then what?

We will probably find out…

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/xafNHbrWOXA/story01.htm Tyler Durden

At some point, someone has to call BS on the entire talk of the recovery.

 

Since 2009, we’ve been told that things have improved. The fact of the matter is that the improvement has been largely due to accounting tricks rather than any real change in reality.

 

Sure you can make unemployment look better by not counting people, you can claim the economy is growing by ignoring inflation, you can argue that inflation is low because you don’t count food or energy, but the reality is that all of these arguments are grade “A” BS.

 

We are now five years into the “recovery.” The single and I mean SINGLE accomplishment from spending over $3 trillion has been the stock market going higher. This is a complete and total failure. Based on the business cycle alone, the economy should be roaring.

 

What does it say that we’ve spent this much money and accomplished so little?

 

The word is FAILURE.

 

The media is lying about the economy. They have been for years. Even the BLS now admits that its methodologies are either inefficient (read: DON’T work) or outright wrong.

 

And yet alleged “adults” continue to believe this stuff. I don’t get it. Is it mass delusion or are people really willing to believe a lie rather than what their own eyes tell them?

 

If your dentist told you, “oh your teeth are fine” does that make your toothache go away? Nope. But for some reason people listen to the Fed and media make absurd proclamations and no one says anything.

 

At some point, likely not too far in the future, the entire market will come crashing down. The Fed bet the republic that its misguided theories would play out. This is what happens when you entrust academics with ZERO banking and business experience (those who have never made loans, managed portfolios, hired or fired people, made payroll, etc.) decide how the economy should operate.

 

When this happens it’s GAME OVER. There will be nothing the Fed can do.

 

For a FREE Special Report outlining how to protect your portfolio from this, swing by: http://phoenixcapitalmarketing.com/special-reports.html

 

Best Regards

Phoenix Capital Research 

 

 

 

 

 

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/i4zsJCvZZQU/story01.htm Phoenix Capital Research

The economy is Boom(er)-ing…

 

(h/t @Not_Jim_Cramer)

 

How does this end well?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/X7S8nlXj-uw/story01.htm Tyler Durden

The economy is Boom(er)-ing…

 

(h/t @Not_Jim_Cramer)

 

How does this end well?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/X7S8nlXj-uw/story01.htm Tyler Durden

Submitted by Wulf via One Easy Trade blog,

In late 1992, just as the Fed was putting the finishing touches on a three-year easing cycle that took the Fed funds rate from 9.75% down to 3%, the 2s/5s Treasury curve peaked at a high of 160 basis points. In the summer of 2003, when the Fed completed another large easing cycle, this one taking the funds rate from 6.5% to 1% over 30 months, the 2s/5s curve peaked at 161 basis points. And in March, 2010, as the Fed made the final purchases of its first quantitative easing program after cutting rates to the zero bound 15 months prior, the 2s/5s curve peaked at 162 basis points.

Today, with the Fed once again in the late stages of an easing cycle (affectionately dubbed QE3), we find the 2s/5s curve steepening yet again, hitting its widest level in 30 months at more than 135 basis points on January 1. Given this curve’s uncanny track record, one can’t help but wonder if it will ring the 160 bell yet again when the Fed completes its final purchase operation of QE3. With tapering now upon us, and the end of QE3 almost in sight, one might even be tempted to sell a few 5s against twos in the hopes of catching that final 25 basis points of steepening.

A closer examination of that trade, however, reveals that one might be better off doing just the opposite.

First let’s consider the timing: At the December 18^th FOMC meeting, the Fed announced a $10bn reduction in monthly asset purchases, and if it continues to reduce asset purchases at that pace going forward, it should be done by the end of the year. If, however, improving economic data compel them to reduce asset purchases at an accelerated rate of, say, $15 billion at each subsequent meeting, they could be done as soon as September. This would be the more aggressive timeline and the best-case scenario for a 2s/5s steepener.

Running a simple horizon analysis of a duration neutral 2s/5s expression using current on-the-runs Treasuries, and assuming a 131 basis point spread at entry and a 160 basis point spread at exit on the September 17 FOMC meeting date shows that the spread widening would net you almost exactly one point in capital gains as the 5yr sells off, but would cost you almost as much in negative carry, leaving you no better than if you had simply bought 2s outright and clipped the coupon for nine months.

And if the Fed instead takes a bit longer to wind down its easing campaign, or puts the taper on hold in response to softer inflation data or some unforeseen shock, you’ll want to be long the 5-year point, not short.

Moreover, since the fed funds rate is likely to remain pinned to the floor for a “considerable time after the asset purchase program ends”, the front end of the Treasury curve is likely to stay fairly well anchored for quite some time as well. This may then also place a soft cap on 5-year yields, which one can expect to rise no more than 160 basis points over 2s. So if 2s trade up to, say 60 bps (already higher than they’ve been in years) and 2s/5s reach their 160 basis point peak, you’re looking at a 2.20% 5yr yield, up 45 basis points from current levels. As long as the front end doesn’t come completely unhinged, you now know your likely downside for the next 9 months or so, and your carry is still about as good as it’s been in years.

Investors find great comfort in being able to quantify their downside, and they also like positive carry in a low-yield environment. As such, I would have to think that 5s are getting close to a strategic buy, and I would use any backup towards 2% (or 160 over 2s) to get long.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/BDay-F5mcdg/story01.htm Tyler Durden

Perhaps the most amusing and curious aspect of this entertaining summary of the Mississippi Bubble of 1720, the resulting European debt crisis (the first of many), how bubble frenzies are as old as paper money, the man behind both – convicted murderer and millionaire gambler, John Law, what happens when paper money’s linkage to gold is broken, and how everyone loses their wealth and hyperinflation breaks out, is who the source is. The New York Fed. Perhaps the Fed-employed authors fail to grasp just what their institution does, or have a truly demonic sense of humor. In either case, the following “crisis chronicle” highlighting how banking worked then, how it works now, and how it will always “work”, is a must read by all.

Crisis Chronicles: The Mississippi Bubble of 1720 and the European Debt Crisis

Convicted murderer and millionaire gambler John Law spotted an opportunity to leverage paper money and credit to finance trade. He first proposed the concept in Scotland in 1705, where it was rejected. But by 1716, Law had found a new audience for his ideas in France, where he proposed to the Duke of Orleans his plan to establish a state bank, at his own expense, that would issue paper money redeemable at face value in gold and silver. At the time, Law’s Banque Generale was one of only six such banks to have issued paper money, joining Sweden, England, Holland, Venice, and Genoa. Things didn’t turn out exactly as Law had hoped, and in this edition of Crisis Chronicles we meet the South Sea’s lesser-known cousin, the Mississippi Bubble.

Who Wants to Be a Millionaire?

John Law was an interesting figure with a colorful past. He was convicted of murder in London but, with the help of friends, escaped to the continent, where he became a millionaire through his skill at gambling. Like South Sea Company Director John Blunt in England, Law believed that a trading company could be leveraged to exchange the monopoly rights of trade for the ability to make low-interest-rate loans to the government. And like Blunt, in 1719 Law formed a trading company—the Mississippi Company—to exploit trade in the Louisiana territory. But unlike Blunt or the South Sea Company, the Mississippi Company made an earnest effort to grow trade with the Louisiana territory.

In 1719, the French government allowed Law to issue 50,000 new shares in the Mississippi Company at 500 livres with just 75 livres down and the rest due in nineteen additional monthly payments of 25 livres each. The share price rose to 1,000 livres before the second installment was even due, and ordinary citizens flocked to Paris to participate. Based on this success, Law offered to pay off the national debt of 1.5 billion livres by issuing an additional 300,000 shares at 500 livres paid in ten monthly installments.

Law also purchased the right to collect taxes for 52 million livres and sought to replace various taxes with a single tax. The tax scheme was a boon to efficiency, and the price of some products fell by a third. The stock price increases and the tax efficiency gains spurred foreigners to Paris to buy stock in the Mississippi Company.

By mid-1719, the Mississippi Company had issued more than 600,000 shares and the par value of the company stood at 300 million livres. That summer, the share price skyrocketed from 1,000 to 5,000 livres and it continued to rise through year-end, ultimately reaching dizzying heights of 15,000 livres per share. The word millionaire was first used, and in January 1720 Law was appointed Controller General.

The Trickle Becomes a Flood

Reminiscent of a handful of florists failing to reinvest in tulip bulbs as we described in a previous post on Tulip Mania, in early 1720 some depositors at Banque Generale began to exchange Mississippi Company shares for gold coin. In response, Law passed edicts in early 1720 to limit the use of coin. Around the same time, to help support the Mississippi Company share price, Law agreed to buy back Mississippi Company stock with banknotes at a premium to market price and, to his surprise, more shareholders than anticipated queued up to do so—a surprise we’ll see repeated at the apex of the Panic of 1907. To support the stock redemptions, Law needed to print more money and broke the link to gold, which quickly led to hyperinflation, as we saw in our post on the Kipper und Wipperzeit.

The spillover to the economy was immediate and most notable in food prices. By May 21, Law was forced to deflate the value of banknotes and cut the stock price. As the public rushed to convert banknotes to coin, Law was forced to close Banque Generale for ten days, then limit the transaction size once the bank reopened. But the queues grew longer, the Mississippi Company stock price continued to fall, and food prices soared by as much as 60 percent.

To make matters worse, there was an outbreak of the plague in September 1720, which further restricted economic activity—in particular, trade with the rest of Europe. By the end of 1720, Law was dismissed as Controller General and he ultimately fled France.

Balancing Dispersed Debt Issuance against Central Monetary Policy

One might argue that Law suffered a self-inflicted loss of control over monetary policy once the link between paper money issuance and the underlying value of gold holdings was broken—a lesson that monetary authorities have learned over time. (ZH: they have? where?)  But what if you don’t have direct sovereign authority over banknote issuance or, in more modern times, monetary policy? A challenge that’s perhaps most visible in the Eurozone is how best to balance dispersed, country-specific debt issuance against more centralized authority over monetary policy. In an upcoming post on the Continental Currency Crisis, we’ll see why a united fiscal policy was needed along with the united currency and monetary policies. Could the same be true of Europe? And if so, would a united fiscal policy include Eurozone debt as well as centralized fiscal transfers, or perhaps even collection of taxes? Tell us what you think.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/6uTWHC3tWiI/story01.htm Tyler Durden