30-year Treasury rates are now at their lowest since December 2008 (they hit 2.7% today). 10-year rates are at their lowest since the 1940s.
I find myself going back to this chart all the time, so I thought others might like to study it (hat tip Barry Ritholz). You can click the image for a larger view.
The German 30 year bond is yielding 2.8%:
bloomberg.com
The US 30 year bond is yielding the same:
Yahoo Finance
There is no margin of safety in Germany debt against the strong likelihood that the country will be forced (by Merkel and other banker tools) to absorb the losses of the rest of Europe.
Of course, there is no margin in safety in US bonds either at this price, certainly not enough to compensate for the probability of trillion dollar deficits forever. I expect yields to stay low through this cyclical bear market, but not much beyond that. Bonds will continue to be a good short at times when they are overbought, and we may be approaching such a time.
Today’s ad-hoc explanation of market action seems to be the failure of the US Congress’ “supercommittee” to come up with a deal to slightly shrink the 2nd derivative of budget growth over 10 years. What a joke! Europe was down over 3.5% today – does anyone there know or care about the supercommittee? What about the Russians (-5%) or traders in Hong Kong last night (-1.5%)? There is a deficit of over a trillion dollars a year, and this committe was talking about spending a trillion less over 10 years than they would at the current pace of growth, as if Congress ever sticks to previous budget plans anyway.
Nobody but journalists has cared about this noise, since it is clear that Congress and the executive will do nothing to meaningfully address the budget gap until the bond market forces their action. If we are in another strong wave down in the secular (post-2000) bear market, this will buy the government (and probably those of Japan, Germany, France and the UK) another year or more before interest rates start to creep higher and force defaults and spending cuts. This outcome is inevitable, since the welfare state Ponzi schemes must collapse and screw the later generations of entrants, as in all Ponzis.
So why is the market down today? Because we’re in a bear market, and Oct-early Nov relieved the oversold condition that had built up by the end of September (lowest, longest-sustained DSI bullishness since 2009). Since before it started, I have viewed this rally aspossibly similar to what we experienced from mid-March to late-May 2008. If the corollary holds, we will be back under SPX 1100 by the New Year.
Journalists are lazy and make up explanations for market action without any empirical evidence, always assuming that correlation equals causation. If every day you magically had the next day’s news headlines, I doubt it would offer much if any trading advantage.
I keep reading about how stocks have fallen because of Congress or S&P’s downgrade of Treasuries. Both theories are nonsense. Stocks markets were overvalued (and still are), overbought and overbullish, so this decline was inevitable.
How do we know that S&P’s ratings are meaningless? Well, they almost always downgrade debt after it’s fallen, and in this case the markets are completely ignoring the rating. Here’s the 10-year note not giving a damn:
futures.tradingcharts.com
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Congress and its budgets do matter, but there is so little difference between the two parties that the debate is moot. Even the “hard-line” Republicans want to just maybe someday slow down the rate of spending growth. Sorry guys, a negative 2nd derivative doesn’t count as a budget cut.
Eventually yields will turn up, but as I have pointed out for years now, interest rate cycles are very long and don’t have to make fundamental sense, especially not at tops and bottoms. Even if this happens to be the very bottom, nobody is going to get rich quick by shortng Treasuries. Here’s a 180 year chart to put things in perspective:
safehaven.com
Two good interviews here with these fund managers.
EDIT: The Bloomberg interview of Kyle Bass is no longer playing, and I can’t find it on youtube, so I’ll just post a couple of other links:
All I could find was this on his new fund:
http://dealbreaker.com/2011/04/want-to-invest-in-japan-kyle-bass-has-a-fund-for-that/
Here he is talking inflation last October:
http://www.youtube.com/watch?v=bCYIBf4_GMw
FYI, I think talk of inflation is still premature, since there is still too much credit to be liquidated before currency creation overwealms credit destruction. Significant inflation is more likely to appear towards 2020 than 2012, and we could easily see another episode of deflation in the next year or two.
From Bloomberg:
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Einhorn has shorted S&P and Moodies. Some take-aways:
Rating agencies are a “public bad,” not a public good.
We need a systemic change to reject the idea of centralized official ratings.
The market would adjust if we didn’t have them.
On Buffett: “He still made a very nice investment for himself.”
“The brands are ruined.”
The companies may lose their equity in (much-deserved) lawsuits.
Margins during boom reflected compromised objectivity, competing for market share.
Without official ratings the market would adjust to risks itself. Official ratings create an arbitrage opportunity: real credit risk is often higher than ratings imply (look at BP: downgraded by just “1/2 notch or something like that.” Ratings allow sharpies to front-run downgrades or prepare to take advantage of depressed prices following downgrades.
Agencies add little value. Market spreads are a much better indicator of risk.
From Bloomberg:
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Some great comments on the OMB (“lying on their forecasts”), Geithner (“who has a mortage on a house not far from mine… who didn’t understand risk and real estate prices”), Summers (“uses wrong mathematics in his papers” and has “systemic arrogance”), and Bernanke (“the one who crashed the plane”).
He has praise for David Cameron, whom he thinks understands how to solve the crisis.
Plenty of fodder for inflationists and bond bears here: Hard assets like metals and agricultural land would be a good way to protect value. Forget the stock market and most real estate.
Does anybody, such as professors, now understand the issues he raises? No. Don’t go to business school, but if you go, don’t take any business class that has equations in it: “it’s all bogus.”
I happen to have similar positions at the moment, though unlike Rogers, I’m a bear on commodities and China, which he seems to be perpetually long. Â Here’s today’s Bloomberg interview.
Take-aways:
– Long euro as a contrary position. Too many shorts out there.
– All these countries (Spain, Portugal, UK, US) are spending money they don’t have and it will continue.
– ECB buying government and private debt is wrong.
– EU is ignoring its own rules about bailouts from Maastricht Treaty.
– Governments are still trying to solve a problem of too much debt with more debt.
– Fundamentals are bad for all paper currencies. Good for gold.
– Is “contagion” limited now? Well, for those who get the money…
Here’s a longer interview from a few days ago on the same topics as well as stocks:
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– Rogers has a few stock shorts: emerging market index, NASDAQ stocks, and a large international financial institution.
– Rogers owns both silver and gold, but is not buying any more. He’s not buying anything here, “just watching.”
– Optimistic about Chinese currency. Expected it to rise more and faster, but still bullish.
– Thinking of adding shorts in next week or two if markets rally (my note: they have now).
– “Debts are so staggering, we’re all going to get hit with the problem,” no longer just our children and grandchildren.
I’m not a believer in manipulation, so I’m not counting on the central banks of the world to drive down the dollar. It’s as simple as 2% bulls: as of late last week there were 50 euro bulls for every bear. I always like to be the lone nut.
EUR.USD is looking very oversold at the moment by RSI, also. I’m still a long-term euro bear and would not be surprised by parity or $0.85, which actually looks all the more likely now that euroland is going to print away to relieve its banks of their bad bets on GIPSI bonds.
He basically expresses my opinion when it comes to manipulation: the Fed manipulates interest rates and bails out banks by accepting crappy collateral and buying bonds, and of course things like FX swaps manipulate that market. GS and others may front-run, but he doesn’t seem to believe in the futures/PPT theory of manipulation. He and I agree that poor traders use that as a mental crutch when they get frustrated.
Lots of other topics are covered, including Greece (he calls it a write-off, and says that the bailout of course was of the European banks, not Greece, which can never pay back its debt).
Sovereign Speculator 