long bond and currency's

[lamboguy]

the dollar and yen both took a big drop to the downside this week, as big a move as i have ever seen in one week.

the long bond went from 123 down to 119 this week as well. unprecendented moves in both these instruments.

these types of moves all the time mean that someone knows something that hasn't hit the newswires yet. it is alot easier to move a stock market up or down than it is to move bond and currency's this big in such a short period of time.

i guess this would mean that something big is happening out there that we will hear about real soon, my guess is that it is no good.

[DJofSD]

I would guess it would involve China in some way.

[ArlJim78]

been watching the dollar index plunge quite rapidly over the past month.
they are planning to sell $162 billion in debt next week, let's see how eager the buyers are.

[slewis]

Dont get all in a tizzy folks...

This is no big deal.... The largest inflation vehicle in the world, China, is experiencing analytical meltdown. The experts are predicting that as the world economies settle (with the recent bank failures and bailouts) they will slow and recovery will be slow. This will keep ever spiking inflation in China lower then past expections. With low(er) inflation worldwide, the central banks can keep rates low. (What our crybaby businesses want).

Also there has been some bickering in the EU recently on monetary policy which drove investors to a more attractive US dollar.... Some of that bickering has subsided.

I doubt we will ever see more manipulated interest rates throughout the world as we will see in the next 5 yrs as all the central banks work in concert.

Major banks will be shifting funds into investments (and currencies) that give them the best returns short and long term... (although this is nothing new) but you may see swings in the Dollar and Yen as the BOJ and the Fed do their thing.

[DJofSD]

Are we going to see an inverted yield curve?

[sammy the sage]

our fiat paper is = to monopoly money...

[robert99]

Rumour this side was that USA to lose triple A debt rating, so yields had to rise to compensate that risk and the safe haven dollar value fall. Japan has so much debt that all its annual GDP growth is now used up to pay its debt interest bill - permanent zero net growth unless it devalues heavily.

[Saratoga_Mike]

Rumour this side was that USA to lose triple A debt rating, so yields had to rise to compensate that risk and the safe haven dollar value fall. Japan has so much debt that all its annual GDP growth is now used up to pay its debt interest bill - permanent zero net growth unless it devalues heavily.

The "rumor" started after S&P placed the UK's sovereign debt on negative watch. The UK's debt/housing situation makes the US look like a fortress.

[robert99]

The "rumor" started after S&P placed the UK's sovereign debt on negative watch. The UK's debt/housing situation makes the US look like a fortress.

No, that was a separate earlier issue.
US rumour was Friday.
UK's debt is manageable as GDP% over a decade - we have already devalued about 30%.
With an 80%+ consumer economy and an overpaid, unskilled workforce, I can't see USA ever getting near to paying off its debts.
As In US debt clock runs out of digits and that was 2008.
http://news.bbc.co.uk/2/hi/business/7660409.stm
UK housing is actually recovering - at -15% from peak, it has never fallen as far as in USA.
Prices are rising regionally in fits and starts, home seekers have more than doubled since last year. House builder stocks have risen sharply.

[Saratoga_Mike]

No, that was a separate earlier issue.
US rumour was Friday.
UK's debt is manageable as GDP% over a decade - we have already devalued about 30%.
With an 80%+ consumer economy and an overpaid, unskilled workforce, I can't see USA ever getting near to paying off its debts.
As In US debt clock runs out of digits and that was 2008.
http://news.bbc.co.uk/2/hi/business/7660409.stm
UK housing is actually recovering - at -15% from peak, it has never fallen as far as in USA.
Prices are rising regionally in fits and starts, home seekers have more than doubled since last year. House builder stocks have risen sharply.

The day S&P put the UK on negative watch everyone in the US bond mkt became concerned about what might happen to the US rating. Perhaps CNBC et al didn't report the concern until Friday - don't know.

The median-home-price-to-median-income stats in the UK are still in bubble territory, whereas the US housing mkt is now trading at roughly 3x, in line with l-t historical norms. I'm well aware of the "recovery" in UK housing - it will prove ephemeral, imo. The UK is one of the few large developed economies where the consumer is more indebted than the US consumer. Also, if you look at the ratio of assets of UK banks to UK GDP, you'll find it's higher than in the US (but not nearly as precarious as the ratio in Switzerland). In any case, both economies have real structural problems.

[onefast99]

The so-called recovery in the housing market has taken a huge hit by this as interest rates rose sharply in the past two days. Not good for an economy that needs the housing market to get it back into gear.

[Saratoga_Mike]

The so-called recovery in the housing market has taken a huge hit by this as interest rates rose sharply in the past two days. Not good for an economy that needs the housing market to get it back into gear.

But the Fed's in the process of buying $750 bb+ in MBSs. How could rates move up? Joking of course. I think the other poster was referring to the ephemeral recovery in the UK housing mkt, but I could be mistaken.

[ArlJim78]

sign of the times - China gives the US a warning on monetary policy.

China warns Federal Reserve over 'printing money' (http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5379285/China-warns-Federal-Reserve-over-printing-money.html)
Richard Fisher, president of the Dallas Federal Reserve Bank, said: "Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature."
"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States," he told the Wall Street Journal.

[Valuist]

No, that was a separate earlier issue.
US rumour was Friday.
UK's debt is manageable as GDP% over a decade - we have already devalued about 30%.
With an 80%+ consumer economy and an overpaid, unskilled workforce, I can't see USA ever getting near to paying off its debts.
As In US debt clock runs out of digits and that was 2008.
http://news.bbc.co.uk/2/hi/business/7660409.stm
UK housing is actually recovering - at -15% from peak, it has never fallen as far as in USA.
Prices are rising regionally in fits and starts, home seekers have more than

doubled since last year. House builder stocks have risen sharply.

And how long has the U.K. been in a housing bubble? How many decades? At least ours is a relatively recent phenomenon. While I agree our debt is a problem, what constitutes an "overpaid, unskilled" workforce? According to what scale?

[robert99]

And how long has the U.K. been in a housing bubble? How many decades? At least ours is a relatively recent phenomenon. While I agree our debt is a problem, what constitutes an "overpaid, unskilled" workforce? According to what scale?

An amusing definition of a "bubble" that can last decades.
UK housing is expensive because we have a 60M+ and growing population on a tiny island where land planning to build new houses is fiercely contested by those already in the area. Land prices can go from £2000 an acre as agricultural land to £6M+ an acre as building land. House builders cannot cope with the demand - until now they can't get finance. So as soon as money became available the dam has started to burst again. Any house buyer has to buy his share of that expensive land plus the more substantial construction building costs. House owners cannot get 100% mortages now so cannot drop their prices - they have to raise them - as they need all the equity for their next purchase to be enabled etc.

UK house prices are already starting to rise, much to the confounding of economists who use irrelevant metrics and never touch upon reality, let alone common sense.

http://www.telegraph.co.uk/finance/economics/houseprices/5443005/UK-house-prices-jump-most-in-almost-seven-years.html

The competitive problems of the US workforce are measured against those of its competitors in Europe, China, India etc. I will leave it to you to find out the comparisons in tertiary educated population, number of engineers, scientists, mathematicians and trade skills produced as well as manufacturing skills retained or increased. A sad and wasted decade for the USA people.

[chickenhead]

reprinted in its entirety, with permission

Staying Rich in the New Normal

By Bill Gross
"Behind every great fortune lies a great crime."
Balzac

Balzac was on to something 200 years ago, but to be fair to modern day multi-millionaires, the only real way to accumulate wealth prior to the 18th century was to steal it, or tax it, I suppose, as was the case with kings and their royal courts. It was only with the advent of capitalism and annual productivity gains that entrepreneurs, investors, and risk-takers with luck or pinpoint-timing could jump to the head of the pack and accumulate what came to be recognized as a fortune. Still, the negative connotations persist. I remember a cocktail party in the early 80s where a somewhat inebriated guest engaged me in a debate about the merits of capitalism. "You're filthy rich," he said, which struck me as most unfair from a number of angles. First of all, he hadn't seen anything yet, I thought, and second, I wasn't quite sure where the "filthy" came from. Resentment that he'd missed out on my presumed good deal, I suppose, and in the process using a hackneyed phrase that was bitter and biting, yet had some context of historical sociological relativity. Still, he might have been on to something there - not about me, hopefully, because I've always felt that while PIMCO has prospered, it's only because its clients have benefitted even more so - but about the developing sense of one-sided, perhaps off-sided wealth generation that was to dominate the next several decades. Granted, we had Bill Gates and Steve Jobs and other true capitalistic dynamos who benefitted society immeasurably. But growing percentages of fortunes were being made by those who could borrow or aggregate other people's money. Because our economy was still in a relatively early stage of leveraging, those who borrowed money and used it to invest in higher-risk yet higher-return financial or real assets didn't require a lot of skill, they just needed to be able to convince a bank or an insurance company to lend them some money. After that, the secular wave of leverage would be enough to multiply their meager equity many times over and carry them to a beach where a fortune awaited them much like a pirate's buried treasure.

I remember as a child my parents telling me, perhaps resentfully, that only a doctor, airline pilot, or a car dealer could afford to join a country club. My how things have changed. Now, as I write this overlooking the 16th hole on the Vintage Club near Palm Springs, the only golfers who shank seven irons into the lake are real estate developers, investment bankers, or heads of investment management companies. The rich are different, not only in the manner intoned by F. Scott Fitzgerald, but also in who they are and what they do for a living. Whether some or all of them are filthy is a judgment for society and history to make. Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people's money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful - or the shadiest - into the Balzac or Forbes 400.

Readers who are interested in such things as the Forbes annual list of hoity-toities will have noticed that more and more of them are global, not U.S. citizens. The U.S., in other words, is not producing as much wealth in proportion to the rest of the world. Its fortune-producing capabilities seem to be declining, which might suggest that its relative standard of living is doing so as well. If so, the implications are serious, not just for Donald Trump but for wage earners and ordinary citizens, as reflected in their income levels and unemployment rates. Stockholders, 401(k) investors, and yes, bond managers will be affected too. Last week's furor over the possibility of an eventual downgrade of America's AAA rating demonstrates that only too clearly. On the night of May 20, Standard & Poor's announced a downgrade watch for the United Kingdom and since the U.S. and U.K. are Siamese-connected, financially-levered twins, the implications were obvious: the U.S. might be next. In the space of 48 hours, the dollar declined 2%, and U.S. stocks and long-term bonds were down by similar amounts. Such a trifecta rarely occurs but in retrospect it all made sense: a downgrade would cast a negative light on the world's reserve currency, and since stocks and bonds are only present values of a forward stream of dollar-denominated receipts, they went down as well.

The potential downgrade, while still far off in the future in PIMCO's opinion, seemed dubious at first blush. While country ratings factor in numerous subjective qualifications such as contract rights, military might, and advanced secondary education, the primary focus has always been on the objective measurement of debt levels, in this case sovereign debt, as a percentage of GDP. Yet, as shown in Table 1, both the U.S. and the U.K. entered the Great Recession with attractive ratios compared to such grievous offenders (and AA rated) as Japan.

Yet as the markets recognized rather abruptly last week, both countries seem to be closing the gap in record time. To zero in on the U.S. of A., its annual deficit of nearly $1.5 trillion is 10% of GDP alone, a number never approached since the 1930s Depression. While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery's corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington's hat. Private sector deleveraging, reregulation and reduced consumption all argue for a real growth rate in the U.S. that requires a government checkbook for years to come just to keep its head above the 1% required to stabilize unemployment. Five more years of those 10% of GDP deficits will quickly raise America's debt to GDP level to over 100%, a level that the rating services - and more importantly the markets - recognize as a point of no return. At 100% debt to GDP, the interest on the debt might amount to 5% or 6% of annual output alone, and it quickly compounds as the interest upon interest becomes as heavy as those "sixteen tons" in Tennessee Ernie Ford's famous song of a West Virginia coal miner. "You load sixteen tons and whattaya get? Another day older and deeper in debt." Pretty soon you need 17, 18, 19 tons just to stay even and that describes the potential fate of the United States as the deficits string out into the Obama and other future Administrations. The fact is that supply-side economics was a partial con job from the get-go. Granted, from the 80% marginal tax rate that existed in the U.S. and the U.K. into the late 60s and 70s, lower taxes do incentivize productive investment and entrepreneurial risk-taking. But below 40% or so, it just pads the pockets of the rich and destabilizes the country's financial balance sheet. Bill Clinton's magical surpluses were really due to ephemeral taxes on leverage-based capital gains that in turn were due to the secular decline of inflation and interest rates that at some point had to bottom. We are reaping the consequences of that long period of overconsumption and undersavings encouraged by the belief that lower and lower taxes would cure all.

The current annual deficit of $1.5 trillion does not even address the "pig in the python," baby boomer, demographic squeeze on resources that looms straight ahead. Private think tanks such as The Blackstone Group and even studies by government agencies, such as the Congressional Budget Office, promise that Federal spending for Social Security, Medicare, and Medicaid will collectively increase by 6% of GDP over the next 20 years, leading to even larger deficits unless taxes are increased proportionately. Collectively these three programs represent an approximate $40 trillion liability that will have to be paid. If not, you can add that present value figure to the current $10 trillion deficit and reach a 300% of GDP figure - a number that resembles Latin American economies such as Argentina and Brazil over the past century.

So the rather conservative U.S. government debt ratio shown in Table 1 will likely be anything but in less than a decade's time. The immediate question is who is going to buy all of this debt? Estimates suggest gross Treasury issuance of up to $3 trillion this calendar year and net offerings close to $2 trillion - almost four times last year's supply. Prior to 2009, it was enough to count on the recycling of the U.S. trade/current account deficit to fund Treasury borrowing requirements. Now, however, with that amount approximating only $500 billion, it is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board - which they are not. Someone else has got to write checks for up to $1.5 trillion additional Treasury notes and bonds. Well, you've got the banks and even individual investors to sponge up some of the excess, but a huge, difficult to estimate marginal supply will have to be bought. The concern is that this can be accomplished in only two ways - both of which have serious consequences for U.S. and global financial markets. The first and most recent development is the steepening of the U.S. Treasury yield curve and the rise of intermediate and long-term bond yields. While the Treasury can easily afford the higher interest expense in the short term, the pressure it puts on mortgage and corporate rates represents a serious threat to the fragile "greenshoots" recovery now underway. Secondly, the buyer of last resort in recent months has become the Federal Reserve, with its publically announced and near daily purchases of Treasuries and Agencies at a $400 billion annual rate. That in combination with a buy ticket for over $1 trillion of Agency mortgages has been the primary reason why capital markets - both corporate bonds and stocks - are behaving so well. But the Fed must tread carefully here. These purchases result in an expansion of the Fed's balance sheet, which ultimately could have inflationary implications. In turn, nervous holders of dollar obligations are beginning to look for diversification in other currencies, selling Treasury bonds in the process.

The obvious solution to both dollar weakness and higher yields is to move quickly towards a more balanced budget once a sustained recovery is assured, but don't count on the former or the latter. It is probable that trillion-dollar deficits are here to stay because any recovery is likely to reflect "new normal" GDP growth rates of 1%-2% not 3%+ as we used to have. Staying rich in this future world will require strategies that reflect this altered vision of global economic growth and delevered financial markets. Bond investors should therefore confine maturities to the front end of yield curves where continuing low yields and downside price protection is more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same. All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago. Staying rich in the "new normal" may not require investors to resemble Balzac as much as Will Rogers, who opined in the early 30s that he wasn't as much concerned about the return on his money as the return of his money.



John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore