I read an excellent piece yesterday by John Burford, the MoneyWeek Trader.
He laid out a convincing argument that T-Bill yields (the interest paid on US Treasuries) has bottomed.
Looking at the charts he presents, he is calling the bottom of a 27 year trend. This is a very bold call, but I think there is something to watch out for here.
I am not sure if I agree with him that the trend for the decline in yields is necessarily over just yet. He is right to talk about the unsustainable level of American debt and that when the market does turn, it will likely reverse its course sharply.
At the heart of this issue is the increasing tension between inflation and deflation clearly present in the global economy.
On the one hand we are probably about to witness another bout of inflationary money printing. On the other hand we could well be about to see European banking losses finally be realised (e.g. through a Greek exit from the Euro, a write down of Spain/Ireland/Portugal, even Italy?), which will obviously be heavily deflationary.
This analysis is simplistic, but the point is still valid.
To profit from Burford’s assessment the timing is as important as the view. I agree that we could be reaching a bottom for yields, but I don’t believe this will be challenged until the point where the general market wakes up the fact that a US default of some kind increasingly looks inevitable.
Whatever the case this is a market I am going to pay much closer attention to as this kind of trend reversal can provide some of the most profitable opportunities by far.
I need to learn more about this market.
I don’t have much time to write today other than to suggest you watch this video.
Economist Laurence Kotlikoff has some very interesting ideas about banking reform.
He advocates a return to a form of equity financed mutual funds in banking. I’ve come across this idea before and it makes perfect sense. Owners of business tend to be far more prudent in their risk-taking as their wealth is directly tied to the success or otherwise of their business. A key problem with too many participants in the banking world is that they are gambling with other people’s money.
An interesting point made in this video is that in 2008, although assets declined in value, the operating business models of the equity financed mutual funds largely survived the worst of the crisis. At the same time we were being told of the dire systemic risks the impending failure of the banks threatened us with.
As Professor Kotlikoff states “the market place is a public good”. When it is not acting in this manner then change is required.
You know my views on this.
Sometimes I wonder how much of a contrarian indicator this blog is. Too often I offer an opinion about what I think is going to happen only to find completely the opposite is this case.
On Wednesday evening I left you with a final comment wondering how Europe might ruin any beneficial impact the Fed’s QE3 may have.
The next day ECB president announced that they would do “whatever it takes to save the Euro”. Naturally markets seized on this as confirmation that the ECB will also jump on the bond buying bandwagon with the Fed.
Today this has been followed by Angela Merkel declaring that “everything possible” will be done to protect the Eurozone.
I’ll spare you my usual diatribe that a debt crisis cannot be solved with more debt. I’ll ignore the idea that the Germans seem to be moving away from one of history’s hardest learned lessons. I’ll gloss over the fact that Europe has now thrown down so many gauntlets that the floor is littered with metaphorical mailed gloves. Above all I will not mention that the Credit Crisis is going away in spite of all the inflationary policies pursued to date.
No, I’ll just rejoice at the fact that markets are about to become engulfed in yet more printed money and seek to benefit like many others will do.
It remains to be seen whether or not Draghi follows through on this grand announcement. The Europeans haven’t exactly demonstrated much of a willingness to do what they say, but he is going to look remarkably weak if he fails to deliver, having made this announcement on the heels of Bernanke’s leak.
The ECB meets on August 2nd and then September 6th. Failure to deliver by the end of these two meetings can only be a massive disappointment.
John Mauldin’s newsletter is another I often enjoy. Although I don’t find it that helpful for trading ideas (I don’t think I have enough of a portfolio to follow his advice), I find his insight challenging and thought provoking.
His latest missive contains three articles offering an excellent critique of commonplace practices in the financial sector, the opacity of the credit default swap market and how Spain is now effectively locked out of credit markets.
To read these articles you need to sign up, but it is well worth it.
If you are not using Google Alerts yet more fool you!
My “Jon Hilsenrath” alert has just thrown up, what looks like an extremely important policy piece.
You may or may not remember but Mr Hilsenrath is Ben Bernanke’s chief puppet in the media. He is the primary conduit for leaking and testing policy ideas. He now says that the Fed is about to launch QE3.
Recently I said that I didn’t expect QE3 until early 2013, after November’s election in America.
The FOMC now meet on July 31st/August 1st and September 12th/13th.
They could act as early as next week.
I have remained invested in the various stocks I bought throughout this recent difficult period. Possibly that was a mistake, but I bought with medium term outlooks.
I have been looking forward to the prospect for some time, as has most of the Market. Let’s see what the Fed now proposes to do, but this could be the start of a really nice bull run in stocks, especially with the election around the corner. If this happens I am well positioned for it.
Perhaps all we now need to wait for is Europe to ruin the party.
News that the wealthy are hiding $21trillion in tax havens isn’t exactly much of a shock.
Perhaps the size of the amount is on the high side of expectations (accounting for the combined GDP of America and Japan), but I find it hard to share any sense of outrage at tax avoidance. Governments of developed nations have proven themselves to be so grossly fiscally irresponsible that even if this money were legitimately declared it would only create more revenue to be wasted on unsustainable social models.
Even so this trapped wealth does make me feel very sad. It represents an incredible waste of human potential.
If we think about the great and varied problems existence on this planet seems to cause, there is something seriously wrong with a system which allows capital to be ensnared in this manner and on this scale.
Traditional thinking maintains that the redistributive powers of the tax system hold the solution. However scratch at the veneer of this simplistic view and you immediately uncover the vast problems of inefficiency, corruption and irresponsible spending, which consistently dog the business of governments.
The more I think about this challenge the more my head hurts. It is just too complex an issue. But then again therein may lay the answer.
As with the sad attempts at regulating the financial system this is just another case of actually attempting to regulate the impossible. Continue reading
I am a little late posting about this, but there can be no surprise that the LIBOR scandal looks set to get bigger.
Barclays may have been the first to be punished, but there is simply no way they did this on their own.
This piece from Bloomberg explains who corruptible the system was. If anyone were in any doubt we can neither trust financiers to regulate themselves nor the regulatory bodies to do their jobs properly.
I have always felt that a massive opportunity was missed in 2008 to conduct root and branch reform of the whole sector. When the industry was on its knees politicians could have put through whatever changes they desired. They baulked at this opportunity though and it was lost.
Perhaps the LIBOR scandal may open the door again?
After all this scandal is so gross and so inexcusable and affects so many people (even though they may not realise it!) that another golden opportunity has been offered up to force through much needed change.
However I doubt it will happen. Based on the track record of lawmakers it is hard to believe they will make anything of this.
More’s the pity.
This is a bit of a lazy blog today, but I have been meaning to post two interesting articles from Zerohedge.
The first is about Gold as a “hyperinflation put”. I am still not sure whether or not I believe this will truly happen, but I am definitely long-term bullish on gold. I don’t believe we can (or should) return to a Gold Standard. This article still makes interesting reading.
The second piece concerns the current health of “Dr Copper”. Copper is viewed as one of the leading indicators for the overall health of the global economy, thanks to its widespread industrial application. One of the stocks I currently own is an undervalued copper explorer. If you have a direct investment in anything related to copper this research is a must read.
This news item really caught my attention yesterday. The Californian city of Oakland has just completed a bond auction to help it meet its pension liabilities. As the article says, “yes borrowing money to fund retiree pay”.
This is one of many terrible indicators of what is around the corner. In short when revenue no longer covers commitments then a fundamental flaw is exposed. Borrowing to cover shortfalls can only ever be a temporary solution and, in most cases, simply exacerbates the longer term problem by increasing the cost of the original commitments (i.e. interest on loans) as well as creating yet another burdensome long-term commitment (i.e. the loan).
Welcome to the simple logic of the Credit Crisis, simple logic that no-one in power seems willing or able to accept. And there is worse to come.
I’ve made passing mention of one of my greatest current concerns, which is that the Credit Crisis has taken attention away from the far greater looming and inexorable crisis, namely the pension deficit.
When I speak about the system being fundamentally broken I always have this in mind.
The old way was already leading us to a seemingly insurmountable problem. As people live longer traditional funding methods and expectations about retirement were inevitably going to be challenged and, most likely, shattered. Continue reading
Zerohedge has proved to be extremely interesting reading recently. I know I run the risk of selection bias in confirming many of my opinions through a “fringe blog” as they like to call themselves, but good sense makes good sense.
Quite how useful Zerohedge is as a means of determining trading strategy is certainly debatable. Their hyper-pessimism could easily cause their readers to sell everything, convert it into physical gold, bury it, buy a weapons cache, retreat to the hills and wait for society’s total implosion.
I proved to be susceptible to this perspective earlier in the year on the cusp of the Greek deal. Regular readers may remember that I closed out of what would have been an extremely profitable trade, worried that a failure was on the cards and what this might have caused in markets.
Oh well it was a valuable lesson put to good use in my recent hedging activity.
However getting back to the purpose of this post I’ve been keenly following the writers of Zerohedge’s assessment for the prospects of the European Stability Mechanism (ESM). They ask and answer the core questions relating to the bailout fund. This refreshingly neutral piece is a must read, but I doubt many will be bothered.
The structural issues are surely as clear as day. Nigel Farage delivers his usual damning verdict, but it is hard to argue with him (as an aside to my Mother, I am sorry for quoting Nigel Farage, but I increasingly like him!).
The size of the fund does not look large enough (Spain will probably use up the first €100bn meaning no more support until October and even then the Spanish could well be back for more), the source of the funds is questionable (can we really expect Italy to live up to its end of the bargain) and the mechanism governing it looks arcane (perhaps the European Project’s biggest structural problem is that it is suffering death by committee). Continue reading
I caught this item last week on Reuters (thank you Google alerts) that the St. Louis Federal Reserve President, James Bullard, said there would need to be a “sharp drop-off” in economic activity for QE3 to be considered.
In other words we need to see a collapse in stock prices before the Fed will act.
I wondered recently whether or not the fall in the price of oil would be enough to stir the Fed into action. It hasn’t so the next obvious asset class to watch is stocks.
I’ve been keeping a bit quiet about the trading system recently. It’s been performing superbly well, but I wanted to wait until the new charts were ready. However I feel I need to publish this thought now.
Please click for full image
I used the system to help guide my recent hedge. I closed out half of it at Secondary Support, which turned out to be a really profitable decision.
For now though I am more interested in some longer term analysis. Looking at the chart above you can clearly see Primary Support for the Dow is at 10,981. It goes without saying that a drop to this level would be distinctly bearish.
Take a look back summer 2010, before QE2 was expected. The Dow had fallen back to Primary Support. Things were looking bad. Then QE2 was announced. The Dow didn’t look back.
Could the Fed be waiting for a return to Primary Support?
I am going to think about this more, but my feeling is I am going to start moving into cash. Let’s see.
This is stunning, truly stunning.
It appears the deputy governor of the Bank of England, Paul Tucker, at the very least knew of the price fixing of LIBOR. At the very worst he was complicit in it.
Until this point I’ve expressed grave concerns about the roles central bankers around the world have played in the credit crisis. I’ve felt all along that many of the policy initiatives have been designed to help their friends in the investment banking community, but this revelation is exceptional.
This is clear evidence of a relationship that has become too close for either party to operate effectively.
It is very interesting how desperate the various players involved in this mess are trying to come clean. This only raises the question “how bad is the real truth”?
It must be terrible and surely more heads are going to roll.
Bob Diamond has at least resigned and this scandal really looks set to grow and grow. It is slightly surprising that it doesn’t seem to have caused much of a stir in America. They are meant to be a more financially sophisticated society so I would have thought anything that indicated price fixing had occurred would have caused more of a fuss. Perhaps it will and it just needs to be given a little time.
Megan Greene’s blog is well worth reading.
I can’t remember how I first came across it, but I’ve enjoyed it for several months now. She has a real grasp for the untenable situation in Europe and has a flowing writing style.
Her latest piece offers an excellent critique of Friday’s latest (yawn) Euro deal.
This was interesting enough, but a point she made about Ireland really caught my attention. I believe it is another indicator of the compromised position more developed nations are soon going to find themselves in.
In underwriting the horrific losses of their financial sector, the Irish took on an amount of debt so large there is simply no way they will ever repay it. They did this to save their financial services sector.
They now are faced with an impossible choice. Well in fact there is no choice at all because it is clear what they have to do. Continue reading