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Thursday, August 04, 2011

You Shouldn't Be Here

You should be watching the volcanic action on the exchanges and at the central banks.

Turkey CUTS rates? Huh?

ECB is buying bonds, but the Spanish/Italian group is too large so it is buying in the smaller volumes trying to force Italy's and Spain's bonds down relatively. Is ECB going to be the world's largest bad bank?

By Monday the Fed will have announced something. I would guess it will be throwing swap lines at the various CBs and I am sure they will throw something internally in the US markets. The Swiss and the Japanese are trying to unhook their currencies from the desperate run from risk.

In the meantime, oil falls, but it can't fall soon enough to do anything.

Unpopular as it may be, the Fed does need to throw dollar liquidity out there internationally. The catastrophic fall in US treasury yields isn't telling us anything good, but according to economic theory, it should be a net stimulus. And it will be. Mortgage rates alone far outweigh anything the Fed could have produced by QE3ing, so the Fed should deal as best it can with the Euro crisis and just leave the internal markets alone.

Normal actions don't help, because with a steep yield curve, throwing money into the markets doesn't alleviate a monetary problem - instead it aggravates a growth/pricing problem.

Implicitly, it sure looks like Greece, Ireland, Portugal and Italy will default. There isn't enough money or credit capacity in the whole European system to deal with Italy, and maybe not with Ireland. So it's time to let it go. Maybe Spain will default, maybe not.

There is classically no better way to destroy a bank than by rolling bad loans, and this is what the ECB chose to do with Greece. The inevitable result is what we see. This has a very long potential reach - it could devastate some of the eastern bloc economies. Raiffeisen.

PS: A two year at 28 bps is a forecast of a hell of a recession. Fundamentals favor a skipping, milder recession, but because real growth is mostly sequestered elsewhere, the ability of the global economy to sustain growth will be the determining factor. Now Brazil - Brazil ain't looking too good. Brazil has a liquidity problem; classic monetary crunch, could well lead to recession. The Aussies have something of a problem; that looks like a recession. UK is intermediate, likely skipping retraction.

The thing is, monetary intervention never cures fundamental ills.

I'm here because I'm out. Closed all my positions (AU, Swiss Francs, Silver) this morning. Mr. Market has lost his meds and is more manic than usual. We live in interesting times.

IMO, QE3 would be like administering a blood transfusion to a body whose heart has quit working. No circulation! The only way to get the heart pumping again is through pro-business, anti environmental policies. Chances of that - nil!

Cash is not a bad place to be for a time. Who would believe the dollar is strengthening in all this? Well, any port in a storm.
Me too, pulled the ripcord on the last of it this morning, just before the bottom fell out. Usually I'm not that lucky. Looks like the deflation trade is on.

I'm keeping an eye on the dollar, though. There's no telling when the markets will decide it's not such a great place to be, after all.
Bruce Krasting was blogging about the markets Tues, a bit and link:

"Money is very expensive via the swaps market. Note that one-week money is now inverted to one-month money. You don’t ever want to see an inverted curve in these markets. In street talk:

The short end is tight.

Depending on the severity and duration of this condition, we have a problem. This one trumps them all if it gets out of hand."

So the music has stopped and everyone is scrambling
for a seat. Will the Fed start the music again ?
I see on previous posts that many people still think
Lowering the corporate tax ratevwould result in companies
Bringing profits back to the US to invest. I'm skeptical,.
It will be paid out to senior shareholders and taxed at a lower rate, if at all. What we have are entities that want
The protections and benefits the US provides but none of the obligations. Including taxation.
Sporkfed - Wouldn't holders of common stock benefit, as well?
How would they evade the standard Federal corporate rate, paying a lower rate?

"Looks like the deflation trade is on."

That's what I thought when I saw that the DJIA was down 500+ points and oil was down to $86+.

I'm sitting almost entirely in inflation protected treasuries. I would have expected to get beaten up today based on the falling price of oil.

That's not what happened. TIPS were up and up big. That tells me that it is mostly a falling real yield story. People abandoned higher risky yields and swamped lower safer yields.

The 30 year TIPS has fallen to 1.1%. This is simply astounding.

The bond market is now predicting that there will be 30+ years of awful economic growth. I can't exactly argue differently. By owning long-term TIPS, I was betting on it.

My word verification is ocknes.

I suspect the markets were attacked by the Ock Nes monster. There are so many investors trying to capture a snapshot of it today but it remains elusive.

It might just be a log floating in the placid sea of our own ignorance.
General comments on the capital markets;

The lower rates aren't feeding thru as you can't get a loan. If anyone doubts that I'll give you my story but for now go with me.

Money funds will soon start charging people to hold their money. That's going to cause a huge withdrawal of currency which restricts economic growth.

I don't have the exact figures yet, but we're close to already hitting the debt ceiling. They used a lot of smoke and mirrors to get to Aug 2 and now they've straightened out the books there's not much room left. They wanted to introduce supplemental bills around $200bil but no room.

TIPS got destroyed today. A block traded 70 basis points cheaper at one point.

There is no solution for the time being.

Good time to hug your kids/significant other.
Follow up; Bad info on TIPS. Up big as SM mentioned. My bad.
Mark - this isn't trading. It's an old-fashioned panic.

CF - no question in my mind that this round we play the credit contraction card. The question is only how deep for how long.

Spork - no time to worry about tax issues now. They are irrelevant for the nonce. This is the Day of the Lord's Wrath.

Jimmy - I'd say cash is a very good place to be for a couple your ages.
The action in Treasuries and TIPS makes sense if we're going to get QE3 soon.
I will once again point out the virtue of I-Bonds. It is not too late to lock in a 0.0% real yield. Pathetic but safe.

1. You get a 4.6% return for the next 6 months (minimum 2.3% return if held a year, even with penalty).

2. At 0.0%, directly linked to CPI. That's a better rate than 5 year TIPS.

3. Must hold one year with modest 3 month interest penalty. No penalty after 5 years. Can hold for 30 years.

4. Tax deferred (if you wish, your choice). Very important if inflation picks up.

5. Cannot deflate even month to month. Excellent deflation protection.

6. No greater fool needed. Rates rise? Cash them out. No big deal.

Isn't there a limit on how many I bonds you can purchase?

The limit a few years ago was $30k in paper form and $30k in electronic form (per year).

It was then lowered to $5k in paper form and $5k in electronic form a few years ago.

Next year we will only be able to buy I-Bonds in electronic form.

The barn doors are shutting. Too many horses were escaping.

There's been a 92% reduction in the amount of I-Bonds we can buy.
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