Tuesday, February 18, 2014

Weather: Cold Outside and for Bonds...L&C

The month of February is short and halfway through it there have been over 75,000 flight cancellations. Oil is back over $100 a barrel and with the spring driving season one month away, prices can rise even further. Together, it points at a target. Can you say, short airline stocks?
Before you jump, check the charts for high/low price range and of course, keep an eye on the weather. I remember a snow storm on St.Pat's Day(17 March) and more white stuff at Wrigley Field for the Cubs opener. So far, 2014 is becoming the "weather year" as the media loves labels.
This is all well and good, but I know that you, dear reader can be anywhere in the world. Wherever you are however, you need to watch what is happening in the 10 year bond market. The Federal Reserve in the US sets the floor for rates, but money moves to where it is best treated. Recently, currency distortions in India and Turkey have caused those governments to raise rates to attract money due to reserve shortfalls. I have told you about this and the world stock markets have felt distress since the beginning of the new year. At present, the market feels that this problem is solved and now, it is back to higher prices.
Not so Fast, Tonto
I can't pass for the Lone Ranger, but I can see through the mask of the market. Governments have complained about all other currencies seeking market export share by devaluing. However, they all rush into the bond market to lock-in big bucks while interest rates are low. This is all based on the continuing low inflation outlook. The market says prices are below inflation and that they expect that prices will stay low or stabilize at current levels.
One indicator of this is the rise in the gap in pricing to .69% last month, the most since 2011. The linker bonds that have sold have all tumbled in value as inflation continues to disappear and some call a disinflation environment.
Inflation v. Deflation
debate. However, standing strong in the corner of inflation is the huge debt volume of the US. Recent bond auctions give the answer. Six month T-Bills totaled $15b in 2007 and last week, the same government needed $30b or a double. See what I mean? To double money in seven years, you need an interest rate of 10% and the last time I looked, the ten year rate is 2.75%. Something is afoot?
One answer is the fact that the Fed has been increasing the money supply at 10% for the last six years. Bernanke use to say before he left last month that the Fed only added a debit on an electronic ledger and this money will not add to inflation because it is not actually money. Oh, really? He forgot to mention that we have fractional banking. The banks purchase the same bonds from the Fed and with magic, they can lend 90% of that money and then, 80% of that money and so on. This is how they grow their balance sheets to which, the Fed's was $800b in 2007 and now, sits around $4T. See a pattern? I see a big, big problem.
US deficits passed $17t last week and if rates rise, this figure could double, just like it has since 2007.
By the way, International Capital, a report by the treasury says outflows were $46b last month and PIMCO, the largest bond trader in the US says it also had outflows of $3.5b. Investors are looking for higher yields. Together, this indicates a change in the weather, however, let's continue with the trend by governments who are pushing sales of inflation-linked bonds, wagering that consumer prices will remain subdued. They got support last week when the guidelines to determine inflation just got changed, and of course, these changes limit inflation. Talk about timing!
35 Nations
issued $-one trillion of the securities in the past year, the "most" on record according to Bloomberg.
On the flip side, the recent rout of currencies as mentioned are igniting some inflation fears. These governments are adding serious debts. Sales of linker bonds have exceeded $300b for three straight years with the US issuing the most, $155b and Italy, second with $63b.
adjust their interest rates based on inflation. In the US these are called TIPS and recently, sold as low as .661% for a ten year term. Yields were .51% which is really, really low.
One other aspect why some are buying is the fact that central banks have purchased over $20.5t under asset-purchase programs. A negative aspect is if rates rise, these bonds decline in value. Not good and with the example that I have provided indicates that low rates are ending because debt continues to rise irregardless of austerity and other deflationary measures. Now, I have one other aspect that I feel no one looks at thoroughly or at least thinks it through all the way.
Under Prime Minister Abe has directed the BOJ to massively increase the money supply with the goal to reach 2 to 3% inflation. If he succeeds, what will happen to all the previous bond holders of Japanese bonds who happen to be its citizens who hold around 90% and receive only .75% for a ten year duration? They will sell seeking the new higher return of at least 3% according to Abe's goal. This massive selling will implode the Japanese bond market. Idiot!
Not to be outdone by anyone else, the Fed under Ben is seeking a 2% goal in yearly inflation. Let us count ten years of 2%. WOW! That means the 2.75% T-Bill is losing money to inflation and like the six month auction totals, the rates should actually be 10% or the previous norm of 6.9%. This means when investors wake up, they will sell massive amounts of T-Bills seeking a higher rate. This could implode the US bond market. Added to this is the additional stupid fact that our government has not locked into these low rates for long-tern bonds. The vast majority of the governments bonds are short-term because why lock in a 3.75% when you can get a .75% in weekly auctions?
Estupido Puerco!
look at the results these idiots have given us. Debts over $17t which is also a double since 2007 when it was $7.9t.
Government spending levels are 40% of GDP and no one mentions the unfunded liabilities of over $61t which makes each citizens share $534k per household.
Federal debt exceeds 100% of the nation's output. This is the figure that sparked the problems in Greece and if rates rise, the debts grow exponentially.
Liars and Crooks:Obama care has started along with exemptions for every Tom, Dick and Harry. It is like Mark Twain said, "there are lies, damn lies and statistics!"