Posts Tagged ‘Interest Rates’

Kyle Bass With David Faber: Bernanke’s ZIRP Is An ‘Inescapable Trap;’ Muni Bond Bloodbath Beckons But “States Will NOT Default”

Courtesy of The Daily Bail  

CNBC Video – Kyle Bass with David Faber – Feb. 16, 2011 

Visit msnbc.com for breaking news, world news, and news about the economy

Video – Part 2

Source – CNBC

Municipal bond defaults on the local level are likely and investors would be better off avoiding them, according to Kyle Bass, managing director of Hayman Capital.

Bass said he generally agrees with the call by famed banking analyst Meredith Whitney, who said as many as 100 defaults are likely that will cost more than $100 billion in damage.

Though Whitney’s call has prompted substantial backlash from her colleagues in the industry, Bass said the question is more a matter of degree.

"There are going to be a number of muni defaults, but it’s where you draw the line.  Will states be allowed to default?  Will legislation be introduced to allow states to restructure?  I don’t believe that’s the case.  I believe states will not default." 


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The Commodity Bubble

Courtesy of SurlyTrader 

In the future they might coin this the “Bernanke Effect” or maybe the great commodity bubble of 2011.  The truth is that commodity prices are rising…dramatically.  You might have started to notice this disconnect in your grocery store shopping or in gasoline prices, but if you were to ask our government they would tell you that a basket of goods consumed (CPI) is rising modestly.  How modest do these numbers appear to you?

Sugar and Corn? Those are luxury goods.

If the basic ingredients to food are skyrocketing, then prices of food will eventually have to keep pace which will directly hurt consumers.

Of the 853 ETF’s that I looked at, which unleveraged funds do you think had the greatest return over that same time period?  It is not a trick question: 

Are you noticing a theme?

My conclusion is simple:  this time is NOT different.  Commodity prices cannot go up forever and China will not continue to support the market regardless of prices.  What is this “Bernanke Effect” doing to farmland prices?  Well, according to a survey by Farmer’s National Company:

“non-irrigated crop land in central Kansas averaged $3,000 an acre, up 50 percent since June…

Crop prices have seen an extraordinary run since early July. A bushel of wheat priced about $4 a bushel on July 4 is now more than $8.50. Other crops have experienced similar increases.

As the land generates more income, it puts more cash in the pockets of the most likely buyers, nearby farmers. It also provides an attractive return for investors who then rent it out to farmers.

The result: Auctions are drawing twice the number of bidders as before, said area agents.”

As with all hot speculation, the commodity run will surely come to an end and will probably have repercussions for all financial markets.  We should have learned by now that large financial dislocations tend to not occur in isolation. 


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The Next Borrow-Short Lend-Long Guaranteed to Blow Up Bank Lending Scheme; Citigroup, Chase, Bank of America CD Ripoff

Courtesy of Mish

Borrow-short lend-long strategies have caused more pain and grief than nearly any play in the book. They are virtually guaranteed to blow up given enough time if the duration mismatch and leverage is too great.

For those who do not know what I am describing, a couple examples below will help explain. The first example is a look at "cost of funds" and guaranteed profits that banks can make. It is not a borrow-short lend-long strategy but will morph into such a scheme as I vary the parameters.

Citigroup CDs

Inquiring minds investigating Citigroup’s cost of funds note that Citigroup 5 year CDs yield a mere 1.5%. For this example, Citigroup’s cost of funds is 1.5%, the rate it pays depositors. Here are a few snips from Citi’s website.

Who said there are no guarantees in life?

Some things in life are a sure thing. Like a Citibank CD, which offers a guaranteed—and highly competitive—interest rate. You also get a wide range of terms, from 3 months to 5 years.

Guaranteed Ripoff

Citigroup has the gall to brag about "guarantees in life" when the "guarantee" in question is a complete ripoff. It’s a ripoff because 5-year US treasuries currently yield 2.35%.

Anyone buying CDs at less than the treasury yield rate is a fool.

Rates at Bank of America, Northern Trust, JPMorgan Chase

I will tie this together shortly, but first make note that the Northern Trust, Bank of America, and JPMorgan Chase offer even lower 5-Year CD rates.

Here are some rates courtesy of Bankrate.Com as of 2011-02-15.

According to Bankrate, national average for 5 year CDs is 1.61% and the rock bottom low is .95%. The site average is 1.98% and the top yielding 5-year CD yields 2.75%. Thus Citigroup’s claim of competitive rates is absurd.

Although Bank of America makes no such claims, its CD rate is priced so preposterously low, that Bank of America must not even want to deal with them. Alternatively, B of A has an incredibly large pool of moronic depositors begging to be ripped off.

Guaranteed Free Money

Anyone buying 5-year CDs from Citigroup, Bank of America, Northern Trust, or JPMorgan Chase is giving those banks a shot at guaranteed free money.

All those banks have to do is take that money and invest in 5-year US treasuries to have a guaranteed profit. Here are the reasons…
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“Sell the News” Bearish Flattening of Yield Curve Continues; Reflections on “Relative Value”

Continuing on the theme of stock market prices vs. real fundamental value, Mish writes: "This is what happens when investors chase "relative value" instead of asking if there is any real value at all…[This] applies to those chasing the stock market at these lofty levels on the basis ‘stocks are cheap relative to treasuries’ or some other nonsensical reason to justify valuations." – Ilene 

Courtesy of Mish

Curve Watchers Anonymous notes a continuing bearish flattening of the yield curve as shown in the following chart.

click on chart for sharper image

A bearish flattening occurs when the curve tightens with yields generally rising. Conversely, a bullish flattening occurs when the curve tightens with yields generally falling.

Since early November, 5-year treasury yields have risen about 60 basis point, 10-year yields about 45 basis points, and 30-year treasury yields have risen perhaps 5 basis points.

Once again we can see the results in today’s action with thanks to Bloomberg.

Buy the Rumor Sell the News

Note the continued unwind of the "sure-thing" treasury bet, with the Fed concentrating its purchases in the 3-to-7-year range hoping to drive down rates, and everyone front-running the trade. That trade is now unwinding.

Clearly this reaction is not what Bernanke wanted at all.

Reflections on "Relative Value"

Check out that .81 yield on 3-year treasuries. On October 18, investors scarfed up $750 million of 3-year Walmart Bonds yielding .75% for the stupid reason they yielded more than treasuries. Now treasuries are yielding more.

This is what happens when investors chase "relative value" instead of asking if there is any real value at all.

The same idea applies to those chasing the stock market at these lofty levels on the basis "stocks are cheap relative to treasuries" or some other nonsensical reason to justify valuations.

There is no value, only unwarranted bullishness.

Mike "Mish" Shedlock

Originally published at Mish’s Global Economic Trend Analysis, "Sell the News" Bearish Flattening of Yield Curve Continues; Reflections on "Relative Value".


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Bear Flattener in Treasuries Continues; Mortgage Rates Climb

Bear Flattener in Treasuries Continues; Mortgage Rates Climb

Courtesy of Mish 

Curve Watchers Anonymous has a quick update on US Treasuries.

click on chart for sharper image

The yield curve is flattening, in a bearish way. A Bull flattener would be when yields are dropping across the board with yields on the long end dropping more than the short end.

In this case, 5-year and 10-year yields are up about 45-50 basis points from the low just after QE II started, while yields on 30-year treasuries are up only about 30 basis point.

Daily Snapshot

You can see this easily in a daily snapshot from Bloomberg.

click on chart for sharper image

As I have pointed out before, this action is not at all usual. It is an artifact of everyone front-running the Fed’s announcement of Quantitative Easing purchases, then selling the news.

Yields are higher across the board than in August when the Fed first hinted at another round of QE.

Mortgage Rates Climb

Curve Watchers Anonymous also points out that mortgage rates are on the rise

Mortgage rates are a quarter point higher than a month ago and back to where they were three months ago, even as housing slips further into the gutter. Please see Bernanke Claims QE II will Create 700,000 to 1 Million Jobs; Where? Mexico, Peru, China for more on mortgage applications and mortgage rates.

Mike "Mish" Shedlock


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Marc Faber: Fed’s QE2 Could Trigger Market Correction

Marc Faber: Fed’s QE2 Could Trigger Market Correction

Courtesy of asiablues at Zero Hedge

By Dian L. Chu, Economic Forecasts & Opinions

Marc Faber, publisher of the Gloom, Boom & Doom report, discusses the potential impact of further quantitative easing (QE2) by the U.S. Federal Reserve in a Bloomberg interview on Oct. 36 (clip below).

Correction Triggered by QE2?

Faber sees Democrats--"sadly enough"--would get a shot at still retaining the majority, which would mean the monetary and fiscal policy will most likely stay on its current course.

Equity has done well in Sep. and Oct months; however, Faber thinks the markets are stretched in the inflation trade, and weak dollar, high commodity and precious metal prices, along with high equity valuations, all suggest a correction is overdue. 

Now, with QE2 being largely priced in, anything less than $1 trillion from the Fed would disappoint the markets and may trigger a correction in U.S. stocks, which could result in more quantitative easing.

But the correction should provide a buying opportunity for investors leading to an up cycle, instead of another bear market.   

Equity Better for the Next Decade

Looking at investing for the next ten years, equities, emerging economies in particular, would be a relatively better place to invest than U.S. government bonds, and cash.  However, Faber advises against financial, auto, and aircraft.  He’s been in the high tech sector and likes Microsoft (MSFT).

Precious Metals Due for Pullback

Faber is currently recommending agriculture commodities, and the accumulation of precious metals.  On precious metals, he thinks they are overdue for "some kind of correction" by year end, and expect the next leg up in 2011.    

Dollar Near An Inflection Point

Faber says dollar is oversold, while in contrast, some of the foreign currencies such as Yen and Franc are overbought.  So, an inflection point could be near for a short-term dollar rally which could temporarily push down asset prices. 

He warns investors to be very careful about shorting dollar and long assets as the trade has become quite crowded.

Expect a Strong Pullback of Chinese Economy 

Although not quite gloom and doom, Faber does expect a "strong pullback" on the Chinese economy due to its many imbalances. 

According to Faber, the 0.25% interest rate hike effective Oct. 20 by the PBoC is "meaningless," because of skyrocketing property prices, and the cost of living inflation has gone up much more than the official figure.

He notes food prices have seen high inflation, and because of low GDP per capita where food would account for a high percentage of total expenditure, Faber estimates that the typical consumer…
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Where the Risk Premium Thinking Leads You

Where the Risk Premium Thinking Leads You

Courtesy of Eric Falkenstein of FALKENBLOG

As they say, somethings are so silly on the highly educated can believe them. John Campbell, an archetype of conventional financial academic thinking, has an interesting yet absurd piece on why the low yields of US treasuries makes sense. He starts off with the standard view, that yields of government bonds are due to three things

  • expected real interest rates
  • expected inflation
  • risk premium

As current interest rates are around 2.5%, and current inflation expectations are around 3%, even with a slight convexity adjustment there’s a negative real expected return here. To guys like Campbell, that means, bonds are some kind of insurance, because the only reason investors would accept this is if they pay off in a very bad state of nature, just as you pay for car insurance. Specifically, everyone is supposedly afraid of a recession that would also bring with it deflation. 

While the CAPM betas of bonds have historically been positive, they have been negative lately. If you believed in the CAPM, that would mean the expected negative return makes sense, it is a negative ‘risk premium’. Of course, the positive beta previously did not explain why bonds cratered from 1960 to 1980, and the CAPM does not work at all within equities, the arena it was designed for. It also does not work in corporate bonds, REITs, options, etc. But looked at in isolation it is a plausible explanation, and hope springs eternal.

I think a better explanation of the current interest rates is that the Federal Reserve has been buying hundreds of billions of dollars in US Treasuries. Considering, they have an infinite supply of capital to do this (they create the money when they write the check), the market is not going to offset this via expectations of future inflation. So, the expectations are there, but US Treasuries are a rigged market, with one huge buyer debasing the world’s most powerful currency because it’s in the standard Keynesian manual for how to treat excess unemployment when inflation is currently low. Once the evidence of this short-sighted policy becomes clear, the inflation toothpaste will be out of the tube, and on to the next bubble-crash. 

That is, the expected return on bonds is negative, because bonds are in a Fed-supported bubble. Just look at gold to see what an


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Currency Wars: Debase, Default, Deny!

Currency Wars: Debase, Default, Deny! 

Hiker pausing at fork in path

Courtesy of Gordon T Long of Tipping Points

In September 2008 the US came to a fork in the road. The Public Policy decision to not seize the banks, to not place them in bankruptcy court with the government acting as the Debtor-in-Possession (DIP), to not split them up by selling off the assets to successful and solvent entities, set the world on the path to global currency wars.

By lowering interest rates and effectively guaranteeing a weak dollar through undisciplined fiscal policy, the US ignited an almost riskless global US$ Carry Trade and triggered an uncontrolled Currency War with the mercantilist, export driven Asian economies. We are now debasing the US dollar with reckless spending and money printing with the policies of Quantitative Easing (QE) and the expectations of QE II. Both are nothing more than effectively defaulting on our obligations to sound money policy and a “strong US$”. Meanwhile with a straight face we deny that this is our intention. 

It’s called debase, default and deny.

Though prior to the 2008 financial crisis our largest banks had become casino like speculators with public money lacking in fiduciary responsibility, our elected officials bailed them out. Our leadership placed America and the world unknowingly (knowingly?) on a preordained destructive path because it was politically expedient and the easiest way out of a difficult predicament. By kicking the can down the road our political leadership, like the banks, avoided their fiduciary responsibility. Similar to a parent wanting to be liked and a friend to their children they avoided the difficult discipline that is required at certain critical moments in life. The discipline to make America swallow a needed pill. The discipline to ask Americans to accept a period of intense adjustment. A period that by now would be starting to show signs of success versus the abyss we now find ourselves staring into.  A future that is now significantly worse and with potentially fatal pain still to come.

Unemployed Americans, the casualties of the financial crisis wrought by the banks, witness the same banks declaring record earnings while these banks refuse to lend. When the banks once more are caught with their fingers in the cookie jar with falsified robo-signing mortgage title fraud, they again look for the compliant parent to look the other way. Meanwhile the US debt levels and spending associated with protecting these failed…
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Raise Rates, Cowards

Raise Rates, Cowards

Courtesy of Joshua M. Brown, The Reformed Broker 

Here’s the deal, FOMC – I’m going to give you the intellectual cover you need to do what many people believe is impossible right now.  I’m going to help you get the jelly out of your spines.  Bear in mind that what I’m about to hit you with is coming from both street smarts and Street smarts; I ain’t the professor of nothing.

Benji, your "I’m a student of the Depression" rap is totally rate-arded at this point.  No one’s going to call you Hoover, you can stop now.

What should you do?  Pay close attention, because I choose my words very carefully and I never repeat myself…

The Move:

The Fed Funds target rate needs to go to 1% immediately. It should happen out of nowhere, not during one of your regularly scheduled FOMC slumber parties.  That’s how China rolls, nobody gets advance notice of nothing.  No jawboning, no telegraphing.   It just IS.

The Perception:

The statement should be something to the effect of "now that the recovery has firmly taken hold…"  Anyone who’s raised themselves up in the business world understands the concept of "Fake it til you Make it" and a lot of economic activity is based on perception and confidence.  Your woe-is-me rate policy gives me all the confidence of an airline pilot wearing two different shoes.…
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Has the Fed Painted Itself Into a Corner?

Has the Fed Painted Itself Into a Corner?

Courtesy of Yves Smith

[unclescrooge.jpg]A couple of articles in the Wall Street Journal, reporting on a conference at the Boston Fed, indicates that some people at the Fed may recognize that the central bank has boxed itself in more than a tad.

The first is on the question of whether the Fed is in a liquidity trap. A lot of people, based on the experience of Japan, argued that resolving and restructuring bad loans was a necessary to avoid a protracted economic malaise after a severe financial crisis. But the Fed has consistently clung to the myth that the financial meltdown of 2007-2008 was a liquidity, not a solvency crisis. So rather than throw its weight behind real financial reform and cleaning up bank balance sheets (which would require admitting the obvious, that its policies prior to the crisis were badly flawed), it instead has treated liquidity as the solution to any and every problem.

Some commentators were concerned when the Fed lowered policy rates below 2%, but there we so many other experiments implemented during the acute phases that this particular shift has been pretty much overlooked. But overly low rates leaves the Fed nowhere to go if demand continues to be slack, as it is now.

Note that the remarks by Chicago Fed president John Evans still hew to conventional forms: the Fed needs to create inflation expectations, and needs to be prepared to overshoot.

This seems to ignore some pretty basic considerations. First, the US is suffering from a great deal of unemployment and excess productive capacity. The idea that inflation fears are going to lead to a resumption of spending (ie anticipatory spending because the value of money will fall in the future) isn’t terribly convincing. Labor didn’t have much bargaining power before the crisis, and it has much less now. Some might content the Fed is already doing a more than adequate job of feeding commodities inflation (although record wheat prices are driven by largely by fundamentals).

From the Wall Street Journal, “Fed’s Evans: U.S. in ‘Bona Fide Liquidity Trap’”:

The Federal Reserve may have to let inflation overshoot levels consistent with price stability as part of a broader attempt to help stimulate the economy, a U.S. central bank official said Saturday.

“The U.S. economy is best described as being in a bona


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Zero Hedge

7 Reasons Why Stocks No Longer Care About Political Shocks, And 2 Why They Should

Courtesy of ZeroHedge. View original post here.

From Nicholas Colas of DataTrek Research

Why do global equity markets ignore political shocks like Brexit, President Trump’s election or the news that Angela Merkel failed to form a government in Germany? There are plenty of good reasons, actually, which we review below.

News that German Chancellor Angela Merkel failed to form a new government was the big shock...



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Chart School

Russell 2000 and Semiconductor New Highs / S&P Breaks

Courtesy of Declan.

The S&P broke higher to confirm a 'bear trap' and also closed at a new all-time high. Volume climbed to register an accumulation day but there were further losses in relative performance and continued losses in the MACD.


The Nasdaq posted a gap-driven 1% gain to bring it ever closer to channel resistance. It hasn't yet tagged resistance but it looks well placed to do so by the end of the week. Technical are all bullish.

...

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Phil's Favorites

Rogue State

 

Rogue State

How the guardians of nationhood conspire in its destruction.

By George Monbiot, published in the Guardian 18th November 2017 (Brexiters, beware: if the ties that bind us unravel, tyranny may soon follow)

What is this country we are asked to love? This might once have been an easy question to answer. National identity was built around a range of institutions, considered to represent the national interest. Rebellion against them was characterised as treason. But one by one, these institutions have been subverted from within. Look to the top to see treacher...



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Insider Scoop

The Urban Outfitters Q3 Print: Jefferies' Likes And Dislikes

Courtesy of Benzinga.

Related URBN 13 Key Technical Levels To Watch On Tuesday 5 Biggest Price Target Changes For Tuesday ...

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Digital Currencies

As Bitcoin Tops $8,200, Only 39% Of Survey Respondents Say It's A Bubble

Courtesy of ZeroHedge. View original post here.

Having first surged above $8000 overnight amid Zimbabwe's chaos, it appears uncertainty in the core of Europe has driven further demand for cryptocurrencu protection, sending Bitcoin to a new record high of $8247 - up 50% from the 'Bitcoin Cash' crash weekend lows.

...



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Biotech

The two obstacles that are holding back Alzheimer's research

Reminder: Pharmboy and Ilene are available to chat with Members, comments are found below each post.

 

The two obstacles that are holding back Alzheimer's research

Courtesy of Todd GoldeUniversity of Florida

Family members often become primary caregivers for loved ones with Alzheimer’s disease. tonkid/Shutterstock.com

Thirty years ago, scientists began to unlock the mysteries regarding the cause of Alzheimer’...



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ValueWalk

Robert Mugabe Under House Arrest, Military Takes Control Of Zimbabwe

By Andjela Radmilac. Originally published at ValueWalk.

Zimbabwe’s head of state, 93-year-old Robert Mugabe, has been placed under house arrest after what seems to be a military coup took place in the nation’s capital.

By U.S. Navy photo by Mass Communication Specialist 2nd Class Jesse B. Awalt/Released [Public domain], via Wikimedia CommonsRobert Mugabe is safe

Following numerous reports on social media late Thursday night about the increased military presence in Harare, the capital of Zimbabwe, the country’s military took...



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Members' Corner

An Interview with David Brin

Our guest David Brin is an astrophysicist, technology consultant, and best-selling author who speaks, writes, and advises on a range of topics including national defense, creativity, and space exploration. He is also a well-known and influential futurist (one of four “World's Best Futurists,” according to The Urban Developer), and it is his ideas on the future, specifically the future of civilization, that I hope to learn about here.   

Ilene: David, you base many of your predictions of the future on a theory of historica...



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Mapping The Market

Puts things in perspective

Courtesy of Jean-Luc

Puts things in perspective:

The circles don't look to be to scale much!

...

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OpTrader

Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Promotions

NewsWare: Watch Today's Webinar!

 

We have a great guest at today's webinar!

Bill Olsen from NewsWare will be giving us a fun and lively demonstration of the advantages that real-time news provides. NewsWare is a market intelligence tool for news. In today's data driven markets, it is truly beneficial to have a tool that delivers access to the professional sources where you can obtain the facts in real time.

Join our webinar, free, it's open to all. 

Just click here at 1 pm est and join in!

[For more information on NewsWare, click here. For a list of prices: NewsWar...



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Kimble Charting Solutions

Brazil; Waterfall in prices starting? Impact U.S.?

Courtesy of Chris Kimble.

Below looks at the Brazil ETF (EWZ) over the last decade. The rally over the past year has it facing a critical level, from a Power of the Pattern perspective.

CLICK ON CHART TO ENLARGE

EWZ is facing dual resistance at (1), while in a 9-year down trend of lower highs and lower lows. The counter trend rally over the past 17-months has it testing key falling resistance. Did the counter trend reflation rally just end at dual resistance???

If EWZ b...



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All About Trends

Mid-Day Update

Reminder: Harlan is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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