Posts Tagged ‘US government debt’

CDS And A U.S. Default: What’s The Point?

CDS And A U.S. Default: What’s The Point?

Courtesy of Tom Lindmark at But Then What

John Carney has a really smart post over at Clusterstock regarding the pricing of credit default swaps for Campbell Soup, JPMorgan and the US government. In case you haven’t been following all of this, the cost to insure credit risk on Campbell Soup and this country are essentially the same while the cost to insure JPMorgan risk is approximately three times as much.

Bloomberg makes an argument that this makes no sense since Morgan is essentially a GSE. In the event of failure, strike that word failure, in the event of a problem with Morgan we can all count on the government coming once more to the barricades. True, but as Carney points out this misses some important elements of risk:

Let’s run through some risks that Reilly seems to be overlooking when it comes to JP Morgan’s debt.

We know that the government isn’t going to let JP Morgan go bankrupt. But we definitely do not know what form future bailouts will take. Maybe creditors will be protected in a future bailout. Maybe they won’t. Keep in mind that in the recent bailouts of the auto sector forced bondholders to take deep haircuts.

We also know that the failure of JP Morgan would almost certainly mean that the financial system was in great distress. In that case, anyone who sold insurance on JP Morgan would likewise probably be distressed, making paying off the insurance more costly. It seems what’s happening here is that sellers of swaps are smartly taking into account this risk.

That kind of risk doesn’t apply to isolated failures due to corruption or embezzling. If Campbell’s went down, the credit markets wouldn’t suddenly freeze up. Those who sold the credit default swaps wouldn’t necessarily have trouble getting the liquidity they need to fund the obligations.

Overlooking these kinds of risks is a problem for Reilly’s argument. It’s hard enough to establish you know how to price risk better than the market. And it’s pretty much impossible when you over look important risks.

I particularly like the way John gets to the real point about letting the markets sort the risks out, but I still don’t quite understand the concept of writing CDS on US government debt.

It seems to me this is a pointless…
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China cuts holding of U.S. Treasury securities

China cuts holding of U.S. Treasury securities

China - national geographic photoCourtesy of Edward Harrison at Credit Writedowns

The conventional wisdom is that the US is beholden to foreign agents as they hold much of the US government debt.  In this view, if these agents sell their securities, interest rates in America should increase as demand for US public debt evaporates.

Now comes evidence that China is indeed selling.  The BBC reports.

China reduced its holdings of US government debt by the largest margin in nearly nine years in June, according to data from the US Treasury.

China holds more US government debt than any other country and cut its holdings of US securities by more that 3% in June, said the BBC’s Chris Hogg…

The sales were made as the US treasury secretary was visiting Beijing to try to reassure the Chinese that their investment in his country’s government debt is safe…

In 2008, the Chinese increased their holdings in US debt by 52% over 12 months.

"China has said it would like to establish an alternative to the US dollar as the world’s favoured currency for foreign exchange reserves," said our correspondent.

"So far there is no evidence that there is a suitable alternative. But these figures suggest they are exploring ways to diversify their investments where they can."

But, as you have probably noticed, interest rates have not increased appreciably.  What gives?  Two ideas:

  1. The Chinese aren’t selling because there aren’t enough alternatives.  Just yesterday, there was a Bloomberg article indicating the Chinese are still very much interested in buying US public debt. They may even being moving out on the long-end of the curve.
  2. The premise that interest rates will increase is false.  If the US economy slows, this automatically decreases the current account deficit, meaning the US becomes less dependent on foreign sources to buy Treasury securities.  Increased private sector savings suggests more domestic sources of Treasury funding are now available.

On the whole, I would expect interest rates to rise as government budget deficits increase.  However, I have just presented you two reasons why this might not be so.

 


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Kimble Charting Solutions

Dow Theory Concerns? Transportation Stocks Make New Lows

Courtesy of Chris Kimble.

The bull market is experiencing its first real test since the 2014/2015 stock market correction. Volatility is high and key sectors are heading lower.

One such sector is the Transportation Sector(NYSEARCA: IYT) and select stocks.

The age-old Dow Theory call for the Industrials and Transports to lead the market (and confirm each others moves). Currently, both are struggling. But the Dow Transports are on the precipice of a major breakdown. Looking at the chart below, you can see that the Transportation Sector ETF (IYT) is attempting to break down below its 12-month trading range and 9-year rising support line.

If the market doesn’t reverse higher soon, this break down will send a negative message to investors about the economy… and the broader stock market.

A move lower wou...



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Phil's Favorites

The NRA's financial weakness, explained

 

The NRA's financial weakness, explained

Political clout doesn’t guarantee a healthy bottom line. AP Photo/Evan Vucci

Courtesy of Brian Mittendorf, The Ohio State University

The National Rifle Association’s political spending fell during the 2018 midterm elections. There’s talk of ending small perks like free coffee at its offices and even ...



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Zero Hedge

Attention US Millennials: Japan Is Now Giving Away Free Houses

Courtesy of ZeroHedge. View original post here.

There are over 8 million abandoned homes in Japanese suburbs, according to The Japan Times. 

If you are a struggling American millennial: you could theoretically move to Japan because the sushi’s fresh, cost of living is low, and the government is giving away free homes. 

What is driving the government to give away these homes? Well, there is a mass...



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Digital Currencies

Crypto Bull Tom Lee: Bitcoin's 'Fair Value' Closer To $15,000, But He's Sick Of People Asking About It

Courtesy of ZeroHedge. View original post here.

Listening to the crypto bulls of yesteryear continue to defend their case for new new all-time highs, despite a growing mountain of evidence to suggest that last year's rally was spurred by the blind greed of gullible marginal buyers (not to mention outright manipulation), one can't help but feel a twinge of pity for Mike Novogratz and Wall Street's original crypto uber-bull, Fundstrat's Tom Lee.

Lee achieved rock star status thanks to ...



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Insider Scoop

Economic Data Scheduled For Friday

Courtesy of Benzinga.

  • Data on retail sales for November will be released at 8:30 a.m. ET.
  • Data on industrial production for November will be released at 9:15 a.m. ET.
  • The flash Composite Purchasing Managers' Index for December is schedule for release at 9:45 a.m. ET.
  • Data on business inventories for October will be released at 10:00 a.m. ET.
  • The Baker Hughes North American rig count report for the recent week is schedule for release at 1:00 p.m. ET.

Posted-In: Economic DataNews Economics ...



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Biotech

Those designer babies everyone is freaking out about - it's not likely to happen

Reminder: We're available to chat with Members, comments are found below each post.

 

Those designer babies everyone is freaking out about – it's not likely to happen

Babies to order. Andrew crotty/Shutterstock.com

Courtesy A Cecile JW Janssens, Emory University

When Adam Nash was still an embryo, living in a dish in the lab, scientists tested his DNA to make sure it was free of ...



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Members' Corner

Blue Wave with Cheri Jacobus (Q&A II, Updated)

By Ilene at Phil's Stock World

Cheri Jacobus is a widely known political consultant, pundit, writer and outspoken former Republican and frequent guest on CNN, MSNBC, FOX News, CBS.com, CNBC and C-Span. Cheri shares her thoughts on the political landscape with us in a follow up to our August interview.

Updated 12-10-18

Ilene: What do you think about Michael Cohen's claim that the Trump Organization's discussions with high-level Russian officials about a deal for Trump Tower Moscow continued into June 2016?

...

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Chart School

Weekly Market Recap Dec 09, 2018

Courtesy of Blain.

Bears are certainly showing the type of strength we haven’t seen in a long time.   A week ago at this time futures were surging on news of a “truce” for 90 days between China and the U.S. in their trade spat.  But the charts were still not saying lovely things despite a major rally the week prior.   And by Tuesday, darkness had descended back on the indexes, with another gut punch Friday.    A lot of emphasis was put on a long term Treasury yield dropping below a shorter term Treasury.

On Monday, the yield on five year government debt slid below the yield on three year debt, a phenomenon which has p...



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Mapping The Market

Trump: "I Won't Be Here" When It Blows Up

By Jean-Luc

Maybe we should simply try him for treason right now:

Trump on Coming Debt Crisis: ‘I Won’t Be Here’ When It Blows Up

The president thinks the balancing of the nation’s books is going to, ultimately, be a future president’s problem.

By Asawin Suebsaeng and Lachlan Markay, Daily Beast

The friction came to a head in early 2017 when senior officials offered Trump charts and graphics laying out the numbers and showing a “hockey stick” spike in the nationa...



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ValueWalk

Vilas Fund Up 55% In Q3; 3Q18 Letter: A Bull Market In Bearish Forecasts

By Jacob Wolinsky. Originally published at ValueWalk.

The Vilas Fund, LP letter for the third quarter ended September 30, 2018; titled, “A Bull Market in Bearish Forecasts.”

Ever since the financial crisis, there has been a huge fascination with predictions of the next “big crash” right around the next corner. Whether it is Greece, Italy, Chinese debt, the “overvalued” stock market, the Shiller Ratio, Puerto Rico, underfunded pensions in Illinois and New Jersey, the Fed (both for QE a few years ago and now for removing QE), rising interest rates, Federal budget deficits, peaking profit margins, etc...



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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

Free eBook - "My Top Strategies for 2017"

 

 

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Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

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About Phil:

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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