>> Bond Investing Strategies: 2011 & Beyond

Excerpts from an interesting article by Shawn Tully:


Substantial Money Flow in Fixed Income

• Since September of 2008, investors have poured a total of $937 billion into bond funds
• The flood of money inflated bond prices to such heights that it drove yields to their lowest level in 50 years.

Chart: Surge of Money in Fixed Income

Why are yields so low?

The Fed is using its immense powers to hold down yields on both short- and long-term Treasuries.

• Once the economy rebounds, the Fed will need to stop buying long-term bonds and substantially raise the Fed funds rate.
• Growth and inflation will once again take hold: for investors, the biggest risks are in longer-term bonds.
• If and when that yields return to their half-century average of 6.76% (say by 2013), the price of the 10-year treasuries would drop by 26%

Chart: How to get Wiped Out in Treasuries

Bond Investing Strategies

Shawn goes on to recommend 4 types of bonds which are still worth investing in:

• Intermediate-term high-yield: E.g. BlackRock's iShares iBoxx High Yield Corporate Bond Fund (HYG) yielding 8% & with an average maturity of 5 years
• Emerging market bonds: E.g. Pimco's Emerging Local Bond Fund (PELAX) yielding 4.2% and with an average maturity of 7 years
• Floating rate bank loans: E.g. BlackRock's Floating Rate Income Trust (BGT) offers a yield of 5.6%
• Go-anywhere funds: E.g. BlackRock's Strategic Income Opportunities Fund (BASIX) yielding 4.1%, and Pimco's the Unconstrained Bond Fund (PUBAX) yielding 2.5%

Continue reading Shawn's article here.

Conclusion

The author makes a few good points in his article, and makes some interesting recommendations. If you consider any of the funds below, do not forget to "comparison shop" for simililar funds with lesser expense ratios and/or with better track records - but perhaps most importantly evaluate the risk each recommendation presents.

Full Disclosure: I have no positions in the securities mentioned in this article.

>> Housing Bottom Coming in 2015?

Housing Market Bottom Predictions
There have been a few predictions on the housing market bottom: 2009, 2010, & 2012?


Dallas Fed Housing Market Bottom Prediction: 2015 with further 33% price drop?
The Dallas Federal Reserve recently came out with an interesting report recently on the path to a healthy housing market. Some interesting excerpts:

• Public policy goal of increasing the U.S. homeownership rate collided with a huge leap in financial innovation.
• 9.1 million homes were built between 2002 and 2006, a period when 5.6 million U.S. households were formed.
• Real home prices rose 85% to their highest level in August 2006. They have since declined 33 percent.
• Mean reversion: home prices still must fall 23% if they are to revert to their long-term mean; chart below:

Other Observations & Implications from the Economic Letter

• In 2008, 33% homeowners devoted at least a third of household income to housing; 12.5% were burdened with housing costs of 50 percent or more
• in a best-case outcome, 20 to 25 percent of modifications will become permanent. Failed modifications suggest that, without strong income growth, the bounds of affordability can be stretched only so far.

A final note:

With nearly half of total bank assets backed by real estate, both homeowners on the cusp of negative equity and the banking system as a whole remain concerned amid the resumption of home price declines.

Continue reading the economic letter here

>> The Inequality That Matters

Excerpts:

Does growing wealth and income inequality in the United States presage the downfall of the American republic? Will we evolve into a new Gilded Age plutocracy, irrevocably split between the competing interests of rich and poor?

and

One group has the status currency of money and the other has the status currency of intellect, so might they be competing for overall social regard?

and

The numbers are clear: Income inequality has been rising in the United States, especially at the very top. The data show a big difference between two quite separate issues, namely income growth at the very top of the distribution and greater inequality throughout the distribution. The first trend is much more pronounced than the second, although the two are often confused.

and

When it comes to the first trend, the share of pre-tax income earned by the richest 1 percent of earners has increased from about 8 percent in 1974 to more than 18 percent in 2007. Furthermore, the richest 0.01 percent (the 15,000 or so richest families) had a share of less than 1 percent in 1974 but more than 6 percent of national income in 2007.

and

At the same time, wage growth for the median earner has slowed since 1973. But that slower wage growth has afflicted large numbers of Americans, and it is conceptually distinct from the higher relative share of top income earners.

and

For instance, for 2004, nonfinancial executives of publicly traded companies accounted for less than 6 percent of the top 0.01 percent income bracket. In that same year, the top 25 hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500.

Read the full article here

--

About the Author:
Tyler Cowen is a professor of economics at George Mason University and at the Center for the Study of Public Choice. He is the Director of the Mercatus Center.

>> Roubini: A Crash Course in the Future of Finance

>> Economic Recovery & Small Businesses

Small Business Economic Trends
The NFIB recently released its Small Business Economic Trends Survey Report for April 2010. The outlook for small business is still not good.

The Index of Small Business Optimism lost 1.2 points, falling to 86.8. The persistence of Index readings below 90 is unprecedented in survey history.

From the Report (highlights by yours truly in bold):
... While news about the economy has been positive for two or three quarters, small business owners remain quite pessimistic about the future for the economy.
...
Since small firms produce half the private sector GDP, it is hard to envision a sustained recovery without their participation.
...
Capital spending is on the sidelines as is the demand for loans to finance these activities. A revival of capital spending will require a significantly improved business outlook and some support from reluctant customers. Plans to make capital expenditures over the next few months were unchanged at 20 percent, four points above the 35 year record low.
...
The news about the economy and financial markets has been positive for some time, so the source of this pessimism must be found elsewhere such as Washington D.C., the source of most business uncertainty, but also facts on the ground: 34 percent said weak sales are their top business problem and that is what business is all about.


In Pictures: What Recovery? - Small Business Still Hurting













About the NFIB
The National Federation of Independent Business foundation is one of the leading sources of information about small business in the United States. The foundation conducts research about policy-related issues as well as the business practices and economic impact of small firms through its Small Business Economic Trends reports and other economic research studies.

Further reading:

• SBET April 2010 Report: here
  

>> Greenspan's $900Billion Survival Formula

Most people are familiar with the sub-prime mortgage crisis. Reader's of this blog have had a humorous look in previous posts:

• >> Dogbert the CEO : Risky Mortgages & Ponzi Schemes

• >> Subprime Mortgage Primer in Pictures

For a more serious look, see this previous post about Bear Stearn's collapse:

• >> Crash Chronicle : The Fall of Bear Stearns

One the problem started, the finger pointing followed not too long after. Lets take a look into a brief history and the solution proposed by Alan Greenspan, who many believe was the chief architect of this crisis.

The Greenspan Put
Once the subprime mortgage meltdown started, there was a lot of "passing the buck" about who was at fault. Greenspan soon became the person most blamed for the crisis:

- Greenspan legacy: erosion of US financial strength , key comments:

• Since Alan Greenspan took office as Fed chairman, it has taken an average of $3.60 of debt growth to generate $1 of nominal gross domestic product growth versus a long-term average of approximately $1.5 to $1.
  

- Reid: It's Greenspan's Fault , key comments:

• Reid's office pointed out that the Fed started to see deterioration in the credit market back in 2003 and 2004, but didn't warn lenders off using the "non traditional mortgages" seen as precursors of what is now a credit crisis until December of 2005, shortly before Greenspan resigned.

But isnt this really a what the Greenspan's put has been all about?
[ Note: The Greenspan put really means that the Fed's monetary policy allowed higher risk taking, becoming a form of privitazing profits and socializing losses ]

For more discussion about Greenspan's "contribution" to the real estate bust such as this chart below, see here:




Greenspan's 1500 word article in the Wall St. Journal

Greenspan, the former Chairman of the Federal Reserve for 19 years, finally spoke out:
- Greenspan's 1500 word op-ed piece in the Wall St. Journal in March 2009: The Fed Didn't Cause the Housing Bubble . Key comments:

• Alan says "Accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble."
• Its all China's fault! Alan says"As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005."
  

Greenspan's $900 Billion Survival Formula @ Financial Crisis Inquiry Commission
The Financial Crisis Inquiry Commission (FCIC) is a ten-member commission appointed by the United States government with the goal of investigating the causes of the financial crisis of 2007–2010.

Quoting Greenspan from his testimony to the FCIC on 7th April 2010"
- "I believe that during the past 18 months, there were very few instances of serial default and contagion that could have not been contained by adequate risk-based capital and liquidity. I presume, for example, that with 15% tangible equity capital, neither Bear Stearns nor Lehman Brothers would have been in trouble"

[ Tangible common equity is defined as total shareholder equity minus preferred stock, goodwill and other intangibles.]

Rolfe Winkler explains how this will help: "A bigger equity cushion not only buffers bank creditors from losses — preventing cascading bank runs — it by definition would reduce frothy lending that inflates bubbles in the first place."

Extrapolating the 15% TCE requirement to major US Banks, $869 billion would need to raised:

Nearly $900 billion more to be raised is certainly not feasible. Greenspan also explains why 15% TCE would not be too popular:"Increased capital, I might add parenthetically, would also likely result in smaller executive compensation packages, since more capital would have to be retained in undistributed earnings."

In other words, smaller bonuses.

Credits / Further Reading:
- TCE shortfall Image courtesy Rolfe Winkler at Reuters
- Greenspan's testimony to FCIC available here
- Video of Greenspan's testimony available here

>> The Silverdome Auction: A sign of things to come?

The Pontiac Silverdome stadium which has hosted some of the world's biggest names - from Elvis to Pink Floyd to the Pope, and at its peak has hosted 93,173 people was built in 1975 at a cost of $55.7 million. ( Read more about the Pontiac Silvedome at wikipedia here )

The silverdome was auctioned recently (auction info: http://www.williamsauction.com/silverdome/ ) - sold for a cost of $583,000. Yes, you read that right - it was auctioned for 1% of its cost to build it in 1975! ( Reference: http://www.detnews.com/article/20091116/METRO03/911160405/1409/METRO/Canadian-company-s-$583-000-bid-wins-auction-for-Silverdome )

Is this a sign of things come?

>> The real dollar story

The dollar has been in news in the last few months, with a lot of people calling out saying "the dollar is dead" and "lets have a new reserve currency". So far:


The Dollar's Days are over?
(1) Reuters says Dollar to eventually lose grip on commodity trade

(2) The Independent had news about a "profound" financial change in recent Middle East history wherein Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Read more here

(3) Financial Express says gulf states considering dollar alternative for oil trade, gold jumps

(4) Even the UN says the world should ditch the dollar!


The China Perspective
(1) China not happy with the US Dollar, wants an alternative to the dollar

(2) China is also is not happy with the probable fall in the dollar!
Mike Pettis is one of the world's top economist's, and to quote him: "The Chinese are worrying about future weakness in the dollar (which hurts their reserves) while complaining about current strength (which hurts exports)!"

Here is an excerpt of a comment from Mike Pettis on why it is improbable that the Dollar will not be removed from the status of a reserve currency:
""There has been for decades talk about creating an international reserve currency and it has never really progressed," said Michael Pettis, a finance professor at Peking University's Guanghua School of Management. Managing such a currency would require balancing the contradictory needs of countries with high and low growth or with trade surpluses or deficits, Pettis said. He said the 16 European nations that use the euro have faced "huge difficulties" in managing monetary policy even though their economies are similar. "It's hard for me to imagine how it's going to be easier for the world to have a common currency for trade," he said"


Will the Fed save the dollar?
Earlier this year:
(1) On March 19th this year, the 'Rambo' Fed, determined to avoid a repeat of the great depression committed to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion. This may more than double the Fed’s balance-sheet assets by September to $4.5 trillion from $1.9 trillion! Bye-bye dollar?

(2) Also earlier this year, the Fed agreed to currency swaps earlier in the year: From this bloomberg article:
""The Federal Reserve and four other central banks announced a currency swap arrangement that will give the U.S. central bank access to as much as $285 billion in euros, yen, British pounds and Swiss francs. ""

The official purpose of such short-term agreements is to finance short-term capital flows; but swap agreements can also be misused to facilitate large interventions in foreign exchange markets. Is this the reason behind this act?

This of course has been tried before, from 1936 to the present the Exchange Stabilization Fund has participated in over a hundred credit or loan arrangements with foreign governments or central banks. What did this attempt to prop the dollar lead to? Here's what happened - the treasury was subsequently forced to issue foreign currency-denominated debt (The Roosa bonds in the 1960s and Carter bonds in 1978) to repay swap drawings.

Here are the details from the Dept. of Treasury website.

{ Recommended reading: A very good article describing this entire chain of events in detail: Fed tries to boost the dollar. }



Putting the Dollar's fall & Gold's spike this week into perspective
Oct 6, 2009: The Independent reported about a dollar alternative to set the value of oil trades. This set in motion the immediate fall of the dollar and a jump in the price of gold.

This was then officially denied by several sources.

Oct 8, 2009: Asian central banks intervened heavily in the currency markets on Thursday to stem the appreciation of their currencies against the US dollar amid fears that their exports could be losing ground against China. More detail here.

Meanwhile, Tyler Durden speculates that there could be a potential deal between US & China to let the dollar slide more slowly, more here.

Or could this all really be an organized short on the dollar? Soros had made $1 billion in 1 trade shorting the British pound in the 1990s, so the possibility remains that someone had an interest in the dollar falling; we shall know with time.


Conclusion - So What is the Dollar story?
We started out with news about calls to replace the dollar with another reserve currency. We also saw that several parties have both short-term as well as long-term interests in the fall of the dollar.

My opinion is that the calls for replacement of the dollar as the reserve currency is noise which will die out with time, there seems to be a low probability of that happening. Meanwhile I expect a slow slide in the dollar, coupled with deflation that has started to continue for some time to come.

( Why deflation? Thats a discussion for some other time :-) )

>> Part 2 - Banking Cartels Engineered Financial Crisis Endgame

Jul 11, 2009 - 07:06 AM; By: DeepCaster_LLC

We issue a word of caution to our readers. So long as The Cartel is in a very active interventional mode (e.g. as in taking down the price of Gold and Silver) do not be lured into thinking that the periodic up spikes in the prices of Gold and Silver necessarily present a "breakout" or a buying opportunity. As a practical matter, technical breakouts are sometimes a lure designed to suck in more "longs" prior to a subsequent deeper Takedown.

Nonetheless, it is essential to study the Fundamentals and Technicals even though the Interventionals can override the Fundamentals and Technicals. One must study the Fundamentals not only for all the usual reasons but also because Fundamentals somewhat constrain the timing and effectiveness of Interventions by The Cartel.

Continue reading here

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Probable? Possible? Or hogwash? Please post your comments on what you think about this article.

>> Part 1 - Banking Cartels Engineered Financial Crisis Endgame

Jul 11, 2009 - 06:36 AM; By: DeepCaster_LLC

“…what is the reason for this “seemingly random monetary mess that multiplies its momentum every day? The answer, in one word, control. The elite/insiders already have control of the financial system, but they wanted more, much more…and it was not random, it was planned.” (emphasis added)

“How will all the above manifest itself in your life? The answer: “All you own will shrink...your income, assets, net worth, will shrink year after year in real terms inflation adjusted and possibly also nominally.” - HS Letter, April 27, 2008.

Continue reading here

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Probable? Possible? Or hogwash? Please post your comments on what you think about this article.

>> Bernanke about the Great Depression - We did it

Here are the words of Ben Bernanke at the Conference to Honor Milton Friedman at University of Chicago, Chicago, Illinois on November 8, 2002:

" Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. "

Thats right. Bernanke himself said that the Fed indeed "created" the great depression.

Continue reading here

>> Great Depression is here? - A picture is worth a 1000 Words

First 14 months of Depression job losses v/s 14 months of job losses so far in this recession:


Job losses in the last 6 recessions:


And finally, payroll employment data from the last 6 recessions and the 1 depression:


Conclusion: The rate and the extent of job losses now is nowhere near the 1930s.

Source:
- NBER numbers on non-agricultural establishments during those years
- NBER's Macrohistory Database
- Charts courtesy Curious Capitalist @ Time.com

[ Yes, I am too lazy to make my own charts from data :) ]

>> NBER study on Recessions & Depressions

---- Abstract -----

Long-term data for 25 countries up to 2006 reveal 195 stock-market crashes (multi-year real returns of -25% or less) and 84 depressions (multi-year macroeconomic declines of 10% or more), with 58 of the cases matched by timing. The United States has two of the matched events--the Great Depression 1929-33 and the post-WWI years 1917-21, likely driven by the Great Influenza Epidemic. 45% of the matched cases are associated with war, and the two world wars are prominent. Conditional on a stock-market crash, the probability of a minor depression (macroeconomic decline of at least 10%) is 30% and of a major depression (at least 25%) is 11%. In a non-war environment, these probabilities are lower but still substantial--20% for a minor depression and 3% for a major depression. Thus, the stock-market crashes of 2008-09 in the United States and other countries provide ample reason for concern about depression. In reverse, the probability of a stock-market crash is 69%, conditional on a depression of 10% or more, and 91% for 25% or more. Thus, the largest depressions are particularly likely to be accompanied by stock-market crashes, and this finding applies equally to non-war and war events. We allow for flexible timing between stock-market crashes and depressions for the 58 matched cases to compute the covariance between stock returns and an asset-pricing factor, which depends on the proportionate decline of consumption during a depression. If we assume a coefficient of relative risk aversion around 3.5, this covariance is large enough to account in a familiar looking asset-pricing formula for the observed average (levered) equity premium of 7% per year. This finding complements previous analysis that were based on the probability and size distribution of macroeconomic disasters but did not consider explicitly the covariance between macroeconomic declines and stock returns.

Emphasis mine. Continue reading here