Linkage roundup

Some reading material for you from my twitter stream:


RT @edwardnh: Why the latest eurozone bail-out is destined to fail within weeks - Telegraph http://t.co/sgj8HQcn
RT @credittrader: GReader: The Global Moral Hazard Dawns: Merkel Says "It Must Be Prevented That Others Come Seeking A Haircut" As... http://t.co/Tjd22kbQ
RT @theanalyst_hk: $$ Jim Chanos: Not Impressed By The Europeans, And Still Shorting #China http://t.co/OvdXeWIr #economy #europe
RT @JackHBarnes: Chart of the Day: North Dakota Annual Oil Production: http://t.co/lUWOqWst -- need to do more research myself on shale oil
Transfer payments over time in US http://t.co/sxiw6sF8
RT @zerohedge: And Now, For Some Semblance Of Sanity, Here Is One Hour Of Hugh Hendry http://t.co/5A5Jwgxu -- separate post on this soon(tm)
CITI: Failure To Trigger Greek CDS Could Cause The Whole Euro Bailout To Fall Apart http://t.co/TLDjUF7L -- be careful what you wish for
Meanwhile in China a swan finally takes flight... http://t.co/Z8w40PKd -- Condo prices are falling hard.
RT @AlephBlog: Fannie Squeezing Banks Makes 4% Mortgage a Mirage, Hinders Housing Rebound http://t.co/BKikceRX Higher lending standards fight lower rates
RT @AlephBlog: Money managers and commodities, the case against http://t.co/ynsn1qT3 Graph shows $$ managers drove commodity prices http://t.co/eNKE3nFA
RT @andrewyorks: *EU LEADERS CALL FOR BANKS TO HAVE 9% CORE CAPITAL LEVEL ok move that dial on the upper left to 9 http://t.co/WHLMk6Dm -- should be interesting when taking haircuts on Greek debt.
Skyscraper taller than any in London or Tokyo opens in Chinese village of 2000. http://t.co/IvHoRw4j #thiswillnotendwell
Underground bank lending in China - NPR - http://t.co/677IPKYK
RT @historysquared: $$ The cash commodity trading firms that account for 1 trillion in annual revenue 50% of all transactions http://t.co/TqTvhHM1
RT @ftasia: Iron ore plummets to 15-month low: As Chinese steel mills cut production, the price of iron ore dropped 7.2 per ... http://t.co/RVfC48zy
Blackberry outage made roads safer. http://t.co/agSNxNGX

Linkage roundup

Some reading material for you from my twitter stream:


RT @zerohedge: "It was grim. The worst mood I have ever seen, a complete mess," said one eurozone finance minister. http://t.co/NnHreVRK


RT @TBPInvictus: My fave homemade chart on labor market slack and why inflation's a long way off: http://t.co/BKBGjFeO #FRED


RT @FactSet: What do yield curves tell us about the outlook for the world #economy? We take a look: http://t.co/r4ucgUfl -- Inverted Yield Curves are bad....


RT @simonsinek: Blow Up Your Business Before Someone Else Does http://t.co/rqdZ8GEW 


TED spread going the wrong way -- http://t.co/6vmUhc60


RT @EpicureanDeal: This Switchblade drone is scary as hell: http://t.co/buFmf6BF Long-distance, remote-controlled , tightly targeted antipersonnel munitions.


Good commentary by GaveKal on the current european situation. http://t.co/9zYX6Wgj


RT @BreakingNews: Biographer says Steve Jobs refused early and potentially life-saving surgery on his pancreatic cancer - @CBSNews http://t.co/YFX7AJOo


RT @NicTrades: FT: French banks curbing credit lines for commodities trading http://t.co/62sZhIkB -- What do you think will happen to all the base metals when Greece goes POP!  ??


#copper getting crushed today. Will it completely break down or bounce off the bottom again? http://t.co/2h0LKT31 -- looks like it bounced.


Italian bond yields going wrong direction. http://t.co/6TP2ixgp


RT @lessig: Ben Smith is brilliant: An Occupy Wall Street/Tea Party Venn diagram http://t.co/AWNNhlBg #rootstrikers #tpp

Ray Dalio on the challenges in front of us

Ray Dalio of Bridgewater Associates has recently appeared on the Charlie Rose show as well as written a piece for the Financial Times. I think he does a good job of describing how we got here (continually borrowing money to improve our standard of living) and the tenuous situation we find ourselves in (Greece, falling home prices, etc.)

From FT.com

We are in the midst of a deleveraging, we are nearly out of ammunition and we are at each other’s throats. Being in a deleveraging and nearly out of ammunition is a very difficult position to be in. But, being at each other’s throats is our biggest problem.
Our character and our political and social systems are now being tested in ways that have typically been tested in past deleveragings. In deleveragings bad economic conditions typically lead to emotional reactions, social and political fragmentation, poor decision-making and increased conflict. When this occurs in democracies, the checks and balance system, which is intended to yield the best decisions for the whole, can stand in the way of thoughtful leadership and lead to ineffective “mob” rule. This dynamic can lead to a self-reinforcing downward spiral.

The video goes into a little more detail of his philosophy of knowing what you don't know and being willing to have your ideas and conclusions challenged throughout the corporate structure.  I suggest you read both the article and watch the interview.

Thanks to The Intrigued Trader and Also Sprach Analyst

Linkage roundup

Some reading material for you from my twitter stream:

RT @pdacosta: World's first malaria vaccine works in major trial http://t.co/XLq02ns1

Custody of your assets is ALWAYS important, no matter what... http://t.co/ynICJv56

RT @planetmoney: New podcast: The price of default. Argentina's default in 2001 offers a cautionary tale for Greece. | http://t.co/levA26eW

RT @niubi: China reveals size of copper inventory - http://t.co/qUyGrZgW http://t.co/LdEoxqtr huge news $$


RT @NicTrades: Japan 'offers 10,000 free trips to foreigners' in an attempt to boost tourism - Telegraph http://t.co/9nJb9dxo


Paging radioactive swan, paging radioactive swan... http://t.co/jRDpJ4Ug


From @ProfSteveKeen We are still screwed and the Doctors have no clue what's wrong http://t.co/G55dEaCJ HT @stacyherbert


Worried about radiation? There's an app for that. http://t.co/3zSl9mut


Prehistoric kids left marks in caves. http://t.co/0uyyp620

You don't buy the last bounce, especially when Mars Attacks

I don't usually comment on the price of the equity markets but considering what I'm seeing I thought I'd bend one of my self imposed guidelines. Remember you are hearing this from someone who does not see any positive forces influencing the market right now.

The markets have been pretty much stuck in a rut since early August and seems to be driven by the constant stream of contradictory rumors coming out of Europe. Will they save Greece? (no, they can't) Will the European banks be nationalized?  (no idea, but I'm not hanging out to find out)  Meanwhile China's negative real rate maneuver and excessive credit creation is coming back to haunt them.  And America is slowing down.

Stuck in a rut for the last two months.

Here are some of the indicators I look at to assess financial market risk and as you can see all of them are going the wrong way.

Ted Spread

Notice how the TED (Treasury - Eurodollar spread, an indicator of banking stress) peaked and started healing before the market bottomed in early July 2010; showing a positive divergence.

Emerging market bond spreads, dollar denominated

The spread for emerging market bonds also shot up before the correction in 2010 and also showed a similar positive divergence. Right now spreads continue to widen.

My own proprietary indicators are not showing any sort of improvement either, again the opposite of 2010.

Note how in 2010 risk stopped going up.

Compare to 2011 where the RiskMeter keeps going up. 

Do I think the market is going to crash? I can't answer that question.  If the European situation looks like it can be truly resolved we could get a serious rally. I'm waiting to see what my fundamental indicators of market health tell me before I get back into the stock market.

Right now they are saying wait.

Remember, no matter what happens there's someone out there who'll be trying to convince you to buy stocks right now.

Video scene from Mars Attacks

Additional Reading:

http://www.businesscycle.com/news_events/event_details/1476/4 - He's been calling for a slowdown for a while and he just upgraded to calling for a recession this week.

Humble Student of the Market - Germany engaging in expensive can kicking. We may get a bounce but it does not fix the fact Greece has too much debt. Who owns it is immaterial.

Linkage roundup

Some links I found interesting today:

Gillem Tulloch video on Chinese money supply, lending, and housing problems.  As I mentioned previously negative real rates in a growing economy create massive distortions:
http://video.ft.com/v/1186054970001/Bubble-in-Chinese-property

ECRI calls for another recession in the US:
http://www.bloomberg.com/news/2011-09-30/u-s-is-heading-toward-another-recession-ecri-s-achuthan-says-tom-keene.html

Can the long bond go further?

The recent drop in long term yields is impressive and historic.  While the 30 year treasury yield has backed up a bit it is still very low, currently in the range seen during the depth of the financial crisis of 2008.

I'm not trying to convince you of whether it can go lower in this post even though I currently own long term treasuries. I'm considering selling of some of my position and this blog post is part of me thinking aloud about the situation.

What is interesting about this current phase of declining interest rates is how the 10 year has broken new lows while the 30 year, while low, is not in record territory yet.  (Note the 30 year was not issued for part of the 2000's. You'll see gaps in the data during that period)

30 and 10 year yields

Looking at the difference between 30 and 10 year yields provides a very different picture.

30 year less 10 year yield

While the spread has declined recently we are still in rare territory when the difference between the 30 and 10 is greater than 1%.  What this all means I honestly don't know yet but I thought I'd share with you yet another example of  how our unique our current situation is.

The author owns long term treasuries and is considering paring back his position.

Kicking Copper while its down

A little more than six months ago I laid out a bearish case for the red metal, also known as Dr. Copper by those in the markets for its ability to predict future economic change.  With the recent thrashing copper and many other risk assets have taken I thought revisiting the topic would be a good idea.

While China is a large factor in all base metals prices let's start with the Old World and the seemingly mundane issue of actually counting how much copper inventory is on hand.  While this would appear to be as simple as looking up the LME (London Metal Exchange) and COMEX (US futures) inventory numbers it really isn't.  The BBC ran a three part series on rising commodity prices in late May and spent nearly a third of the program on copper.

BBC Radio - Bubble Trouble - Part 1 - May 28,2011
BBC Radio - Bubble Trouble - Part 2 and 3
Ft.com blog highlighting the inventory issue
In part 2 around the seven minute mark the presenter takes a tour of a well known base metals warehouse in which the warehouse representative reveals only about 40% of the copper in the warehouse is registered as LME inventory.  When I heard the words I had to replay it several times to ensure I understood that correctly; my brain almost rebelled at the concept of anyone just coming out and publicly stating such a figure.  Now I'm not suggesting the LME reported amount is under counting European stocks by 40%, just that this one warehouse has a lot more copper inside its walls that is reported to LME.  Please listen to at least part 2 of the radio series to get the full details.  If it can happen in one warehouse in Rotterdam what is preventing it from happening elsewhere in the world?

So why is the copper 'hiding'? Some of it is because costs are cheaper to store it in a non registered warehouse versus an official LME warehouse. Another factor may be what is suspected to be going on in China. FT Alphaville has discussed import/export trading firms there are using copper as a credit funding vehicle because other more official forms of credit are drying up.

From ft.com blog

Here’s the gist of it.In the first instance, our source says, the strategy is not exclusive to copper markets but goes on across most commodity markets.
The banks call it “inventory financing”. And of course, we should stress, it is completely legal. The practice mainly involves pledging an asset in return for an exchange warrant or cash.
According to our source, traders can deposit copper in an exchange warehouse in order to receive a warrant which can then be used to gain financing, usually via a broker, and less a 15 or 20 per cent haircut needed to cover futures margin deposits (sometimes called margin or warrant financing).

Read the whole article to get the full weight of what they are doing. This copper-as-financing would help explain why copper continues to be imported even though for most of 2011 it has been cheaper on the domestic Shanghai exchange. For the credit focused copper trader the money created by the transaction has greater value than the actual copper, it is just a funding mechanism.

LME vs Shanghai premium/discount

While the discount has been steadily falling one must understand China is a net importer of Copper; so why has it been cheaper to buy copper inside China?

Izabella Kaminska followed up a few weeks later with more details on the same copper-as-collateral trade

More worryingly however is that the primary use of copper in bonded warehouse appears to be as a financing mechanism to provide cheap working capital for various types of business often unrelated to the metallic industry.

Another copper financing entry at ft.com

Simon Hunt, of Simon Hunt strategic services actually goes to China and tries to see what is happening on the ground and his opinion is not bullish.  An audio interview from March 29 is very interesting.

Having just come back from China my impression is that more and more people are beginning to understand that a lot of copper that has been imported has not gone into furnaces, that it is held by both foreign and Chinese financial institutions and others and I do think that even at the top level in government there is now starting to be a concern of the impact of this speculation on China's economy.  Because it is not just copper - it goes much deeper than that.  With money which has been so freely available in recent years, and with negative deposit rates, any company or individual is very reluctant to hold funds on deposit.  So they are looking for other means of investment and it goes into commodity markets generally - the stock market, it goes into manufacturing investment and so on so forth.  Whether government does anything to stop this game going on I've no idea, but there is at least a realisation at a pretty senior level that these developments are ongoing. 

Mr. Hunt also brings up the insidious problem of negative real interest rates in a growing economy.  Empty cities such as Ordos are an example of what happens when people respond to the obvious distortion of losing money when you put it in a bank account.

Even the Chileans are publicly talking about the excess inventory in China

The world No.1 copper producer, Chile's state-ownedCodelco, sounded a warning shot at the CESCO copper industrygathering in Santiago on Monday, saying copper stocks in China were abnormally high and needed to be watched carefully.

Figures are tossed about regarding how much inventory has been tied up in these financing deals but one never really knows how much until the real washout hits and people are forced to dump their positions.

That being said, some analysts are putting out huge numbers as to the extent of hidden inventory, again from ft.com blog

The ICSG data shows an increase in Chinese demand of 99% for the four years between 2005 and 2009 when Chinese GDP probably rose by about a third. Obviously, there cannot possibly have been such a massive rise in copper’s intensity of use in China. You can look through all the intensity of use curves for every commodity for every economy in history and you will never find a doubling in consumption against a one third increase in GDP over so short a period of time.  

The numbers are large, around 4 million tonnes since the end of 2006. This dates from when global fabricators and others started to understand that a new paradigm in the copper market had begun. It was the involvement of the financial community by buying copper directly from producers and others and warehousing the metal outside the reporting system.

Standard Chartered puts the amount of hidden inventory lower, but still extensive, April 28

 High inventories in bonded warehouses point to the possibility of destocking, which could hit copper prices on the London Metal Exchange (LME). As of this week, we estimate that total copper stocks in bonded warehouses in Shanghai (usually 80% of the national total) have hit 650 thousand tonnes (kt) – equivalent to roughly four weeks of China's domestic use, a record-high level (Chart 2). This is significantly higher than 550kt in late February and the 200kt average over the past three years.

Who's the sucker? If you don't know, its probably you.

ETFs have been a useful tool to allow banks to move risk off balance sheet. When a bank takes on risk through lending to or financing a big commodity player, say for an acquisition, there is a need to hedge potentially huge commodity exposure — so as sell to lock in the commodity price, and you couldn’t sell that volume easily into the terminal market; although you could transfer a large amount of exposure to investors through an ETF more easily. The only way this used to be done is by the bank taking proprietary risk, but they now have other risk issues and aren’t prepared to carry that sort of exposure.
Using ETFs becomes a mutuality of interest, with everyone moving to launch products to investors – retail and institutional – so that they can carry the risk instead. It’s all about de-risking your book. And you saw it in the dot com bust when investment banks pushed dotcoms, but offloaded the risk to investors. When the NASDAQ crashed the investors carried the bulk of the exposure.It all has similarities to the Abacus CDO. If you want to short the market you have to create the demand, like Paulson did. If you are an institutional advisor you can do that by hyping the commodity.

The actual import numbers going into China for both refined and scrap do not mesh well with the meme of voracious demand. On a year over year basis both are falling.

Furthermore the reported inventory numbers have been wandering around the 600k number for a while. Ironically the last time year over year inventory numbers dipped into negative territory for a while was 2008.

I'm not the only one who is not a copper bull.  The Reformed Broker sums it nicely while debating a copper bull:

I will admit some of my thesis is based upon information that is not reported as cut and dried numbers that can easily be looked up on a computer screen but what I do find does not add up to the template of China hoovering up all known copper deposits in the universe:

• Copper is cheaper in Shanghai than in London
• Copper imports of all kinds are dropping
• Public reports of a LOT of hidden copper stocks, in the Old Word as well as China and confirmed by Chileans

I could go on but you need to put in some work as well. Read over the links below. I saved a few bombshells  for your discovery...

Additional reading:

http://ftalphaville.ft.com/blog/2011/05/11/565696/chinese-commodity-imports-are-falling/
http://macro-man.blogspot.com/2011/05/commodities-are-crap.html
http://ftalphaville.ft.com/blog/2011/05/16/569436/chinas-copper-collateral-and-covert-credit/
http://www.bloomberg.com/news/2011-06-15/copper-users-in-china-plunder-stockpiles-as-goldman-forecasts-record-rally.html
http://ftalphaville.ft.com/blog/2011/05/24/576131/and-now-goldman-says-the-commodities-correction-is-over/
http://pragcap.com/on-the-conflict-of-interest-that-exists-between-research-and-commodity-traders
http://traderightuk.wordpress.com/2011/06/01/guest-blog-david-threlkeld-on-copper/
http://ftalphaville.ft.com/blog/2011/06/21/601061/coppers-inventory-inconsistency-charted/
https://customers.reuters.com/community/newsletters/metals/MetalsInsider20110729.pdf -- Page 2 -- If the warehouses are about to be empty of any metal, why buy them?
http://ineteconomics.org/blog/money-view/copper-standard
http://ftalphaville.ft.com/blog/2011/08/31/665791/a-new-development-in-chinas-copper-collateral-trade/
http://ftalphaville.ft.com/blog/2011/09/07/671416/more-than-2-8m-tonnes-of-hidden-copper-stocks/ - another estimate in an SEC filing guessing there's 2.8 million metric tons in hidden copper stocks.
http://traderightuk.wordpress.com/2011/09/07/guest-blog-simon-hunt-on-copper/ - More on the 2.8 million ton question.
http://blogs.wsj.com/chinarealtime/2011/09/19/dr-copper-gets-a-check-up-in-shanghai/
http://www.economist.com/node/21530107?frsc=dg|a

The Author is long precious metals and short base metals

Ordos -- Time to double down

Nearly two years ago I highlighted the city of Ordos, China and how it appeared local municipalities and investors were building an empty city with no hope of a positive return on investment.

Fast forward to present day and the same reporter made a return visit to see what has changed. While there have been a few people moving in, residential construction continues at the usual Chinese breakneck pace.  The new video show the same empty boulevards but with more skyscrapers being built in the background.

(direct link to Youtube video)


Melissa Chan provides more details in here blog entry

She interviewed the same person, Mr. Chovanec, as last time and he provides the reasons why supposedly rational people would invest in an empty city and expect a positive return.  Mr. Chovanec provides more examples of bubble behavior in China in a recent blog entry titled This is What a Bubble Looks Like

China's response to the Great Financial Crisis of 2008 was to tell the banks to lend, and they did. The resulting excessive credit growth just exacerbated the already imbalanced situation brewing in their country.  When the next monetary event comes with Greece's default I will not be around (metaphorically) to see if they will be able to 'fix' the problem again.

Google maps link to Ordos

Money Money + Money -- Money supply update

The broadest money supply figures available (M2 + institutional money market funds) continues to trend higher.  


A note to all of you who are fearful of hyperinflation, this figure would be skyrocketing upwards instead of being in the ~+6% year over year range if we were entering a phase of very high inflation.  Yes, the narrower measures of money supply are growing but they aren't being transmitted to the rest of the economy (see Japan, deleveraging) as there is still a reluctance to borrow by the US consumer.  See my recent previous posts on mortgage rates and  total mortgage loans outstanding for examples of how the Fed's pumping money into the financial system is not being transmitted into higher lending (and thus higher prices)

Verleger on high oil prices and demand destruction

I don't quite agree with the prediction towards a hydrogen economy but it is interesting to hear about the demand destruction of gasoline usage.  Mind you this conversation is about US demand. Add in emerging demand and you may see a different picture in total

Video of Verleger on gasoline consumption, heavy versus sweet crude, diesel versus gas costs --
(I would embed the video but it autoplays)
September 7 on Bloomberg

End Date Bond ETF's followup -- More options on the menu

More than a year ago I highlighted a new twist on bond etfs called the end date bond etf.  Since then Ishare's end date muni etfs have grown to manage over 185 million in total through the 2012-2017 maturity spectrum.  Not bad.

Guggenheim also rolled out both a corporate bond and high yield end date etf series, providing a wider menu of risk. Guggenheim's corp etf's run from 2011 to 2017 while the high yield field provides a 2012 to 2015 maturity spectrum.   While the high yield etf's have gathered 144 million, the corporate funds have pulled in over 430 million with one fund, the 2013 Corporates (symbol BCSD) about to break 100 million.

Hopefully someone will introduce an end date bond etf series on US Treasuries and US Tips (Inflation protected) to round out the risk profiles available. (hint hint, nudge nudge)

A few caveats are needed regarding buying and selling these etfs

• They are still illiquid and the price can vary dramatically from the NAV of the underlying assets.  Check the fund description page and make sure you are not overpaying.
• Diversification does not eliminate risk.  The 2017 Guggenheim Corp fund contains a large slug of financial bonds. If we have another credit event like 2008 due to a European sovereign default you could see losses on these corporate bonds (and possibly junk bonds and muni bonds)  The price the market will give you will also fluctuate.
• Check when the bond etf actually 'matures'. Each fund complex has their own procedures and nuances as to when the funds will be distributed to shareholders.

While there are disadvantages to these (currently) illiquid etfs I find their introduction into the investing universe promising. Building a bond ladder will be much easier and cheaper with greater liquidity for smaller dollar amounts versus finding, researching and purchasing individual bonds.

End date etfs will also allow one to take advantage of rolldown in the bond market. With short rates at zero, as the maturity date approaches for a bond the yield will drop (setting credit risk aside) and thus the price rises and yield drops. Econompic explains the dynamics in greater detail.

Ishares highlights a few of these advantages in a video:

Additional reading:
Seeking Alpha guide to end date etfs
Ishares muni bond end date etf
Guggenheim menu of corp and junk end date etfs - (scroll down to bottom)

Disclsosure: The author does not own any end date etf's but is examining the muni bond etfs for purchase shortly.

The Swiss choose inflation, but the Chinese do not?

The Swiss central bank recently announced it would print any amount of francs required to maintain a peg of 1.20 Swiss francs to one euro.  The response was... massive

Euro / Swiss Franc

A multi percent move in currency markets is exceedingly rare. I'm not going to spill many electrons going over why the Swiss decided it was time to fix their currency as it has been a hot topic over the last 48 hours.  The WSJ and Economist have already written about it at length.  

So why bring up the topic? Because the Chinese have been doing it for years and the dots need to be connected.  I recently commented on the threat of China 'dumping' US Treasuries and how this was not the problem everyone thought it would be.

In both the Swiss and Chinese case you have a country forcibly keeping their currency away from the market clearing price for differing reasons; the Swiss exporters are getting killed while the Chinese desire to keep their workshops fully staffed by forcibly underpricing their currency.

Whatever the reason the result will be the same -- an explosion of  domestic currency and loan demand eventually forcing up demand and inflation.  The WSJ's title on the Franc peg is The Swiss Choose Inflation  Why does one not think the same will happen in China? Chovanec has highlighted the constant struggle to contain inflation in China from both a massive increase in lending and an artificially underpriced currency. 

In both cases the Swiss Franc and the Chinese Yuan will eventually find their market clearing prices regardless of central bank manipulation, either by currency price appreciation or by domestic inflation.

edit: FT links China and Switzerland as well:
http://ftalphaville.ft.com/blog/2011/09/07/671121/what-will-switzerland-do-with-all-those-euros/

Time to refinance your home (again?)

One year ago I stated it would be a good time to refinance your home.  Once again the opportunity presents itself. The 30 year conventional home loan rate is near historic lows.

Conventional 30 year home loan rates

Theoretically the vast majority of home loans out there could be refinanced but there are a few unfortunate facts which may prevent many from refinancing: Negative equity, conservative valuations and high unemployment.  

CNN Money has a good article detailing the these 3 challenges.  

If you are wondering how monetary policy can have limits this is a good example of how and why.  In an effort to continually re-stimulated the economy and encourage society to take on more debt over time we have reached a point where historic low interest rates will just not do much for the US consumer. They are already too tapped out and low interest rates will not encourage them to borrow more let alone take advantage of the lower interest rates and buy a home; they just can't.  People 'trapped' in their homes due to negative equity also hinders future home sales as it inhibits consumers from being able to move or trade up.

Consumer home debt / GDP

The ratio of consumer mortgage debt to gdp (both nominal) was at data series highs at the beginning of the great financial crisis. Yes I know I'm comparing home debt to national GDP and not home prices but it's yet another reminder of how much debt our society has taken on.

If you are in the position to refinance and have questions give me a ring and we can talk about some of the options / pitfalls when looking for a new mortgage.

Thanks: David Merkel

Long term treasury rates in a bubble? Maybe not?

Talk of a bubble in long term treasury rates has been careening around the financial markets for a while now and considering the rate on the 10 year T note is approximately 2.22% right now I went looking for some perspective.

10 year versus nominal GDP:

Econompic has a great series relating nominal GDP growth versus the 10 year and the long term patterns are impressive. 

Note how during the rise in nominal gdp growth rates from the 60's to the 80's interest rates were below nominal gdp and this pattern flipped as nominal gdp growth rates declined.

90 day tbill rates versus 10 year:

Rarely does the spread between the 90 day tbill and 10 year rates go beyond 4% and with short rates at zero this puts a cap on interest rates further out the curve.  With 10 year rates at 2.22 this does provide some upside to the range of interest rates, but those recently calling for 10 year rates higher than 4% were calling for something truly exceptional.

Until we see nominal GDP growth really perk up and/or the Fed start raising interest rates I find the possibility of the 10 year going above 4% unlikely. 

Disclosure: I own long term treasuries in personal and client accounts.

Risk: As described by Chanos, Hendry and Gundlach

Some videos new and old which may provide some perspective on the recent downgrade of America by Standard and Poors and the current market thrashing.
I could attempt to write something eloquent but I'm busy right now. Instead I'll refer you to some successful investors voicing their opinions.

Chanos talking about credit ratings versus CDS rates
http://youtu.be/kRxAMM7UU_k

Gundlach on how the US will never not pay its debt, it just may pay its debt back with devalued currency
http://video.cnbc.com/gallery/?video=3000037858

A series by Hugh Hendry from late last year which I don't believe I have published before.  Considering the current market thrashing I think the discussion is important.
part 1: http://youtu.be/zvzKgjaVnlE
part 2: http://youtu.be/MJSO3H4GLqw

ht: HistorySquared

Home prices going up? Not until you show me the money.

Are home prices going up in a sustained manner anytime soon? No

A recent presentation by Australian Professor Steve Keen inspired me to search for a similar American data series. One exists and it does not predict any sort of sustained bounce in American home prices. (I am simplifying Mr. Keen's presentation as he looks primarily at the 2nd derivative of loan levels but the level of destruction in American mortgages outstanding is epic)

As Mr. Keen states, it is not people who buy homes, it's people with money who buy homes.  Just to show you the magnitude of the home devastation we are experiencing here's the entire home loan series:

For the entire data series, going back to the mid 50's we've never seen a year over year decline in the total value of home loans outstanding.  Yes, some of this decline is due to homes being foreclosed and the loans vaporizing as a result, but that also eliminates yet another person who cannot trade up from their current home to something larger as their equity and credit score head towards zero.

Until we see year over year growth in mortgages outstanding we will not see a sustained nationwide rise in home prices. We will of course see localized variation in this with some pockets of growth but nothings happening until You show me the money.



Disclosure: The author is short some housing related stocks.

Italian and Spanish yields keep climbing

I recently highlighted the rise in Spanish and Italian government bonds yields. Today they are shooting higher yet again and I'm certain this is a contributing factor to the equity market's weakness, US budgetary problems notwithstanding.

I usually don't mention my trading activity but I sold off an equity ETF position Friday due to this European contagion situation.

The challenge of Google+ and entering my circle of trust

I recently signed up for Google+ and in typical Google style its somewhat spartan in style and instruction on how to use it.  I'm slowly stumbling around trying to figure the system out.

There are some improvements over Facebook in my opinion, most specifically the 'circle' system where you can place individuals in multiple different groups so as to filter and direct your comments, pictures and information to specific groups.

Even if Google+ is 'superior', will it eventually exceed Facebook in popularity?  Not necessarily.  Part of the challenge Google+ faces is the size of their network is MUCH smaller than Facebook's (which is currently over 750 million people!) Network size is very critical as a social network with very few 'nodes' provides a much lower utility even if it's 'better'  [See Metcalfe's law]  Google+'s strategy of slowly rolling out the system via invites from current members mitigates this problem as people are automatically creating more connected 'nodes' in the network instead of random additions you don't personally know.

Right now my plan is to use Google+ as a social media outpost/gateway for my twitter and virtual friends versus Facebook for my 'in the flesh'  friends.  It will be curious to see how the two competing social media platforms evolve.

Many thanks to downtown Josh Brown for being the first person to put me in one of his circles.  Hopefully I'm not in the deranged fanboy category but in the circle of trust...

Club Med Hangover -- Bond yields climbing in Spain and Italy

Nearly a month ago I mentioned rising yields in Spain possibly causing problems.  I underestimated the number of countries. Both Italy and Spain's treasury yields have spiked higher.

Italy 10 year

Spain 10 year

Spain 10 year versus German 10 year

 

None of the charts are pretty.  While Italy was getting most of the headlines for the rate of yield increase please note how Spain's yields are higher.  Any EU country bordering the Mediterranean is having serious problems right now.

North Korea watch -- look out for some sabre rattling?

North Korea is rumored to have recently closed all universities and put the students to work:

From North Korea Econ Watch

The reports said the students would be put to work on construction projects in major cities and on other works in a bid to rebuild the economy. This could indicate that the country’s food crisis and economic problems are worse than previously thought.

Combined with reports of additional EU aid it appears the speculation of severe stress in the Hermit Kingdom appear to be correct.

From the Guardian

The European commission is to give €10m (£9m) in urgent food aid to North Koreans on the brink of starvation, after negotiating for "unprecedented access" to ensure that the food goes straight to those most in need.

With North Korea on the ropes I wouldn't be surprised to see some sabre rattling and more than your usual number of threats and provocations in the near future.  South Korea recently winning the 2018 Winter Olympics bid provides North Korean a new 'delicate' target to threaten as well. 

Economics for the post MTV Generation -- It's the debt stupid

I previously mentioned an entertaining video regarding the competing economic theories of Keynes and Hayek.  Here is round two, and while its a few months old it deserves attention.

When watching the video pay close attention to the assistants to each boxer, you may recognize some other names as well as what appears to be Chairman Ben Bernanke in the first row of the meeting.





While the debate over monetary and fiscal stimulus continues (most recently as the wrangling over the federal debt limit) I'd like to repeat a graph I've shown before.

Total US debt (private, corp, government) to GDP rose for this entire data series until the great financial crisis of 2008.  Since then its been dropping and this is one reason our recovery has felt so sluggish as corporations and individuals continue to delever.

I have mentioned before how even with a very steep yield curve we are not seeing a rebounding economy and others have noticed this as well; the steep yield curve mechanism appears broken.

From Bonddad:

for virtually the entire period beginning in late 1929 and continuing right through the Great Depression and into the 1950s, the yield curve was resolutely positive. And yet that period coincided with the two worst downturns in the last 100 years, as well as three other recessions.

Until the private sector deleverages monetary policy levers will be less effective. I have suspicions as to how Mr. Bernanke will 'fix' this problem but I'll leave that to a later post with evidence.

So what explains the current crisis and malaise? I think Steve Keen is on to something.  I strongly suggest you watch this video and examine his theories.

edit: sorry about the autoplay. Hit the pause button to stop it.



http://www.ritholtz.com/blog/2010/01/steve-keen-on-the-modern-economy-and-the-outlook/
http://www.debtdeflation.com/blogs/2010/07/07/naked-capitalism-and-my-scary-minsky-model/
http://www.debtdeflation.com/blogs/2009/12/01/debtwatch-no-41-december-2009-4-years-of-calling-the-gfc/

Hedge fund watch - Hugh Hendry and Jim Chanos

Here's some recent news from a few hedge fund managers:

A short video from Hugh Hendry (thanks Creditwritedowns)



Some notes from Jim Chanos' presentation at the Vail value conference. (thanks Katsenelson) Provides more detail on Chanos' bearish position in China.  Note Chanos is a short seller so he is always bearish on something.

Sino Forest even ripped off the scam

As more information comes to light regarding accusations of Sino-Forest fraud it appears even their technique was stolen from someone else:

From IndiaExpress -- March 2003


Dream plantations that never bore fruit

The brochure said the company would develop the land for agro-forestry farms and after expiry of the plan period, trees and cash crops would be cut and money from the sale would be guaranteed by post-dated cheques.... The Income Tax Department sniffed out a trail of bribes the company had paid buying real estate. The department says it has evidence that the palms of the registering authorities were greased while purchasing land at Jharmari for Chandigarh Extension 22 Project.

I should do a forensic study to see if the income statement and balance sheet could have alerted people to the possible fraud. A rogues gallery of failures / frauds could me most instructive.

Greece and Ireland are not the only European problems.

While Greece is dominating the news (again) there are other rumblings in Euroland you should be watching.  Below is the spread between German and Spanish 10 year yields.  The trend is not going the right way.

Furthermore yesterday Spanish 10 year yields went up on a 'risk off' day.  No longer does the market consider the government debt of Spain a safe haven when the equity and other risk markets go down.  I'm closely watching the relative and absolute levels of  Spanish debt  As the Greece situation develops keep an eye on this to see if the panic spreads to Spain.

Housing update -- Build it and they will come?

Does supply lead demand or the other way round?

Attached is the year over year change in the Case-Shiller home price index and new housing permits.  The year over year rise in 2010 was most likely due to the one time tax credit provided by the Federal Government.  

One may notice it appears new home permits lead the rise and fall of home prices.  Regardless both prices and new home permits are negative on a year over year basis which does not bode well for future employment or home price appreciation. 

Linkage roundup

Some stuff I've been reading:

Saudi's ready to pump more oil after OPEC disagreements.  Could get interesting if Saudi Arabia decides to burn the other OPEC nations and pump all out.  They have done this before to let everyone know who's boss.
If you are looking for a good historical book regarding oil and politics I'd suggest
The Prize: The Epic Quest for Oil, Money & Power

Central banks are culpable for cycle of boom / bust --  I have been meaning to write a longish entry regarding how specifically emerging market central banks have contributed to the cycle of boom and bust but this will have to do until then

US structural problems remain -- We are not out of the woods. It is going to take a while.

One reason for high yield falloff ? -- The Fed is selling into an illiquid market it appears, driving down prices.

I know, cheery stuff! Here's some good news:
Industrial jobs coming back to America? -- China's inflation and a declining dollar may help induce an improvement in domestic production. This macro idea has been something I've been considering for a while.