Tuesday, August 16, 2011

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.

Monday, August 8, 2011

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

Gundlach on how the US will never not pay its debt, it just may pay its debt back with devalued currency

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

Tuesday, August 2, 2011

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.