Municipal pressure…continued

Rockefeller Institute report on state tax revenues:

State tax revenues declined by 4.1 percent nationwide during the final quarter of calendar 2009, the fifth consecutive quarter of reduced collections, according to a report issued today by the Rockefeller Institute of Government. The five straight quarters of year-over-year decline in overall tax collections represent a record length of such decreases, the Institute said.

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Soros in the FT, Munger in Slate

When some of the biggest investors in the world go so mainstream, you might want to at least listen. Below is the article by George Soros discussing the continuing problems for the euro. After, read Charlie Mungers parable about a country that came to financial ruin.Viewing the remainder of this article requires a Subscription

Fed raises discount rate

Yesterday, after the close, the Fed raised the discount rate from 50 to 75 basis points.Viewing the remainder of this article requires a Subscription

What we’re watching unfold…

Warning: This post has nothing new for readers of our newsletter.Viewing the remainder of this article requires a Subscription

Watch the 10-Year

Everyone is talking about Plosser discussing selling off the Fed's MBS hoard. It's obviously necessary, but completely unfeasible given a still shaky housing market and no lending. Additionally, it would fly in the face of the Fed's QE campaign.Viewing the remainder of this article requires a Subscription

Treasury auctions 30-yr at 4.72%

Not a good auction. Emphasis mine...

NEW YORK (MarketWatch) -- The Treasury Department sold $16 billion in 30-year bonds on Thursday at a yield of 4.720%, a little higher than traders expected.

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I feel left out of the gravy train…

Just wanted to bring to light some of the accounting and financial shenanigans that are occurring.Viewing the remainder of this article requires a Subscription

Rates during The Great Depression – deflation with rising real rates

A reader recently asked me if there was a period in time when a country faced increasing rates in a deflationary environment. Yes - the Great Depression. I'm not in the Great Depression camp, although I think there are scary similarities.Viewing the remainder of this article requires a Subscription

It’s always easier to give advice…

We were great at giving advice to Japan throughout their lost 2 going on 3 decades, and we're great at giving advice to Europe on whether and how to deal with Greece.Viewing the remainder of this article requires a Subscription

To Whom Does The Fed Intend To Sell Its MBS? Great title from The Atlantic Journal, but I had to respond

The following article appeared on The Atlantic Journal's website earlier today. After reading it, I just couldn't help myself and I posted a reply, included underneath.Viewing the remainder of this article requires a Subscription

10-year auction was mediocre

Bid to cover was still 2.67, direct bidders was at a recent high of 13%, which is interesting. Not sure why that is. In the meantime, yields crept up towards the 3.7% mark. More interestingly, the credit default swaps (CDS) on 5 yr bonds is at 53 bps, which is up from 36 bps in January.Viewing the remainder of this article requires a Subscription

PIMCO introduces a new bond index – and shorts the entire developed world in the process

The Barclays Global Agg Index is a cap weighted index where as a countries debt rises, so does the representation in the index.Viewing the remainder of this article requires a Subscription

This story was definitely under-reported: A must read from the Financial Times.

I saw this story in the Financial Times and was surprised that I didn't see it all over the place. It relates to China punishing the US over arms sales to Taiwan, by halting purchases of Treasuries.Viewing the remainder of this article requires a Subscription

It makes me uneasy when too many people agree with me…

All over the place, I see signs that people agree with me, and it’s making me increasingly uncomfortable:

1. The End of the Bond Bull Market: Barry Ritholz writes in The Big Picture that the bond bull market we’ve been seeing since 1981 looks like it might be ending. He uses charts to like this to make his point:The problem is that I agree with his assessment. The model for the monetary authorities was Japan, which was able to ramp up QE, keep zombie banks alive for 20 years, and borrow at 0%. The US, however, is not in the same position. We are not a nation of savers, like the Japanese, so we can’t self fund our low rates, for starters. Our QE will not end with low rates.
2. We spoke weeks ago about going long the dollar versus the Euro and the Yen. Part of the motivation of that trade was that speculative positions had gotten too one-sided against the dollar. Another part was the insight that Europe and Japan were not in better economic positions as the currency market was implying. Well, that too seems to have become more mainstream as the DXY has gone from low 70’s to high 70’s-low 80’s. And then I read that there are the largest ever speculative short positions against the Euro: http://www.ft.com/cms/s/0/0330ba78-149f-11df-9ea1-00144feab49a.html. Now $8 billion might not sound like a lot given the numbers our Congress throws around, but it is a large floor (implied bid) for the Euro as these shorts need to cover at some point.

Just some morning thoughts.

Bank of England Halts Bond Purchases, Obama Supports Free Trade, where we went wrong, and more

The carnage from yesterday masked a lot of interesting news bits, some good, some bad, some just plain confusing:

• For starters, CBS Marketwatch ran a story about Bank of England Halts Bond Purchases. As central banks around the world face up to the reality that even they are not bigger than the markets, quantitative easing programs are likely to be pulled back. We’re seeing it in England, but as the PIIGS come under continued fire, they’ll also be mandated to cut back fiscal spending. Unlike the US, the PIIGS are closer to states in that they have limited leeway on deficits and printing. It might actually end up being their saving grace if they can get their PR story straight.

• On our side of the pond, President Obama made a step in the right direction by going against his party, and coming out in support of free trade. The NY Times ran the following story: White House Unveils Plan to Double U.S. Exports. While encouraging, the language did not contain the commitment that we’d prefer to see, and I’m afraid that this is all just talk.

But in announcing the new strategy, the commerce secretary, Gary Locke, did not say when the administration might send Congress three completed free-trade accords — with Colombia, Panama and South Korea. Many trade specialists say that is essential to prod other countries to negotiate with the United States. But the move is likely to cause a rift with Mr. Obama’s liberal supporters in the Democratic Party, as well as free-trade opponents in the Republican Party.

So we’re left holding our breath. I don’t think the Obama administration will have the political will or power to go against their base of unions and left and right wing protectionists. In fact, I wouldn’t be surprised to see protectionist measures implemented over the course of the year.

• Obviously, Australia left it’s interest rates unchanged. Screwed the carry trade for a lot of people yesterday, but was not that surprising to us. Remember, we’re long USD vs. JPY and vs. EUO. We just believe that USD will still be the beneficiary of the unwinding of risk as must happen. We should have been like Wells Fargo, who shorting the carry trade on the yield curve, and taken more aggressive positions in long USD.

• Where we went wrong: We’ve allocated a small portion of our portfolio to a metals portfolio. We built a position in gold and maintained it. We increased our exposure by building positions in SLV, PALL, and PPLT. We got in too late and should have diversified some of our gold holdings earlier. We are down between 8-18% on the positions. While it’s painful, we continue to hold these positions. First, the individual positions are small. Second, the entire position in metals is relatively small. Third, we maintain that the reasoning behind owning exposure to physical metals continues and we’re happy about the diversification into metals other than gold. We’re not in copper at all. Additionally, today we added a small exposure to GDX as the spread between GDX and GLD seems to imply that there is more potential for outperformance in the miners than in the physical. Here’s the chart from StockCharts.com:

This is the ratio of GLD:GDX. It’s not at the hyperextended levels of Oct. 2008, when the ratio was over 4, but it still looks like the valuation of the miners is low relative to the price of gold.

• Lastly, I want to discuss Treasuries. In 1992, as Soros was breaking the Bank of England, the trade was a simple understanding that no entity nor government is stronger than the market on a long term basis. We have been getting comments and notes about how we can see a continued debt deflationary environment, with a stronger dollar, and lower Treasuries. In the 1970’s, the thinking was that inflation and growth went hand in hand. Stimulate inflation and you’ll get to full employment (sound familiar?). Instead, we had a previously unimaginable situation where we had inflation and no growth, and with it a new term: stagflation. In my mind, we can enter a period where people will want to hoard dollars and not lend it out to the government. It’s the worst possible world for the Fed, whereby they will face higher borrowing costs without stimulating any inflation since the velocity of money will go down. If fiscal policy doesn’t cut government spending, we will be in a very weak position with very few places to hide. Once spending does start, we will face the specter of inflation that will continue to put downward pressures on Treasuries, this time on the short end. We are stuck and the losers will be the holders of long-dated Treasuries. For the Treasury market to rally from here, an investor would have to believe that the Fed, Treasuries, and government can orchestrate a “soft-landing” where domestic savings rates inch up, foreigners continue to want to finance our deficits, trade balances magically and incrementally improve, etc. I’m not a big believer.