Posted: 15 Aug 2010 09:39 PM PDT

As investors search for yield anywhere and everywhere, bonds are trading in uncharted territory. Please consider Obama Wins Low Yield as Markets Shrink Aiding Deficit

Bond investors seeking top-rated securities face fewer alternatives to Treasuries, allowing President Barack Obama to sell unprecedented sums of debt at ever lower rates to finance a $1.47 trillion deficit.

Shrinking credit markets help explain why some Treasury yields are at record lows even after the amount of marketable government debt outstanding increased by 21 percent from a year earlier to $8.18 trillion. Last week, the U.S. government auctioned $34 billion of three-year notes at a yield of 0.844 percent, the lowest ever for that maturity.

Spending by companies and consumers has slowed as the economy has shown signs of weakening. Companies in the Standard & Poor's 500 Index have stockpiled a record $2.3 trillion of cash and equivalents. Company borrowing slid 29 percent in the first half of the year to $528 billion amid a dearth of business investment, Bloomberg data shows.

Piles of Cash Equates to Piles of Debt

Companies are piling up cash alright. However, the flip side of that cash is debt.

Moreover, analysts mistake that cash for willingness to expand. The reality is corporations do not want to get trapped like they did in 2008, unable to borrow.

For more on corporate cash levels, please see Are Corporations Sitting on Piles of Cash?

Individuals are also hoarding cash. The U.S. savings rate reached 6.4 percent in June, up from 1.7 percent in August 2007, the start of the financial crisis.

Are Individuals Hoarding Cash?

Individuals are not really "hoarding cash" either. Instead they are paying down debt. Most do not realize that by definition, paying down debt constitutes "saving".

For most wage earners, the savings rate is after-tax salary minus personal consumption expenditures (PCE). For a more precise definition, please see What's Behind The Soaring Savings Rate?

"There's been a collapse in both consumer and business credit demand," said James Kochan, the chief fixed-income strategist at Menomonee Falls, Wisconsin-based Wells Fargo Fund Management, which oversees $179 billion. "To see both categories so weak for such an extended period of time, you'd probably have to go back to the Depression."

Food Stamps and Unemployment Insurance Mask Depression

I believe we are in a depression now. The key difference is food stamps and unemployment checks have replaced bread lines.

We also have hundreds of thousands of people living in their homes without making payments on their mortgage or home equity lines. The slow foreclosure process encourages more to do the same.

"The diminishing supply" of alternatives to Treasuries "is giving Washington an opportunity to continue with its fiscal irresponsibilities," said Mark MacQueen, partner and portfolio manager at Austin, Texas-based Sage Advisory Services, which oversees $8.5 billion. "The only way to tell Washington and America 'no more' is a weak dollar, which eventually leads to higher interest rates."

"We are slowly playing a fool's game as rates go further down to unsustainably low levels," said Dan Shackelford, a money manager who helps oversee $15 billion in fixed-income assets at T. Rowe Price Group Inc. in Baltimore.

Thoughts on the Fool's Game

If you are managing $15 billion thinking it is a "fool's game", then in my opinion you ought not be doing it. It seems to me there is a lack of fiduciary responsibility if one is investing client money in a "fool's game".

What the hell - Anything for a fee!

I do think corporate bonds, especially most junk is playing for the greater fool. In regards to treasuries, there is going to be an exit problem for sure, but that could be years away. In Japan, yields stayed low for a decade. Why can't it happen here?

Yields certainly might stay low for an extended period. Whether or not they do remains to be seen. I happen to like long-term treasuries right now, but certainly not as much as when the 10-year was at 3.75% and bears were foolishly shorting treasuries like mad.

The government isn't the only one getting a good deal. Armonk, New York-based International Business Machines Corp., the world's biggest computer services provider, sold $1.5 billion of three-year notes on Aug. 2 with a coupon of 1 percent, the lowest of the more than 3,400 securities in the Barclays Capital U.S. Corporate Index of investment-grade company debt.

Portland, Oregon, sold about $408 million in sewer-system revenue debt on Aug. 11, with utility bond yields at the lowest level on record. Yields on 10-year, AA rated tax-exempts backed by utility revenue stood at 3.02 percent on Aug. 10, according to Bloomberg Fair Market Value data. That's the lowest since the index was created in November 1993.

"We are in unchartered territory," said [William Larkin, a fixed-income money manager in Salem, Massachusetts at Cabot Money Management]. "We are pushing and pulling levers that we don't understand the full implications."

Uncharted Territory

This is indeed uncharted territory thanks to the Fed pushing and pulling levers in a manner it does not understand. William Black, a former bank regulator, is one person who does understand. Black says U.S. Using "Rally Stupid Strategy" to Hide Bank Losses - Will Produce Japanese Style Lost Decade.

I agree with his assessment.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

ECRI WLI "Flattens Out" at -9.8% - ECRI says "Gage is Fine"

Posted: 15 Aug 2010 11:48 AM PDT

Lakshman Achuthan and Anirvan Banerji, Co-founders, Economic Cycle Research Institute (ECRI), continue to pour out statements about the ECRI WLI that are worth taking a close look at, if not outright challenging them.

Please consider Know How to Read WLI.

Sir, "Out on a limb, the ECRI weekly leading indicator ... suggests a double-dip recession is imminent," according to James Mackintosh (The Short View, August 4). This is a popular misconception pushed by pessimistic pundits.

Let's review what the Weekly Leading index (WLI) has done this year. After rising to a two-and-a-quarter-year high by end-April, it plunged for all of two months – before flattening out and finally edging up to a six-week high by end-July. That's hardly a recession signal.

Imagine flying in an aircraft that hits a huge air pocket and plunges 5,000ft in 10 seconds. That would leave you quite shaken up, but it doesn't mean the aircraft's about to crash – unless it keeps falling. That's pretty much what's happened with the WLI. Unless it turns down again and then keeps falling, it wouldn't make sense to predict an imminent recession.

Many self-proclaimed experts have been back-fitting our data, looking at the WLI the wrong way, and screaming that the end is near. This is like people saying they don't remember an aircraft dropping so fast and not crashing, while blaming the instrument makers for not trusting their own altimeter. Well, we do trust it. Bottom line, the gauge is just fine – as long as you know how to read it.

When there really is danger of an imminent recession, it will be signalled by a cyclical downturn in the WLI itself rather than its growth rate. But that hasn't happened yet.

ECRI WLI

click on chart for sharper image

When there is "danger" of an imminent recession by the ECRI's calls, history suggests we will have been in a recession for months. Nonetheless, one must be careful of "reading" indicators, especially when no one knows for sure what the hell it even consists of.

Instead, I would like to point out that two weeks of flattening after an enormous plunge to -10.8 is hardly worth calling "flattening". Let's see where the index goes from here before we talk about "flattening" after that unprecedented nosedive.

By the way, this is not like an airplane dropping then recovering. Please pay attention to the zero line. This plunge is more like an airplane hitting the earth and leaving a quarter mile long crater, only to have someone crow "Good News! The plane stopped falling."

Nonetheless, it remains to be seen whether or not we have a double-dip recession. I actually have the odds of a double-dip recession falling quite rapidly. Why? Because it is increasingly likely the recession that started in 2007 never ended.

Thoughts From "BC"

My friend "BC" pinged me with a few interesting comments about the WLI....

Since 1967, the current WLI growth rate plus annual change has never occurred without a recession being imminent or the economy already in recession. In every case, the stock market had begun a bear market averaging a decline of 38% peak to trough; but the average decline for years 11-14 of debt-deflationary secular bear markets has ranged from 40-45% to 65%.

The annual and 26-week rates of change for the SPX is set to turn negative in the coming weeks, were the self-similar pattern to repeat for the SPX in '00-'01 and '07-'08, and the Nikkei in '00-'01.

The annual change comparisons for the WLI become harder hereafter through May-June '11, with the WLI at early '98 levels.

Of course, from a strict statistical perspective, the six events do not qualify for a minimum number of events to be statistically significant.

Still, given the current implied private annualized GDP growth of 0% to -1.5% from money supply (after government), bank lending, personal income and spending, and weakening employment, private GDP is likely already at or near 0% or contracting again as of late Q2 or into Q3.

All things considered, I happen to agree with Lakshman Achuthan that the "gauge is just fine – as long as you know how to read it". With that, I leave it to the reader to decide whether BC's comments or those from the ECRI provide the most meaningful intrepretation.

For more on the ECRI please see

ECRI's Lakshman Achuthan Still Blowing Smoke

ECRI Weekly Leading Indicators at Negative 9.8; Has the ECRI Blown Yet Another Recession Call?

Please bear in mind, I like the WLI indicator, especially in conjunction with other economic indicators. I just wish I knew what was in it. I also wish the ECRI's claims about its predictive capability and what it means were far more consistent.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Sunday Funnies 2010-08-15 FDIC Help

Posted: 15 Aug 2010 10:57 AM PDT

United Federation of Teachers Fires Employee for Starting a Union

The United Federation of Teachers wants to have nothing to do with unions, at least for its own workers. Please consider This oughta teach him!

In a move of stunning hypocrisy, the United Federation of Teachers axed one of its longtime employees -- for trying to unionize the powerful labor organization's own workers, it was charged yesterday.

Jim Callaghan, a veteran writer for the teachers union, told The Post he was booted from his $100,000-a-year job just two months after he informed UFT President Michael Mulgrew that he was trying to unionize some of his co-workers.

"I was fired for trying to start a union at the UFT," said a dumbfounded Callaghan, who worked for the union's newsletter and as a speechwriter for union leaders for the past 13 years.

Callaghan said he personally told Mulgrew on June 9 about his intention to try to organize nonunionized workers at UFT headquarters.

"I told him I want to have the same rights that teachers have," said Callaghan, 63, of Staten Island. "He told me he didn't want that, that he wanted to be able to fire whoever he wanted to."

The UFT has long strenuously resisted city efforts to make it easier for school administrators to fire teachers.

"This is the exact antithesis of what they preach, and Michael Mulgrew is the biggest hypocrite out there," Callaghan fumed.

Callaghan said the union-busting bullying continued after he was told he was fired, when UFT leaders called in a detail of six uniformed cops to remove him from his office because he wasn't leaving fast enough.

Callaghan said he decided to unionize the 12 UFT writers after a colleague was fired last year without cause.

"We have no protections and no disciplinary process," he said.

Clearly the United Federation of Teachers knows full well the economic damage unions cause. So who can blame them for only wanting to profit by organizing unions as opposed to having their own employees be in unions? As for Callaghan - Anyone making $100K wanting to organize a union is missing quite a few marbles and deserves to be fired.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Home Refinance Calculator

Sunday, August 15, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

No comments:

Post a Comment