MORE BUBBLE TALK
by ilene - September 29th, 2010 5:12 pm
MORE BUBBLE TALK
Courtesy of The Pragmatic Capitalist
It’s becoming increasingly popular to describe the U.S. government bond market as a “bubble.” As I’ve previously explained, this strikes me as totally nonsensical for several reasons – the primary reason being that the term simply is not applicable to an asset in which you receive your entire principle back at maturity. The term “bubble” implies a grossly mispriced asset that is susceptible to substantial losses. If the instrument is used as intended there should be little to no risk of principal loss in a U.S. government bond. And given the weak economy and constant need for government intervention it is no surprise that investors are seeking a safe haven such as
Aside from all that, Credit Suisse recently published an interesting piece of research arguing the same point – that the U.S. bond market is not a bubble. They noted that the price action in government bonds is very different from historical bubbles:
“We note that the price action of bonds it is very different from the bubbles in other asset classes we have seen over the last 30 years. The six-month US bond return is 1.9 standard deviations above norm, compared to an average of 5.9 standard deviations during previous bubbles.”
So you can see the price action is not even remotely similar to the great bubbles in history. If investors continue to use government bonds as they are intended (for instance, don’t make a 10 year loan with the intention of demanding your money back in 10 minutes), diversify across bond markets and generally allocate bonds as they are intended (as a hedge against other higher risk assets) then there should be very little risk of you ever experiencing a catastrophic loss such as those seen after many of the great bubbles of the last 30 years.
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DiggMedia: Expanded Thoughts on Potential Currency Trading Bubble
by ilene - September 10th, 2010 6:27 pm
Media: Expanded Thoughts on Potential Currency Trading Bubble
Courtesy of Joshua M Brown, The Reformed Broker
I gave an interview to My Private Banker the other day. They wanted to take my discussion of the potential bubble in currency trading a step further.
Enjoy:
Investing in currencies is all the rage in wealth management. Currency ETFs, ETNs and currency structructured products are springing up like mushrooms. Inspired by the Euro crisis many private investors in the EU have started investing in currency products. Wealth managers and bankers play also a big role as more and more products are pushed on to their clients. But does currency investing make any sense? We talked about this topic to Josh Brown, who is one of the best known global finance bloggers providing daily comments on The Reformed Broker. Josh Brown has been recently a vocal critic of the boom in currency investing.
MyPrivateBanking: Why do you see a bubble in currency trading – comparable to bubbles in stocks or house prices?
Josh Brown: With currencies, we are still at the stage where we’re talking "prospective bubble", but all the ingredients are there. This isn’t going to be a Price Bubble, it will be an Activity Bubble should the mania take over.
MyPrivateBanking: What differentiates this bubble from “normal” investment bubbles?
Josh Brown: Normal investment bubbles require a certain backdrop of speculative fervor along with some exogenous encouragement to fan the flames (think innovative mortgages or freely available margin leverage). This one is more akin to the Texas Hold ‘Em craze of the mid-2000′s where all of a sudden all your friends and neighbors were poker sharks out of nowhere.
MyPrivateBanking: Why do wealth managers increasingly recommend currency products to their clients?
Josh Brown: I think wealth managers are introducing ETFs that are currency-related because of what’s known as "reverse inquiry". The financial media has done a really terrific job of painting the currency markets as unstable and exciting, this has led to product introductions and marketing which has in turn led to inquiries from the public to their advisors – "How can we get in on this". The reality is that it’s foolish to "invest" in a currency from an asset management standpoint, unless we’re talking about swinging for the fences with the Iraqi Dinar or something. Currency is not an investment, it…
How Keynesian Archduke Krugman Recommended A Housing Bubble As A Solution To All Of America’s Post Tech Bubble Problems
by ilene - September 8th, 2010 7:20 pm
How Keynesian Archduke Krugman Recommended A Housing Bubble As A Solution To All Of America’s Post Tech Bubble Problems
Courtesy of Tyler Durden
The year is 2002, America has just woken up with the worst post dot.com hangover ever. Paul Krugman then, just as now, writes worthless op-eds for the NYT. And then, just as now, the Keynsian acolyte recommended excess spending as the solution to all of America problems. Only this one time, at band camp, Krugman went too far. If there is one thing that everyone can agree on, it is that the Housing Bubble is arguably the worst thing to ever happen to America, bringing with it such pestilence and locusts as the credit bubble, the end of free market capitalism, and the inception of American-style crony capitalism. Those who ignored it, even though it was staring them in the face, such as Greenspan and Bernanke, now have their reputation teetering on the edge of oblivion. So what can we say of those who openly endorsed it as a solution to America’s problems?
Enter exhibit A: New York Times, August 2, 2002, "Dubya’s Double Dip?" Name the author: "The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." If you said Krugman, you win. Indeed, the idiocy of Keynesianism knew no bounds then, as it does now. The solution then, as now, to all problems was more bubbles, more spending, more deficits. So we have the implosion tech bubble: And what does Krugman want to create, to fix it? Why, create a housing bubble… Well, at least we know now how that advice played out.
And now what? He wants another trillion in fiscal stimulus… Quadrillion? Sextillion (arguably this cool sounding number is at least 2-4 years away before the Fed brings it into the daily vernacular)?…
HAVE WE SEEN CAPITULATION?
by ilene - August 26th, 2010 12:08 pm
HAVE WE SEEN CAPITULATION?
Courtesy of The Pragmatic Capitalist
We’re not even close according to David Rosenberg:
“Short interest on the Nasdaq down 1.6% in the first week of August?
The Rasmussen investor
confidence index at 80.4? Call us when it hits 50, which in the past was a “classic” washout level.Investors Intelligence did show the bull share declining further this past week, to 33.3% from 36.7%. But the bear share barely budged and is still lower than the bull share at 31.2%. Are we supposed to believe that at the market lows, there will still be more bulls than bears out there? Hardly. At true lows, the bulls are hiding under table screaming “uncle!”.
Yes, Market Vane equity sentiment is down to 46, but in truth, this metric is usually in a 20-30% range when the market correction ends. We are waiting patiently.
As for bonds, well, Market Vane sentiment is 73%. Now what is so bubbly about that. Call us on extreme positive sentiment when this measure of excessive bullishness is closer to 90%, and we’ll be in the correction camp hopefully by the time this happens.”
I would tend to agree. We have seen nothing in the fear gauges that convinces me that people believe in a sustained downturn in the economy. The cult of the equity investor has spent the last several months debating the possibility of a bubble in bonds, however, almost every single person who makes these claims is an owner of stocks and I have more and more trouble finding people these days who believe in bonds. Yet, for some odd reason there is a never ending love affair with the equity portion of their portfolio. Perhaps the bubble they should be more concerned about is the one that has been imploding underneath them over the course of the last 10 years.
TIPS Like Sugar
by ilene - August 18th, 2010 10:08 pm
TIPS Like Sugar
Courtesy of Joshua M Brown, The Reformed Broker
The ‘Treasury Bonds are a Bubble" meme has been going around and building intensity for months now, but we’ve finally seen the definitive article written on the subject in the Wall Street Journal.
Jeremy Siegel and Jeremy Schwartz frame the story in a context that the investor class will truly understand – they compare it to the dot com bubble. I had front row seats for that show as a young stockbroker ten years ago and, like anyone else that was there, I have injuries so visceral that I can actually sense when rain is coming.
Of particular importance is their comparison of tech stocks then with TIPS now…
We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.
The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.
The rush into TIPS has felt mind-boggling to me, in spite of the fact that this trade has "continued to work". With the Professor in agreement, I feel (only slightly) better about my reluctance to participate.
Meanwhile, The Boss has been making the media rounds talking about the bond bubble story all week, on MSNBC and Fast Money last night, on Bloomberg Radio this morning. This long-simmering story is finally getting some real attention.
Felix Salmon and Vince Fernando have had a highly important back-and-forth on what exactly the TIPS Spread is pricing in and Eddie Elfenbein picked up on the fact that JNJ was able to price a 10-year bond with a yield under 3% while it’s common stock pays a 3.6% dividend yield.
The disgust for the growth prospects of equities is palpable as money flies out of stocks and piles into bonds of every stripe. Here’s the WSJ on these inflow/outflow stats:
Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds
…
Mass Delusion – American Style
by ilene - August 15th, 2010 5:29 pm
Mass Delusion – American Style
Courtesy of Jim Quinn of The Burning Platform
“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” – Charles Mackay - Extraordinary Popular Delusions and The Madness of Crowds
The American public thinks they are rugged individualists, who come to conclusions based upon sound reason and a rational thought process. The truth is that the vast majority of Americans act like a herd of cattle or a horde of lemmings. Throughout history there have been many instances of mass delusion. They include the South Sea Company bubble, Mississippi Company bubble, Dutch Tulip bubble, and Salem witch trials. It appears that mass delusion has replaced baseball as the national past-time in America. In the space of the last 15 years the American public have fallen for the three whopper delusions:
- Buy stocks for the long run
- Homes are always a great investment
- Globalization will benefit all Americans
Bill Bonner and Lila Rajiva ponder why people have always acted in a herd like manner in their outstanding book Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics
“Of course, we doubt if many public prescriptions are really intended to solve problems. People certainly believe they are when they propose them. But, like so much of what goes on in a public spectacle, its favorite slogans, too, are delusional – more in the nature of placebos than propositions. People repeat them like Hail Marys because it makes them feel better. Most of our beliefs about the economy – and everything else – are of this nature. They are forms of self medication, superstitious lip service we pay to the powers of the dark, like touching wood….or throwing salt over your shoulder. “Stocks for the long run,” “Globalization is good.” We repeat slogans to ourselves, because everyone else does. It is not so much bad luck we want to avoid as being on our own. Why it is that losing your life savings should be less painful if you have lost it in the company of one million other losers, we don’t know. But mankind is first of all a herd animal and fears nothing more than not being part of the herd.”
Stocks for the
…
The Last Gasp Bubble of Government.com
by ilene - July 28th, 2010 5:30 pm
The Last Gasp Bubble of Government.com
Courtesy of Todd Harrison at Minyanville
History doesn’t always repeat but it often rhymes.
When I began writing ten years ago, I would offer that the opposite of love wasn’t hate; it was apathy.
I shared that thought after tech stocks dropped 40% in less than two months and then recovered half those losses the next two months. We all know what happened next; the tech sector melted 70% the next few years.
Wash and rinse, Pete and repeat; we’ve seen that sequel again and again and again. From the homebuilders (real estate) to China to crude oil, a “new paradigm” arrived. Every time was different and each offered a fresh set of forward expectations that would finally prove historical precedents need not apply
I traded all of those bubbles thinking quite sure they would follow the path of false hope and empty promises paved by their predecessors. That proved true as the real estate market crashed, China imploded under the weight of the world, and crude crumbled just as it seemed ready to stake claim to the new world order. (See: Oil of Oy Vey)
Sisyphus Now!
While those bubbles hit home for many Americans, they’re hardly unprecedented through a historical lens.
There was the tulip mania in 17th century Holland as Dutch collectors hoarded a hierarchy of flowers.
The Mississippi and South Sea bubbles of the 18th century emerged in the wake of Europe’s dire economic condition.
The roaring twenties, fueled by an expansive use of leverage, led to the crash and Great Depression while not necessarily in that order.
And there’s Japan, perhaps the most frequently referenced modern-day parallel of our current course. The land of the rising sun boasted one of the strongest economies on the planet before a prolonged period of deregulation, money supply growth, low interest rates, bad real estate bets, and “zaitech” (financial engineering) creating a virtuous cycle of speculative frenzy that ultimately collapsed the country.
Does any of this strike a chord?
If familiarity breeds contempt, the percolating societal acrimony shouldn’t come as a shocker. Albert Einstein said the definition of insanity is doing the same thing over and over and expecting a different result. That most certainly applies to our financial fate…
WILL THE “CULT OF THE EQUITY” INVESTOR DIE?
by ilene - July 20th, 2010 6:07 am
WILL THE “CULT OF THE EQUITY” INVESTOR DIE?
Courtesy of The Pragmatic Capitalist
RBS recently published a dramatic and very bearish research note that described equity investors as “the world’s worst cult”. While I thought the note was a bit over the top it did raise some interesting and thought provoking topics. More specifically, they said:
“The big turnover in the US economy will lead to dramatic turns down in valuations we suspect – and may finally destroy the world’s worst cult: the cult of the equity, which has no basis in fact, or history, but yet seems universally accepted.”
The credit crisis is a reflection of our excesses and this is best reflected in the markets. We have become a society that values those who get rich quick over those who create sustainable and productive businesses. This is nowhere more apparent than it is in the financial sector which has become the epicenter of the crisis. Our bloated financial sector steals our best minds and puts them to work doing little of real value while rewarding them excessively. The excess growth of this industry has coincided with Main Street’s obsession with Wall Street. While the buy side reaps the rewards of 2 & 20 or 2% funds fees for what is effectively an index fund (sorry mutual fund managers) the sell side reels the small investor in with the myth of becoming the next Warren Buffett. The result? What RBS would call the worst cult in history – an economy that has become transfixed with making money by effectively doing nothing.
We have spent more than we have and lived well beyond our means. We buy every new Apple product, houses because we believe it is a right and not a privilege, and think of debt as a way to keep up with the way of life that God bestowed upon us. It is not sustainable and this is becoming clear to us all as the economy appears to be in a perpetual stall. The worst part in all of this is that we have tried with all our might to prop up a sector that has failed us all. While Main Street struggles Wall
As a nation I sometimes wonder if a depression wouldn’t set us straight. I have often cited the “greatest generation” in this regard.…
VIX Futures Contango Bubble
by Chart School - July 10th, 2010 3:30 am
VIX Futures Contango Bubble
Courtesy of Bill Luby at VIX and More
Truth be told, there is no such thing as a “contango bubble,” but I like how the two words look juxtaposed and it is Friday…
Bubble or not, the VIX futures are stretched to an extreme that I do not ever recall seeing and to the extent that the grapevine is whispering to Adam Warner of the Daily Options Report that the differential between the first month and third month VIX futures is at its highest level ever. (Note to self, why doesn’t the grapevine ever whisper to me?)
The chart below, courtesy of FutureSource.com, shows the difference between the VIX third month futures and front month futures (VX V0 – VX N0 in current VIX futures parlance) going back about six months. Personally, I tend to get excited when the third month VIX futures rises more than 2.00 higher than the front month, as this frequently suggests that the VXX negative roll yield contango play is starting to set up.
Some 17 months after its launch, I probably still get more questions about VXX than any other subject. As much confusion as there is about VXX, I think it is probably time to come out with an extended look at this volatility product in the next week or two.
For more on related subjects, readers are encouraged to check out:
- VIX Spike and VIX Futures Contango Means…
- VXX Calculations, VIX Futures and Time Decay
- VIX Term Structure and VIX Forecasts
- VIX:VXV Sell/Short Signal
- Is the Fear Bubble Bursting?
- VIX Futures Starter Kit
Disclosure(s): short VXX at time of writing
Comment by Ben: I don’t understand what this means. Is it a signal to short VXX? Buy it? Or VXZ? Or what?
Bill’s response: It is not a signal to short VXX, though that is the position I currently have on right now. What it means is that the consensus is that the VIX has fallen too far, too fast. The VIX futures indicate that the market believes the VIX will spike back up into the 30s over the course of the next few months.…
Our Douchebag Government – Midyear Debt Update
by ilene - July 2nd, 2010 7:11 pm
Our Douchebag Government – Midyear Debt Update
Courtesy of Karl Denninger at The Market Ticker
Keep up the lying, legislators, about how it’s all "those other guys" fault…..
Yesterday gave me the opportunity to update this chart with an extrapolated forward number for this year through the first six months.
Yeah, tell me it’s all the Republicans’ fault. Or all the Democrats’.
Nonsense.
Our government refuses to deal with the facts - there is no recovery in the private economy, there has been no recovery; private final demand collapsed in 2008 and has not come back one iota and the Feral Government is LYING – on both sides of the aisle.
You want a stock market crash and economic collapse Mr. Grayson? Mr. Reid? Ms. Pelosi? Mr. McCain? Mr. Hoyer? Mr. Issa? Mr/Ms (Pick a name)?
You’re going to get one and the longer you keep this crap up the worse it’s going to be.
Want to argue with me? Go ahead and try – argue with the math. Tell me how we can keep doing what we’re doing, and for how long. How long we can borrow and spend 10, 11, 12% of GDP on an annual basis before those who fund our national credit card say this:
Are you in Congress and the White House so damned arrogant as to think that this can’t or won’t happen? What are you going to threaten people with? 6,000 nuclear weapons? For what? Refusing to fund an ever-spiraling higher Ponzi Scheme? For how long will that game work? Can such a threat be effective beyond the mathematical limits of capacity, even if the leaders of said nations want to continue doing so?
No.
Here’s reality folks: We’ve written checks for 30 years with our political mouths we cannot cash with our producing fingers. We’ve papered over this with fraud in virtually every nook and cranny of public and private life. We have allowed producers to depart for lands where effective slavery exists for labor, refusing to enact parity tariffs to put a stop to it. We have allowed blatant and outrageous theft of our producers’ intellectual property and conferred upon these nations "most-favored nation" trading status. We have blown serial bubbles in the stock and housing markets and would love to blow another one in "carbon trading", but all three were and are frauds without foundation in reality – or sustainability.
Jeff Immelt, GE’s Chief Executive, came out today…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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