Signs of the Times
"Spanish banks' bad loans jumped to an 18-year high in May."
Bloomberg, July 18
"Speculative-grade corporate debt in Europe is the most expensive to
insure in 1 1/2 years."
Bloomberg, July 20
"Wall Street's five biggest banks reported the worst start to a year
Bloomberg, July 20
"Landlords are piling the most debt onto commercial properties in
five years as Wall Street bundles the loans into bonds to meet rising demand
from investors seeking high yields amid record-low interest rates."
Bloomberg, July 17
is getting intriguing. Conservative money, and lots of it, has been finding
comfort in the liquidity of US treasury bills. This has been enough to drive
yields to Depression lows. Longer-dated corporate bonds are not at
Depression-devastated high yields. But, are working on a momentum and
sentiment high for prices.
Street is again "bundling" securities, and "investors"
are again reaching for yield.
week's Pivot concluded that the Dollar Index was having trouble getting
through the 83.5 level and that any decline would prompt some "Positive
vibes". The shelf-life was good until Friday, and Ross got onto the
change with the two ChartWorks on Sunday.
change was Spanish yields going to new highs, as the DX rose to 84.10 on
Tuesday. Yesterday's updated ChartWorks reviewed
that the near term tendency will likely be down.
this works with the likelihood of choppy action through the summer.
as each week goes by events continue to reinforce our view that Mother Nature
is adamant about keeping financial history on a fairly typical post-bubble
contraction. Benighted policymakers don't stand a chance - again.
inability to really service sovereign debt is shown by Spain's 10-year notes
rising to 7.50% (new high) on Monday.
over reality has brought relief, otherwise known as positive vibes, that could run for a week or so.
market advice has been to sell the rallies.
hypocrisy of the establishment is something else again. Agit-propaganda
about Barclays "manipulating" Libor has more to do with politics
than improving interest rate markets. Terry Corcoran at the Financial Post
has had some good pieces on the story. Yesterday's is the latest and here is
are comments going back to the 1500s about a businessman complaining that
some agent is deliberately setting rates too high. Then there is the
seemingly endless record of "intellectuals" speculating or boasting
that some agency can lower rates at will. Such examples usually appear during
the record, successful traders, such as Thomas Gresham (1519 - 1579), seem to
be able to understand a crisis and merely observe that there is no money
available - even "with double collateral".
a process of learning the hard way, successful traders get liquid or
defensive at a speculative high. Thus Gresham's dispassionate reporting,
rather than despairing for some agent to wave a credit wand.
the notion that some gifted agency can manipulate interest rates for the
public good or relief has become dominant. And no matter how hapless the behaviour of the Fed has been it still has its admirers.
speculative boom in commodities that culminated in 1919 was followed by an
equally outstanding crash. The objective of the Fed during the 1920s was to
prevent commodities from falling further. The real price of copper plunged
from 663 to 148 and spent most of the 1920s around 175. The high in 1929 was
323 and the Depression low was 84.
attempt to prop up commodities (old losers) was not successful as excess
funds roared into the stock markets (new winners). The excitement of
inflation in financial assets was discovered - again. Current policymakers
still do not understand inflation in financial assets during a great bubble
and that great depressions have always followed. As head of the Fed in 1927,
Ben Strong, knew about financial asset inflation with his "coup de
whiskey" remark. We elaborated on this in November 2007 and the piece
problem is that interventionist economists have read economic theories, not
point is that Fed manipulations have not materially changed financial
history, but have exaggerated the urge to speculate.
does the establishment grant central bankers the privilege of manipulating
interest rates, and recently condemn what appeared to be interest rate
manipulation of the non-government Libor?
this regard, the Fed provides a special irony. It attempts to regulate
economic behaviour through interest-rate
manipulation via the official "Fed Funds". Special is that the Fed
is owned by a small group of large private banks.
story gets worse. Talk to anyone who was on a Canadian bond trading desk in
the 1960s and 1970s when the laws applied to traders did not apply to their
equivalent at the Bank of Canada.
such as wash trading to "increase" trading volume, focusing on one
maturity to push the whole market up, and timing news releases to favour the market would put a private trader in jail. The
central bank did it with no regard for common law.
noise about Libor is purely political as control freaks are looking for
another item to run. Perhaps part of Robert Diamond resignation from Barclays
has to do with the nonsense of government functionaries impractical
intrusions. Who needs it?
one time, call money was a benchmark interest rate. This was the rate at
which private banks loaned funds to brokers, who in
turn provided margin to customers. Then in the insanity of yet another
"new" financial era banks became brokers and putting it glibly;
call money became Libor.
the empty suits want to take it over.
times. Sovereign debt issues have been under severe pressures as long-dated
US treasuries are working on an "Eiffel Tower" top. The action is
similar to the magnificent high for silver at 48.35 in April 2011.
the long bond has become another asset play that has little to do with
interest rates. Representing investment-grade corporates, the LQD is carrying
on with impetuous buying, impetuous enough to register some daily Upside
Exhaustions. In the past these have led the high by a few weeks. We have had
our eye on the top channel-line at 122. Of course, precision depends upon the
thickness of the trend line.
reversal will be interesting as most corporates could then be heading to
Junk vs. Treasuries
- Up represents
narrowing, which indicates confidence.
- Down is bad.
- A few weeks
ago we reviewed a few items that were replicating their action in the
summer of 2008.
- This is
Excerpt from PIVOTAL EVENTS published November 1, 2007
the next crisis seems to have started.
the meantime the October 17 Financial Times made some interesting points:
"A decade ago, when Asia was facing a financial crisis, American
bankers and government officials regularly traveled to the region delivering
homilies about the best way to exit a banking mess. After all - or so the
lectures went - America had suffered bank crises, such as the Savings and
Loan debacle of the late 1980s. This experience had shown that the best route
to recovery was to establish realistic prices for distressed assets, by
conducting fire sales if necessary, and then write the losses off. However,
it seems that some US financiers seem to need to take a hefty swig of the
medicine they used to wave at Asia."
that problem is not just in America, but global financiers and central
bankers combined to juice the markets, prompting impressive short covering.
reminds of 1927 when faltering spirits with the collapsing Florida real
estate bubble needed reviving. Ben Strong, then head of the New York Fed,
told a French central banker that he was going to give the markets a "coup
de whiskey". The rally was terrific but as it turned out, yet
another story in the house of cards. It might just as well have been called a
"coup de bourse", and it was celebrated as a "coup d'eclat", prompting a "coup de chapeau".
For realists it was eventually seen as a failure ("coup de manque") as was all the preceding nonsense about
managing "price stability". As for us, we would have been content
with a "coup de beer".
part of Pivotal Events that was published for our subscribers July 26,
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