"6,125 Proposed Regulations Posted in Last 90 Days
- Average 68 Per Day"
~ CNS News, November 8
Ironical, as the release came on the week when certain
politicians were observing the deaths of so many soldiers - in the defense of
"Japan Plunges Into Deep Recession"
~ Financial Times, November 12
"Bank of Canada warns that 'vigilance by all parties'
is essential to contain the country's household debt problem."
~ Financial Post, October 30
This seemed familiar so we checked our notes:
"The impact on the broader economy from sub-prime
is likely to be contained."
~ Ben Bernanke, March 28, 2007
Using the typical timing on the end of boom, the yield
curve was likely to reverse from inverted to steepening by as late as June
2007. The deadly reversal was completed by late in that fateful May.
Representative sub-prime bonds soared to an outstanding
high on September 14th. News that mortgage-backed securities were on the
Fed's shopping list was announced the day before. The chart shows the initial
sell-off was followed by a trading range below the high. It broke down this
week, suggesting no lack of supply for a foolhardy bid. At 57.4 now, taking
out 56.6 would extend the downtrend. Taking out 55 would ring the alarm
Contrary to official plans other bond sectors showed
contempt for notions about "containment".
US corporate high-yield (CYE) tested the late September
high at 8.05 in late October and then plunged to 7.08. The low during the
concerns of May was 6.86.
Junk (JNK) also tested its September high and has
rolled over. The high was 40.53 and taking out 39.25 will set the downtrend.
The low in May was 36.45.
Representing global markets, the Spanish Ten-Year
reached 7.52% with concerns about default in July. Then the
"risk-on" move dropped the yield to 5.34% in mid-October. The
action has trended up and taking out 6.10% will start to get some attention.
As risk began to gain regard, the long bond has rallied
from a key low of 144 and change on September 14th. Last week the high was
151.66 and the move is not overbought.
In shorter maturities, the Ted-Spread reached an
exceptional degree of oversold at 0.203 on October 24th. It has set a brief
and choppy uptrend to 0.240, which has been caused by the treasury bill rate
plunging while Libor remained unchanged. It will become interesting when
Libor starts to increase.
This brief update will lead to a more extensive comment
about government treasury departments issuing endless amounts of bonds as
government central banks buy endless amounts of treasury issues. In case of
the US it includes buying , shudder, the sub-prime.
Of course, outside investors have been playing the
game, but overall it is institutionalized insanity. Where does the money come
from to pay the interest? Well, it comes from issuance of yet more debt and
it reminds of playing the popular game of Monopoly. Decades ago our family
and friends decided to play the game with all of the money from another
Monopoly set. It went on forever and there were no winners. Eventually, we
quit and went back to only one set of money. Played by the rules it's a good
Back in the 1970s as interest rates were soaring to
unprecedented levels there were some articles about the costs of compounding
interest. One concept was that within a speculative rise in price the
compounding cost of interest eventually limits the ability of speculators to
drive prices higher. This really took effect when surging prices faltered,
which was the cue for Mister Margin to come onstage.
It makes sense that this would apply at any level of
interest rates. Compounding doesn't care what the rate is and even today's
low coupons must be paid.
Recently this seems to have been noticed by the UK
government. The request for interest payments from the Bank of England is
Halkin's Weekly Letter includes a brief and amusing piece that
starts with "Dear Mervyn":
Link to November 17 'Bob and Phil Show' on