Is the Bond Market Ready to Crash?

The media hype is for a sharp sell off in the bond market. Some “gloom and doom” pundits are even predicting a crash that will plummet the world into a worldwide depression. The US Federal Reserve has ended its $4.5 trillion bond purchase program. Fed Chairperson, Janet Yellen, has maintained a “stead as she goes” policy without a definitive time frame for raising rates. This has left analysts in a state of suspended animation.

Logic is telling us that interest rates should rise and prices fall sharply (When rates rise prices fall). However, your normal thought patterns go out the window in this topsy-turvy finance of world economies. What is up is down and vice versa. We are actually seeing a “drop” in bond yields to record lows.

Why do we have this paradox? The Central Banks of the United States, Europe and Japan are desperately trying to re-inflate their economies and bring them to a 2% inflation threshold. In the United States the Fed is stubbornly preaching that inflation is still below 2%. However, except for a drop in gasoline prices, we know that prices, especially for food, shelter and services have far outstripped the 2% barrier. Analysts see this and forecast a rise in rates in 2015. Median estimates are for the benchmark 10- year note yield to rise to 3.24% in 2015. This is the number that most investors are expecting.

Now let’s take this “smooth as silk” forecast and turn it inside out. Enter the law of “supply and demand.” The Central Banks of Europe and Japan are in desperate straits to raise cash. They do this by issuing more bonds. Japan is now in recession and sees its only salvation is to raise more money to keep stimulating their economy. The Bank of Japan expects to up their bond purchases by 20% and even up to 50% by 2018. European Central Bank President Mario Draghi is planning a QE program for Europe. The ECB expects to issue $400 billion and the Bank of Japan $700 billion. At first blush you would expect this to be a drag on prices with rates rising substantially. However, on the demand side we expect bond purchases to exceed supply. In total, we are looking at a worldwide bond market of $100 trillion. Worldwide borrowers are expected to issue $2 trillion. On the demand side Central Banks and investors world- wide are looking to spend $2.4 trillion. That leaves a shortfall of $400 billion. In addition to Central Bank buying you have pension funds, insurers and bond funds as active buyers.

The picture we have now is quite different from “gloom and doom” forecast of a bond bubble bursting. At some point the market will run out of buyers. This would trigger a panic wave of selling. Always remember that is a lack of buyers that triggers a sell off. Bids are lowered then more selling comes in and you have a full-scale sell-off. It will come when investors lose faith in their government’s ability to pay its debts. All of this paper will go up in smoke.

Gold – The Long and Short of it.

It’s an understatement to say that gold is a mysterious commodity. There are wars in the Mid East and we have Russia and the United States verbally battling each other over Russia’s invasion of the Ukraine. The natural resource boom of 2011-12 is taking a breather, affecting the economies of Australia, Canada, South America and Africa. International conflicts usually drive investors to seek haven in precious metals. This time, however, they are running away from them with gold making new lows in the month of November. It is extremely difficult to make sense of these cross currents and come up with a rational sense of where gold is headed. A look at the fundamental and technical factors affecting gold trading will give us some insight about the market.Continue Reading

The Detroit Bankruptcy Case – Municipal Bondholders Take Note

For the past 16 months the city of Detroit has gone through a gut-wrenching series of negotiations to settle the largest bankruptcy in US history. Detroit has a population of 680,000 and a land mass larger than Manhattan, Boston and San Francisco combined.Continue Reading

Debt Wipeout: The Great $4.45 Trillion Experiment

Imagine this scenario. Bankers and Mortgage Brokers have gone berserk writing mortgages for people who could not afford to pay them off. Some customers didn’t even make the first payment. Some signatures were forged to get approval. It was an era of pure “greed.” Now, imagine this fictitious conservation between two bankers: “Tom, you know we have a lot of junk here with some of these mortgages.” “Yes, says Bill. Why don’t we just package them together and resell them to hedge funds and pension funds? We’ll use a fancy name like Collateralized Debt Obligations. That way no one will know exactly what we are selling them.” This scheme goes along for a while until a few “sane” investors start thinking: “I don’t think we should buy this stuff.” There are no bids and the market freezes up. Panic sets in and the markets are in freefall. The bankers run to the politicians and beg, hat in hand, for a bailout from Congress. The politicians dream up a fancy name like TARP and give the bankers $787 billion of taxpayer money. However, this is just a drop in the bucket. A whopping $7 trillion of household debt has been wiped out.
Continue Reading

Investors-Urgent Start Following the Giant Bond Bubble

During the last few weeks we saw the stock market gyrate with wild swings up and down. Investors started thinking “crash” mode. In times of crisis we need a clear head and logical thinking. First, let’s look at who is doing the buying and selling. The US Federal Reserve gave the big banks 4 trillion to play with when they set in motion their bond- buying program. It lasted from 2009 through 2013 and will end this year. (When the Fed buys bonds it credits banks’ balance sheets.) The banks used this money to rally the stock market to new all time highs. So, this was a ‘big boys” rally. Individual investors have been largely absent in this bull- run. The selling and buying that occurred was largely driven banks and hedge funds.Continue Reading

What Happened to the Oil Market?

While the focus has been on the Dow Jones Industrials and the S & P, there is another sea change taking place in the energy markets. This past summer the benchmark West Texas Intermediate (WTI) crude was trading near $107.00 per barrel. This past week we saw a low of $79.78 per barrel in the December futures contract, hitting a four year low.Continue Reading

Breakthrough in LED Lighting-Nobel Prize Winners Crack the Blue LED

The Noble Prize for Physics was awarded to three scientists, Akasaki, Amano and Nakamura for cracking the problem of creating the Blue LED. The Blue LED will allow manufacturers to produce white light lamps. This is a major breakthrough in an industry the is expected to capture 70% of a $100 billion market by 2020. LEDs will last 10 times longer than fluorescent bulbs and 100 times longer than traditional incandescent -tungsten filament bulbs (Reuters).The transition to more efficient lighting has been underway for several years but took a giant leap forward with the 2014 ban on the old incandescent bulbs.Continue Reading

Market Volatility is Ramping Up-A Traders Game

Market Volatility is Ramping Up-A Traders GameContinue Reading

Investors Seek the Fed’s Guidance on the Economy

What do the latest Fed minutes tell us? Since the recession began, the Fed has set two goals for the economy. Perhaps the foremost objective is to maintain inflation at or near the 2% level. The one crisis point would be a drop in inflation below the flat line. This would indicate that the economy is teetering on the brink of recession. The entire quantitative easing program is aimed at keeping the economy growing. We are seeing the effects of stagnation in Europe with the introduction of negative interest rates to stimulate the economy. So far, the US economy has been expanding, albeit very slowly. The latest 2nd quarter GDP numbers came in better than expected at 4.6%. The media has jumped on this number and is prodding the Fed to raise interest rates. However, all is not that great. The 1st quarter GDP actually fell 2.1% after a brutally cold winter in the Northeast. When taken together these numbers indicate a moderate expansion in the economy. According the Fed’s statistics, inflation in August was at 1.7%. However, this number does not include food, energy and shelter.Continue Reading

Currency Info: How Does the Strong US Dollar Affect Your Portfolio?

Currency fluctuations affect a country’s economy and, in turn, the individual investor. Here we want to examine how a strong or weak currency will permeate the economy. Always remember that currency fluctuations are relative depending on the countries involved.Continue Reading