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Tag Archives: Government bonds

INVESTMENT STRATEGY LETTER #639

29 Monday Jun 2015

Posted by Carl M. Birkelbach in Uncategorized

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Government bonds

MARKETS STRUGGLE WORLDWIDE WITH CLOSURE OF GREEK BANKS

Dow Industrials are in a trading range between 18,300 and 17,700

Since February, the Dow industrial Averages have been trading between a narrow trading range of  18,300 and 17,700. Does this SIDEWAYS TREND mean that the Dow is no longer a bull market? Is this what stock market chartists call DISTRIBUTION??? Although the NASDAQ has made new highs, the Dow Transports and Dow Utilities are definitely in a downtrend. According to the Dow Theory, this is a sell signal. If you want to know what’s really going  on in the US markets, take a look at the US Treasuries. Today at 2.48% the 10 year yield is up 3.55% for the day and up over 20% this year. I would think, that’s where the smart money is going, even though the yields are low. For many, it’s better to receive a small yield, than be in a dangerous stock market.

ISL JUNE 22

All that I said below is being negated by a supposed new deal with Greece.        (DAX up 3.8% Ya Ya!) If a deal is made, it is just postponing the enviable, in my opinion, which is a Greek default. The Bull market has run out of gas and is now being pushed, by hand, up a very steep hill. It reminds me of the Greek myth ‘SISYPHUS” that was charged with roiling a bolder up a hill. The higher he got, the bigger the boulder became. THE 10 YR T-bond yield is up 10 basis points. That tells the real story. Watch out below!

ISL  June 19 2015

BULL MARKET OVER FOR DAX, FTSE,CHINA, DOW TRANSPORTS/Utility AND BOND MARKET! AT THE SAME TIME THE NASDAQ MAKES NEW HIGHS. WHO IS OUT OF SYNC?

The Chinese markets are down 12% this week. The DAX is down from  a high of 12,375 to 11,062. The FTSE is down from a high of 7,104 to 6,728.The Dow Transports are down from a high of 9,217 to 8,479.The Dow Utilities are down from a high of 652 to 575. The 10 year yields have risen some 20%. All this while the  NASDAQ hits new highs. Somebody is out of sync?

Robert Prechter of the famed Elliott Wave Forecasting has just said that he believes the stock market is in a high risk of a sharp collapse. As an example he looks at the Dow on February 27 when the Dow hitting new high, there were 172 New York Stock Exchange listed stocks that achieved a new high and 31 stocks that hit new lows. However, when the Dow rose to his latest record high on May 19, the number of new highs had fallen to 118, while new lows rose to 38. In addition, he points out something that I did in our last letter, which is that the Dow Jones Transportation index and the Dow Jones Utility index are in downtrends. This is a traditional Dow Theory, sell signal. Prechter also said that the market is operating in a 6.25 years to 7 year cycle that has been operating since 1980 which calls for a market decline. The Elliott wave is based on a Fibonacci summation series known as the divine, or golden ratio which is been found to exist throughout nature including outer space. (See my book above entitled the Investment Strategy Handbook for Volatile Markets.)


I believe that the Bull Markets of the above-mentioned indexes HAVE ENDED. IN MY OPINION THE INTERMEDIATE TREND OF THESE INDEXES IS NOW DOWN. However, the Dow industrials, the NASDAQ and the Standard & Poor’s 500 continue in a narrow trading range in what technical chart readers may call Distribution. One of the main topics of contention is, when will the Federal Reserve increase interest rates and will Greece meet its financial obligations? According to Diane Swank of Mesrow Financial, she believes short-term rates are headed up and in September. This is much earlier than the market investors are contemplating. As far as the Greece situation is concerned, we have been consistently negative and believe that all alternatives are just kicking the can down the road to Greece’s inevitable default. How long will the major indexes hold up in their current Bull Market? There’s an old saying, “it isn’t an over, until it’s over.”

Maybe, you haven’t heard the news yet, but the bond market is crashing. Yields on the 10 year bond are up .55 basis points. That corresponds to approximately a 20% increase in yields for the 10 year bond. Maybe the Federal Reserve isn’t ready to increase interest rates, but investors sure are.

The fabric of the economy continues to be ripped apart by events that hurt the Middle Class and the poor. Pew Research have 30 States cutting budgets in health care, senior care, city government and universities, At the same time wages are dropping and upward mobility is suffering. Add to this, is a recent decision by the Supreme Court to not protect individuals who have second mortgages in bankruptcy. Meanwhile Jamie Dimon becomes a billionaire.  IF THE SUPREME COURT RULES AGAINST OBAMA CARE, THE POOR WILL RECEIVE ANOTHER BLOW.  HOW MUCH MORE PUNISHMENT CAN OUR CONSUMER ORIENTED ECONOMY TAKE? Watch out below!

KEEP AN EYE ON THE CHART BELOW FOR BREAK OUT POINTS BELOW RESISTANCE OR ABOVE SUPPORT AREAS. Particularly  watch for a breakout below Dow 17,700 AND THEN 17,147/17,000, NASDAQ 4605/4545, S&P 500   1991/1973. That would change the Intermediate trend to DOWN

 Current  Dow NASDAQ S&P 500
17,953 5,082 2,102
Short Term DOWN DOWN DOWN
Int. Term SIDEWAYS SIDEWAYS SIDEWAYS
Long Term UP UP UP
ForecastedTrendd  DJIA NASDAQ S&P 500
Short Term Down Down Down
Int. Term ? ? ?
Long Term Sideways? Sideways? Sideways?
Breakout Points DJIA NASDAQ S&P 500
Short Term Up (Resistance) 18,312 5,157 2,131
Short Term Down (Support) 17,147/17000 4605/4,545    1,991/1973
Int. Term Up (Resistance) 18,974 See Fibonacci Projections above 5,250 2,486 See Fibonacci Projections above
Int. Term Down (Support)  15,855         /15,356 /14,688 4,166 3,986/3294 1,820 /1,560
Long Term Up (Resistance) 18,974 5,250 2,500
Long Term Down Fibonacci Support 50%12,000  62% 10,750       50%2,958  62% 2,555 50%1,390 62% 1,177
 10 yr Treasury 2.48% Gold 1,173 Oil 59.73 

CURRENT MARKET COMMENTS 6/26/15

26 Friday Jun 2015

Posted by Carl M. Birkelbach in Uncategorized

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Government bonds

Dow Industrials are in a trading range between 18,300 and 17,700

Since February, the Dow industrial Averages have been trading between a narrow trading range of  18,300 and 17,700. Does this SIDEWAYS TREND mean that the Dow is no longer a bull market? Is this what stock market chartists call DISTRIBUTION??? Although the NASDAQ has made new highs, the Dow Transports and Dow Utilities are definitely in a downtrend. According to the Dow Theory, this is a sell signal. If you want to know what’s really going  on in the US markets, take a look at the US Treasuries. Today at 2.48% the 10 year yield is up 3.55% for the day and up over 20% this year. I would think, that’s where the smart money is going, even though the yields are low. For many, it’s better to receive a small yield, than be in a dangerous stock market.

ISL JUNE 22

All that I said below is being negated by a supposed new deal with Greece.        (DAX up 3.8% Ya Ya!) If a deal is made, it is just postponing the enviable, in my opinion, which is a Greek default. The Bull market has run out of gas and is now being pushed, by hand, up a very steep hill. It reminds me of the Greek myth ‘SISYPHUS” that was charged with roiling a bolder up a hill. The higher he got, the bigger the boulder became. THE 10 YR T-bond yield is up 10 basis points. That tells the real story. Watch out below!

ISL  June 19 2015

BULL MARKET OVER FOR DAX, FTSE,CHINA, DOW TRANSPORTS/Utility AND BOND MARKET! AT THE SAME TIME THE NASDAQ MAKES NEW HIGHS. WHO IS OUT OF SYNC?

The Chinese markets are down 12% this week. The DAX is down from  a high of 12,375 to 11,062. The FTSE is down from a high of 7,104 to 6,728.The Dow Transports are down from a high of 9,217 to 8,479.The Dow Utilities are down from a high of 652 to 575. The 10 year yields have risen some 20%. All this while the  NASDAQ hits new highs. Somebody is out of sync?

Robert Prechter of the famed Elliott Wave Forecasting has just said that he believes the stock market is in a high risk of a sharp collapse. As an example he looks at the Dow on February 27 when the Dow hitting new high, there were 172 New York Stock Exchange listed stocks that achieved a new high and 31 stocks that hit new lows. However, when the Dow rose to his latest record high on May 19, the number of new highs had fallen to 118, while new lows rose to 38. In addition, he points out something that I did in our last letter, which is that the Dow Jones Transportation index and the Dow Jones Utility index are in downtrends. This is a traditional Dow Theory, sell signal. Prechter also said that the market is operating in a 6.25 years to 7 year cycle that has been operating since 1980 which calls for a market decline. The Elliott wave is based on a Fibonacci summation series known as the divine, or golden ratio which is been found to exist throughout nature including outer space. (See my book above entitled the Investment Strategy Handbook for Volatile Markets.)


I believe that the Bull Markets of the above-mentioned indexes HAVE ENDED. IN MY OPINION THE INTERMEDIATE TREND OF THESE INDEXES IS NOW DOWN. However, the Dow industrials, the NASDAQ and the Standard & Poor’s 500 continue in a narrow trading range in what technical chart readers may call Distribution. One of the main topics of contention is, when will the Federal Reserve increase interest rates and will Greece meet its financial obligations? According to Diane Swank of Mesrow Financial, she believes short-term rates are headed up and in September. This is much earlier than the market investors are contemplating. As far as the Greece situation is concerned, we have been consistently negative and believe that all alternatives are just kicking the can down the road to Greece’s inevitable default. How long will the major indexes hold up in their current Bull Market? There’s an old saying, “it isn’t an over, until it’s over.”

Maybe, you haven’t heard the news yet, but the bond market is crashing. Yields on the 10 year bond are up .55 basis points. That corresponds to approximately a 20% increase in yields for the 10 year bond. Maybe the Federal Reserve isn’t ready to increase interest rates, but investors sure are.

The fabric of the economy continues to be ripped apart by events that hurt the Middle Class and the poor. Pew Research have 30 States cutting budgets in health care, senior care, city government and universities, At the same time wages are dropping and upward mobility is suffering. Add to this, is a recent decision by the Supreme Court to not protect individuals who have second mortgages in bankruptcy. Meanwhile Jamie Dimon becomes a billionaire.  IF THE SUPREME COURT RULES AGAINST OBAMA CARE, THE POOR WILL RECEIVE ANOTHER BLOW.  HOW MUCH MORE PUNISHMENT CAN OUR CONSUMER ORIENTED ECONOMY TAKE? Watch out below!

KEEP AN EYE ON THE CHART BELOW FOR BREAK OUT POINTS BELOW RESISTANCE OR ABOVE SUPPORT AREAS. Particularly  watch for a breakout below Dow 17,700 AND THEN 17,147/17,000, NASDAQ 4605/4545, S&P 500   1991/1973. That would change the Intermediate trend to DOWN

 Current  Dow NASDAQ S&P 500
17,953 5,082 2,102
Short Term DOWN DOWN DOWN
Int. Term SIDEWAYS SIDEWAYS SIDEWAYS
Long Term UP UP UP
ForecastedTrendd  DJIA NASDAQ S&P 500
Short Term Down Down Down
Int. Term ? ? ?
Long Term Sideways? Sideways? Sideways?
Breakout Points DJIA NASDAQ S&P 500
Short Term Up (Resistance) 18,312 5,157 2,131
Short Term Down (Support) 17,147/17000 4605/4,545    1,991/1973
Int. Term Up (Resistance) 18,974 See Fibonacci Projections above 5,250 2,486 See Fibonacci Projections above
Int. Term Down (Support)  15,855         /15,356 /14,688 4,166 3,986/3294 1,820 /1,560
Long Term Up (Resistance) 18,974 5,250 2,500
Long Term Down Fibonacci Support 50%12,000  62% 10,750       50%2,958  62% 2,555 50%1,390 62% 1,177
 10 yr Treasury 2.48% Gold 1,173 Oil 59.73 

MARKET COMMENTS

05 Friday Jun 2015

Posted by Carl M. Birkelbach in Uncategorized

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Government bonds

BOND MARKET CRASHES

Maybe, you haven’t heard the news yet, but the bond market is crashing. Yields on the 10 year bond are up .75 basis points. That corresponds to approximately a 30% increase in yields for the 10 year bond. Maybe the Federal Reserve isn’t ready to increase interest rates, but investors sure are.

The fabric of the economy continues to be ripped apart by events that hurt the Middle Class and the poor. Pew Research have 30 States cutting budgets in health care, senior care, city government and universities, At the same time wages are dropping and upward mobility is suffering. Add to this, is a recent decision by the Supreme Court to not protect individuals who have second mortgages in bankruptcy. Meanwhile Jammie Damon becomes a billionaire.  Watch out below!

KEEP AN EYE ON THE CHART BELOW FOR BREAK OUT POINTS BELOW RESISTANCE OR ABOVE SUPPORT AREAS. Particularly  watch for a breakout below Dow 17,147/17,000, NASDAQ 4605/4545, S&P 500   1991/1973. That would change the Intermediate trend to DOWN

 Current  Dow NASDAQ S&P 500
17.865 5,067 2,095
Short Term DOWN DOWN DOWN
Int. Term SIDEWAYS SIDEWAYS SIDEWAYS
Long Term UP UP UP
ForecastedTrendd  DJIA NASDAQ S&P 500
Short Term Down Down Down
Int. Term ? ? ?
Long Term Sideways? Sideways? Sideways?
Breakout Points DJIA NASDAQ S&P 500
Short Term Up (Resistance) 18,312 5,107 2,131
Short Term Down (Support) 17,147/17,0000 4605/4,5455     1,991/1,9733
Int. Term Up (Resistance) 18,974 See Fibonacci Projections above 5,250 2,486 See Fibonacci Projections above
Int. Term Down (Support)  15,855         /15,356 /14,688 4,166 3,986/3294 1,820 /1,560
Long Term Up (Resistance) 18,974 5,250 3,044
Long Term Down Fibonacci Support 50%12,000  62% 10,750       50%2,958  62% 2,555 50%1,390 62% 1,177
 10 yr Treasury 3.11 Gold 1,167 Oil 57.88  

INVESTMENT STRATEGY LETTER # 635

03 Wednesday Jun 2015

Posted by Carl M. Birkelbach in Uncategorized

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Government bonds

YIELDS UP/ Bonds down

Today, bond yields broke out on the upside, or another way of saying it; bond prices broke out on the downside. This is very significant, as stock traders HAVE been guessing for months, when this readjustment would start. Stocks held up rather well, considering the action in the bond market.

Equity Loss

The working poor got another jab in the mouth today, as the US Supreme Court ruled that homeowners can’t get rid of 2nd mortgages by filing bankruptcies.

Because second mortgages are based entirely on the amount of equity you possess in your home, taking out a second mortgage causes you to lose that equity. In the event that your home’s value decreases, this leaves you stuck owing more money on your home than the house is worth. If your financial situation changes and you find yourself unable to pay your primary mortgage payment and your second mortgage payment, you’re unlikely to sell the home for enough money to cover both mortgages.

As reported in the Wall Street Journal:

In a win for banks, the U.S.’s top court Monday ruled that underwater homeowners can’t get rid of a second mortgage by filing for bankruptcy protection.All nine Supreme Court justices agreed that filing for chapter 7 bankruptcy protection doesn’t give homeowners the power to cancel a second mortgage when their properties aren’t even worth the value of the first mortgage.

The case involved two Florida homeowners who tried to cancel their second mortgages from Bank of America, arguing that because a second mortgage gets paid after the first, it is essentially worthless. Lenders, however, fought to keep the second mortgage liens, arguing that the debt could someday be fully paid once property values rise.

In Monday’s opinion, Justice Clarence Thomas said the court’s decision took into consideration “the constantly shifting” value of real estate.

“Sometimes a dollar’s difference will have a significant impact on bankruptcy proceedings,” he wrote in the nine-page decision.

Consumer advocates said the ruling will make it harder for bankrupt homeowners to get a fresh start.“Some consumers may be forced to catch up on thousands of dollars of [payments] or lose their homes,” said Carol Colliersmith, an Atlanta bankruptcy lawyer.Bank of America declined to comment Monday on the ruling. But the bank’s lawyers had argued that the dispute “may be the single most important unresolved issue in consumer bankruptcy.”

The 11th U.S. Circuit Court of Appeals upheld bankruptcy court decisions that stripped Bank of America of its liens. The bank appealed.The dispute pitted homeowners, who saw property values plummet during the housing crisis, against mortgage lenders and their allies. Lending groups, including the Loan Syndications and Trading Association and American Bankers Association, backed Bank of America.

The AARP Inc. fought for loan cancellation, saying in a brief that it is “far more difficult for older people to bounce back from enormous financial setbacks” like bankruptcy or medical problems.”Monday’s opinion clarifies the rules for bankruptcy judges who have disagreed on this issue. In 1992, Supreme Court justices determined that a bankrupt homeowner doesn’t have the power to cancel the lien on an underwater first mortgage, but it is less clear what power a bank with an underwater second mortgage has in bankruptcy.

Second mortgages were far less common at the time of the U.S. bankruptcy code’s last major overhaul in 1978.Amid the confusion, some consumer experts argued that despite the sticking power of a lender’s lien after bankruptcy, bankruptcy should also give struggling homeowners a way to fix their housing-related financial problems.

Last year, more than 700,000 individuals and couples filed for chapter 7 bankruptcy, the most popular type of consumer bankruptcy, which enables a court-appointed trustee to sell a person’s property to repay debts and then cancel the rest.Manhattan bankruptcy lawyer William Waldner said he still sees people who are underwater on both their first and second mortgages.

“I don’t think we have as big of a housing recovery as we think,” Mr. Waldner said.

About 2.1 million underwater homeowners had second liens at the end of the second quarter of 2014, said lawyers for Bank of America, citing a CoreLogic report.

KEEP AN EYE ON THE CHART BELOW FOR BREAK OUT POINTS BELOW RESISTANCE OR ABOVE SUPPORT AREAS. Particularly  watch for a breakout below Dow 17,147/17,000, NASDAQ 4605/4545, S&P 500   1991/1973. That would change the Intermediate trend to DOWN

 Current  Dow NASDAQ S&P 500
18,107 5,088 2,116
Short Term DOWN DOWN DOWN
Int. Term SIDEWAYS SIDEWAYS SIDEWAYS
Long Term UP UP UP
ForecastedTrendd  DJIA NASDAQ S&P 500
Short Term Down Down Down
Int. Term ? ? ?
Long Term Sideways? Sideways? Sideways?
Breakout Points DJIA NASDAQ S&P 500
Short Term Up (Resistance) 18,076 5,099 2,114
Short Term Down (Support) 17,147/17,0000 4605/4,5455     1,991/1,9733
Int. Term Up (Resistance) 18,974 See Fibonacci Projections above 5,002 See Fibonacci Projections above 2,486 See Fibonacci Projections above
Int. Term Down (Support)  15,855         /15,356 /14,688 4,166 3,986/3294 1,820 /1,560
Long Term Up (Resistance) 18,974 5,132 3,044
Long Term Down Fibonacci Support 50%12,000  62% 10,750       50%2,958  62% 2,555 50%1,390 62% 1,177
 10 yr Treasury 2.37 Gold 1,185 Oil 59.57  

INVESTMENT STRATEGY LETTER

28 Saturday Mar 2015

Posted by Carl M. Birkelbach in Uncategorized

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Government bonds, INVESTMENT STRATEGY

I WILL BE ON VACATION DURING THE HOLIDAYS AND RETURN                 AFTER APRIL 15.

KEEP AN EYE ON THE CHART BELOW FOR BREAK OUT POINTS BELOW RESISTANCE OR ABOVE SUPPORT AREAS. Particularly  watch for a breakout below Dow 17,147/17,000, NASDAQ 4605/4545, S&P 500   1991/1973. That would change the Intermediate trend to DOWN

How can I still be bearish? Well, there is a long list. I still feel that deflation (Feb CPI flat)and not inflation is the problem. This can be seen in recent reports that have been issued lately that Wall Street seems to be ignoring. Retail sales for instance fell by 0.6% in February. That’s a drop for three months in a row. Housing starts for February were 897,000 on an annualized basis to levels not seen this low since September 2013. Industrial production edged up a negligible 0.1% in February carried almost entirely by gains in utilities because of colder weather. The producer price index, for final demand, in February fell 0.5% , after plummeting 0.8% in January. The bulk of those declines “70%” occurred in the service industry as opposed to goods, which had been weighed down by falling oil prices in recent months. Barclays cut its US gross domestic product forecast from 2% to up 1.2%. With the strength of the dollar and the effect of the decrease price of oil on energy companies, I wouldn’t be surprised to see a flat first-quarter 2015. The 10 year US Treasury bond yield is back down to 1.92% from over 2.1%. For those who can’t figure what’s going on with the economy, just look to the bond market. Investors are buying bonds for safety purposes. Retail sales are down and it is very difficult to raise prices in a deflationary economy.

KEEP AN EYE ON THE CHART BELOW FOR BREAK OUT POINTS BELOW RESISTANCE OR ABOVE SUPPORT AREAS. Particularly  watch for a breakout below Dow 17,147/17,000, NASDAQ 4605/4545, S&P 500   1991/1973. That would change the Intermediate trend to DOWN

 Current  Dow NASDAQ S&P 500
17,712 4,891 2,061
Short Term UP UP UP
Int. Term UP UP UP
Long Term UP UP UP
ForecastedTrendd  DJIA NASDAQ S&P 500
Short Term Down Down Down
Int. Term ? ? ?
Long Term Sideways? Sideways? Sideways?
Breakout Points DJIA NASDAQ S&P 500
Short Term Up (Resistance) 18,288 5,042 2,120
Short Term Down (Support) 17,147/17,0000 4605/4,5455     1,991/1,9733
Int. Term Up (Resistance) 18,974 See Fibonacci Projections above 5,002 See Fibonacci Projections above 2,486 See Fibonacci Projections above
Int. Term Down (Support)  15,855         /15,356 /14,688 4,166 3,986/3294 1,820 /1,560
Long Term Up (Resistance) 18,974 5,132 3,044
Long Term Down Fibonacci Support 50%12,000  62% 10,750       50%2,958  62% 2,555 50%1,390 62% 1,177
 10 yr Treasury 1.97  Gold 1,204 Oil 51.05  

 

DEFLATION OR INFLATION DANGEROUS FOR THE BOND MARKET I continue to worry about the bond market. Both deflation, which is what I suspect will happen or inflation, which is what the Fed is trying to accomplish, could be very dangerous for bondholders. Dollar borrowing has grown everywhere, but the biggest growth has been in emerging markets. Between 2009 and $2004 denominated debts of developing countries (in the form of both the bank loans and bonds) more than doubled from around $2 trillion to some $4.5 trillion according to the Bank of the International Settlements. Countries like Brazil, South Africa and Turkey, whose exports fall far short of imports, finance their current account gap’s by building up debts to foreigners. State own energy giants like Russia’s Gazprom from Brazil’s Petrobras, and been issuing dollar bonds via subsidiaries based in Luxembourg and the Cayman Islands. Taking on debt just before a shift in exchange rates, as has now happened with the US dollar rising, can be very painful. For instance in 2010 a Turkish firm borrowed $10 million via a 10 year bond with a 5% coupon. Because of the rise of the dollar, the payments over the 10 year period can now amount to some $25 million. Asian firms foreign-currency debt tripled from $700,000,000 to $2.1 trillion between 2008 and 2014. That’s going from 7.9% of regional GDP to 12.3% according to Morgan Stanley Bank. China holds $1.2 trillion in US treasury bills, most of which are sitting in its sovereign wealth fund. When the dollar rises, the fund gets richer, but even in a dollar rich country there can be pockets of pain. Almost 25% of corporate debt is dollar denominated, but only 8.5% of corporate earnings are. Worse, according to Morgan Stanley is that debt is concentrated with 5% of the firms holding 50% of it. As mentioned market letter number 624, Chinese property developers are vulnerable.

NEGATIVE BOND YIELDS Negative bond yields are very modern phenomena. Strategies that are used to protect one’s investment with negative interest rates have been described as “picking up nickels in front of a steamroller”. Whereas, investors may make a series of small gains, they can be wiped out by a sudden large loss. Most of the time the market will not fall and the seller of put options pockets the premium. However, in times like October 1987 the full bill will come due. Government bonds have typically been used as “shock absorbers” with portfolios when activities of commodities are plummeting, government bonds tend to do very well. Even when bonds do badly, the pain is not that great. Since 1925 the biggest annual loss in real terms was 15.5% in 2009. In contrast, the biggest real loss in equities was 38.9% in 1930. When yields are zero or negative, government bonds clearly do not give investors  income. The problem is they may also not function as shock absorbers. Since prices move in opposite direction of yields, it is thus difficult to imagine investors buying bonds at current yields, making much of a capital gain. It is easy however, to imagine them making a big loss. If inflation returns nominal yields would rise sharply and  prices could plummet. If government bonds in the rest of the developing world start to behave like Japanese bonds with a negative skew, some investors may doubt whether they are worth holding at all. Many investors, pension funds, insurance companies are forced to hold government bonds for accounting or regulatory reasons. Such requirements are all very well, but in a declining bond market, could have severe negative implications.

SO FAR SO GOOD A deflationary scenario could lead to bond defaults, whereas, an inflationary scenario could lead to gigantic losses in bond portfolios. Wall Street is obviously hoping for a ‘Goldilocks Scenario’ of, not too hot and not to cold. So far, so good. However, like the man who jumped out of 100 story building said at the 50th floor “so far so good”, his long-term outlook appears to be in doubt.

INCOME INEQUALITY.  COMMENTS: on The New Yorker Magazine March 16, 2015 entitled RICHER AND POORER

Economic inequality has been measured on a scale, from 0 to 1 with an index known as the Gini index. If all the income in the world are earned by one person and everyone else earn nothing, the world will have a Gini index of one. If everyone in the world earned exactly the same income, the world would have a Gini index of zero. In 1928 the Gini index was at a high of .476, just before the stock market collapsed, with the top 1% earning 24% of all income. In 1944 the top 1% earned 11% and now in 2013, the top 1% once again earned 24% of all income and the Gini index is back to .476. Is there a correlation between the Gini index in 1928 before the stock market collapsed and the current situation? Income inequality in the United States is greater than any other democracy in the developed world.

Last year Thomas Pickety’s book, Capital In the 21st Century, became a bestseller. Basically the book explained that income inequality and economic growth could not go hand in hand after reaching a critical point. This book was followed by a book entitled The Unstable American State and a world version of this argument, entitled Inequality Matters in a report by the United Nations and a book by economists Joseph Stiglitz called The Price of Inequality, all of which indicated that income inequality is not good for economic growth on a worldwide basis. Last year, Pew research Center conducted a survey about which of the five dangers people in 45 countries considered to be the greatest threat in the world. Most countries polled had religious extremism and ethnic hatred at the top of their list. But most Americans and Europeans chose inequality as the number one problem. Capitalism may be the best system in the world, but it creates winners and losers by its very nature. And capitalism as Karl Marx pointed out;  can choke on its own success, as capital dominates the workers, causing wages to shrink beyond the ability to keep all boats afloat.

As stated in the Lone Bear Letter:  In the US all income growth in the last 15 years has gone to the top 1% of the economic ladder, whereas wages, adjusted for inflation, are down 4.3%. It is estimated by Oxfam America that the top 1% in the world own 99% of total world wealth and most of that belongs to the 0.01%, as worldwide only 80 billionaires control 50% of the global wealth (they own more than 3.5 billion people in the bottom half). There is nothing wrong with accumulating wealth; however, the excessiveness of wealth accumulation could have a stifling effect on the US and world consumer based economies and could make future economic growth unsustainable. The cause of this great wage slowdown and shifting of assets to the very rich has several main causes: 1) Globalization has forced many American and Developed Country’s workers to compete with worldwide poorer workers, who are willing to accept lower wages. 2) Computers and modern machines are replacing human labor in numerous ways. 3) The rest of the world has become more educated and more highly skilled than the US, which ranks 39th in basic education, according to the latest Social Progress Index. 4) Economic and political power (through political contributions) has been switched away from workers and toward billionaire entrepreneurs, corporations and high paid executives. 5) The very nature of the Internet makes pricing extremely competitive and thereby squeezes profit margins, causing companies to trim work force expenses in order to maintain competiveness. The proposals that the President made at his State of the Union Address on 1/20/15, for ‘Middle Class Economics’ have in my opinion, no chance of passage in the Republican Congress. Because of these factors, instead of all boats rising, this scenario isn’t good for anybody and it is possible that as in the 1930s depression, all boats will sink. After all, how many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions, in my opinion, are taking the breath out of the economy, are shaking its base and have yet to be seen in the metrics.

In another book written by Robert Putnam entitled Our Kids The American Dream in Crisis an attempt to set statistics aside and instead tell a story. Our Kids, is a heartfelt portrait of four generations of Putnam’s fellow 1959 graduates and their children in the town of Port Clinton on Lake Erie. The world obviously changed and Port Clinton changed with it. Putnam states that most of the downtown shops of his youth now stand empty and derelict. In the 1970s the town’s manufacturing base collapsed. Between 1999 and 2013 the percentage of children in Port Clinton living in poverty rose from 10% to 40%. Wealthy newcomers began arriving in Port Clinton in the 1990s and built their mansions and golf courses and gated communities next to the trailer parks. A comment of one of the higher income residents to Putnam was, “If my kids are going to be successful, I don’t think they should have to pay other people who are sitting around and doing nothing for their success.” As income inequality expands, kids from the more privileged backgrounds start and probably finish further and further ahead of their less privileged peers. Putnam sees the American dream in crisis. He states, “Americans used to care about other people’s kids and now they only care about their own kids.” The situation is even getting worse. In states where Republican governors have cut taxes, they find they also have to cut educational expenditures.

The latest Social Progress Index has just been announced. The US ranks 16th overall, ranks 70th in health, 69th and in echo systems sustainability, 39th in basic education, 34th in access to water and sanitation and 31st and personal safety. Even access to cell phones and the Internet ranks us at a disappointing 23rd, partially because one of Americans in five lacks Internet access. The winners are New Zealand number one, followed by Switzerland, Iceland, the Netherlands and Canada. All are somewhat poorer than America per capita, yet they appear to do a better job of meeting the needs of their people, including free healthcare and reasonably priced colleges. Some politicians who propose cuts in Medicare and ending Obama Care and reducing food stamps and public services believe that such trends could boost America’s competitiveness. However, looking at this report, it seems that the opposite is true. In America, capitalism spiritual home, a survey conducted in 2013 found that just 54% had a positive view of the term. This seems to be the case because the benefits of capitalism have recently only gone to the top 1%. There seems to be a crisis in confidence as the Supreme Court has a ranking of only 30% public schools 26%, the criminal justice system 23% and Congress 7%. The recent election showed just how unsatisfied people are. They voted for change, but change is unlikely to come. Since Citizens United, that declared corporations are people, most changes in government is dictated by donors and election contributions. A recent Princeton study has shown that public opinion has no effect on the outcome of an issue in Congress, whether there is 0% approval or 100% approval, the line of accomplishment is flatlined. Donor power has taken over the rights of ‘we the people’. The current illusion that voters are being heard and are connected will soon diminish in my opinion. The risk now is that voters of both parties may pursue policies which damage the common good.

What’s new about the chasm between the rich and the poor in the United States is that American politicians are now all climbing on the bandwagon and talking about it. In a recent January forum sponsored by Freedom Partners (the Koch brothers), GOP presidential candidates Ted Cruz, RAM Paul, and Mark Rubio battled over which one of them disliked inequality more. At the end of Pres. Obama’s State of the Union address he said “let’s close the loopholes that lead to inequality by allowing the top 1% to avoid paying taxes on their accumulated wealth.” Speaker of the House John Bayner countered that with “the president’s policies have made income inequality worse.” The causes of income equality are much disputed. What is no longer in disputed, is that income inequality is bad for the economy and could eventually lead to its stagnation and the sinking of all boats.

CARL BIRKELBACH

INVESTMENT STRATEGY LETTER #627

25 Wednesday Mar 2015

Posted by Carl M. Birkelbach in Uncategorized

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Government bonds

No surprise! Dow falls 300 points NASDAQ down 2.4%

The Dow NASDAQ and S&P index all found resistance at their all-time highs and now the markets are backing off severely. Suddenly, investors are surprised that expenses are up and earnings are down. Barclays cut its US gross domestic product forecast from 2% to up 1.2%. With the strength of the dollar and the effect of the decrease price of oil on energy companies, I wouldn’t be surprised to see a flat first-quarter 2015. The 10 year US Treasury bond yield is back down to 1.92% from over 2.1%. For those who can’t figure what’s going on with the economy, just look to the bond market. Investors are buying bonds for safety purposes. Retail sales are down and it is very difficult to raise prices in a deflationary economy.

Incidentally, I had lunch with Barney Frank today. He is promoting his new book and predicted that if the Republicans win the presidency in 2016, he expected the end of social programs of not only Obama care but the end of federal Medicare, Medicaid and that the poverty rate in the United States would increase from 13% to 26%. Also, if Dodd Frank rules are not pursued, that the banking industry would once again cause a financial crisis.

How can I still be bearish? Well, there is a long list. I still feel that deflation (Feb CPI flat)and not inflation is the problem. This can be seen in recent reports that have been issued lately that Wall Street seems to be ignoring. Retail sales for instance fell by 0.6% in February. That’s a drop for three months in a row. Housing starts for February were 897,000 on an annualized basis to levels not seen this low since September 2013. Industrial production edged up a negligible 0.1% in February carried almost entirely by gains in utilities because of colder weather. The producer price index, for final demand, in February fell 0.5% , after plummeting 0.8% in January. The bulk of those declines “70%” occurred in the service industry as opposed to goods, which had been weighed down by falling oil prices in recent months.

DEFLATION OR INFLATION DANGEROUS FOR THE BOND MARKET I continue to worry about the bond market. Both deflation, which is what I suspect will happen or inflation, which is what the Fed is trying to accomplish, could be very dangerous for bondholders. Dollar borrowing has grown everywhere, but the biggest growth has been in emerging markets. Between 2009 and $2004 denominated debts of developing countries (in the form of both the bank loans and bonds) more than doubled from around $2 trillion to some $4.5 trillion according to the Bank of the International Settlements. Countries like Brazil, South Africa and Turkey, whose exports fall far short of imports, finance their current account gap’s by building up debts to foreigners. State own energy giants like Russia’s Gazprom from Brazil’s Petrobras, and been issuing dollar bonds via subsidiaries based in Luxembourg and the Cayman Islands. Taking on debt just before a shift in exchange rates, as has now happened with the US dollar rising, can be very painful. For instance in 2010 a Turkish firm borrowed $10 million via a 10 year bond with a 5% coupon. Because of the rise of the dollar, the payments over the 10 year period can now amount to some $25 million. Asian firms foreign-currency debt tripled from $700,000,000 to $2.1 trillion between 2008 and 2014. That’s going from 7.9% of regional GDP to 12.3% according to Morgan Stanley Bank. China holds $1.2 trillion in US treasury bills, most of which are sitting in its sovereign wealth fund. When the dollar rises, the fund gets richer, but even in a dollar rich country there can be pockets of pain. Almost 25% of corporate debt is dollar denominated, but only 8.5% of corporate earnings are. Worse, according to Morgan Stanley is that debt is concentrated with 5% of the firms holding 50% of it. As mentioned market letter number 624, Chinese property developers are vulnerable.

NEGATIVE BOND YIELDS Negative bond yields are very modern phenomena. Strategies that are used to protect one’s investment with negative interest rates have been described as “picking up nickels in front of a steamroller”. Whereas, investors may make a series of small gains, they can be wiped out by a sudden large loss. Most of the time the market will not fall and the seller of put options pockets the premium. However, in times like October 1987 the full bill will come due. Government bonds have typically been used as “shock absorbers” with portfolios when activities of commodities are plummeting, government bonds tend to do very well. Even when bonds do badly, the pain is not that great. Since 1925 the biggest annual loss in real terms was 15.5% in 2009. In contrast, the biggest real loss in equities was 38.9% in 1930. When yields are zero or negative, government bonds clearly do not give investors  income. The problem is they may also not function as shock absorbers. Since prices move in opposite direction of yields, it is thus difficult to imagine investors buying bonds at current yields, making much of a capital gain. It is easy however, to imagine them making a big loss. If inflation returns nominal yields would rise sharply and  prices could plummet. If government bonds in the rest of the developing world start to behave like Japanese bonds with a negative skew, some investors may doubt whether they are worth holding at all. Many investors, pension funds, insurance companies are forced to hold government bonds for accounting or regulatory reasons. Such requirements are all very well, but in a declining bond market, could have severe negative implications.

SO FAR SO GOOD A deflationary scenario could lead to bond defaults, whereas, an inflationary scenario could lead to gigantic losses in bond portfolios. Wall Street is obviously hoping for a ‘Goldilocks Scenario’ of, not too hot and not to cold. So far, so good. However, like the man who jumped out of 100 story building said at the 50th floor “so far so good”, his long-term outlook appears to be in doubt.

INCOME INEQUALITY.  COMMENTS: on The New Yorker Magazine March 16, 2015 entitled RICHER AND POORER

Economic inequality has been measured on a scale, from 0 to 1 with an index known as the Gini index. If all the income in the world are earned by one person and everyone else earn nothing, the world will have a Gini index of one. If everyone in the world earned exactly the same income, the world would have a Gini index of zero. In 1928 the Gini index was at a high of .476, just before the stock market collapsed, with the top 1% earning 24% of all income. In 1944 the top 1% earned 11% and now in 2013, the top 1% once again earned 24% of all income and the Gini index is back to .476. Is there a correlation between the Gini index in 1928 before the stock market collapsed and the current situation? Income inequality in the United States is greater than any other democracy in the developed world.

Last year Thomas Pickety’s book, Capital In the 21st Century, became a bestseller. Basically the book explained that income inequality and economic growth could not go hand in hand after reaching a critical point. This book was followed by a book entitled The Unstable American State and a world version of this argument, entitled Inequality Matters in a report by the United Nations and a book by economists Joseph Stiglitz called The Price of Inequality, all of which indicated that income inequality is not good for economic growth on a worldwide basis. Last year, Pew research Center conducted a survey about which of the five dangers people in 45 countries considered to be the greatest threat in the world. Most countries polled had religious extremism and ethnic hatred at the top of their list. But most Americans and Europeans chose inequality as the number one problem. Capitalism may be the best system in the world, but it creates winners and losers by its very nature. And capitalism as Karl Marx pointed out;  can choke on its own success, as capital dominates the workers, causing wages to shrink beyond the ability to keep all boats afloat.

As stated in the Lone Bear Letter:  In the US all income growth in the last 15 years has gone to the top 1% of the economic ladder, whereas wages, adjusted for inflation, are down 4.3%. It is estimated by Oxfam America that the top 1% in the world own 99% of total world wealth and most of that belongs to the 0.01%, as worldwide only 80 billionaires control 50% of the global wealth (they own more than 3.5 billion people in the bottom half). There is nothing wrong with accumulating wealth; however, the excessiveness of wealth accumulation could have a stifling effect on the US and world consumer based economies and could make future economic growth unsustainable. The cause of this great wage slowdown and shifting of assets to the very rich has several main causes: 1) Globalization has forced many American and Developed Country’s workers to compete with worldwide poorer workers, who are willing to accept lower wages. 2) Computers and modern machines are replacing human labor in numerous ways. 3) The rest of the world has become more educated and more highly skilled than the US, which ranks 39th in basic education, according to the latest Social Progress Index. 4) Economic and political power (through political contributions) has been switched away from workers and toward billionaire entrepreneurs, corporations and high paid executives. 5) The very nature of the Internet makes pricing extremely competitive and thereby squeezes profit margins, causing companies to trim work force expenses in order to maintain competiveness. The proposals that the President made at his State of the Union Address on 1/20/15, for ‘Middle Class Economics’ have in my opinion, no chance of passage in the Republican Congress. Because of these factors, instead of all boats rising, this scenario isn’t good for anybody and it is possible that as in the 1930s depression, all boats will sink. After all, how many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions, in my opinion, are taking the breath out of the economy, are shaking its base and have yet to be seen in the metrics.

In another book written by Robert Putnam entitled Our Kids The American Dream in Crisis an attempt to set statistics aside and instead tell a story. Our Kids, is a heartfelt portrait of four generations of Putnam’s fellow 1959 graduates and their children in the town of Port Clinton on Lake Erie. The world obviously changed and Port Clinton changed with it. Putnam states that most of the downtown shops of his youth now stand empty and derelict. In the 1970s the town’s manufacturing base collapsed. Between 1999 and 2013 the percentage of children in Port Clinton living in poverty rose from 10% to 40%. Wealthy newcomers began arriving in Port Clinton in the 1990s and built their mansions and golf courses and gated communities next to the trailer parks. A comment of one of the higher income residents to Putnam was, “If my kids are going to be successful, I don’t think they should have to pay other people who are sitting around and doing nothing for their success.” As income inequality expands, kids from the more privileged backgrounds start and probably finish further and further ahead of their less privileged peers. Putnam sees the American dream in crisis. He states, “Americans used to care about other people’s kids and now they only care about their own kids.” The situation is even getting worse. In states where Republican governors have cut taxes, they find they also have to cut educational expenditures.

The latest Social Progress Index has just been announced. The US ranks 16th overall, ranks 70th in health, 69th and in echo systems sustainability, 39th in basic education, 34th in access to water and sanitation and 31st and personal safety. Even access to cell phones and the Internet ranks us at a disappointing 23rd, partially because one of Americans in five lacks Internet access. The winners are New Zealand number one, followed by Switzerland, Iceland, the Netherlands and Canada. All are somewhat poorer than America per capita, yet they appear to do a better job of meeting the needs of their people, including free healthcare and reasonably priced colleges. Some politicians who propose cuts in Medicare and ending Obama Care and reducing food stamps and public services believe that such trends could boost America’s competitiveness. However, looking at this report, it seems that the opposite is true. In America, capitalism spiritual home, a survey conducted in 2013 found that just 54% had a positive view of the term. This seems to be the case because the benefits of capitalism have recently only gone to the top 1%. There seems to be a crisis in confidence as the Supreme Court has a ranking of only 30% public schools 26%, the criminal justice system 23% and Congress 7%. The recent election showed just how unsatisfied people are. They voted for change, but change is unlikely to come. Since Citizens United, that declared corporations are people, most changes in government is dictated by donors and election contributions. A recent Princeton study has shown that public opinion has no effect on the outcome of an issue in Congress, whether there is 0% approval or 100% approval, the line of accomplishment is flatlined. Donor power has taken over the rights of ‘we the people’. The current illusion that voters are being heard and are connected will soon diminish in my opinion. The risk now is that voters of both parties may pursue policies which damage the common good.

What’s new about the chasm between the rich and the poor in the United States is that American politicians are now all climbing on the bandwagon and talking about it. In a recent January forum sponsored by Freedom Partners (the Koch brothers), GOP presidential candidates Ted Cruz, RAM Paul, and Mark Rubio battled over which one of them disliked inequality more. At the end of Pres. Obama’s State of the Union address he said “let’s close the loopholes that lead to inequality by allowing the top 1% to avoid paying taxes on their accumulated wealth.” Speaker of the House John Bayner countered that with “the president’s policies have made income inequality worse.” The causes of income equality are much disputed. What is no longer in disputed, is that income inequality is bad for the economy and could eventually lead to its stagnation and the sinking of all boats.

CARL BIRKELBACH

INVESTMENT STRATEGY LETTER #626

24 Tuesday Mar 2015

Posted by Carl M. Birkelbach in Uncategorized

≈ Leave a comment

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Government bonds, IN

WORLD MARKETS CONTINUE TO RALLY!

This is a good week for the stock markets throughout the world. The Dow and NASDAQ and S&P index are all close or above new all-time highs. The DAX index is about 12,000 and the Nikkei is close to breaking into new high ground. The Federal Reserve is clearly on board on its policy to diminish the fears of deflation. Its recent comment to eliminate “patients” from its policy is not clear or transparent. Sure, we’re all patient, like mental patients. Wall Street seems to like the ambiguity and it appears that interest rates may not start up in June as earlier expected. It has been seven years since the Fed raised rates and they seem in no hurry now. There is an old saying on Wall Street “Don’t fight the tape.” So, for the time being, enjoy the rally.

How can I still be bearish? Well, there is a long list. I still feel that deflation (Feb CPI flat)and not inflation is the problem. This can be seen in recent reports that have been issued lately that Wall Street seems to be ignoring. Retail sales for instance fell by 0.6% in February. That’s a drop for three months in a row. Housing starts for February were 897,000 on an annualized basis to levels not seen this low since September 2013. Industrial production edged up a negligible 0.1% in February carried almost entirely by gains in utilities because of colder weather. The producer price index, for final demand, in February fell 0.5% , after plummeting 0.8% in January. The bulk of those declines “70%” occurred in the service industry as opposed to goods, which had been weighed down by falling oil prices in recent months.

DEFLATION OR INFLATION DANGEROUS FOR THE BOND MARKET I continue to worry about the bond market. Both deflation, which is what I suspect will happen or inflation, which is what the Fed is trying to accomplish, could be very dangerous for bondholders. Dollar borrowing has grown everywhere, but the biggest growth has been in emerging markets. Between 2009 and $2004 denominated debts of developing countries (in the form of both the bank loans and bonds) more than doubled from around $2 trillion to some $4.5 trillion according to the Bank of the International Settlements. Countries like Brazil, South Africa and Turkey, whose exports fall far short of imports, finance their current account gap’s by building up debts to foreigners. State own energy giants like Russia’s Gazprom from Brazil’s Petrobras, and been issuing dollar bonds via subsidiaries based in Luxembourg and the Cayman Islands. Taking on debt just before a shift in exchange rates, as has now happened with the US dollar rising, can be very painful. For instance in 2010 a Turkish firm borrowed $10 million via a 10 year bond with a 5% coupon. Because of the rise of the dollar, the payments over the 10 year period can now amount to some $25 million. Asian firms foreign-currency debt tripled from $700,000,000 to $2.1 trillion between 2008 and 2014. That’s going from 7.9% of regional GDP to 12.3% according to Morgan Stanley Bank. China holds $1.2 trillion in US treasury bills, most of which are sitting in its sovereign wealth fund. When the dollar rises, the fund gets richer, but even in a dollar rich country there can be pockets of pain. Almost 25% of corporate debt is dollar denominated, but only 8.5% of corporate earnings are. Worse, according to Morgan Stanley is that debt is concentrated with 5% of the firms holding 50% of it. As mentioned market letter number 624, Chinese property developers are vulnerable.

NEGATIVE BOND YIELDS Negative bond yields are very modern phenomena. Strategies that are used to protect one’s investment with negative interest rates have been described as “picking up nickels in front of a steamroller”. Whereas, investors may make a series of small gains, they can be wiped out by a sudden large loss. Most of the time the market will not fall and the seller of put options pockets the premium. However, in times like October 1987 the full bill will come due. Government bonds have typically been used as “shock absorbers” with portfolios when activities of commodities are plummeting, government bonds tend to do very well. Even when bonds do badly, the pain is not that great. Since 1925 the biggest annual loss in real terms was 15.5% in 2009. In contrast, the biggest real loss in equities was 38.9% in 1930. When yields are zero or negative, government bonds clearly do not give investors  income. The problem is they may also not function as shock absorbers. Since prices move in opposite direction of yields, it is thus difficult to imagine investors buying bonds at current yields, making much of a capital gain. It is easy however, to imagine them making a big loss. If inflation returns nominal yields would rise sharply and  prices could plummet. If government bonds in the rest of the developing world start to behave like Japanese bonds with a negative skew, some investors may doubt whether they are worth holding at all. Many investors, pension funds, insurance companies are forced to hold government bonds for accounting or regulatory reasons. Such requirements are all very well, but in a declining bond market, could have severe negative implications.

SO FAR SO GOOD A deflationary scenario could lead to bond defaults, whereas, an inflationary scenario could lead to gigantic losses in bond portfolios. Wall Street is obviously hoping for a ‘Goldilocks Scenario’ of, not too hot and not to cold. So far, so good. However, like the man who jumped out of 100 story building said at the 50th floor “so far so good”, his long-term outlook appears to be in doubt.

INCOME INEQUALITY.  COMMENTS: on The New Yorker Magazine March 16, 2015 entitled RICHER AND POORER

Economic inequality has been measured on a scale, from 0 to 1 with an index known as the Gini index. If all the income in the world are earned by one person and everyone else earn nothing, the world will have a Gini index of one. If everyone in the world earned exactly the same income, the world would have a Gini index of zero. In 1928 the Gini index was at a high of .476, just before the stock market collapsed, with the top 1% earning 24% of all income. In 1944 the top 1% earned 11% and now in 2013, the top 1% once again earned 24% of all income and the Gini index is back to .476. Is there a correlation between the Gini index in 1928 before the stock market collapsed and the current situation? Income inequality in the United States is greater than any other democracy in the developed world.

Last year Thomas Pickety’s book, Capital In the 21st Century, became a bestseller. Basically the book explained that income inequality and economic growth could not go hand in hand after reaching a critical point. This book was followed by a book entitled The Unstable American State and a world version of this argument, entitled Inequality Matters in a report by the United Nations and a book by economists Joseph Stiglitz called The Price of Inequality, all of which indicated that income inequality is not good for economic growth on a worldwide basis. Last year, Pew research Center conducted a survey about which of the five dangers people in 45 countries considered to be the greatest threat in the world. Most countries polled had religious extremism and ethnic hatred at the top of their list. But most Americans and Europeans chose inequality as the number one problem. Capitalism may be the best system in the world, but it creates winners and losers by its very nature. And capitalism as Karl Marx pointed out;  can choke on its own success, as capital dominates the workers, causing wages to shrink beyond the ability to keep all boats afloat.

As stated in the Lone Bear Letter:  In the US all income growth in the last 15 years has gone to the top 1% of the economic ladder, whereas wages, adjusted for inflation, are down 4.3%. It is estimated by Oxfam America that the top 1% in the world own 99% of total world wealth and most of that belongs to the 0.01%, as worldwide only 80 billionaires control 50% of the global wealth (they own more than 3.5 billion people in the bottom half). There is nothing wrong with accumulating wealth; however, the excessiveness of wealth accumulation could have a stifling effect on the US and world consumer based economies and could make future economic growth unsustainable. The cause of this great wage slowdown and shifting of assets to the very rich has several main causes: 1) Globalization has forced many American and Developed Country’s workers to compete with worldwide poorer workers, who are willing to accept lower wages. 2) Computers and modern machines are replacing human labor in numerous ways. 3) The rest of the world has become more educated and more highly skilled than the US, which ranks 39th in basic education, according to the latest Social Progress Index. 4) Economic and political power (through political contributions) has been switched away from workers and toward billionaire entrepreneurs, corporations and high paid executives. 5) The very nature of the Internet makes pricing extremely competitive and thereby squeezes profit margins, causing companies to trim work force expenses in order to maintain competiveness. The proposals that the President made at his State of the Union Address on 1/20/15, for ‘Middle Class Economics’ have in my opinion, no chance of passage in the Republican Congress. Because of these factors, instead of all boats rising, this scenario isn’t good for anybody and it is possible that as in the 1930s depression, all boats will sink. After all, how many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions, in my opinion, are taking the breath out of the economy, are shaking its base and have yet to be seen in the metrics.

In another book written by Robert Putnam entitled Our Kids The American Dream in Crisis an attempt to set statistics aside and instead tell a story. Our Kids, is a heartfelt portrait of four generations of Putnam’s fellow 1959 graduates and their children in the town of Port Clinton on Lake Erie. The world obviously changed and Port Clinton changed with it. Putnam states that most of the downtown shops of his youth now stand empty and derelict. In the 1970s the town’s manufacturing base collapsed. Between 1999 and 2013 the percentage of children in Port Clinton living in poverty rose from 10% to 40%. Wealthy newcomers began arriving in Port Clinton in the 1990s and built their mansions and golf courses and gated communities next to the trailer parks. A comment of one of the higher income residents to Putnam was, “If my kids are going to be successful, I don’t think they should have to pay other people who are sitting around and doing nothing for their success.” As income inequality expands, kids from the more privileged backgrounds start and probably finish further and further ahead of their less privileged peers. Putnam sees the American dream in crisis. He states, “Americans used to care about other people’s kids and now they only care about their own kids.” The situation is even getting worse. In states where Republican governors have cut taxes, they find they also have to cut educational expenditures.

The latest Social Progress Index has just been announced. The US ranks 16th overall, ranks 70th in health, 69th and in echo systems sustainability, 39th in basic education, 34th in access to water and sanitation and 31st and personal safety. Even access to cell phones and the Internet ranks us at a disappointing 23rd, partially because one of Americans in five lacks Internet access. The winners are New Zealand number one, followed by Switzerland, Iceland, the Netherlands and Canada. All are somewhat poorer than America per capita, yet they appear to do a better job of meeting the needs of their people, including free healthcare and reasonably priced colleges. Some politicians who propose cuts in Medicare and ending Obama Care and reducing food stamps and public services believe that such trends could boost America’s competitiveness. However, looking at this report, it seems that the opposite is true. In America, capitalism spiritual home, a survey conducted in 2013 found that just 54% had a positive view of the term. This seems to be the case because the benefits of capitalism have recently only gone to the top 1%. There seems to be a crisis in confidence as the Supreme Court has a ranking of only 30% public schools 26%, the criminal justice system 23% and Congress 7%. The recent election showed just how unsatisfied people are. They voted for change, but change is unlikely to come. Since Citizens United, that declared corporations are people, most changes in government is dictated by donors and election contributions. A recent Princeton study has shown that public opinion has no effect on the outcome of an issue in Congress, whether there is 0% approval or 100% approval, the line of accomplishment is flatlined. Donor power has taken over the rights of ‘we the people’. The current illusion that voters are being heard and are connected will soon diminish in my opinion. The risk now is that voters of both parties may pursue policies which damage the common good.

What’s new about the chasm between the rich and the poor in the United States is that American politicians are now all climbing on the bandwagon and talking about it. In a recent January forum sponsored by Freedom Partners (the Koch brothers), GOP presidential candidates Ted Cruz, RAM Paul, and Mark Rubio battled over which one of them disliked inequality more. At the end of Pres. Obama’s State of the Union address he said “let’s close the loopholes that lead to inequality by allowing the top 1% to avoid paying taxes on their accumulated wealth.” Speaker of the House John Bayner countered that with “the president’s policies have made income inequality worse.” The causes of income equality are much disputed. What is no longer in disputed, is that income inequality is bad for the economy and could eventually lead to its stagnation and the sinking of all boats.

CARL BIRKELBACH

INVESTMENT STRATEGY LETTER #625

20 Friday Mar 2015

Posted by Carl M. Birkelbach in Uncategorized

≈ Leave a comment

Tags

Government bonds, INVESTMENT STRATEGY

WORLD MARKETS CONTINUE TO RALLY!

This was a good week for the stock markets throughout the world. The Dow and NASDAQ and S&P index are all close or above new all-time highs. The DAX index is about 12,000 and the Nikkei is close to breaking into new high ground. The Federal Reserve is clearly on board on its policy to diminish the fears of deflation. Its recent comment to eliminate “patients” from its policy is not clear or transparent. Sure, we’re all patient, like mental patients. Wall Street seems to like the ambiguity and it appears that interest rates may not start up in June as earlier expected. It has been seven years since the Fed raised rates and they seem in no hurry now. There is an old saying on Wall Street “Don’t fight the tape.” So, for the time being, enjoy the rally.

How can I still be bearish? Well, there is a long list. I still feel that deflation and not inflation is the problem. This can be seen in recent reports that have been issued lately that Wall Street seems to be ignoring. Retail sales for instance fell by 0.6% in February. That’s a drop for three months in a row. Housing starts for February were 897,000 on an annualized basis to levels not seen this low since September 2013. Industrial production edged up a negligible 0.1% in February carried almost entirely by gains in utilities because of colder weather. The producer price index, for final demand, in February fell 0.5% , after plummeting 0.8% in January. The bulk of those declines “70%” occurred in the service industry as opposed to goods, which had been weighed down by falling oil prices in recent months.

DEFLATION OR INFLATION DANGEROUS FOR THE BOND MARKET I continue to worry about the bond market. Both deflation, which is what I suspect will happen or inflation, which is what the Fed is trying to accomplish, could be very dangerous for bondholders. Dollar borrowing has grown everywhere, but the biggest growth has been in emerging markets. Between 2009 and $2004 denominated debts of developing countries (in the form of both the bank loans and bonds) more than doubled from around $2 trillion to some $4.5 trillion according to the Bank of the International Settlements. Countries like Brazil, South Africa and Turkey, whose exports fall far short of imports, finance their current account gap’s by building up debts to foreigners. State own energy giants like Russia’s Gazprom from Brazil’s Petrobras, and been issuing dollar bonds via subsidiaries based in Luxembourg and the Cayman Islands. Taking on debt just before a shift in exchange rates, as has now happened with the US dollar rising, can be very painful. For instance in 2010 a Turkish firm borrowed $10 million via a 10 year bond with a 5% coupon. Because of the rise of the dollar, the payments over the 10 year period can now amount to some $25 million. Asian firms foreign-currency debt tripled from $700,000,000 to $2.1 trillion between 2008 and 2014. That’s going from 7.9% of regional GDP to 12.3% according to Morgan Stanley Bank. China holds $1.2 trillion in US treasury bills, most of which are sitting in its sovereign wealth fund. When the dollar rises, the fund gets richer, but even in a dollar rich country there can be pockets of pain. Almost 25% of corporate debt is dollar denominated, but only 8.5% of corporate earnings are. Worse, according to Morgan Stanley is that debt is concentrated with 5% of the firms holding 50% of it. As mentioned market letter number 624, Chinese property developers are vulnerable.

NEGATIVE BOND YIELDS Negative bond yields are very modern phenomena. Strategies that are used to protect one’s investment with negative interest rates have been described as “picking up nickels in front of a steamroller”. Whereas, investors may make a series of small gains, they can be wiped out by a sudden large loss. Most of the time the market will not fall and the seller of put options pockets the premium. However, in times like October 1987 the full bill will come due. Government bonds have typically been used as “shock absorbers” with portfolios when activities of commodities are plummeting, government bonds tend to do very well. Even when bonds do badly, the pain is not that great. Since 1925 the biggest annual loss in real terms was 15.5% in 2009. In contrast, the biggest real loss in equities was 38.9% in 1930. When yields are zero or negative, government bonds clearly do not give investors  income. The problem is they may also not function as shock absorbers. Since prices move in opposite direction of yields, it is thus difficult to imagine investors buying bonds at current yields, making much of a capital gain. It is easy however, to imagine them making a big loss. If inflation returns nominal yields would rise sharply and  prices could plummet. If government bonds in the rest of the developing world start to behave like Japanese bonds with a negative skew, some investors may doubt whether they are worth holding at all. Many investors, pension funds, insurance companies are forced to hold government bonds for accounting or regulatory reasons. Such requirements are all very well, but in a declining bond market, could have severe negative implications.

SO FAR SO GOOD A deflationary scenario could lead to bond defaults, whereas, an inflationary scenario could lead to gigantic losses in bond portfolios. Wall Street is obviously hoping for a ‘Goldilocks Scenario’ of, not too hot and not to cold. So far, so good. However, like the man who jumped out of 100 story building said at the 50th floor “so far so good”, his long-term outlook appears to be in doubt.

INCOME INEQUALITY.  COMMENTS: on The New Yorker Magazine March 16, 2015 entitled RICHER AND POORER

Economic inequality has been measured on a scale, from 0 to 1 with an index known as the Gini index. If all the income in the world are earned by one person and everyone else earn nothing, the world will have a Gini index of one. If everyone in the world earned exactly the same income, the world would have a Gini index of zero. In 1928 the Gini index was at a high of .476, just before the stock market collapsed, with the top 1% earning 24% of all income. In 1944 the top 1% earned 11% and now in 2013, the top 1% once again earned 24% of all income and the Gini index is back to .476. Is there a correlation between the Gini index in 1928 before the stock market collapsed and the current situation? Income inequality in the United States is greater than any other democracy in the developed world.

Last year Thomas Pickety’s book, Capital In the 21st Century, became a bestseller. Basically the book explained that income inequality and economic growth could not go hand in hand after reaching a critical point. This book was followed by a book entitled The Unstable American State and a world version of this argument, entitled Inequality Matters in a report by the United Nations and a book by economists Joseph Stiglitz called The Price of Inequality, all of which indicated that income inequality is not good for economic growth on a worldwide basis. Last year, Pew research Center conducted a survey about which of the five dangers people in 45 countries considered to be the greatest threat in the world. Most countries polled had religious extremism and ethnic hatred at the top of their list. But most Americans and Europeans chose inequality as the number one problem. Capitalism may be the best system in the world, but it creates winners and losers by its very nature. And capitalism as Karl Marx pointed out;  can choke on its own success, as capital dominates the workers, causing wages to shrink beyond the ability to keep all boats afloat.

As stated in the Lone Bear Letter:  In the US all income growth in the last 15 years has gone to the top 1% of the economic ladder, whereas wages, adjusted for inflation, are down 4.3%. It is estimated by Oxfam America that the top 1% in the world own 99% of total world wealth and most of that belongs to the 0.01%, as worldwide only 80 billionaires control 50% of the global wealth (they own more than 3.5 billion people in the bottom half). There is nothing wrong with accumulating wealth; however, the excessiveness of wealth accumulation could have a stifling effect on the US and world consumer based economies and could make future economic growth unsustainable. The cause of this great wage slowdown and shifting of assets to the very rich has several main causes: 1) Globalization has forced many American and Developed Country’s workers to compete with worldwide poorer workers, who are willing to accept lower wages. 2) Computers and modern machines are replacing human labor in numerous ways. 3) The rest of the world has become more educated and more highly skilled than the US, which ranks 39th in basic education, according to the latest Social Progress Index. 4) Economic and political power (through political contributions) has been switched away from workers and toward billionaire entrepreneurs, corporations and high paid executives. 5) The very nature of the Internet makes pricing extremely competitive and thereby squeezes profit margins, causing companies to trim work force expenses in order to maintain competiveness. The proposals that the President made at his State of the Union Address on 1/20/15, for ‘Middle Class Economics’ have in my opinion, no chance of passage in the Republican Congress. Because of these factors, instead of all boats rising, this scenario isn’t good for anybody and it is possible that as in the 1930s depression, all boats will sink. After all, how many bars of soap and how many cars can each of the wealthy people buy? These excessive conditions, in my opinion, are taking the breath out of the economy, are shaking its base and have yet to be seen in the metrics.

In another book written by Robert Putnam entitled Our Kids The American Dream in Crisis an attempt to set statistics aside and instead tell a story. Our Kids, is a heartfelt portrait of four generations of Putnam’s fellow 1959 graduates and their children in the town of Port Clinton on Lake Erie. The world obviously changed and Port Clinton changed with it. Putnam states that most of the downtown shops of his youth now stand empty and derelict. In the 1970s the town’s manufacturing base collapsed. Between 1999 and 2013 the percentage of children in Port Clinton living in poverty rose from 10% to 40%. Wealthy newcomers began arriving in Port Clinton in the 1990s and built their mansions and golf courses and gated communities next to the trailer parks. A comment of one of the higher income residents to Putnam was, “If my kids are going to be successful, I don’t think they should have to pay other people who are sitting around and doing nothing for their success.” As income inequality expands, kids from the more privileged backgrounds start and probably finish further and further ahead of their less privileged peers. Putnam sees the American dream in crisis. He states, “Americans used to care about other people’s kids and now they only care about their own kids.” The situation is even getting worse. In states where Republican governors have cut taxes, they find they also have to cut educational expenditures.

The latest Social Progress Index has just been announced. The US ranks 16th overall, ranks 70th in health, 69th and in echo systems sustainability, 39th in basic education, 34th in access to water and sanitation and 31st and personal safety. Even access to cell phones and the Internet ranks us at a disappointing 23rd, partially because one of Americans in five lacks Internet access. The winners are New Zealand number one, followed by Switzerland, Iceland, the Netherlands and Canada. All are somewhat poorer than America per capita, yet they appear to do a better job of meeting the needs of their people, including free healthcare and reasonably priced colleges. Some politicians who propose cuts in Medicare and ending Obama Care and reducing food stamps and public services believe that such trends could boost America’s competitiveness. However, looking at this report, it seems that the opposite is true. In America, capitalism spiritual home, a survey conducted in 2013 found that just 54% had a positive view of the term. This seems to be the case because the benefits of capitalism have recently only gone to the top 1%. There seems to be a crisis in confidence as the Supreme Court has a ranking of only 30% public schools 26%, the criminal justice system 23% and Congress 7%. The recent election showed just how unsatisfied people are. They voted for change, but change is unlikely to come. Since Citizens United, that declared corporations are people, most changes in government is dictated by donors and election contributions. A recent Princeton study has shown that public opinion has no effect on the outcome of an issue in Congress, whether there is 0% approval or 100% approval, the line of accomplishment is flatlined. Donor power has taken over the rights of ‘we the people’. The current illusion that voters are being heard and are connected will soon diminish in my opinion. The risk now is that voters of both parties may pursue policies which damage the common good.

What’s new about the chasm between the rich and the poor in the United States is that American politicians are now all climbing on the bandwagon and talking about it. In a recent January forum sponsored by Freedom Partners (the Koch brothers), GOP presidential candidates Ted Cruz, RAM Paul, and Mark Rubio battled over which one of them disliked inequality more. At the end of Pres. Obama’s State of the Union address he said “let’s close the loopholes that lead to inequality by allowing the top 1% to avoid paying taxes on their accumulated wealth.” Speaker of the House John Bayner countered that with “the president’s policies have made income inequality worse.” The causes of income equality are much disputed. What is no longer in disputed, is that income inequality is bad for the economy and could eventually lead to its stagnation and the sinking of all boats.

CARL BIRKELBACH

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