More Signs the End is Nigh

“What has been will be again, what has been done will be done again; there is nothing new under the sun,” explained Solomon in Ecclesiastes, nearly 3,000 years ago.

Perhaps the advent of negative yielding debt would have been cause for Solomon to reconsider his axiom.  We can only speculate on what his motive would be.  As far as our studies have shown, negative interest rates are a brave new phenomenon.

Still, we’ll concede the present day ain’t all that unique or special.  We continue to look to the night sky with wonder.  When the moon is full we let out a howl with the innate impulse of early man.  So, too, we still put on our pantaloons one leg at a time.

The context, however, and the fantasies, have their differences.  Here we defer to Fred Sheehan, and a brief passage from his December 2006 historical essay, War of the Nerds, for edification from the not too distant past:

“Every generation suffers its particular fantasies.  So it was a century ago.  Investors had grown so immune to the consequences of war that bond markets from London to Vienna didn’t flinch after the assassination that provoked World War I. Continue reading

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Destination Mars

One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.

For example, in Japan this explicit intervention into the stock market is being performed with the composed tedium of a dairy farmer milking his cows.  The activity is more art than science.  Similarly, if you stop – even for a day – pain swells in certain sensitive areas.

In late April, a Bloomberg study found that the Bank of Japan (BOJ), through its purchases of ETFs, had become a top 10 shareholder in about 90 percent of companies that comprise the Nikkei 225.  At the time, based on “estimates gleaned from publicly available central bank records, regulatory filings by companies and ETF managers, and statistics from the Investment Trusts Association of Japan,” Bloomberg assumed the BOJ was buying about 3 trillion yen ($27.2 billion) of ETFs every year.  The rate of buying has likely accelerated since then. Continue reading

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Larry Summers Wants to Give You a Free Lunch

The existing capital stock continues to be frittered away at the expense of savers and retirees.  Nonetheless, central bankers don’t give a doggone about it.  This, after all, is one consequence of roughly eight years of near zero interest rate policy.

Another related consequence is that the pricing equilibrium of capital markets has broken down.  In particular, bond yields no longer reflect a market determined price of money established by the economy’s demand for credit.  Hence, previously unfathomable interest rate movements are now happening with regular occurrence.

Presently, the yield on the 10-Year U.S. Treasury note is sliding into the abyss.  On Wednesday a new record low yield of 1.34 percent was reached.  This is the lowest historical yield we could find based on a review of 10-Year Treasury rate data going back to about 1870.

The last time the interest rate cycle bottomed out was during the early 1940s.  The low inflection point at that time was somewhere around 2 percent.  Where and when rates will finally turn this time is anyone’s guess. Continue reading

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Celebrating this Land of Absurdity

“Myths and legends die hard in America,” remarked Hunter S. Thompson in The Great Shark Hunt, nearly 40-years ago.  Thompson didn’t likely have U.S. Treasury bonds in mind when he made this observation.  Though, if he were still alive, he may find the present state of the great Treasury bond bubble to be an amusing anecdote.

On Monday the yield on the 10-Year Treasury note touched down at 1.45 percent.  This is but a scant distance from the 1.39 percent yield reached in July 2012.  What compels someone of sound mind and honest convictions to give their hard earned money to the government for 10-years for just a 1.45 percent yield?

Is it the myth that U.S. Treasuries are the safest – default-free – investment in the world?  Is it the legend of American exceptionalism?  Maybe it’s both…or maybe it’s neither.

As far as we can tell, U.S. Treasury investors suffer the same cognitive dissonance that the broad U.S. populace takes with them to the shore each July 4th as they celebrate Independence. Continue reading

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