AZK/MNG/
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If the US Stock Market were a broken down car...
...If the US stock market were an old broken-down car, it would have been towed away by now...it is as if someone had abandoned a shiny new Porsche on a rundown housing estate and the locals had forgotten to steal the hubcaps...
Bill Bonner - Other articles
Thu 09 Mar, 2006
It has barely moved for years. Rust has eaten up the hood. Trees poke through the wheel wells. Just as in Britain and Europe, investors who bought "the market" in the late ‘90s see their investments still sitting there – just where they were when they first bought them.
The same could be said for the dollar, sterling and bonds. They have hardly twitched in several years. Every time we look, we still get about $1.20 per euro per greenback...around €1.46 per pound. And bond yields remain under 5%...way under for UK gilt buyers, in fact.
That last item is the most peculiar. It is as if someone had abandoned a shiny new Porsche on a rundown housing estate and the locals had forgotten to steal the hubcaps. British government 50-year bonds paying barely 0.4% above inflation are an invitation to larceny, as near as we can tell. What hope does the lender have of ever seeing his money again? What will the pound be worth in 2056? How much will the bond be worth then?
Someone is being set up for a major loss. You’d expect investors to take advantage of it...snapping up lenders’ money as if they were ripping out radios from parked cars.
And yet, there is a curious and eerie silence - when it comes to the risks. No one is talking. Just look at the options market. The cost of protecting against risk hasn’t been lower since 1998, just before Long Term Capital Management blew up. Yet the cat seems to have grabbed all warning tongues.
Still, in yesterday’s International Herald Tribune, we managed to find one that got away.
“Investors appear to believe that for some reason the age of globalization has made the prospect of a global economic meltdown remote,” writes Daniel Wagner, “and that the global economy will recover from whatever is thrown in its way.”
And what might be thrown in its way, we wonder out aloud. Oil trades at $65 a barrel – with no major disruption in tight supplies, Wagner notes. But, what would happen if terrorists took out a major oil field or pipeline...or if a major producer went ‘off line”...or a major oil terminal were attacked? What would happen if the price simply went up? The whole world economy could suddenly shrink like a deflating balloon.
Wagner doesn’t pose the question, but what would happen if another big hedge fund went bust...or the derivatives market suddenly imploded...or there were a crash on Wall Street...or the Bush Administration were to attack Iran...or China flew off the rails...or a Y2K-type virus were to clog up the world’s communications...or an avian flu-type virus were to clog up the world’s lungs?
Colleague Dan Denning, another person whose tongue the cat hasn’t got, sends this note:
“The US Treasury hit the debt ceiling and had to raid the exchange stabilization fund and disabled civil servants pension to meet current obligations...over $1 trillion in [US] government borrowing has to be rolled over this year. Over $614 billion of long-term debt matures this year....meaning over $1.6 trillion in funding has to be floated in the market, at rising interest rates, for the [US] government to meet its obligations to current bond holders and entitlement recipients.
“It's a grim looking situation for the Empire, and explains why ten-year Treasury yields hit 4.75% yesterday, the highest since the Fed began cutting rates. Ten-year rates are finally moving up. Greenspan's conundrum is disappearing, one basis point at a time."
In a similar vein, our own MoneyWeek magazine – published here in London - carried an article last week explaining how Japan’s rising interest rates could finally knock the pins out from under America’s real estate bubble. Today’s IHT picks up the story with a front page headline:
“Bank of Japan facing a momentous decision," it says.
Investors have enjoyed a field day, borrowing from Japan at zero interest...and sticking the money all over the world – including in US debt and British gilts, thereby helping to hold Anglo-Saxon mortgage rates down. This surge of money has lifted house prices in Las Vegas...bond prices in London...and even stock prices in India (up 42% last year). What will happen when it stops?
“The five year free ride is coming to an end,” says a Tokyo-based economist.
But you wouldn’t know it from all the people queuing up at the station. In the face of rising risks, people have never been more confident or more eager to get on board. The modern democratic capitalism cannonball, driven by enlightened central bankers, adjusts fluidly and painlessly, they tell themselves sagely. That is what markets are supposed to do, constantly toting up the odds of trouble...constantly hedging...constantly looking down the tracks ahead and adapting.
Maybe so. But occasionally markets also make mistakes. The joy riders sitting on the top of the train are all reading the same newspapers and the watching the same TV channels, all borrowing from Japan and investing in asset bubbles everywhere...and they have all come to believe more or less the same thing...something they all desperately want to believe...something that flatters them...something that comforts them...and something that ultimately ruins them.
Yes, dear reader, that is how it works. Risks do not go down just because people do not see them. The more sure people are that they have nothing to fear...the less ready they are for bad news.
And then, when it comes, they are shocked and appalled. And ruined.
We do not buy gold because we know there is bad news coming. Bad news always comes. We buy gold because we suspect that most people are not prepared for it...
“497% in the next 4 years from this silent bull market”
Buy this stock and you could clean up from a bull market experts predict will soar 497% in the next 4 years...
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