just in in-tray and out send-tray
player 1: one day bonds will crash, but they could go to new all time lows in yields first (i'm referring to US government bonds, specifically). in spite of the huge rally they've had, they remain the most hated asset class. recently there has been talk of a bubble in bonds - usually when this type of talk starts, the market in question still has some way to go.
that said, although i can't bring myself to be negative on bonds yet, i acknowledge that all the welfare/warfare nation governments of the West are in principle bankrupt. they will all default one day, whether outright or via inflation. so those holding governmment bonds must not lose sight of this fact, and always keep a wary eye on a number of signposts (i have agreed with David Rosenberg's analysis of the situation except that i do not share his nonchalance about the government's total debt and the chances of it ever getting paid; in addition to this, the Fed under Bernanke is hell-bent on 'averting deflation', which means it will probably one day go one crucial step too far with its money printing).
for instance, with Japan's savings rate having declined to a minuscule level, it is only a question of a relatively short time before Japan will have to face the choice of either paying higher interest rates to attract foreign funding or printing money to finance the deficit. my gut feeling is that this looming problem could be a 'tipping point' event for bond markets everywhere.
another problem is the crisis in sovereign debt at the euro area's periphery. it is not over. in fact, it seems to be entering the next phase - CDS on Ireland's debt have already broken out to new crisis highs, and all the other usual suspects are playing catch-up. this crisis is a stark reminder that governments can indeed go bankrupt. the extent to which the EU is prepared to continue to attempt to bail these nations out will inter alia determine how quickly the crisis moves from the periphery to the center.
all in all it seems possible to me that the bond market will first keep crushing the bears - of which there are still too many - and when it has accomplished that, it will turn around and crush the bulls.
The all time low in the 10 year yield (made in 1942) is a mere 97 basis points away.
player 2: In regards to bonds, I think that we are relatively late in the game - so I'm inclined not to play them in either direction.
I'll look elsewhere for places to invest.
I still think that the Japanese Yen and Bonds can rally more. My target is "75." At 75 to the USD on the Yen and 0.75% on the JGB 10-Year, I'd be looking to buy some 5-Year very much out of the money puts on both.... The only problem in shorting JGB's at 0.75% is if the Yen collapses as well, your returns could very much be muted as the gains in US Dollar terms could be much lower than in Yen terms.
player 3: If you think we’re late in the game in buying bonds, why wouldn’t this hold true for gold?
Who else is left in the world who isn’t long gold who wanted to be long gold? Everybody is already all in..in gold.
That’s why despite some very good tailwinds, eg QE2, gold hasn’t made new highs.
If jgbs hit .75%, why wouldn’t tnotes hit 1.75%?
Equities: everyone has been bearish since 2009. we’re in the new normal but that doesn’t mean we’re looking for a 100 year flood every year. We just had one. Additionally, there are few who will need to sell equities if/when it crashes because ICI tells us retail continues to pull out of stock mutual funds for the past 2 years. Eg. I own zero traditional equity, except reits like analy mortgage.
Relative value:
1) Anyone visit Singapore lately and notice how expensive it is compared to a hk or tokyo? Tokyo is one of the most beautiful, cleanest, vibrant cities in the world and its great value now. Best dry powder skiing is in Hokkaido, imho.
2) schools as represented by hk intl school are so inferior as compared to most usa schools, in terms of sports and academics. Eg at hkis, there are 2 academic lanes.. normal and accelerated. In palo alto, there are 5 lanes. Our kids could not test beyond the lowest lane and had to catch up by taking summer school via private lessons. There are 2 soccer coaches at hkis. There are 5 at palo alto.
3) have you tasted the water or smelt the air of hk or asia lately? Try coming to palo alto where the air is pristine blue and water from sierra mountains taste sweet
4) have you bought wine from Costco usa? A bottle of almaviva, probably one of the better cabernets which costs us$120 at hk airport is $65 at Costco here. This bottle rivals any wine at any price. I can buy cases of it without any guilt and bbq my organic beef knowing its not tainted from china.
If hkma can intervene and buy hk shares directly in 1997, why cant the fed buy $2Tln worth of made in usa stocks?
Why stop at $700B tarp money targeting banks? If the empire is at risk, I don’t doubt Bernanke has other arrows in his quiver.
I do hope s&p gets to 750 because I love 50% off sales.
Double happiness: player 2 gets his bear call right and I get my bargain.
player 4: in the very short term bonds do however look rather overbought now. for instance, the DSI (daily sentiment index of futures traders) has been at 98% bulls for several times in a row lately. the record high was 99% bulls in late 08, and that soon provided a set-up for a tactical short trade.
mind you, i am one of the on-the-record bond bulls over many years now, with the only reservation I have w.r.t. the longer term consisting of the fact that i think the government will eventually default (whether outright, or what's more likely, via inflation, is immaterial - at some point there will be a tipping point when the markets cease to believe in the promise to pay, or at least in the promise to get paid with money that has the same purchasing power).
Anyway, i would summarize that i think the bond bull market still has some way to go in the medium term, but near term there should soon be a correction that is steep enough to bring the strong bullish consensus of futures traders back to earth. Longer term (how long, i don't know, but the process could be dragged out for some time), see above.
As to gold, let us not forget it has been going up for ten years straight. not a single losing year since 2000. and yet, it hasn't really gone up in parabolic fashion, but rather steadily, a bit more in some years, a bit less in others. It could easily have a down year at some point without endangering the bullish trend. The gold market's main driving force is actually reservation demand. This is to say, the willingness, or lack thereof, of the current owners of the stock of gold to sell at prevailing fiat money prices.
Consider that the yearly growth of the global stock of gold is only about 1.5% - only the Japanese Yen has a comparably slow supply growth rate (euro area money grows 10 times as much, and US money 7 times - most recent quarterly TMS growth rates). However, practically all the gold that is produced by mines (about 2,500 tons p.a.) is earmarked for non-monetary uses. Jewellery and industrial demand together account actually for more demand than the mines can supply. So the remainder of this demand is supplied by scrap. The investment demand for gold, i.e. its monetary function, is a separate category. Here we see probably some two thirds of the total global stock in play, including central bank reserves, so maybe about half of the existing gold stock is theoretically available for trading.
Given the state of the world, and the vast expansion of fiat money claims, the main question is always: why would the current owners of this gold want to sell? It is perfect insurance against governments printing ever more money, and more importantly, it is practically the ONLY insurance against a global systemic collapse. I think the financial system's near-death experience in 2008 has brought home the fact to many people that such a collapse is at least in the realm of the possible. This conviction can only have been fortified by the recent sovereign debt crisis. In 2008, the last line of defense were governments, and it (barely) held. In 2010, we see even this last line of defense being eroded at the margin.
So why would anyone holding gold sell it here? Even the opportunity cost of holding gold has become negligible, with central banks everywhere holding interest rates near zero.
This means that any new buyers will probably not be able to get it cheaply. Now and then the futures traders at the COMEX lose their nerve, and a $100-$200 correction is always possible when that happens, but every time it does, we immediately hear of 'strong physical demand' showing up. The retail public is not really in gold. Yes, in some countries with strong traditional gold affinity this may be different, but there the public has always held a lot of gold (Vietnam or India for example). Elsewhere though, especially in the West, there's only an occasional flaring up of gold buying, but it usually only happens when there's panic in the air. Most people have been warned away - by their brokers, by CNN Money, by Forbes, by the WSJ, by the FT - all these purveyors of investment advice have been bearish on gold all the way up, and they have yet to change their tune. There are a few prominent hedge fund managers that are in gold, but i would call them good company (Soros, Paulson, Einhorn, Tudor-Jones...). Most fund managers still don't do gold. As Marc often mentions, when you go to conferences and ask people who actually owns gold, not too many hands tend to go up. Alas, there was once a time when 25% of the world's investable assets were in gold and gold-related investments. Now? 0.80%.
The conclusion is imo that the bull market has still some way to go - regardless of whether it corrects in the near term or not.
... to be continued in next post Message 26784585
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