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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Madarasz who wrote (5408)	1/8/2002 10:07:52 AM
From: macavity	Read Replies (2) \| Respond to of 33421

Bubblicious. My problem with this - is all post-bubble economics. You can be sure that deflation will happen, that's just the way things are: too much supply - fiber, chips, steel, coffee. Remember everyone issued (stocks or bonds) to build for an 8% GDP US economy. It puffed a lot of people in. My problem with the bond argument is that someone has to be selling them for the Japanese to buy. Who is selling? And why? I do not really buy it, but the Japanese authorities are the worst traders in the world. People do not want debt, and are selling / shorting. Why? Because at the top (1998-2000) every one was leveraging up. Companies were issuing debt and buying shares (either their own or other companies) or building plants. All that telco, fiber, argentinian, high-yield stuff, no-one wants it. Individuals are maxing out on credit cards and stuff, hey most are worried about their jobs. People look at Japan and say that bonds are high (yields are low) due to deflation - crap! They are high as the government forces pension funds to buy the worthless stuff to finance all their white elephant infrastructure projects. Believe me, if they did not then JPY yields would be somewhere else. It is nothing do do with Bond Vigilantes - it is supply and demand. How can you be short 130% of GDP debt and have 2% long-rates? You can have deflation, falling stocks, and falling bonds. The US government is a net issuer of debt if any of these fiscal stimulus plans go through, or not. No-one wants it so maybe they are getting the Japanese to swallow it, the same way that the Japanese get their pension funds to buy all their crap. If it is done on the same scale as the JGB then USD/JPY is going one way fast, and deflation will simply be imported to the US faster. It is all the bubble! People will go to cash. Looks like the US may have to securitise bank accounts (c.f. argentina) to finance their stimulus - (only joking), and keep the economy going if all this rate dropping does not work. 0.25% p.a. on cash may seem a lot safer than bonds and stocks to many. P.S. I know FA about economics, i just prefer the supply/demand arguments. The charts say that bond yields may have made a long-term bottom (1998 lows re-tested in 2001). Look at the bullish divergence in monthly MACD/PPO. stockcharts.com[g,a]macayyay[pc8!c21!c55][vc60][iLe12,26,9!Lp13,3,3!Lp55,8,8] With the US looking to issue more, defaults going up, I just do not see why people would bid bonds up. Maybe they get the Japanese to buy enough, i wont be surprised. Just get ready for the subsequent trade war. JMHO -macavity

To: John Madarasz who wrote (5408)	1/8/2002 3:56:48 PM
From: Hawkmoon	Respond to of 33421

EXCELLENT ARTICLE!! I found the following particularly interesting: Junk bond funds have turned back down after flirting with a break-out. Imploding debt is deflationary, by the way. For that special person who has been PMing me about monetary policy and forcing me to break loose the rust on my "mental gears", this should be interesting as well. One of these days I want to write and essay called "where has all the money gone" to discuss how defaulting debt causes deflation. Suffice it to say, defaulting debt impacts the amount of money private banks have available to lend. That impacts their financial "liquidity" as financial institutions. And that leads to the Fed decreasing rates so that private banks can borrow from them at cheap rates and restructure their debt portfolio, if only by paying off previous debt they borrowed from the Fed at higher rates. I mean, let's face it.. incurring debt and paying it off, while skimming some profit off the top, is how the economy works. There has to be debt for an economy to grow (or the existing quantity of money must circulate faster as a variable known as "velocity" due to greater efficiency of business transactions). We all go into debt to buy something we want, with the expectation we can pay it off over time. And the banks loan that money to us at such and such an interest rate (while paying depositors a lower rate) and skim off their slice of profit. That's how an economy grows.. the ability to acquire and pay off debt, with everyone getting what they want. But when borrowers can no longer pay those debts, the banks are caught holding the bag, and still obligated to pay their depositors, as well as insuring the safety of their money. So banks are less likely to loan, no matter how low the Fed lowers rates. And as in the case of Japan, they can only lower rates so far to bail out these banks. When their debts amount to such levels that it doesn't matter how the rates are, they can't find anyone qualified to loan to (except Americans and Europeans.. :0) they have to devalue that debt by devaluing the currency it's denominated in. Here's to the return of the Yen-Dollar "carry trade", where American firms will find it efficacious to borrow as many yen as possible, and convert them to dollars, netting themselves a nifty 10% "guaranteed" profit. And here's those those companies that produce goods in Asia, and then sell them in the US. They will see a potential 10% windfall, solely due to the more favorable currency differential. And here's to the US government, because they will now be able to free up UDS private capital and redeploy it elsewhere, while the Japanese finance our low interest rates through purchasing US Treasuries, thus providing the Fed some assistance in draining liquidity from the over stimulated money supply (the Japanese will now provide "buying pressure" in a Treasury market anticipating a Fed forced to dump Treasuries in order to drain that liquidity). This should bring interest rates back down, and net the Japanese banks buying US Treasuries a nifty profit, which should help their bottom line. But who gets screwed in all of this? The average Japanese saver, and the American worker competing with cheap foreign goods. But hey.. you can't make lemonade without squeezing a few lemons... Except this time the banks and the Fed will be the ones holding the sugar.. But even with devaluation of the Yen, the more debts that are defaulted on in Japan, the more the currency must lose value in order to prevent the currency from growing stronger due to the dimishing supply of them. How's that? Any comments... corrections? Anyone care for a mint? Hawk

To: John Madarasz who wrote (5408)	2/11/2002 11:17:06 AM
From: John Pitera	Respond to of 33421

Hi John, That is a very good and very unvarnished article. There's a tremendous number of concepts and material presented there. The section you highlight is great, it did not take long for $/yen to get to 130 did it -g- The Yen depreciation seemed to be fairly widely telegraphed, it seems. Henry commented about how the YEN should week several months ago. The below paragraphs, really reinforce the great comments that Ned Davis os Ned Davis Research made on WSW 10 days ago. I took some notes of Ned's statistics and hope to get to get a chance to post them. 267 listed companies declared bankruptcy last year. here's that paragraph: -------------- Companies have defaulted on a record $107 billion of debt in 2001, and default rates have soared to a 10-year high, Standard & Poor’s said in a study released Wednesday. “The absolute number and dollar amount of defaults are unprecedented,” said Brooks Brady, author of the study issued by S&P. This year’s default total dwarfs by more than 150% last year’s record $42.3 billion, S&P said. 196 issuers have defaulted this year, surpassing last year’s record of 117. S&P said the default rate for high-yield, or “junk” rated issuers is 8.9%, and for “investment-grade” issuers is 0.6%. Those rates peaked in 1991, the last time the U.S. economy was in recession, at 12.7% and 0.8%, respectively. Junk bond funds have turned back down after flirting with a break-out. Imploding debt is deflationary, by the way. But it is not just in the US. Canada exports 80% of its products to America. In just the last 5 months, Canadian prices to the US have dropped 8%. Canadian businesses are kissing their profits bye-bye.