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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (6093)	1/24/2004 1:29:31 PM
From: mishedlo	Respond to of 110194

6% in a year huh? Well you can make a veritable fortune on that if you buy some treasury puts and hold them. As for Me, I would take the opposite side of that bet in on second flat. M

To: Crimson Ghost who wrote (6093)	1/24/2004 3:18:17 PM
From: NOW	Respond to of 110194

i concur....but i wont short yet...

To: Crimson Ghost who wrote (6093)	1/24/2004 5:03:18 PM
From: mishedlo	Respond to of 110194

Credit Bubble Bulletin prudentbear.com

To: Crimson Ghost who wrote (6093)	1/24/2004 8:06:51 PM
From: glenn_a	Read Replies (3) \| Respond to of 110194

Hi Fillmore. Donald Coxe has a brilliant analytical mind IMO. But his institutional conference call yesterday was exceptional. A few highlights for me: 1 - Pointing out the "sociology of ownership" (as Barton Biggs used to call it) of US 10-year Treasuries. That is, that the entities that hold 10-year US Treasuries is significantly foreign central banks, and large financial institutions and hedge funds hedging their exposure to US mortgage-backs. He further comments that the latter class of holders are engaged in a classic carry trade of borrowing short to lend long, similar to what caused the 1994 bond market fiasco. Quoting Coxe: "Let's look who is actually buying [U.S. Treasury Bonds], China, Japan, and South Korea in particular have been buying treasury bonds that's somewhere around US $400 billion around the last 18 months, and the pace seems to have picked up. ... The Bank of Japan has recently obtained authorization to invest up to US $560 billion in holding down the value of the Yen." 2 - Of course, it's not just Treasuries, but mortgage-back as well. Again quoting Coxe: "Now, that's a recipe for disaster, and as if that weren't enough, within the Lehman aggregate index ... we now have a bigger asset class than Treasuries, which is US mortgage-backs, and they are an even more vulnerable asset class, because as you know, these bonds are peculiar in that they extend duration dramatically when they fall in price. You don't just lose on principal, you're losing on duration, and here's the point, the holders of these protect their positions by hedging with the 10-year Treasury note. That's one of the reasons that I include the 10-year Treasury note in this, because what we have is huge holders of the 10-year Treasury note who I don't call real investors, because they're using them for hedging purposes. And when mortgages are getting hit, they have to sell the US 10-year Treasury note to protect their position. So what we actually have out there is that the biggest U.S. domestic investment holders are actually once again not holding them as true investors, but hedging their exposure to their own basic asset class." 3 - Finally, I really liked Coxe's analysis that I read as arguing that at some point, the cost structure advantage of cheaper commodities and raw materials, may well outweigh the costs of rising domestic currencies in China and India. I believe Russ has argued that should this happen, you would have a supply-side inflation shock in developing world economies. Anyway, fascinating stuff. And I highly recommend giving Coxe's call a listen. Regards, Glenn

To: Crimson Ghost who wrote (6093)	1/24/2004 8:50:38 PM
From: yard_man	Read Replies (1) \| Respond to of 110194

stagflation coming up, eh? Main Entry: stag·fla·tion Pronunciation: "stag-'flA-sh&n Function: noun Etymology: blend of stagnation and inflation : persistent inflation combined with stagnant consumer demand and relatively high unemployment during the last bout of stagflation, what was happening to housing prices ... what was home ownership and homeowners equity like as a percentage of the home's worth ... if you envision treasury rates at 6% sometime -- how long do you reasonably think they could persist at that level. What do you think the demand for money would be if tomorrow treasury yields went to 4.5% or 5%?? You say bonds are grossly mispriced -- what does that mean except that having the real piece of property in x number of periods will be worth considerably more on a nominal basis than now?? Or that the principal plus interest will buy considerably less in the future than market participants currently think?? Considering how large, relatively speaking the housing market is and the market for capital goods -- is it really likely that there is an extreme danger that these will cost more across the board. I tend to think just the opposite -- untoward housing inflation has led to ->> WAY above mean levels of consumption ->> businesses to extrapolate much greater levels of demand than will be present in the future -- capacity utilization remains low for many industries, even with these high levels of demand -->> rationaliztion or liquidation has been forestalled. This all implies to me that as far as capital goods are concerned -- as far as housing is concerned -- treasuries are already yielding quite a bit with respect to "future purchasing" power. Now you will want to talk about the prices of commodities, foodstuffs, etc. for which there can be no bubble at present -- given the infatuation with all things financial -- that's all well and good, except those are not the kinds of things supported by debt -- what a dollar buys now and in the future of those goods is irrelevant to bonds, IMO. What I can't explain or rationalize is the love of "junk." That most certainly is a bubble -- it's confidences rests solely on the idea of recovery. You buy high yield in an economy on the "verge of recovery" because the discounts in there for the default risk are too high, but now everyone has bought and keeps buying because we are "perpetually" turning the corner -- until we don't?? You want something that doesn't make any sense, except in terms of high-powered, levered finance and that is it, IMO. The only reason it is happening is because of interest rate derivatives and the false sense of security they give. I'll give you my opinion FWIW -- a large number of folks hold this carp -- junk and keep buying it while holding some offsetting contracts or swaps which are predicated on interest rates rising and they think they are safe ...but I think the garbage is going to meltdown if rates go too low, too quick, because of the folks that took the other side of that bet.