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

To: mishedlo who wrote (63681)	6/14/2006 12:43:27 PM
From: UncleBigs	Respond to of 110194

great point on bonds mish.

To: mishedlo who wrote (63681)	6/14/2006 1:22:51 PM
From: Mike Johnston	Read Replies (3) \| Respond to of 110194

Treasuries have been universally despised in the face of a strong bull market. Is that how bull markets end? If and when we see panic buying of treasuries and everyone loving them, that will be the clue. We had a bull market in bonds that started in 1982, then in 2003 we had a buying panic that pushed the yields down to 3%. At that time everyone was bulish and there were million reasons to buy bonds: -we are entering deflation -the Fed will peg long rates -interest rates are going to 0 -the Fed will buy bonds -the Asians are buying -carry trade IMO that was the top, and for now it still is. At 20 years old this bond bull market was very old in 2003. 20 years of declining rates should be enough to turn everybody bullish on bonds.

To: mishedlo who wrote (63681)	6/14/2006 10:43:55 PM
From: SouthFloridaGuy	Read Replies (1) \| Respond to of 110194

Mish, you are correct. There are a lot of skeletons in the closet that I fear will be exposed when we least expect it. In a perfect world, inflation/stagflation SHOULD occur based on the CURRENT economic conditions, but the wildcard is the debt and there is a HELLUVA lot of it which is going to vanish in thin air. I recently sent my colleague a graph of the yield spread versus the corporate default rate. Of course defaults tend to pick up when the yield curve inverts due to economic slowdown and while current default rates are relatively low, there has been an increase in the last few months. Meanwhile, credit spreads have actually tightened in the past few months. Something is wrong in Dodge, WTF? Here's the answer: There is a huge "artificial" bid coming from Collaterized Debt instruments. These products effectively take a basket of bonds, create a structured product (derivative) which is 10x leveraged (let's not get started with CDO squareds). We in the HF community know it's served to keep things tight, but never in my mind could I imagine the amount of distortion until I saw it last month. Amazingly, last month while Emerging Market spreads were blown away, and the equity market sold off relentlessly, CCC spreads - (distressed paper) barely budged. In fact the whole US credit curve didn't move significantly. In June 1999 when we had a similar default rate as today and a steeper yield curve, high yield credit spreads were a full 200 basis points higher having troughed in the summer of 1998. Never before has the world seen such insane leverage and Bernanke doesn't have enough keys on his computer to create the amount of liquidity needed to bail this sh!t out when it busts. Unlike LTCM, there are multiple players involved who all went to the same schools, do the same credit work, and basically own the same thing. These people are very smart in a micro sense, but I am afraid they have missed the forest from the trees. Let's not forget the counterparties and prop trading desks who are also in the mix. We will all wake up one day to a new financial world, I guaranteee this. Even if you want to short (credit), I don't think you'll have a chance because the market will seize up...overnight. Equity will obviously get killed as well because valuations have been predicated on access to cheap credits. I just don't see how it can get crazier than this. And I mean that. One could make an argument that there were some pockets of undervaluation in asset classes in 2000, but now??? Would be interested in anybodys comments (excuse the typos, I am not wearing my glasses).

To: mishedlo who wrote (63681)	6/17/2006 12:23:33 PM
From: gregor_us	Respond to of 110194

Mish, I Expect the Bull Market in Treasuries to not end the same way all bull markets end, because I remain with my view that the maarket is not normal, in that it has the FCBs in it too much to get a read. Nothing new here with my view, or, the presence of the FCBs. This is why, for example, its no longer possible for the Bond Vigilantes to operate in the US T-Bond market, and imo they have all gone over to the gold market, or other markets where they can get positioned against the US Govt, and it's destruction of its own balance sheet. I think the bull market in US T-Bonds started to end, internally, some time ago. So, I guess I can't expect a market I don't see as normal to end like all other bull markets. But hey, since I think it's not normal, I am open to the possibility it rallies again, and again, and again. That's why I like the scrum analogy. Several steps, and a cloud of dust, and broken legs on all sides. The Wall Game, at Eton. Did you have any thoughts on Fekete's view about capital flowing between the opposite shores of commodities, and bonds? Best, LP