Treasuries Soar on European Debt Concerns

Thank god it's Friday!  Things are quiet for the most part.  I was happy to see treasuries rally today. 

Here is the 10 year:

Quick Take:

PHEW!  I am not looking forward to bond Armageddon and I would have hated to see it right before Christmas.  The Wall St Journal reported that treasuries rallied as a result of European flight to safety trades:

"The bond market extended Thursday's rally, a relief for a market that has been hammered over the past week. The benchmark 10-year note's yield, which moves inversely to its price, fell by about 16 basis points from the seven-month peak of 3.568% hit Thursday.

Many investors bought Treasury's after Moody's downgraded Ireland's sovereign credit ratings by five notches amid worries about the euro-zone debt crisis.

"Negative news from Europe spurred flight-to-safety flows into Treasurys," said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, adding that some foreign central banks and investment funds bought Treasurys with 10-year yield around 3.55%, providing attractive value.


As of 10:49 a.m. EST, the 10-year note was 8/32 higher to yield 3.405%. The 30-year bond was 22/32 higher to yield 4.498%.

The bond market is "oversold," said James Combias, head of U.S. Treasury trading at Mizuho Securities USA Inc."

The Bottom Line:

Everything else is pretty much a snoozefest today.  Metals are up a bit.  Stocks are flat.

I gotta be honest: I am looking forward to shutting it down for the holidays.  All of this impending doom is quite tiring and stressful.

FYI,  the blog will be hit and miss over the next two weeks.  I will be pretty regular next week.  This weekend and the holiday week might get a bit quiet.  Don't be fooled though:  The Housing Time Bomb will be back in full gear as we head into next year!

Let me wrap things up for today.

I have a feeling that Europe will be center stage as we head into 2011.  It will be interesting to see what bonds do in the meantime.

Christmas came early for the Fed this year.  Their gift was the European debt crisis.  It's creating huge revenue streams for treasuries as the Europeans flock to safety.  It's also taking the focus off of the US and our own debt issues and placing it on the squarely on the PIIGS.

Some advice:

Enjoy the holidays with your family because I expect 2011 to come in with a whirlwind.

We are nearing the tipping point of this whole crisis.  How it all plays out remains to be seen, but one thing is becoming very clear:   Radical change is coming and life as we know it will never be the same.

I know it's hard but try and forget about our economic insanity for now and enjoy some time with your family. 

I'll end today with a little holiday cheer!

2010: The Year of Reflation

Since it looks like the holiday trade is on I thought I would look back and see how various sectors performed in 2010:

My Take:

If you were an inflationist you did pretty darn well last year.  Commodities were clearly the play of the year.  I find it kinda funny to look at the S&P 500 performance relative to other investment options.

CNBC would love to make you believe that buying stocks was and always is the best thing to do.  As you can see above, this was clearly not the case in 2010.  Ironically, bonds gave a lot back since November when the Fed started it's brilliant QE strategy.

You can thank the Fed's reckless policies(along with lots of Chindians) for the commodity run.  The dollar has held up well as of late as a result of the European debt fiasco but it's clearly evident above that the market believes inflation is coming.

If you were a deflationist in 2010 you pretty much got slaughtered.  The classic deflation trade is to go short stocks and energy and go long the dollar and bonds.  So much for that idea in 2010.   

Personally, I was pleased with my year for the most part.  I did well with gold and silver.  My bond funds did well thanks to PIMCO.  I lost a little on some short hedges but I was glad I owned them when we dipped this summer. 

My cash didn't do anything thanks to low rates.  In fact, I probably lost money from an inflation adjusted standpoint but that's OK.  The security of knowing it's there is invaluable from my perspective at this point in the game. 

Where Do We Go From Here?

This is the million dollar question.  I will touch on this today but stay tuned for a THTB Top 10 prediction list for 2011.  I see this done a lot and i liked it so I figured I would give it a shot.

I think a lot of what happens in 2010 will come down to the Fed, the bond market, and politics. 

I think Obama put himself in a bad spot by passing the tax cuts. I say this because Washington DC is going to change drastically starting next year.

The House and the Senate will both be filled with several new tea partying Republicans who are going to want to cut spending.   As the deficit worsens we will see increasing pressure to do something to stop it.

This is going to lead to job cuts and other austerity measures beginning in 2011.  I don't expect anything drastic but it will start nonetheless. 

Obama is going to end up looking bad when the Republicans start cutting because the middle class are the ones who are going to feel the pain.

Obama will then get painted the President who gave the middle class the shaft after giving tax cuts to the rich.  This will be a political nightmare for him down the line and ironically I think the left may hate on him on this issue as much as the right does.

The Bottom Line

We have clearly reached a fork in the road when it comes to the markets and the economy.  Unemployment remains high and is getting worse.  Our deficit is on the verge of not being manageable as bond yields continue to rise. 

Stocks have priced in a strong 2011 recovery which I don't think is going to happen.  I can't see any material recovery without a nice uptick in jobs.  The only reason we had a recovery this year was because the government was willing to put it on it's credit card.  The economy would have been miserable this year without their handouts. 

The Fed would love to rinse and repeat the same thing this year which is why we got QE2.  The problem with this idea is the Fed now has the bond market to deal with.

They aren't too keen on this idea.   They are becoming increasingly worried about our deficits because they see no recovery that can pull us out of this mess.

The Fed doesn't see the recovery either.  If they did then they would have never pushed the QE2 button.   Bernanke knows this can't work but he did it anyway because there was no other option.

The after shocks are still being felt from our "printing" announcement.  Bonds have collapsed and commodities have soared ever since.   

This is going to be felt down the line by stocks as increased costs hurt margins.  Remember:  Oil remains stubbornly high and you need oil to make pretty much everything in our economy. 

I'll have more on my thoughts later.  The bottom line is I expect lower stock prices in our future as the market realizes that the great 2011 recovery was nothing but a pipedream. 


 

Take Your Austerity and Shove It!

It looks like the Greeks decided to not be upstaged by Italy today:



My Take:

Nothing like seeing angry mobs trying to light cops on fire.  How long can this last until the police say "F" this and join the other side. 

Folks, take it all in because you are going to see a replay of this over here.  I say this because the US is in the same fiscal shape as Greece.

The images above are horrifying and it's only going to get worse.  This is what happens when your debt levels can no longer be sustained, and you must slash the cost of government via austerity in an attempt to stay solvent.

The problem we have is the people in the world today are soft and have no idea what it's like to experience real HARD TIMES.  Go watch a few clips from WWII or the Great Depression if you want to see what it's like to really struggle in order to survive.

As a result, citizens like the Greeks are completely unprepared when the government stops writing checks when they run out of ways to borrow more money.

The bottom line here is reality is beginning to set in and they don't like it.  The people of Greece are now broke and jobless, and the government has no money or answers for them.  This is not an acceptable answer for it's citizens so they turn to violence and upheavel as they become enraged with the situation over time. 

Things is only going to get worse as people become more desperate.  If I was a politician over there I would be strongly considering getting the hell out of dodge before getting bloodied like the stooge at the end of the video above.

I know if I lived in Greece and had money I would getting out of there because inevitably people will start stealing from others in order to survive.  Think about it:  What other options do people have when there are no jobs and no future?

Some advice:

Before you go spend your last $2000 on a 50" HDTV I suggest you reconsider unless you have at least 6 months of cash in the bank. 

In case you missed the move in bonds, we are now seeing something similiar to what Greece saw a year ago in their own debt markets.  Take a look at the 10 year today:

Now take a look at the 10 year since the Fed decided to QE in early November:

The Bottom Line:

Are we officially Greece yet?  No, but we are well on our way if we don't dramatically change our government spending. 

Greek 10 year bonds got up to around 9% yield before all hell broke loose in their debt markets.  How did they get there?  Just like we did by spending.

Remember folks, the path to insolvency does not matter.  We got here by bailing out the rich and hiding our losses.  Greece got there by allowing their public sector to retire at the ridiculous age of 53.

The point I make here is it doesn't matter what path you take.  Once you are considered to be insolvent from a debt vs GDP perspective it's over because no one will continue to lend you money.

Does anyone really think the Chinese will keep lending us money via buying treasuries if they don't think they will get paid back?  You are delusional if you believe so.

Everyone likes to think that it's different over here.  Yeah OK.... I recall a realtor telling me the same bullshit when I looked at houses during the peak of the housing bubble.   

Like my father always says:  "It is what it is".  Insolvency is insolvency no matter what country you live in. 

Whats scary to me is I think we are toast over way before we reach the 9% yields that Greece did because we have issued so many trillions of dollars in treasury bonds that we must pay interest on. 

For example:  If we hit 6-7% yields on the 10 year then a huge chunk of our GDP would have to be used to service our $14 trillion of public debt.  Austerity would then be forced upon us because no one would lend to us without a realistic budget. 

Fortunately, the US is allowed extra time to get it's house "in order" because we have been the world's "safe haven" for several decades.

This luxury has arrogantly made us think that we can keep acting like Greece without the consequences.  How else can you explain the passage of another $900 billion spending bill on tax cuts?

The bond market is currently telling us that we are no different than anyone else.

The US politicians need to learn the from the lesson that our Realtors were taught a few short years ago:  Housing doesn't always go up if you treat it like a Ponzi scam and our reckless spending is no different.

Government spending will be forced to collapse once we reach the tipping point of sustainability just like the Greeks and the housing industry learned.

If we fail to recognize this and take action then our debt bubble will end up popping just like the housing bubble did.