Five Things You Need to Know: Get Out Now!
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
Get Out Now!
There's nothing quite like an alarming magazine cover headline to set the market's tone for the new year. Talk of a bubble in Treasuries has been making the rounds on Wall Street for a couple of months now, so nothing new there. Over the weekend, however, Barron's gave the Treasury bubble cover story status, "Get Out Now!"
The piece is full of sage-sounding, cautionary advice, such as this warning from from Mohamed El-Erian, chief investment officer of Pacific Investment Management Co.: "Get out of Treasuries. They are very, very expensive."
Presumably, PIMCO, which runs the world's largest bond fund, is just looking out for the little guy. And, hey, if bond prices do plummet from here, then maybe they'll be kind enough to stem the tide by stepping in and purchasing them at "less expensive" prices.
Of course, the chief risk to the Treasury market, at least according to the Barron's article, is "the potentially inflationary impact of both the Federal Reserve's super-accommodative monetary policy, which has dropped short rates close to zero, and the enormous looming fiscal stimulus from the federal government."
That does sound like one disastrously inflationary cocktail. But below is why it may take much longer to make that drink than many think:
It's About Real Interest Rates
Sure enough, when the 30-year Treasury yields a nominal return of just 2.82%, it would seem there is very little upside in owning Treasuries here. But this is a tale of "real" interest rates, not the nominal rate as it appears in magazine articles.
If we buy a one-year bond for $100 with a nominal interest rate of 2%, then at the end of the one-year holding period we'll get back $102. If the rate of inflation is 2%, however, then our $102 return reflects a "real" interest rate of 0%.
That's how inflation saps purchasing power. You began the year "investing" $100. Even though you received $102 back at the end of the year, however, the rate of inflation has simply put you in the break-even position because your $102 purchases the same amount of goods that $100 purchased at the beginning of the year.
Here's why understanding real interest rates is important, however. During a deflationary debt unwind nominal interest rates are virtually meaningless. If the rate of inflation is actually declining, then your real return is much higher.
Meanwhile, in the "real world," real interest rates remain impossibly high, infinitely high in some cases, all of which is simply a fancy way of saying credit is tight, and in some cases completely unavailable for consumers and businesses.
Credit Really Is Tight
Look, I'm not just making this stuff up. Credit really is tight. Today the Wall Street Journal ran a piece noting some things you may already have noticed: "Credit Card Companies Slash Credit Limits."
According to the Journal, about 20% of banks reduced credit limits on the existing credit cards of prime borrowers. Sixty-percent lower limits for nonprime borrowers.
The newspaper reported American Express (AXP), US Bancorp (USB), Washington Mutual and Wells Fargo (WFC) each indicated they would reduce cardholders' credit limits due to perceived risks such as high balances or late payments.
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a ski lift ticket
cable tv
school taxes
college tuition
all go down.
Have a wonderful day
JPM
"The findings... suggests that the credit crunch has provoked a backlash against the rich, with the public seeking retribution..
Yes, retribution. And just like that, barely five days into the new year, we have our motif for 2009."
If this trend becomes strong enough we will see not only considerably higher tax rates for upper decile incomes but a tax on assets. After all, asset taxes are the oldest sort of taxes there are.
Politicians would love it totally - what an opportunity to write in "loopholes" for "favored constituents"!! What a vast source of campaign finance contributions, donations to captive charities, and speaker's fees!! What a source of insider trading information!!
O frabjous day! Callooh! Callay!'
They chortled in their joy.
Wow. Shakespeare on one page, and Carroll on another. Did you major in English English?
I have considered that taxing assets rather than income might produce a more stable tax base, similar to property taxes versus sales taxes at the state & local level. That's not retribution, it's just trying to avoid the sort of problems one sees in a normal recession. Which, of course, this ain't. It would appear to the taxpayer to be a form of inflation. If, by increasing tax revenues and running less of a deficit, we reduced inflation (not guaranteed), it might turn out to be pretty close to a wash.
Since these funds are "invested" in UST securities, the government is essentially borrowing from the fund to cover the deficits we already have. The logic by which borrowing even more funds to dump into this pot (which in turn is possibly the "lender" for that same money) can be said to actually generate a return makes Madoff's business model look promising by comparison.
There is some merit to the idea that putting 3 million on early retirement would have a similar net impact on unemployment rates as creating a similar number of jobs, however in the bigger picture job creation (if possible) is probably a better path since it would give a bigger boost to net productivity and would likely generate a greater velocity of the money involved (which should translate into a bigger benefit to GDP than the retirement option).
Obama was elected on an FDR platform. The rich, capitalism, profits, school vouchers, small business, and individual responsibility are going to take Marie Antoinette's place; with the proletariat cheering on the guillotine.
I think many "average" or median/middle class wage earners will begin to eschew ownership; as in, ownership of houses, cars, stocks, insurance policies, etc.
Interest rates are so low, that the tax benefits of taking out a loan are less than a standard deduction. If you have a mortgage you have responsibility; if you rent, you can pull up stakes and move away from bills and liabilities (and civil unrest) and towards the latest job. Illegal activities will take on even greater benefit.
If Obama pushes through health care reform, people will drop health insurance premiums in favor of CHIP and Medicare.
So we have: deficit spending, less investment in real property and stocks = less tax revenue, increased burden on social services via unemployment, less income for health care providers and pharmaceuticals (price controls), less income = fewer taxes, etc.
After a couple of years, the reflexive and politically expedient response will be increasing taxes on the "rich": capital gains rates, estate taxes, property taxes. The retired with investments and assets will become seen as "the rich" and their assets encumbered to pay to prevent riots. The response will be that, like Mr. Practical, money, people, and capital will flee the country.
The face cards will be playing crouquet in Asia while the rest of the deck collects gub'ment cheese or toils under the yoke of the unkept promise that responsibility will be rewarded.
I'm not a fan of any of this but I think that by tossing out different idea's it helps to create different points of views for folks to look at. We are mired in the mud because people have had their blinders on. In fact from the smell of things I don't think it mud we are mired down in and its going to take more then fecal flinging masters to dig us out.
JPM
The other face cards are are at croquet in the usual haunts as the riots and revenge killings along with the punitive taxation have yet to commence.
People run for the root cellar when the tornado is visible, not when the clouds are just beginning to gather.
That root cellar may get pretty crowded.
