Scott:The piece below is from the Economist which is ranked at the level of the WSJ for financial reporting. This poor senile cow wonders where all the brains have gone:
1. The fallback in the bond market came initially from the Fed going 25 basis points earlier this year when the market had built 50 into the prices.
2. The fallback continued from momentum - trading volume in bonds and their derivities vastly dwarfs end use
3. The idea that the Asian Central Banks are buyers of T bonds is a joke. They are massive one way sellers of goods to the US. These goods are sold in dollars as the big US chains will only give purchase contracts in dollars and much of the rest go to sales subsidiaries of the Asian exporters who ultimately sell in dollars. So China, Taiwan, HK, SK, Japan accumulate dollars. They do not want to import so they hold the dollars which they then park in T Bills
4. The threat to switch to Euros is hollow. If they crash the dollar against the Euro they will lose the ability to keep their own currencies from rising against the dollar. This will diminish their exports. Exports are the only thing keeping their economies alive. So they are in a suicide pact. The Asian can hold dollars,pretending they are of value,or dump them and crash themselves faster than they crash the US and EU.
5. Essentially the 90's boom papered over the structural defects of the world economy all of which have now come back. We have three very different regional capitalisms linked too tightly to each other via financial liberalization. This is a disaster waiting to happen. There is a financial 911 in our future with the ability to make 1929 look tame. In many ways this is like Islamic terrorism before 911. It had been there since the 70's. However dealing with it was nasty and painful. It meant confronting cherished illusions in all three sectors and all groupings of economic and political thought. So every incident from the initial Black September through the Cole was papered over. It was just Israel,just Lebanon, just Palestine, just Kashmir,just a few crazies [Meir Kahane and the 1st WTC attack]. Afterwards everyone was a grandstand quarterback. However look at the commentary for Bush's first year. Missile defense to knock down a few dozen missiles from a rouge state [NK,Iran,Iraq] was regarded as rightwing lunacy plus military-industrial boondoggle. A focus on 'homeland security' was racist paranoia plus McCarthyism. If we get a meltdown everyone will have claimed to see it coming. It may never happen but the danger is real. The system is in serious disequilibrium from both the financial and deflationary sides. pray.
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The riddle of the bonds
Nov 25th 2003
From The Economist Global Agenda
The American economyÂ’s third-quarter growth has been revised up to a dizzying 8.2% on an annual basis. But do bond investors believe in the Bush Boom?
AS A young bond trader, Buttonwood was given two pieces of advice, trading rules of thumb, if you will: that bad economic news is good news for bond markets and that every utterance dropping from the lips of Paul Volcker, the then chairman of the Federal Reserve, and the man who restored the central bank’s credibility by stomping on runaway inflation, should be treated with more reverence than a Papal injunction. Today’s traders are, of course, a more sophisticated bunch. But the advice still seems good, apart from two slight drawbacks. The first is that parsing utterances from the present chairman of the Federal Reserve, Alan Greenspan, is of more than passing difficulty. The second is that, of late, good news for the economy has not seemed to upset bond investors all that much. For all the cheer that has crackled down the wires, the yield on ten-year bonds—which you would expect to rise on good economic news—is now, at 4.2%, only two-fifths of a percentage point higher than it was at the start of the year. Pretty much unmoved, in other words.
Yet the news from the economic front has been better by far than anyone could have expected. On Tuesday November 25th, revised numbers showed that AmericaÂ’s economy grew by an annual 8.2% in the third quarter, a full percentage point more than originally thought, driven by the ever-spendthrift American consumer and, for once, corporate investment. Just about every other piece of information coming out from the number-crunchers shows the same strength. New houses are still being built at a fair clip. Exports are rising, for all the protectionist bleating. Even employment, in what had been derided as a jobless recovery, increased by 125,000 or thereabouts in September and October. Rising corporate profits, low credit spreads and the biggest-ever rally in the junk-bond market do not, on the face of it, suggest anything other than a deep and long-lasting recovery. Yet Treasury-bond yields have fallen.
If the rosy economic backdrop makes this odd, making it doubly odd is an apparent absence of foreign demand. Foreign buyers of Treasuries, especially Asian central banks, who had been hoovering up American government debt like there was no tomorrow, seem to have had second thoughts lately. In September, according to the latest available figures, foreigners bought only $5.6 billion of Treasuries, compared with $25.1 billion the previous month and an average of $38.7 billion in the preceding four months. In an effort to keep a lid on the yenÂ’s rise, the Japanese central bank is still busy buying dollars and parking the money in government debt. Just about everybody else seems to have been selling.
These are old figures, of course, and coincided with the peak in yields. Perhaps foreign investors thought that the recovery was for real and disliked the historically meagre yields available on government debt. But the fact that overall portfolio flows slowed in September suggests that foreigners have not been overly enthused by the American economyÂ’s prospects, or at least the price at which they can buy into them. Or perhaps they disliked the fact that their IOUs are denominated in a currency which the issuer seems determined to devalue: the dollar has fallen by 11% in trade-weighted terms since the start of the year.
Whatever the explanation for their desertion, foreigners seem to be back buying Treasuries, even though the recovery seems still more firmly entrenched. Or perhaps domestic investors are rediscovering the joys of a fixed rate of interest: even commercial banks, which have reduced their holdings of Treasuries by $62 billion since the middle of June, have been tip-toeing back in.
The simple explanation for this renewed enthusiasm is that investors sense a chill beneath the warm glow of the numbers. One cold wind blowing across this particular recovery is that Americans are up to their necks in debt. With short-term interest rates at a 45-year low, households are spending some 13% of their disposable income on servicing their debts—a higher number even than in the sharp recession of the early 1980s, when the Federal funds rate topped 13%. How much longer can they carry on spending at this rate, let alone increase it? If they don’t, then someone else will have to spend on their behalf.
The government, perhaps? The Bush administration has turned a budget surplus of 2.4% of GDP into a deficit that official numbers say will amount to 4.3% of GDP next year. Not much room, in other words, to raise spending. Nor do American companies have oodles of money to play with. For all the talk of restructuring, they continue to increase their borrowing, though at least a slowdown in the rate at which they borrow and better profitability mean that their dreadful financial ratios are starting to look better than they were. Whether they will continue to do so is another matter.
The chillest wind of all is the rising protectionist nonsense sweeping Washington as it prepares for an election year. Undeterred by having its steel tariffs recently declared illegal by the World Trade Organisation, the administration last week slapped quotas on a range of Chinese textiles, including bras, capping (cupping?) the rise in their imports. And this week it imposed stiff tariffs on Chinese television sets.
We are meant to laugh this off as a bit of electioneering hokum: the administration’s heart, we are supposed to believe, lies with free trade. But George Bush is a man who wants to get re-elected and seems prepared to sacrifice the long-term economic good—assuming (a big assumption) he knows how it is best served—to get back into the Oval Office. Mr Greenspan, who has forged a career out of obscure, elliptical comments, had this to say, and it needed no deciphering: “It is imperative that creeping protectionism be thwarted and reversed.”
posted by scott 11:02 PM