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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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The Great Bond Bubble-WSJ
I have to say what is new here???? Now we know who has been buying all those Treasuries that finance the US Deficits...The article states 569B have been placed in US T Bills since the end of 2008. People around the world have been flocking to the US T Bill as an ON THE BEACH STRATEDGY..However perceptions of this nature can turn on a dime and one morning one might wake up to find that the bubble has burst and we are in a Bond Armageddon. I happen to think it is a matter of when and not if...Bond holders will suffer huge losses and the ramifications on interest rates and the servicing of those T Bill will become a major issue for the US government...you might just think in terms of handing your complete paycheck over to the government at that time in the form of taxes.
The Great American Bond Bubble If 10-year interest rates, which are now 2.8%, rise to 4% as they did last spring, bondholders will suffer a capital loss more than three times the current yield. Text By JEREMY SIEGEL AND JEREMY SCHWARTZ Ten years ago we experienced the biggest bubble in U.S. stock market history—the Internet and technology mania that saw high-flying tech stocks selling at an excess of 100 times earnings. The aftermath was predictable: Most of these highfliers declined 80% or more, and the Nasdaq today sells at less than half the peak it reached a decade ago. A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds totaled $232 billion while bond funds have seen a massive $559 billion of inflows. We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic. The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout. .Shorter-term Treasury bonds are yielding even less. The interest rate on standard noninflation-adjusted Treasury bonds due in four years has fallen to 1%, or 100 times its payout. Inflation-adjusted bonds for the next four years have a negative real yield. This means that the purchasing power of this investment will fall, even if all coupons paid on the bond are reinvested. To boot, investors must pay taxes at the highest marginal tax rate every year on the inflationary increase in the principal on inflation-protected bonds—even though that increase is not received as cash and will not be paid until the bond reaches maturity. Today the purveyors of pessimism speak of the fierce headwinds against any economic recovery, particularly the slow deleveraging of the household sector. But the leveraging data they use is the face value of the debt, particularly the mortgage debt, while the market has already devalued much of that debt to pennies on the dollar. This suggests that if the household sector owes what the market believes that debt is worth, then effective debt ratios are much lower. On the other hand, if households do repay most of that debt, then the financial sector will be able to write-up hundreds of billions of dollars in loans and mortgages that were marked down, resulting in extraordinary returns. In either scenario, we believe U.S. economic growth is likely to accelerate. .Furthermore, economists generally agree that the most important determinant for long-term economic growth is productivity, not consumer demand. Despite the subpar productivity growth reported for the last quarter, the latest year-over-year productivity growth of 3.9% is almost twice the long-term average. For the first two quarters of this year productivity growth, at over 6%, was the highest since the 1960s. From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds. Rather, stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade. Yes, we can hear the catcalls now. Stock returns calculated off the broad-based indexes have been horrendous over the last decade. In 2009, the percentage decline in aggregate dividends was the largest since the Great Depression. But remember the last decade began at the peak of the technology bubble. Those who bought "value" stocks during the tech bubble—stocks with good dividend yields and low price-to-earnings ratios—have done much better. From December 1999 through July 2010, the Russell 3000 Value Index returned 35% cumulatively while the Russell 3000 Index of all stocks still showed a loss. Today, the 10 largest dividend payers in the U.S. are AT&T, Exxon Mobil, Chevron, Procter & Gamble, Johnson & Johnson, Verizon Communications, Phillip Morris International, Pfizer, General Electric and Merck. They sport an average dividend yield of 4%, approximately three percentage points above the current yield on 10-year TIPS and over one percentage point ahead of the yield on standard 10-year Treasury bonds. Their average price-earnings ratio, based on 2010 estimated earnings, is 11.7, versus 13 for the S&P 500 Index. Furthermore, their earnings this year (a year that hardly could be considered booming economically) are projected to cover their dividend by more than 2 to 1. Due to economic growth the dividends from stocks, in contrast with coupons from bonds, historically have increased more than the rate of inflation. The average dividend income from a portfolio of S&P 500 Index stocks grew at a rate of 5% per year since the index's inception in 1957, fully one percentage point ahead of inflation over the period. That growth rate includes the disastrous dividend reductions that occurred in 2009, the worst year for dividend cuts by far since the Great Depression. Those who are now crowding into bonds and bond funds are courting disaster. The last time interest rates on Treasury bonds were as low as they are today was in 1955. The subsequent 10-year annual return to bonds was 1.9%, or just slightly above inflation, and the 30-year annual return was 4.6% per year, less than the rate of inflation. Furthermore, the possibility of substantial capital losses on bonds looms large. If over the next year, 10-year interest rates, which are now 2.8%, rise to 3.15%, bondholders will suffer a capital loss equal to the current yield. If rates rise to 4% as they did last spring, the capital loss will be more than three times the current yield. Is there any doubt that interest rates will rise over the next two decades as the baby boomers retire and the enormous government entitlement programs kick into gear? With future government finances so precarious, private asset accumulation and dividend income must become the major sources of retirement funding. At current interest rates, government bonds will not be the answer. One hundred times earnings was the tipping point for the tech market a decade ago. We believe that the same is now true for government bonds.
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08-19-2010, 11:30 AM
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Information Overloader
Join Date: Mar 2003
Location: NW Lower Michigan
Posts: 29,365
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"...private asset accumulation and dividend income must become the major sources of retirement funding."-DUH.
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08-19-2010, 05:40 PM
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Unconstitutional Patriot
Join Date: Apr 2000
Location: volunteer state
Posts: 5,620
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This article is absurd.
They pimp dividend paying stocks and quote a 35% cumulative yield over the past 10 years for Russell 3000 value index. Wow! That's an awesome yield. The bond market is going to crater, and somehow stocks, and economic growth will not be affected. Looks like the tax rate for dividends is going up to 40% from 15%. Yeah, that's great for dividend stocks, right? While I agree productivity is critical to long-term health of a nation, we've been relying on consumer demand for so long. Where does that leave us now? Issues where I do concur: 1) bond yields are pathetic for the risk 2) stocks are probably a better place to be That said, if the bond bubble bursts, it's taking these idiots and their dividend stocks for a ride. |
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08-19-2010, 06:40 PM
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Registered
Join Date: Sep 2005
Location: So. Cal.
Posts: 11,239
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Tabby - On the Beach - what a great, obscure reference. I humbly bow to thee.
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David 1972 911T/S MFI Survivor |
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08-20-2010, 01:21 PM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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I'm constantly wondering who keeps buying these bonds?
A glib answer would be the Banks...they trade the CDO's for $$$ and then put it back into T Bills.. The Chinese have been shortening the maturity dates when they roll over their T Bills and then eventually take the money off the table and go buy Korean debt, and Euro debt. I am reminded of the old Safaris surfin song....WIPEOUT... By 2018 the USA will be paying $1,000,000,000,000.00 a year in interest...that is 40% of the current tax revenues of 2.5T....That is 1T a year in a transfer of WEALTH...
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08-21-2010, 10:55 PM
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Information Overloader
Join Date: Mar 2003
Location: NW Lower Michigan
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The best defence against a bond bubble burst involves a very simple calculation: Divide the number of people whom you really, really care about by the number of arable acres (without irrigation) in your free and clear possession. If < 3.1 make the appropriate adjustment(s).
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08-22-2010, 12:29 PM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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Quote:
This afternoons missive is about US government INTEREST PAYMENTS. As I have said many times...The historic highs on 30 year T BIlls was reached in the early 1980's at 16%, that is spelled capital S, capital I capital X, capital T, capital E, capital E, capital N...S..I...X...T..E...E...N...PERCENT. What that means for U if those rates are once again seen is that that 2.125T USD will go to INTEREST PAYMENTS alone of the 2.5T USD tax revenues collected. Thate leaves 350B USD to fund the REST of the US government....Currently the DOD spends 687B USD...What does this SPELL..What does this SPELL.... And JUST for HUGH...this WAS going to be the title of this afternoons little missive...currently by 2018, if we see no dramatic increase in Interest rates..the US will be paying $1,000,000,000,000.00 in Interest on the debt. That is about $3000.00 for every man woman and child in America...So Hugh since you are an EMPTY NESTER..you and you wife will have to cough up $6000.00 a year every year above and beyond the funding of the other US govt operations... Family of 4...$12,000.00 RIGHT OFF THE TOP. This will suck the American economy DRY and there will be NO ECONOMIC GROWTH..and NO JOB CREATION. What this does spell is A TRANSFER OF WEALTH TO THE T BILL HOLDERS.. Now to Wayne...Everything I have said for the past 2 years is that one day we will wake up and the those Bond Vigilantes will be demanding HIGHER INTEREST RATES...as the risk to reward ratio grows ever higher..as seen above the interest payments will put a stake through the heart of the American economy. Perhaps it will be a report, perhaps it will be some event, or perhaps it will start with the loss of confidence in shall we say a state like CA and there will be a run on those Muni's...which would snowball...In other words the more deficits and debt the easier it is for a minor event to trigger a crisis Now Wayne you very casually say that a rise of say 4% on the Long Bond is possible as a way to curb deficit spending...But exactly what will that do to the already fragile Economy? Do I hear you say send it into a almost unstopable tail spin that will make the Great Depression look like a walk in the park? The countervailing pressure at the moment is the Fed and Treasury are DOING EVERYTHING POSSIBLE to keep liquidity in the system and interest rates low. At the moment Investors are FLOCKING (569B since early 2009) to put their money into T Bills as an ON THE BEACH STRATEDGY. They will gladly take a negative yield for the safety of their principle. However if interest rates should start to move higher that principle could be WIPED OUT...and that sentiment of fear is where a RUN ON THE BOND MARKET OCCURS and a BURSTING OF THE BUBBLE TAKES PLACE...as everyone wants out the door at the same time. So welcome to he11 Mr Wayne...where EVERY SOLUTION has an unintended consequence or blow back and if you will a Catch 22 situation.
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Copyright "Some Observer" Last edited by tabs; 08-22-2010 at 03:33 PM.. |
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08-22-2010, 03:16 PM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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Under the Wayne scenario Interest Rate will start to climb as the Bid To Cover Ratio starts to decline in the Treasury Auctions...this would force interest rates slightly higher to intice investors to buy Treasurys..rates would start to climb slightly at first and then dramatically as fear starts to set in.
The CURRENT policy by the Fed is to be a PURCHASER of last resort of Treasurys at Auction to keep the Bid to Cover ratio high and interest rates low. For the Wayne scenario to play out the capacity of the Federal Reserve to purchase Treasuryes will have to be exhausted. That ain't quite the situation at the moment.
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08-22-2010, 03:31 PM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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The Federal reserve RUNNING OUT OF CAPACITY to purchase Treasuries???? That is a joke..they have umpteen ways of manipulating things...for instance they could devalue the currency...cut the value of the USD by say 25%....EVERYTHING WOULD GO UP 25% IN VALUE IMMEDIATIALLY...instant inflation...However DEBT HOLDERS and people in CASH or CASH EQUILIVALENT POSTIONS WOULD take a 25% haircut...But here comes Catch 22 again..cut the value of the USD and U have HIGHER INTEREST RATES for people to want to RISK their money in Treasuries...
Welocme to He11....BOYZ...
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08-22-2010, 03:42 PM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
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The HOPE and there is HOPE..is that the Fed manipulations will be ever so slight so as not to be noticed...and HOPE AND PRAY that NO STRONG GUSTS OF WIND comes along to knock their plans off their ever so precarious of a perch...
This is where PERCEPTION COMES IN....if the TEA PARTY is successfull, regains Congress and starts to institiute AUSTERITY MEASURES....the perception will be that things are going in the right direction again..that SOMETHING, ANYTHING is being done to curb not onlythe deficits but the debt... The PERCEPTION of CONFIDENCE will be RESTORED or at least start to be.
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Copyright "Some Observer" Last edited by tabs; 08-22-2010 at 03:48 PM.. |
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08-22-2010, 03:44 PM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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With the Democrats AND OBAMA there is nothing but UNCERTAINITY...and that translates to FEAR....
The evidence U say...Corporations are SITTING ON 2T USD....
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08-22-2010, 03:56 PM
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Unconstitutional Patriot
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Quote:
Staggering debt, it is. |
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08-23-2010, 03:57 AM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
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Quote:
Even with the flight to T Bills which drives interest rates down..the Long 30 year Bond is at roughly 4.5%. One can certainily count on rates climbing to 5% or above in the medium term future.
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08-23-2010, 10:11 AM
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A Man of Wealth and Taste
Join Date: Dec 2002
Location: Out there somewhere beyond the doors of perception
Posts: 51,063
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Some of U BOyz think I am being overly PESSMISTIC...Well just figure this..
All figures are approximate now.. BY 2018 the Debt is projected to be $20,000,000,000,000.00 which will be greater than 100% of GDP The USA currently is roughly a $14,000,000,000,000 GDP economy Federal Tax Revenues are roughly 2,500,000,000,000. Current interest on the debt is $375,000,000,000.00 calculated at 5% Current Federal spending is $4,000,000,000,000 with a $1,400,000,000,000 deficit __________________________________________________ ________________________ Figure a 3% Growth rate on the economy per year...by 2018 you have roughly an $18,000,000,000,000.00 GDP Let us say Taxes go up to 20% of GDP from the 17.8% ..that means.. $3.600,000,000,000 in tax revenues collected Minus the $1,000,000,000,000.00 in interest payments on the $20,000,000,000,000 debt at 5% interest that leaves the Fed to run on $2,600,000,000,000.00 The US governement minus the $375B in interest it is currently paying is spending right around $3,625,000,000,000 a year currently...this figure would be good in 2018 if there were NO FURTHER INCREASES IN THE BUDGET????...Also calculate that the Deficit WOULD BE GREATER if the positive cash flow from SS taxes were not included in the accounting. $3,625,000,000,000 - $2,600,000,000,000 = $1,025,000,000,000 DEFICIT...for 2018 Now factor that in 2018 SS is taking in less money than it is paying out, which is the REVERSE OF TODAY..today it is taking in more money than paying out...THAT LITTLE ACCOUNTING GIMMICK HAS BY 2018 GONE AWAY..as the BOOMERS HAVE RETIRED.. I should look up the numbers of the projected SS payout for 2018...that ought to be enlightening...because it will be adding to the deficit spending projected above. LOOKS LIKE THE DEFICITS JUST NEVER SEEM TO GO AWAY DO I HAVE TO SAY IT ONE CAN NOT RUN DEFICTIS FOREVER...SOONER OR LATER YOUR BROKE AND HAVE EXHAUSTED ALL OTHER MEANS OF RAISING MONEY.. So the ALTERNATIVE IS GOING TO BE RAISING TAXES...The government in 2018 is going to need $3.6T to operate and $1T to pay the interest on the debt....$4,600,000,000,000 in taxes on a $18,000,000,000,000 means 25.5% of GDP is going to be CONSUMED in paying Taxes...THESE FIGURES ARE GOOD ONLY IF THE FEDERAL BUDGET DOES NOT GROW BETWEEN NOW AND 2018 U draw your own conclusions..
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08-23-2010, 11:19 AM
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