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Bonds & Interest Rates

The NEXT Credit Crisis Has Already Started

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Posted by Bill Bonner - Diary of a Rogue Economist

on Friday, 18 August 2017 06:44

Screen Shot 2017-08-18 at 6.50.03 AMPOITOU, FRANCE – “My father told me to plant trees,” said a neighbor last night.

“It was right after I bought this place. Of course, I was young… I was busy… I didn’t have time to plant trees.

“Now, I tell my sons to plant trees while they’re still young. So they can enjoy them later.

“Funny, as you get older, and the less future you have available, the better you know it.”

Closed Book

What follows is a meditation on something we cannot know – tomorrow. 

The future is a closed book, insofar as it is possible to know what will happen. But that doesn’t mean the future won’t happen.

And although it is terra incognita – a place you’ve never been before – that doesn’t mean you shouldn’t pack your old familiar toothbrush and a warm sweater; it might be a lot like home.

Aesop wrote his fables. The French have added to them with a few of their own. Here’s one about the future:

Long ago, an old man decided to turn his farm over to his son and his wife.

“I have just one condition,” he told them. “You have to let me stay with you as long as I live.”

This was readily agreed. But the son’s wife and the old man didn’t get along. Finally, the wife persuaded her husband to throw him out. And so he did.

But taking pity on the old man, the younger man turned to his own son: “Go and get a horse blanket for your grandfather so he’ll at least have something warm to wrap around him.”

A few minutes later, the young boy came with a blanket, but his father could see that it was only half a blanket.

“Why did you cut the other half off?” he asked.

“Oh…” replied the boy. “That’s for you when you get old.” 

All of a sudden, a pattern came into view. And the future didn’t seem so unknowable.

Like a tall tree, the future casts its shadow backward over the present. 

If you think it will rain later in the day, you take an umbrella in the morning. If you think stocks will go up, you buy now. If you think you have only two years to live, there is no point buying a refrigerator with a 20-year guarantee.

Gift to the Future

The invention of money greatly increased man’s interest in tomorrow.



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Bonds & Interest Rates

What I Learned at (Economics) Summer Camp

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Posted by John Mauldin - Mauldin Economics

on Monday, 14 August 2017 06:56

Will Yellen Stay or Go?
Quantitative Tightening
Consensus Forecasts
Lightning Round
Chicago, Lisbon, San Francisco, Denver, and Lugano

All over America, kids who were fortunate enough to go to summer camp are busy telling mom and dad what they did. Their stories will be suspiciously incomplete, but that’s OK. We know they learned something.

170812-01

Well, I went to camp this summer, too. I go every year, and I always learn more than I can manage to remember. Camp Kotok is an invitation-only gathering of economists, market analysts, fund managers, and a few journalists. It takes place at the historic Leen’s Lodge in Grand Lake Stream, Maine. We fish, talk, eat, drink, and talk some more. It’s a three-day economic thought-fest (and more rich food and wine than is good for me or anyone else at the camp). For me, that’s about as good as life gets.

(Aat the end of the letter in the personal section I’ll describe a typical day at my summer camp. Not exactly arts and crafts and games. Unless poker counts as a game.)

Come along with me as I share some of my main takeaways from the camp and then, in a “lightning round,” touch on on a few various shorter topics.

David Kotok of Cumberland Advisors started the event after narrowly escaping death in the World Trade Center on 9/11. It was a way for him and a few friends to get away from the city, appreciate life, and talk about things that matter. Now the gathering has grown to about 50 of us. We meet under the Chatham House Rule, which means we can’t quote each other directly without permission. That helps promote an open exchange of ideas. And it’s definitely open. It is interesting to see the difference in the level of communication in an environment where people are not worried about being quoted when they trot out a new idea they have recently started thinking about. Testing those ideas against one’s peers, who might have different views about the same topic, is a valuable process.

David relaxes the rule for certain parts of the event, and that’s part of what I’ll share with you today. The Saturday night dinner always includes a debate on some contentious issue, with participants who are known to disagree. Martin Barnes from Bank Credit Analystalways moderates. He is one of the few who can quiet that room, with his imposing height, his booming Scottish brogue, and his offbeat sense of biting humor.

This year’s debate topic was the Federal Reserve. Specifically, we discussed the Fed’s future leadership and policies. Both are very much in question right now, and much depends on the answers. Time will tell what happens, but here is what some experts think.

Will Yellen Stay or Go?



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Bonds & Interest Rates

The Death of Abenomics; the Rise of Interest Rates

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Posted by Michael Pento - Pento Portfolio Strategies

on Wednesday, 09 August 2017 06:46

Job approval numbers for Japan’s Prime Minister Shinzo Abe are in freefall. Abe's support has now fallen below 30%, and his Liberal Democratic Party recently suffered heavy losses stemming from a slew of scandals revolving around illegal subsidies received by a close associate of his wife. But as we have seen back on this side of the hemisphere, the public’s interest in these political scandals can be easily overlooked if the underlying economic conditions are favorable. For instance, voters were apathetic when the House introduced impeachment proceedings at the end of 1998 against Bill Clinton for perjury and abuse of power. And Clinton’s perjury scandal was indefensible upon discovery of that infamous Blue Dress. The average citizen, then busily counting their chips from the dot-com casino, were disinterested in Clinton’s wrongdoings because the 1998 economy was booming. Clinton remained in office, and his Democratic party gained seats in the 1998 mid-term elections.

Therefore, Abe's scandal is more likely a referendum on the public’s frustration with the failure of Abenomics.

When Shinzo Abe regained the office of Prime Minister during the last days of 2012, he brought with him the promise of three magic arrows: an image borrowed from a Japanese folk tale that teaches three sticks together are harder to break than one. The first arrow targeted unprecedented monetary easing, the second was humongous government spending, and the third arrow was aimed at structural reforms. The Prime Minister assured the Japanese that his “three-arrow” strategy would rescue the economy from decades of stagnation.

Unfortunately, these three arrows have done nothing to improve the life of the average Japanese person. Instead, they have only succeeded in blowing up the debt, wrecking the value of the yen and exploding the Bank of Japan’s (BOJ) balance sheet. For years Japanese savers have not only seen their yen denominated deposits garner a zero percent interest rate in the bank; but even worse, have lost purchasing power against foreign currencies. The yen has lost over 30 percent of its value against the US dollar since Abe regained power in 2012.

Meanwhile, the Japanese economy is still entrenched in its “lost-decades” morass; and growing at just over one percent year over year in Q1 2017. Japan’s dramatic slowdown in growth, which averaged at an annual rate of 4.5 percent in the 1980s, fell to 1.5 percent in the 1990s and never recovered. In addition to this, higher health care costs from an aging population have driven government health care spending to move from 4.5 percent of GDP in 1990, to 9.5 percent in 2010, according to IMF estimates.

Incredibly, this low-growth and debt-disabled economy has a 10-Year Note that yields around zero percent; thanks only to BOJ purchases.

Prime Minister Abe’s plan to address this recent scandal-driven plummet in the polls is to increase government spending even more and have the BOJ simply step up the printing press. In other words, he is going to double down on the first two arrows that have already failed! However, the Japanese people appear as though they have now had enough.

Japan's National Debt is already over a quadrillion yen (250% of GDP). And the nation would never be able to service this debt if the BOJ didn’t own most of it. The sad truth is that the only viable alternative for Japanese Government Bonds (JGBs) is an explicit or implicit default.  And, a default of the implicit variety has already occurred because the BOJ now owns most of the government debt—total assets held by the BOJ is around 93% of GDP; JGBs equal 70% of GDP.

abe1



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Bonds & Interest Rates

Is Inflation an issue or did the Fed Mess Up?

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Posted by Sol Palha - Tactical Investor

on Tuesday, 08 August 2017 07:49

26-1427341963-inflation-deflationBankers know that history is inflationary and that money is the last thing a wise man will hoard.

William J. Durant

The Fed has been trying to create the illusion that inflation is an issue. The guys from the hard money camp also maintain that inflation is an issue and to a point they are right. Their definition of inflation is an increase in the money supply. The Fed, on the other hand, defines inflation as an increase in prices. The real definition of inflation is an increase in the money supply; rising prices are just the symptom of the disease. This article from mises.org summarises this concept quite succulently

Inflation, therefore, means an increase in the amount of receipts for gold on account of receipts that are not backed by gold yet masquerade as the true representatives of money proper, gold.

The holder of un-backed receipts can now engage in an exchange of nothing for something. As a result of the increase in the amount of receipts (inflation of receipts) we now also have a general increase in prices.

We are not going to spend time dwelling on this point as the crowd has bought the line the Fed has sold them and so the above point is moot. This article will focus on the price factor and not money Supply factor.

In numerous articles published over the last twenty months, we stated that Fed would be playing with fire if they raised interest rates as this economic recovery is based on “hot money”. We went on to state that if they raised rates, it would be a temporary ploy to buy them more wiggle room. Yellen recently confirmed that the Fed’s Hawkish bias might be coming to an end. She acknowledged that Inflation was below the Central bank’s target of 2%

Yellen, as she has in other statements recently, told lawmakers that she expects low inflation to be transitory. "Temporary factors appear to be at work. It's premature to reach the judgment that we're not on the path to 2% inflation over the next couple of years,” Yellen said. "As we indicate in our statement, it's something we're watching very closely, considering risks around the inflation outlook.” Full Story

Based on the factors we are going to list below, Yellen, might have to wait a very long time before inflation hits the Fed’s target rate of 2%. All we need to do is look at Japan; they have been trying to generate inflationary forces for decades without any success. They continue to inject billions into the economy hoping for change, but inflation remains stubbornly low. Our economic recovery is not real; remove the easy supply of money, and the economy will collapse.

Former Bond King Bill Gross seems to concur:



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Bonds & Interest Rates

Raising the Debt Ceiling Means Jacking Up Future Inflation

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Posted by Stefan Gleason

on Thursday, 03 August 2017 06:38

lying-politicianThe dramatic failure of the U.S. Senate’s last-ditch Obamacare repeal effort leaves Republicans so far without a major legislative win since Donald Trump took office. No healthcare reform. No tax reform. No monetary reform. No budgetary reform.

The more things change in Washington... the more they stay the same.

Despite an unconventional outsider in the White House, it’s business as usual for entrenched incumbents of both parties. The next major order of business for the bipartisan establishment is to raise the debt ceiling above $20 trillion.

Since March, the Treasury Department has been relying on “extraordinary measures” to pay the government’s bills without breaching the statutory debt limit.

By October, according to Treasury officials, the government could begin defaulting on debt if Congress doesn’t approve additional borrowing authority.

Treasury Secretary Steven Mnuchin wants Congress to pass a “clean” debt limit increase. That would entail just signing off on more debt without putting any restraints whatsoever on government spending.

Fiscal conservatives hope to tie the debt ceiling hike to at least some budgetary reforms. But even relatively minor spending concessions will be difficult to obtain from the bipartisan establishment.

Democrats and a few left-leaning Republicans together have an effective majority in the U.S. Senate. They wielded their legislative might by defeating the GOP’s watered down Obamacare repeal bill, with the decisive “no” vote cast by ailing Republican John McCain.

It was exactly the sort of media spotlight moment Senator McCain has craved throughout his long political career.

The narcissistic Senator’s shtick is to posture as a selfless crusader for noble causes that his fellow Republicans just aren’t high-minded enough to get behind.

Yet for all his sanctimony, McCain is just as politically opportunistic and just as hypocritical as many of his Senate colleagues. The Senator from Arizona ran for re-election last time around on repealiång Obamacare. Yet when given the opportunity, he voted to keep it in place.

He campaigns as a conservative when it suits his political needs and portrays himself as a maverick when he wants media accolades. He legislates as neither a conservative nor a maverick but as an entrenched establishment incumbent. That can also be said of other big-name Republicans.

Trump’s Budget Cut Proposals Declared “Dead on Arrival” by Spending-Drunk Congress



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