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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.

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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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Bonds & Interest Rates

Thoughts on FOMC Day

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Posted by Gary Tanashian via NFTRH

on Wednesday, 26 July 2017 08:20

It is FOMC day, a periodic ritual where a group of economists get together and pretend to have decisions to make about interest rate policy. Well, according to CME and the Fed Funds Futures there is a 97% chance that the Fed sits on its hands today. That won't be a surprise.

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But Janet Yellen has a little problem and his name is Uncle Buck. The US dollar index and its pairing vs. several global currencies are on the verge of collapsing below important support levels. This update on currencies from this week's NFTRH 457 explains why I am short the euro and prepared for the USD to find support and bounce. Now, at this point that is just a contrarian's fantasy because the market says USD is in trouble. But have a look at the post and see if you might agree with some of its premises, especially where sentiment and Commitments of Traders are concerned.

So here we have the Fed, overseeing a massive bull market in stocks and ostensibly in accommodation removal mode. My premise since the election of Donald Trump has been that the Fed could now slowly and routinely remove the monetary policy stimulants it had injected into markets nearly non-stop during the Obama years because that admin's goals depended on monetary policy (i.e. monetary stimulation, because there sure was precious little real economic stimulation going on) whereas the new Republican policies would depend upon fiscal stimulation. I would argue, however, that "fiscal stimulation" may be code for 'dollar devaluation' to spur exports and boost manufacturing.

So a big question now is whether the Fed, despite its slow tightening regime and stated intention to implement future rate hikes and reduce the size of its balance sheet (USD-supportive actions) actually means business, leaving the Trump admin to its fiscal policies; or whether the Fed will 'play ball' with this admin in a different way.

Core to the Trump fiscal agenda would be a weak US dollar. We just may get a look at Yellen's cards today. If FOMC rolls over and keeps things well and dovish despite the weak USD, we'd have a clue that they are on board the weak dollar express. But what if the Fed chooses to support the dollar through some subtle jawboning about future hikes and balance sheet reductions? I have no real dog in this fight. I'm just trying to make sure NFTRH is on the right side of it.

Looking at it from a different angle and taking out the political while only considering market-oriented inputs, here is a big picture look at previous Fed tightening cycles. The stock market topped on the last two occasions that the Fed Funds Rate (FFR) caught up to and slightly exceeded the 2 year Treasury yield. But a more acute signal was when the 2yr began to decline and negatively diverge the FFR (note the red lines on the chart below).



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Bonds & Interest Rates

Something Big, Bad And Ugly Is Taking Place In The U.S. Retirement Market

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Posted by Steve St. Angelo - SRSrocco Report

on Wednesday, 26 July 2017 07:32

While the highly inflated value of the U.S. Retirement Market reached a new high this year, something is seriously wrong when we look behind the scenes.  Of course, Americans have no idea that the U.S. Retirement Market is only a few steps from falling off the cliff, because their eyes are focused on the shiny spinning roulette wheel called the Wall Street Stock Market.

Yes, everyone continues to place their bets, hoping and praying that they will win it big, so they can retire in style.  Unfortunately, American gamblers at the casino have no idea that the HOUSE is out of money.  The only thing remaining in their backroom vaults is a small stash of cash and a bunch of IOU’s and debts.

According to the ICI – Investment Company Institute, the U.S. Retirement Market hit a new record $26.1 trillion in the first quarter of 2017:

Q1-2017-US-Retirement-Market



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Bonds & Interest Rates

The Fed May Show Trump No Love

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Posted by Peter Schiff - Euro Pacific Capital

on Friday, 21 July 2017 07:03

Peter SchiffTypically, U.S. Presidents are wary of claiming stock market performance as a referendum on their success. Most have seemed to understand that taking credit also means accepting blame, and no one would want to make the tortured argument that the positive moves reflect well on their presidency but that the negative moves do not. But Donald Trump has shown no reluctance to make any argument that suits his political purpose of the day, no matter its absurdity, and no matter if he has to contradict the arguments he made last year, or last week. Perhaps he assumes, as most investors seem to, that the risks are minimal because the Federal Reserve will jump in to save the markets if things turn bad. But in binding his performance so closely to the markets he overlooks the possibility that the Fed will be far less charitable to him than it was to Obama.

The Federal Reserve's Quantitative Easing program, which lasted from the end of 2008 to October 2014, was specifically intended to push up asset prices by lowering long-term interest rates and reducing financial risk. This provides a good explanation why the stock market gained nearly 200% from the bottom in March 2009 to October 2014 despite the fact that the U.S. economy persistently performed below expectations during that time.

Many people, myself included, argued that once the stimulus was removed stock prices would have to fall. Two and a half years later that has yet to occur. Although U.S. stocks are no longer rocketing upwards like they were during the QE era (the S&P 500 is up just 19% since the program wound down completely in November 2014), they have yet to experience any type of meaningful correction. Certainly market observers sense danger, but with the Federal Reserve cavalry always ready to ride to the rescue (as they did in January of 2016), markets have been free to drift upward.



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