Bonds & Interest Rates

Look Out: The 'Central Bank Put' is Moving Into Bubble Territory

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Posted by Mohamed El-Erian: Pimco

on Thursday, 11 October 2012 07:30


Earlier today, El-Erian in the Financial Times released a short and apt note on the limits of the central bank put. It’s richly ironic that an aggressive promoter of unbridled capitalism, Ayn Rand acolyte Alan Greenspan, spawned the innovation that is the biggest market intervention of all time: the Greenspan put, which gave way to the Bernanke puts of the crisis and its aftermath, and have been emulated by apt students at the ECB, in the form of its Securities Markets Program, which has been tweaked, rebranded, and relaunched as the Outright Monetary Transactions, or OMT.

Yet as much as Rule Number One of investors is “don’t fight the Fed,” it’s hard not to notice that the effectiveness of central bank interventions is waning. Admittedly, the half life of pretty much any Eurocrat initiative seems to have collapsed, but even so, the initial celebration of the announcement of the OMT fizzled quickly. Similarly, after months of eager anticipation, the launch of QE3 produced a mere one day stock market rally, and key commodities and Treasuries gave up much of their initial move with surprising speed.

....read more HERE at NakedCapitalism.com


 - From the Financial Times Article below:

Beware the ‘central bank put’ bubble

by Mohamed El-Erian

"Essentially, the Fed is inserting a sizeable policy wedge between market values and underlying fundamentals. And investors in virtually every market segment – including bonds, commodities, equities, foreign exchange and volatility – have benefited handsomely. In the process, many asset prices have been taken close to what would normally be regarded as bubble territory, with some already there.

Central bank action, both real and perceived, rules the investment day, and will continue to do so for now. This is also the case in Europe."

....read more HERE (Ed Note: you'll have to sign up for free at a minimum, to read the the other 15 paragraphs above & below this article)



Bonds & Interest Rates

Spain & Greece Rates Soared: Whose Next?

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Posted by Bill Gross & Various Authors

on Thursday, 04 October 2012 07:37

Head of the world’s largest bond fund, Bill Gross of Pimco said the US, with its high level of national debt and government borrowing, belonged in the ‘ring of fire’ with Greece, Spain, France, Japan and the UK. He noted: "only gold and real assets would thrive" unless spending is cut and taxes rise.

"The US and its fellow serial abusers have been inhaling debt’s methamphetamine crystals for some time now, and kicking the habit looks incredibly difficult," he continued switching metaphors to make the same point.

US the next Greece?

"If we continue to close our eyes to deficits … then the US will begin to resemble Greece before the turn of the next decade. Unless we begin to close this gap, then the inevitable result will be that our debt-to-GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline. Bonds would be burned to a crisp and stocks would certainly be singed."

It’s a timely warning from the Bond King but is anybody listening? Even if they are then nothing is being done except in Greece and Spain to get the deficits down and debt lower. The US, UK and Japan all have ballooning debts.

The US at least faces its ‘fiscal cliff’ of automatic tax rises and spending cuts next year unless the new Congress decides otherwise after the elections next month. That said if this action goes ahead it will immediately plunge the US economy back into recession.

Gold and property

Is it any wonder then that the professional investors continue to highlight the attractions of gold and real estate? That said gold could face an imminent correction and real estate buyers need to be sure they are not overpaying for low-yield property left over from the last bubble, like UK and Australian housing.

This is a very tough environment to be an investor. Bonds are supposed to be low risk investment but the risk to capital is enormous if interest rates rise, and that has already happened in Spain and Greece. Who’s next?

Fed is preparing the way for US austerity reckons SocGen

Alain Bokobza, head of global asset-allocation strategy at Societe Generale, talked about November’s US presidential election, Federal Reserve policy and the outlook for Europe with Maryam Nemazee on Bloomberg Television’s ‘The Pulse.’

If he is right about the true reason for Fed money printing 'then a US recession and stock market correction are on the horizon"

Buy gold, oil and copper as a defense against inflation says Aimed Capital founder

Daniel Weston, founder and chief investment officer of Aimed Capital Management, discussed his investment strategy on Bloomberg. He sees a profit squeeze coming all over the world and a correction for equities.

The inflationary consequences of money printing by central banks has him looking at gold, oil and copper as hedges against inflation.

interest rates






Bonds & Interest Rates

Bernanke: Don't Worry, "It's Only Temporary"

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Posted by Mike Shedlock: Mish's Global Economic Trend Analysis

on Tuesday, 02 October 2012 00:11

Earlier today, in Bernanke Begs Congress to Address "Fiscal Cliff", Pledges to Hold Interest Rates Near Zero Through Mid-2015 Even If Economy Picks Up I commented on the Bernanke's self-serving responses to his own questions.

In this post I want to focus on another disingenuous part of his speech that I did not comment on previously. Specifically ...

With monetary policy being so accommodative now, though, it is not unreasonable to ask whether we are sowing the seeds of future inflation. A related question I sometimes hear--which bears also on the relationship between monetary and fiscal policy, is this: By buying securities, are you "monetizing the debt"--printing money for the government to use--and will that inevitably lead to higher inflation? No, that's not what is happening, and that will not happen. Monetizing the debt means using money creation as a permanent source of financing for government spending. In contrast, we are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates. At the appropriate time, the Federal Reserve will gradually sell these securities or let them mature, as needed, to return its balance sheet to a more normal size. Moreover, the way the Fed finances its securities purchases is by creating reserves in the banking system. Increased bank reserves held at the Fed don't necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years. 

Gradual Bullsheet

Bernanke knows damn well that the Fed will never "gradually sell these securities". Rather, the only way the Fed would be willing to sell securities is at break-even or a profit.

Yet, if Bernanke honors his pledge to hold those securities until after a recovery is well underway, interest rates will be higher and the Fed will have losses.

Thus, it is the clear intent of the Fed to hold assets it buys from now until maturity (perhaps a decade from now, which for all practical purposes is "permanent"). At that point in the distant future, the Fed may even roll the securities over.

Who Benefits From This?

As I did note previously    ...

Bernanke's policies have destroyed those on fixed income (a claim he tries but fails to address in his five questions). More importantly, those with first access to money (primarily banks and the wealthy) are the biggest beneficiaries of monetary printing exercises.

Those wondering how the 1% got so wealthy need only look at the Fed for the answer.

That was a question Bernanke did not address, but I addressed in detail a few days ago in Can the Fed Fight Droids and Win? Apple's SIRI, Driverless Trucks, What's Next? Riveting Video: Are Droids Taking Our Jobs?

Finally, when it comes to "printing" let's flashback to December 8, 2010: Caught in a Massive Lie: Daily Show Comments on Bernanke's Lies Regarding "Printing Money"



Bonds & Interest Rates

Does Canada Have a Housing Bubble?

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Posted by Steven Johnston

on Monday, 01 October 2012 08:41

Does Canada have a housing bubble? It is a common question these days and based on some simple analysis of aggregate data on current prices versus long-term historical averages, rents and income the answer for certain markets would appear to be yes. However, there is considerable variation by local market as to the degree by which houses have deviated from long-term averages – a few more years of ZIRP by the Bank of Canada and that remains to be seen.

I would put limited credence on the metric most favoured by housing cheerleaders – affordability as measured by mortgage rates – as interest rates are at historic lows and ultimately a house is a long-term consumption good and long-term income levels must dictate prices.

House Prices versus Income (click on charts for larger version)


House Prices versus Rental Costs


House Prices versus Historical Averages


Of course some markets are better than others, but certainly the key, large markets seem stretched as can be seen in recent research by Demograhia:

“Historically, the Median Multiple has been remarkably similar in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States, with median house prices having generally been from 2.0 to 3.0 times median household incomes (historical data has not been identified for Hong Kong), with 3.0 being the outer bound of affordability. This affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in the past decade in Australia, Ireland, New Zealand, and the United Kingdom and in some markets of Canada and the United States.

Housing in Canada is moderately unaffordable with a Median Multiple of 4.6 in major metropolitan markets and 3.4 overall. Housing was generally affordable in Canada as late as 2000. In the early years of the Demographia International Housing Affordability Survey, Canada was generally the most affordable nation. However, this year, Canada ranks third, behind the United States and Ireland.

Among major markets, four were moderately unaffordable and two were severely unaffordable. Among all markets, 9 were affordable, 17 were moderately unaffordable, 3 were seriously unaffordable and 6 were severely unaffordable. The four most unaffordable metropolitan markets were in British Columbia (Table 7).

Edmonton was the most affordable major market, with a Median Multiple of 3.5, while Ottawa-Gatineau had a Median Multiple of 3.7. Both of these markets were rated moderately unaffordable.

Canada’s most affordable markets were Windsor (ON) at 2.2, Fredericton (NB) at 2.4, Moncton (NB) at 2.5. Other affordable markets were Saint John (NB) and Thunder Bay (ON) at 2.6. Yellowknife (NWT) and Charlottetown (PEI) at 2.9 and Saguenay (QC) at 3.0 and Trois-Rivieres (QC) at 3.0.

Vancouver, which like Sydney has largely prohibited housing development on the urban fringe for decades, experienced a significant deterioration, with housing reaching a Median Multiple of 10.6, replacing Sydney as the second most unaffordable market in the Survey, following Hong Kong. Toronto was also severely unaffordable, at 5.5, a deterioration of 40 percent in housing affordability since 2004, as that metropolitan area’s “smart growth” program has taken effect. Montreal has been one of the worst performers in housing affordability, over the years of the Demographia International Housing Affordability Survey, with a Median Multiple of 5.1, up nearly 60 percent from 2004, at the same time as the land for development has been severely limited by an inflexible approach to agricultural zoning. Smaller British Columbia markets Abbotsford (7.0), Victoria (6.6) and Kelowna (6.6) were also severely unaffordable.”

House prices are highly mean reverting to median income and it is on that metric that most markets seem stretched. The timing and path of trend changes are always challenging to predict – are we facing an imminent and sharp price adjustment or a long, drawn out malaise. Perhaps the relentless upward march will continue?

Stephen Johnston 



Bonds & Interest Rates

The Central Bankers could End Up Killed , Hanged or Crucified

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Posted by Marc Faber - Gloom, Boom and Doom Report

on Thursday, 27 September 2012 16:24

We have the money printing today which we did not have before and so it is very difficult to predict because it is always a political decision. Conventional wisdom went wrong because it has been brainwashed by the media and the policy makers. What's happened is not the failure of the free market,  but the failure of the interventionists with monetary fiscal policies and regulation.

All I can say is if you look at history the most powerful people were usually in the end killed or hanged or crucified, and the central bankers today are the most powerful people. So you can imagine what I am thinking about the central banks, and what will eventually happen to their leading employees.

 More below in an interview with Australia Financial Radio:


About Marc Faber:

Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude. Between 1970 and 1978, Dr Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, which acts as an investment advisor and fund manager. You can read and watch more at his MARC FABER BLOG which tracks Faber's Investment Strategy , Market analysis & Outlook.


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