Bonds & Interest Rates

In the Long Run "Market Forces Will Prevail & Overrun Everything"

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Posted by Victor Adair Interviewing Marc Faber

on Monday, 30 July 2012 16:15

Victor Adair interviews Mark Faber on The Money & Wealth Show:

Marc Faber : for the time being and near term , political decisions affect market movements but in the long run it's market forces that will prevail and overrun everything , so if you have money printing , yes you can create additional bubbles like we created the NASDAQ bubble and then the housing bubble and so forth but in the long run the market forces will teach central banks a real lesson that's I assure you , either you have rising asset prices like equities you have some inflation in the system what could also happen is after this asset inflation we have over the twenty or thirty years which was very considerable if you look at the price of paintings at the prices of commodities collectibles and so forth prices essentially of any kind of asset have gone up irregularly but still up very substantially and so at some stage I think the deflation will be right we will have a massive deflation , but the question is does it come right now or from an elevated level that we don't know , we just don't know .....

The Whole Interview by Victor of  Mark below:


Bonds & Interest Rates

A Really Big Problem....

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Posted by Ivan Lo - Equedia Weekly Newsletter

on Monday, 30 July 2012 00:26

We're in the midst of a major global restructuring that has been happening for the last decade. (For the full interactive edition, please CLICK HERE)

Technology is replacing the traditional methods of manpower - much like that of the auto industry where machines have taken over the assembly and production of automobiles.

Last week the U.S. Postal Service announced that it would be unable to meet billions of dollars in payments that are coming due in August and September for future retiree health benefits. Post offices all over the US are being cut back as digital communications have taken over.

Newspapers and magazines around the world are struggling as people move away from print to online media. Publishers everywhere are feeling the heat as new and less wasteful forms of books are published in digital format.

The days of walking to your neighbourhood video rental store are gone. The once famous Blockbuster stores and Canada's own Rogers Video stores are all but obsolete. I still remember grabbing the free popcorn and browsing the aisles of the Jumbo Video stores - but that is a distant memory never to be relived again.

Innovation is human evolution. Yet as we advance in technology, more jobs will be destroyed and replaced by more efficient robotics and digital technology. Movies where humans lose their jobs to robots and technology are no longer fiction - its reality.

Manufacturing has long moved to emerging markets where costs of production are far below anything in N. America. That means the technology created here are sent overseas to be mass produced.

The Big Problem  

Economies grow through mass consumption. The more we consume, the bigger the economy. That is why the US is the number one economy in the world; it is the ultimate consumer.

To fuel that consumption, an economy must be able to sustain itself through the production of goods and services. It must be able to create wealth through job creation. But the problem is there is no job creation.

Unemployment rate has been stuck above 8 percent for more than three years in a row (real unemployment rate is easily double that number) with little signs of hope. Confidence among U.S. consumers dropped in July to the lowest level this year.

Revised GDP numbers are now showing a 2.5 percent growth in the 12 months after the contraction ended in June 2009, compared with the 3.3 percent gain previously reported. The government also revised down corporate profits and personal income for each of the past three years.

The US knows it needs to create more jobs to fuel consumption - to increase GDP. But where will the new jobs come from?

The Truth About the Bubble

A couple of years ago in the letter, "The Truth About the Bubble" I wrote:

Over the past few decades, we have witnessed two very significant bubbles: the dot-com bust and the recent housing/commodities bubble.   

During the rally of the dot-com days, everyone got excited about the Internet boom. The NASDAQ 100 doubled in less than a year and kids from their basements were becoming multi-millionaires.

In 1996 Alan Greenspan warned that the U.S. economy was suffering from "irrational exuberance" as the stock market, led by the high-tech and Internet sectors, boomed. Yet he and the Fed took no action, and added billions of dollars into the economy. Greenspan knew he should have put a hamper on the stock market craze with rate hikes, but he didn't - until it was too late.

The dot-com crash wiped out $5 trillion in market value of technology companies in two years.    

A few years after the dot-com boom, recovery was slow and tedious. This put pressure on the fed to once again cut the Fed Funds rate dramatically over the next few years from a high of 6.25% in 2001 down as low as 1.5% in 2004. This, of course, created yet another bubble.    

The Housing and Commodities Bubble     

Because of the low rate, housing prices were climbing and many of the homes increased by as much as 200% in less than a few years.     

First time home buyers were eagerly racing to snag up homes with low interest rate mortgages. They took on half million dollar mortgages on houses that were worth less than 200k just years ago.     

Combine that with offers from mortgage companies that were far too good to be true, it led to the subprime mortgage crash, and thus 2008 unfolded.

A Credit Bubble  

Where I am I going with this?  

For the last decade, most American consumption came as a result of low borrowing costs. This led to the major bubble in 2008. Yet here we are again and the only choice politicians have is to give away free money to avoid the same disaster caused by giving away free money.  

In Q2 America added $2.33 in debt for every $1 in GDP; the US added $274.3 billion in debt while adding $117.6 billion in GDP. Never have I studied a scenario like this that hasn't ended in disaster.

There is no way to avoid the collapse of a credit boom. There are only two simplified choices:

  1. Let the world's financial system collapse
  2. Print more money/expand credit, destroy currency

Most people believe that printing more money causes inflation. But what they don't realise is that it doesn't always happen right away. Too much austerity can, and will, lead to a deflationary spiral - especially when combined with a world economy that is in surplus. Years of deflation will occur, followed by a fast and major rise in inflation as the economy recovers and grows.  

The world is producing far more than it can consume as a result of a mentality that the only way out of this credit bubble is to increase spending. But when the spending comes from debt, it only creates a larger bubble. What would happen if the US couldn't print more money? What would happen if the dollar was no longer the world's reserve currency?

Still Number One...But for How Long?

The only reason America has not already collapsed under the weight of its massive debt is because of its status as the world's reserve currency. That status means it can print massive amounts of dollars and people will still buy them. But surely this won't last.

I have mentioned before in my letter, "The Biggest Buyer of Garbage" that China is secretly and cautiously introducing its currency to the world by untangling itself from its substantial reserves of US dollar. I also talked about how China and Russia have already abandoned the dollar in bilateral trade dealings, resolving to use their own currencies instead (see It's Already Here).

Many major banks, including British banking giant HSBC, have already openly said the Renminbi could soon become another world reserve currency. These banks are already setting up in preperation for this occurence by allowing major transactions to be done in the Renminbi. HSBC has just recently created the first Renminbi bond issue outside of China and Hong Kong, a move toward the internationalisation of the renminbi, and in the UK's efforts to expand its financial links with the world's largest emerging market.  

If it were freely convertible today, the Renminbi will be the second-largest currency in the world.

What Happens if China Sells Out? 

China is the largest holder of US bonds. If China were to sell its $1 trillion plus of US bond holdings, the prices of US bonds would drop and interest rates would rise (yield moves opposite to price in bond markets. The rate of interest from a bond does not change, so the price of that bond fluctuates to adjust to current yields. The bigger the yield, the bigger the risk associated with the issuing country.)

Higher interest rates would obviously be bad for business. As the world's largest manufacturer, China cannot afford bad business. As a result, China would not be looking to unleash all of their US bonds. Rather they would slowly diversify their holdings for gold and other commodities.

It's not a coincidence that the US is both the largest holder of gold bullion and the world's reserve currency; it has more than 76% of its foreign holdings in gold. China, on the other hand, owns less than 2% of its foreign holdings in gold. Furthermore, the US has nearly 8 times more gold than China.

China will be increasing its gold reserves.

mentioned a few weeks back that banks in Europe will soon have to recapitalise their tier 1 assets in gold bullion. What many are unaware of as well is that the recent proposal from the Germans on the European redemption facility requires that gold be posted as collateral by those who participate.  

That's a clear sign that countries and central banks trust gold over any other currencies.  

Gold to Breakout?

From a technical standpoint, gold is looking to rebound with some serious momentum. If gold were to break through $1640 and stay above this level, we should see a renewed rise in gold.

Gold mining shares are looking strong - finally.  

Despite the drought, the GDX's MACD has finally turned up towards a buy signal and RSI is also positive. Bellwether Agnico Eagle's price action is looking much stronger - especially considering the beating it took after its $2-billion write-down earlier this year at its shuttered Goldex mine.

By September, Hong Kong will have completed construction and opening the doors to its largest gold vault.  It will hold nearly 22% of the gold that Fort Knox has.   

China, currently the world's second largest consumer of gold, is clearly making a statement that it wants to expand its holdings of physical gold bullion.  

You don't build a vault that big just for show.

Until next week,

Ivan Lo

 (For the full interactive edition, please CLICK HERE)

depositphotos 7666133-Trouble-ahead


Bonds & Interest Rates

Marc Faber On a Global Crash, the U.S. Treasury Bubble & China's Slowdown

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Posted by Marc Faber

on Friday, 27 July 2012 16:30

On Bonds: 



Treasury yields peaked out in 1981 with the ten years at 15.8 percent and now we're below 1.5 percent , some of my friends who are the super bears on assets prices and on inflation , they think that we will have deflation they think that yields would drop to say less than one percent on the ten years and less than 2 percent on the thirty years , so it may happen but say it is like if you said at the end of 99 the NASDAQ is a bubble well it still went up between December 99 and March 2000 by thirty percent and offers people a hell lot of money in NASDAQ stocks , so all I am saying is I do not think that from a longer term perspective to own US treasuries is a desirable investment but if you asked me , can they rally somewhat more , YES possible I just won't buy them at this level I think the risk out weights the return potential - (Ed Note: Marc's comments on a Global Crash begin at the 9 minute mark in the video below. All of his comments end at the 10:10 mark)

On China:

The difference between China and the US , the US had credit bubble built on consumption in other words the debt level on the household sector level the government level went up dramatically to finance consumption in the case of China at least it financed investments in infrastructures research and development and so forth that is a key difference , now if you have a capital spending bubble like in china the downturn can be very severe because you're running to over capacities and then when you print money you produce even more over capacities and the fact is simply that if you look at reliable statistics say which country is the largest export market for Taiwan and South Korea ? it's China and if you look at exports from Korea and Taiwan they're all flat year on year so that is quite reliable , you look at electricity production in China it's up one percent year on year and so forth and so on , so the statistics would actually suggest that Chinese economy is much weaker than what the official statistics suggest , it does not mean that all Chinese growth model will collapse entirely , but I'd like to mention one thing , in China we still have One Party System and we have an incredible level of corruption and that could lead to social unrest at some point , by the way we can have social unrest anywhere in the world given the high unemployment that we are facing in most countries , but that could derail growth in China for a while and then we have geopolitical problems coming up , the south china sea and so forth and so on so there are many things that could go wrong.

Europe is in Recession


Bonds & Interest Rates

Capital Gain Fireworks Due When The Vast Ocean of Money Hiding in 2% Bonds Suddenly Flees Into The Most Reliable Dividend Stocks On The Planet

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Posted by Dividend Opportunities

on Wednesday, 25 July 2012 08:27

This group of stocks has paid reliable dividends for over 20 years. One of my favorites in this space has paid over 144 consecutive dividends and raised its payout for 37 straight years.

They're the creme de la creme of the income universe. (Ed Note: The Tax friendly equivalent in Canadian Stocks, like Penn West Petroleum @ 8.33%, Sun Life Financial @ 7.11%, Enerplus @ 15.13% and TransAlta @ 7.18% are at S&P/TSX 60 best Dividend Yielding Stocks.)

Each one has increased its dividend every year for at least two decades... some sport track records with over 50 years of consecutive dividend increases.

All told, these stocks are some of the most reliable dividend payers on the planet.

I'm talking about the S&P 500 "Dividend Aristocrats" and their kissing cousins, the S&P "High Yield Dividend Aristocrats."


In order to become a member of these elite groups, a company must not only pay a regular dividend, it must also enjoy a stellar track record of growing that dividend every year for at least 20 years.

With such stringent membership criteria, only about 70 U.S. companies make the grade. (Ed Note: Given the amount of money tied up in the Bond markets dwarfs the amount tied up in Stock markets, if investors start start looking for safe higher North American yields, those few high quality dividend stocks are going to be an attractive candidates. With the US 10 Year Treasury Note at  hitting a low of 1.3908 % in the last 24 hours, and the equivalent Spanish 10 Year Bonds jumping to a new high of 7.52% on monday , its clear that fears of a wilting economy and Government finances can drive investors to look for something else to invest in besides government Bonds).

As you'd expect, a wide variety of industries are represented. You'll find an overweighting of consumer staples such as Procter and Gamble (NYSE:PG)


and Kimberley Clark (NYSE: KMB), and a healthy chunk of electrical utilities, such as Consolidated Edison (NYSE: ED) and Northwest Natural Gas (NYSE: NWN).

But there's one group that makes the list that you would probably never expect: insurance.

All together, six of some 70 aristocrats sell insurance. Even more interesting, five of these six companies are property and casualty insurers. The exception is Aflac, which is mainly a life insurer.

What is it about property and casualty insurers that allows them to keep increasing their dividends in good times and bad for at least a quarter of a century?

The answer surprised me. Here's what I found out...

Today, insurance is usually life or non-life, also known as property and casualty.

Property insurance covers loss or damage to physical property, such as houses and cars. Casualty insurance covers the legal cost if the insured person were to cause someone else physical injury or damage another's property. Liability insurance is a common example.

You might expect property and casualty insurers such as Dividend Aristocrat -- RLI (NYSE: RLI ) -- to be cash-flow machines... churning out streams of highly predictable earnings quarter after quarter.

Nothing is further from the truth.

Their earnings streams are notoriously volatile. Major unpredictable risks, such as natural disasters, have a huge impact on earnings.

So why do I like property and casualty companies then? As in all industries, some companies far outperform others. RLI is one of them -- as measured by the combined ratio, the key industry metric of underwriting profit.

The combined ratio combines two metrics. It measures underwriting expenses as well as the amount paid out in claims, both as a percentage of net premiums earned. 

A combined ratio of 100 means the company is breaking even on its underwriting activities. The lower the ratio, the higher the company's underwriting profit.

In 2011, RLI's combine ratio was an outstanding 78.4... Well below the industry average of 107. RLI has seen sixteen straight years of underwriting profitability, with an average combined ratio of 87 over the period.

And while property and casualty companies may break even or lose money on their underwriting activities, that is only part of their financial story.

These companies accumulate millions and even billions of dollars of investment capital, which provides investment income that makes a vital contribution to their per-share earnings.

For example, RLI earns investment income and realizes gains from a $1.9 billion portfolio, comprised 74% of high-quality debt with an average "AA" credit rating, and 26% in equity.

Given that the investment portfolio comprises the lion's share of earnings, management's decision on whether or not to realize capital gains or losses by selling investments can cause tremendous earnings volatility from year to year. 

How can volatile earnings grow dividends? 

First, insurance companies keep their payout ratio relatively low, so it can inch up the dividend regardless of earnings. RLI had a payout ratio of 25.0% of in 2009, 19.2% in 2010, and 19.5% in 2011. 

Meanwhile, insurance companies keep building shareholders' equity, which they can dip into on a temporary basis to supplement the dividend if there were a short-term earnings shortfall.

That's one reason RLI has been able to pay a dividend for 144 consecutive quarters and raise its ordinary dividends for 37 consecutive years.

For the past two years, the insurer has also returned excess earnings to shareowners in the form of one-time special dividends. In 2010, the special December payout was $7 and in 2011 it was $5.

Over the past four quarters, the company paid out $1.14 in ordinary dividends. Factoring in last year's special dividend, shares of RLI provide a remarkable yield of 9.8% at today's price -- an outstanding yield for a member of the "Dividend Aristocrats."

Of course, as with every investment, there are risks to be considered. If management decides to break with its two-year policy of paying out a special dividend from excess capital, the stock would no longer be suitable as a high-yield income play.

But that said, many insurance companies have a surprisingly good track records when it comes to dividend payouts. If you're looking for a high-yield stock with a reliable dividend track record, then an insurer like RLI may be suitable for you.

[Note: For more high-yield ideas, make sure to watch the latest presentation StreetAuthority's research team recently put together. In it, they've identified 5 of the best income stocks for the next 12 months. To learn about these stocks, click here now.)

Good Investing!

Carla Pasternak's Dividend Opportunities

P.S. -- Don't miss a single issue! Add our address, Research@DividendOpportunities.com, to your Address Book or Safe List. For instructions, go here.


Bonds & Interest Rates

Victor Adair: 6 Key Market Observations & 2 Conclusions

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Posted by Victor Adair via VictorAdair.com

on Monday, 23 July 2012 00:00

The Age of Deflation is Intensifying:

Last week I wrote about how interest rates on some European government debt was trading at a negative yield...that is...you buy short term German or Swiss bonds and you get your money back...minus a safekeeping charge. This week the number of European countries with government securities trading at negative yields grew to include Germany, Switzerland, Holland, Finland, Denmark and Austria....while the yield on Spanish 10 year government bonds rose to 7.3%...their highest level since the introduction of the Euro.

This week the value of the Euro fell to a 2 year low against the US Dollar, a 12 year low against the Yen, a 21 year low against the CAD and a 23 year low against the AUD.

Credit Quality Spreads Widen:

The market is focused on Spain...where the debt problems only seem to be getting worse...while at the same time citizens of countries that might provide financial help, particularly Germany, seem to be increasingly unwilling to do so....this is making the "Euro debt crisis" an even tougher problem to solve...fear is driving capital from the periphery to the center in an attempt to find relative safety...the yield spreads between problem countries and perceived safe havens continues to widen.

The Crisis Could Get Much Worse - Quickly:

Despite the fact that several European financial crisis have come and gone over the past couple of years it now feels as though the crisis could suddenly take a dramatic turn for the worse...the debt  problems seem to be getting much bigger and the solutions seem to be getting much harder to find. A dramatic turn for the worse would have a contagion effect on global markets...which would inspire central bankers to take dramatic action...have no doubt, when push comes to shove central bankers will fight deflation with stimulus.

A Real Crisis Could Produce a Real Solution:

Perhaps a really dramatic crisis will force the politically unpalatable action necessary for a lasting solution to the European debt crisis...such a solution would certainly include default/bankruptcy in some form...either a debt write-off or a dilution of liabilities through the adoption a new currency.

If The Stock Markets Aren't Much Worried - The Credit Markets Certainly Are: 

Until Friday the major European and North American stock markets had made good gains for the week...they appeared oblivious to the European credit market stresses, and to the growing evidence of a global economic slow down. Perhaps the markets sensed more central bank stimulus was coming soon, although Fed Chairman Bernanke seemed to rule that out during his Congressional presentations...or perhaps the stock markets were benefiting from capital flows seeking safety....however they turned sharply lower Friday as the Spanish debt crisis intensified.

Despite the European stresses and the evidence of a global economic slowdown the DJI has rallied nearly 1,000 pts from its June 4 lows to this week's highs...the British, German and French stock markets have also made good gains while the AUD has rallied over 8 cents, and the CAD is up 3.5 cents. However, if the stock markets aren't worried the credit markets certainly are...witness the negative yields in perceived European safe haven countries and note that the yields on all US Government debt are at or near all time record lows...even while the US Treasury issues new debt at a record pace.

Two Big Risks Ahead For Investors As The Macro-Economic Deflation Intensifies:

1) Asset prices decline, and

2) Taxes on "rich" people will go up. This will make it harder to preserve capital...and it won't much matter which political party is in charge...the "math" of the debt problems supersedes political dogma...way more money has been borrowed than will ever be repaid...and somebody...maybe everybody...is going to get stuck with the "bill." As veteran analyst Richard Russell says of a bear market, "He who loses the least wins." My long term savings remain very conservative and liquid and I've also been very cautious lately with my short term trading accounts.

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