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The Multi-Year Surge in Bond Fund Buying

On August 31, 2010, in Bonds, by Tim

After seeing charts like this appear elsewhere on the internet for some time now, it seemed like a good idea to grab the data from the Investment Company Institute myself and whip up a chart, the one below being similar to one that Moody’s recently published.

Note that the latest data will be released tomorrow and that the trend you see above is not likely to change, though some investors seem to be getting a little antsy, Jeffrey Gundlach at DoubleLine Capital apparently in a selling mood according to this Bloomberg report now that the yield on the ten-year Treasury has reached 2.5 percent.

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TARP2 and Millions of New Visas

On August 31, 2010, in Economy, Housing, by Tim

Hedge fund manager and author Andy Kessler recounts the recent history of the U.S. failing to rid itself of toxic assets and proposes some solutions to today’s economic and financial market ills in this Wall Street Journal op-ed($) today.

• QE toxic. The Fed’s quantitative easing has been focused on buying Treasurys as well as packages of high-quality mortgage assets. It’s time to go back to the original TARP and start buying toxic assets directly from banks, no matter the price. If they become insolvent, set up the Treasury to inject capital a la TARP2 and allow the Federal Deposit Insurance Corporation (FDIC) to implement a quick-turnaround, prepackaged bank resolution and receivership. Clean those balance sheets up for good, else we relapse into financial crises again and again.

• Import buyers. Someone has to step up and buy those 1.5 million extra homes in inventory. I would wager there is a backlog of high-paying jobs for educated foreigners well beyond what H1-B visas allow to trickle in. In the name of financial stability, create a million visas for qualified immigrants, say, those with a masters or Ph.D., and watch home prices start to rise.
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There are so many price distortions that markets, let alone business leaders, are confused as to what is real. So they sit on their hands. The only way out is to let prices go to where they need to go to clear the overhang. This is especially true of housing and the housing assets clogging up bank balance sheets. Next time banks are under fire (and I hope we are not heading toward a next time), buy them out, fire management and restart the franchise with a clean bill of health. We are starting to see what the alternative is.

That sure sounds like a better plan than the one that we’ve been working to over the last couple years. As an addendum to that last item, it sure would be nice to get the banks out of the business of selling houses because they seem to be much more content to sit on them at their “mark to fantasy” prices than sell them, a development that, left unchecked, could result in another lost decade following the one that we just started.

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Krugman on the Need for More Stimulus

On August 31, 2010, in Economy, by Tim

Princeton economics professor and Nobel Laureate Paul Krugman laments the smallish $800 billion stimulus of last year and says we should now double down with another $800 billion.

On what’s going through the mind of fixed income investors, Krugman says:

The bond market is telling us not to worry about the current deficits. They’re happy to lend the federal government money at very low rates. What the bond market is telling us is they’re terrified of deflation and of a weak economy for a very long time.

They’re also terrified of the stock market…

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Ireland’s “Zombie Hotels”

On August 31, 2010, in Europe, by Tim

Word of how the bursting of a massive property bubble followed by a program of forced austerity is affecting the travel and leisure sector of the Irish economy comes via this Bloomberg report where “zombie hotels” are said to be increasingly common.

At least 200 hotels opened during Ireland’s decade-long economic boom, leaving a glut of rooms and mountain of debt as the number of visitors dwindles. While some establishments cut their losses and shut, others are lowering prices to stay in business and avoid repaying tax breaks if they were to close.
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Many hotels that opened as Ireland’s economy tripled in size between 1997 and 2007 were given tax breaks provided they remained open for at least seven years.

Such hotels are slashing prices in a bid to stay open, undermining longer-established venues, said Joe O’Flynn, owner of the Rathsallagh Country House Hotel, south of Dublin.

“It’s a zombie plague,” O’Flynn said. “I can’t compete. If that happens do I join the zombies?”

In other cases, banks are keeping alive hotels to avoid crystallizing losses on loans, hoteliers said.
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“The big problem that the industry faces at the moment is that banks are keeping hotels open that would not normally survive,” said Charlie Sheil, manager at Dublin’s four-star Gibson Hotel. “They are being propped up by the banks, which is causing major damage to a lot of the good hotels.”

Celtic Tiger no more – such is the legacy of unchecked asset bubbles.

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False Hope for Housing from Case-Shiller

On August 31, 2010, in Housing, by Tim

Standard and Poor’s reported that both the 10-city and 20-city Case Shiller home price indexes rose 1.0 percent from May to June following a bigger gain the month prior, reflecting the end of the homebuyer tax credit that expired two months ago.

This will no doubt offer some hope for housing bulls, however, it will be undoubtedly be short-lived, similar to the home price gains that were seen last fall that were then followed by declines when the first round of the tax credit expired.

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Tuesday Morning Links

On August 31, 2010, in Uncategorized, by Tim

MUST READS
Global Stocks Fall on Economic Worries – NY Times
Second Leg of Crisis Beginning: Hedge Fund Manager – CNBC
Youth Unemployment Hit A Record High This Summer – HuffPost
Central bankers gear up for more quantitative easing – Telegraph
Nakahara: BOJ Is Too Little, Too Late in Tackling Yen – Bloomberg
Obama comes out swinging on economy, slams GOP on jobs – McClatchy
Thinking about raiding your 401(k) plan? Don’t do it – USA Today
Need for big deposit hits U.K. home sales hard – Telegraph
Ignore Talk of a Housing Tax Credit ‘Revival’ – WSJ
Why Wall Street Is Deserting Obama – NY Times
Another Home Buyer Tax Credit? – CNBC

MARKETS/INVESTING
Oil falls below $74, heads for monthly loss – Reuters
Gold Rallying to $1,500 as Soros’s Bubble Inflates – Bloomberg
Short the S&P500 When 1,030 Support Is Breached: Charts – CNBC
Titan Capital Joins Black Swan’s Taleb in Raising Bets on Crash – Bloomberg
‘Big fall is likely in Gold at a high of $1,325’ – Commodity Online
Analysis: Major hedge funds cut back equity risk – Reuters
Gold: is it really a safe haven? – Telegraph

ECONOMY/WORLD/HOUSING/BANKING
Seven lean years: No recovery till 2016 – MarketWatch
Obama promises new efforts to boost economy – Washington Post
Singapore Announces More Measures To Cool Property Market – Nasdaq
Japan moves to fight rising yen, announces stimulus – Washington Post
India’s economy grew 8.8 percent in June quarter – AP
Survey: Mortgage closing costs 37% higher – USA Today
Home values drop 0.2% from a year ago: Freddie Mac – REO Insider
Credit is finally available, but no one wants it – Fortune
Bernanke’s song & dance act in Jackson Hole – NY Post
Don’t get fooled by Bernanke – MarketWatch

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