2012 February 27 | timiacono.com

Those Amazing Treasury Yields

One of the many financial oddities in recent months, that is, ever since the European sovereign debt situation entered about its sixth crisis phase over the last two-and-a-half years, is that, now that the latest crisis appears to be over and investors’ mood has again switched from “risk off” to “risk on”, nobody’s selling their super safe Treasuries. The chart below from this Fidelity viewpoints item provides another example of how the historical relationship between U.S. debt and everything else has broken down lately.

Some say the bond market knows something that other markets don’t about the true health of the economy and credit markets while others blame the Fed for making the U.S. bond market dysfunctional with its huge asset purchases in recent years and its “Operation Twist” program of selling short-term debt to buy long dated securities. One thing is certain – the recent stability in long-term Treasuries at near record low yields won’t last forever.

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[Following are excerpts from the current issue of the Weekend Update at Iacono Research. By the way, the new combined investment website/blog will launch in the next week or so and, as part of that process, subscription rates will be going up considerably, so, if you're thinking of subscribing, sooner would be better than later - the link is here.]

Gold and silver prices picked up where they left off in January, surging again after a three week pause on optimism that a messy debt default in Greece will be avoided, heightened tension in the Middle East, and a weaker trade-weighted dollar as bullish technical factors triggered hedge fund buying, most analysts now predicting even higher prices ahead.

For the week, the gold price surged nearly $50 an ounce (or 2.9 percent), from $1,723.80 an ounce to $1,773.60, and the silver price jumped 6.4 percent, from $33.28 an ounce to $35.41. Gold is now up 13.2 percent for the year, but down 7.7 percent from its high last year, and the silver price has gained 27.1 percent so far in 2012, now down 28.4 percent from its peak last spring.

Silver reached a five-month high at $35.70 an ounce on Friday after piercing through its 200-day moving average the day before (as indicated in red in the one-year silver chart below) and, while some analysts think it is now vulnerable to profit taking, others think this sets the stage for another assault on the $40 an ounce level, last seen in early-September prior to the vicious sell-off that affected nearly all asset classes.

[To continue reading this story, please visit Seeking Alpha.]

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Grantham, Shakespeare on Debt

As always, Jeremy Grantham’s quarterly investment letter(.pdf) is well worth reading, a good portion of it taking up the issue of how capitalism has failed us and another recounting GMO’s surprisingly good market calls over the years, but item number two in the section on investment advice was what grabbed my attention:

“Neither a lender nor a borrower be.” If you borrow to invest, it will interfere with your survivability. Unleveraged portfolios cannot be stopped out, leveraged portfolios can. Leverage reduces the investor’s critical asset: patience. (To digress, excessive borrowing has turned out to be an even bigger curse than Polonius could have known. It encourages financial aggressiveness, recklessness, and greed. It increases your returns over and over until, suddenly, it ruins you. For individuals, it allows you to have today what you really can’t afford until tomorrow. It has proven to be so seductive that individuals en masse have shown themselves incapable of resisting it, as if it were a drug. Governments also, from the Middle Ages onwards and especially now, it seems, have proven themselves equally incapable of resistance. Any sane society must recognize the lure of debt and pass laws accordingly. Interest payments must absolutely not be tax deductible or preferred in any way. Governments must apparently be treated like Polonius’s children and given limits. By law, cumulative government debt should be given a sensible limit of, say, 50% of GDP, with current transgressions given 10 or 20 years to be corrected.)

In Shakespeare’s Hamlet, it was Polonius who said, “Neither a borrower nor a lender be”, words of wisdom that seem to have gone out of fashion over the last thirty years or so but that now seem to be making a strong comeback.

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Back in Time, Lost Decades, etc.

Using a variety of economic indicators, this item in The Economist’s Daily Chart section provide a depiction of how economies around the world have fared in recent years, from the point of view of how far the Great Recession has set them back.

No big surprise there with Greece taking down the top … er, bottom … spot, but the U.S. coming in third with economic conditions set back to late-2001, is a bit of a shocker. Germany has recovered nicely from the recession and their position relative to Greece goes a long way in explaining why the Greek bailout has been so difficult.

My guess is that a chart depicting the amount of new debt taken on prior to the bust would result in  about the same country order as the upper-left graphic above.

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Monday Morning Links

G20 seeks eurozone bailout boost – BBC
Europe Gets Ready for Round 2 of Bank Loans – NY Times
A Greek exit: Nothing to fear but the lack of fear itself – Economist
Spanish revolt brews as economic rearmament begins in Europe – Telegraph
The robosigning deal is a useless embarrassment – Washington Post
Buffett on housing: Was “dead wrong,” but still believes – Fortune
Wall Street Confesses to Bonus Culture Ills – Bloomberg
10 investment lessons from Jeremy Grantham – MarketWatch
Right-wing political extremism in the Great Depression – voxeu
Bernanke Pessimism Drives Credit Amid Cuts – Bloomberg
Economists see more reasons for optimism this year – AP
A new recession seems inevitable – CNN/Money

Surging oil prices weighing on markets – AP
Gold retreats in line with euro, stock markets – Reuters
Factors in the recent oil price increases – Econbrowser
What High-I.Q. Investors Do Differently – NY Times
Paulson Said to Tell Clients Gold Fund Will Top Others – Bloomberg
Buffett Buys US Precious Metals Business from Cookson Group – Jesse’s Cafe
Your pot of gold’s ‘sell-by’ date, after which it’ll be trash – Emirates 24/7
Thinking small so your gold investment can make it big – Globe & Mail
Factors leading to paradigm shift in metals commodities pricing – Mineweb
The new Canadian gold rush – Globe & Mail

The High Price of Losing Manufacturing Jobs – Fiscal Times
The ‘High Oil Prices = Recession’ Fallacy – Daily Capitalist
Why the Government Must Keep Running Deficits. Forever. – Angry Bear
Is the Administration Joining Team Balance-Sheet Recession? – rortybomb
China’s Billionaire Congress Makes Capitol Hill Look Poor – Bloomberg
Yen Shows BOJ Stimulus Beating Intervention – Bloomberg
Debunking the “Housing Has Bottomed” Meme – Naked Capitalism
Why the Federal Reserve can’t fix housing – CNN/Money
There is No Shortage of Rental Housing and Rents Are Not Rising Rapidly – CEPR
Bullard: Housing Declines May Have Cost a Generation of Buyers – Bloomberg
How Will Central Banks Respond to Oil Prices? – WSJ
Contemporary Monetary Analysis – Prudent Bear

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