 PIVOTAL
EVENTS - AUGUST 27, 2009
Signs of the Times
Bob Hoye
Institutional Advisors
Sep 1, 2009
The following is part of
Pivotal Events that was published for our subscribers Thursday,
August 27, 2009.
SIGNS OF THE TIMES:
Last Year:
"Former Fed Chairman
[Volker] says Bear
Stearns loan stretched central bank's authority." -Financial
Post, April 9, 2008
"The new version of
the bailout has new taxes, so according to the constitution is
should have originated in the Senate." - Rep. Ron Paul, October 6, 2008
* * *
This Year:
With Bernanke's reappointment,
President Obama congratulated the Fed Chairman on his "bold
action and out-of-the-box thinking."
Well, that's a new slant on
legally dubious knee-jerk and now ancient remedies.
Some services provided interesting
coverage:
"Bernanke is Sentenced
to 4 More Years" -The
Motley Fool, August
25, 2009
"Bernanke's Next Tasks
Will Be Undoing His First"
"Bernanke gets rewarded
for bravery in defeat." -NYTimes.com, August 25, 2009
On why the "Cash for
Clunkers" is ending:
"NY Dealers Pull Out
of the Clunkers Program" -Breitbart, August 19, 2009
"Dealers Stiffed as
Clunkers Pile Up." -KRQE,
Albuquerque, August 20, 2009
The problem has been that the
vast apparatus of government has not been able to remit checks
in a timely manner. Dealers have been carrying the mess for too
long.
***
INTEREST RATES
The Long Bond: Support was found at the 115
level, and we thought the initial rally could make it to around
120.
This was reached last week,
when we noted the rise had further to go. Getting through
121.25 could open the door to 123-124, where there is considerable
resistance.
Credit Spreads: As we have been noting, the carry trade
has been irresistible. For example, junk crashed from a 10% yield
at the market high in October 2007 to almost 42% in early March.
That represented an outstanding opportunity (which we advised)
for a move to spring.
The representative ETF (CYE)
soared from 2.82 in early March to 5.82 on August 15. In the
final stages the action replicated that seen at two previous
important highs. All that was needed was the "sell"
from the MACD, which was accomplished a week and half ago.
The initial price break was
to 5.37 last week. So far, the test has made it to 5.72 this
week.
The action has been another
huge compulsion to employ leverage against the double jeopardy
of soaring prices and a cheap "carry". On low interest
rates, such as for treasury bills, the Fed has little influence.
Short-dated notes in the senior currency always fall to exceptional
lows during a post-bubble contraction. It is, however, complicit
in fostering reckless speculations upon its own reckless experiment
in "managing" the economy.
The audacity of central planners
has been breathtaking - the hubris should be that as well. It
is worth repeating that central banks have virtually no influence
upon the curve and spreads.
The next step to the next phase
of the contraction, as in the critical turn in the spring of
2007, will be signaled by a change in credit spreads, which seems
underway.
The Yield Curve: The change to the next phase of financial
distress will also include the reversal to flattening. This is
opposite to the killer reversal made in June 2007. Then the world
was leveraged for inversion, now after a two-year trend the world
is leveraged for steepening.
Should be interesting.
Currencies: One of the keys to this sector has
been the official, as well as market hostility to the US Dollar.
The former is the magic wand of interventionist economics and
the latter has been learned the hard way.
All the wand has been doing
is adding to the degree of speculation as well as to the corruption
of investment standards. Wall Street, the former bastion of capitalism,
had become mesmerized by the FMOC - a committee. More recently,
hanging upon bailouts forced from a largely naïve taxpayer.[1] Interventionist theories have not been working,
otherwise there would not have been a crisis. The public won't
remain naïve forever. Shocking things could happen - they
could discover that 2+2 equals 4. It's been done before.
Like other things, corruption
could not be isolated and it afflicted fiduciary responsibility.
This writer started with Canada's senior investment dealer in
1963, when consumer price inflation began its eventually extraordinary
increase. One of the senior partners on the bond side was asked
about the effect of price inflation upon the bond-price and coupon.
The main answer was that chronic
inflation only afflicted lesser countries in Europe or South
America. Canadian and U.S. policymakers had sufficient integrity
to resist the evils of depreciation. With this belief, pension
funds were virtually full of bonds just as the great bull market
in "inflation" and concomitant bond bear got underway.
Then fiduciary responsibility
at the federal level was abandoned for magic wands and pension
funds tossed theirs out the window and bought the commodity story.
From the 1960s to 2007 the certainty of investors went from "corruption
was impossible" to "corruption is forever".
In so many words, as late as
the early 1960s institutions were hoarding bonds, in the 1970s
they started hoarding real estate, in the 1990s it was high tech
stocks and on the last mania they were hoarding everything except
dollars. The more aggressive leveraged hoarding against shorting
dollars. The latest revival in this took the sentiment
on the Dollar down to only 3 percent bulls at the last low, which
was at a lower low for the DX.
Short Dollars is the natural
position during a credit inflation and the natural consequence
is credit deflation with the compulsion to deleverage.
Another bout of the latter
has been likely to start after mid-year and become visible in
the fall. The next step up in the DX would be a warning.
Think of deflation as hoarding cash.
1 - "If God had not meant them
to be sheared, he would not have made them sheep." -Calvera, the bandit who preyed
upon the farmers in THE MAGNIFICENT SEVEN
###
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
Hoye Archives
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