for all the talk on housing being a huge problem, there is scant evidence thus far that it is hurting the economyacording to the markets. Does the fed take into account that there is a negative basis in the credit default market right now? Global markets are still searching for yield. If you want a wild prediction for 2007 this is it. Junk Bond yields start getting better yields than bonds. Sounds crazy, but wall street will do whatever it can to take on more risk and leverage.
40% of the treasury market is held by foreign central banks that dont have to mark to market ....so with that demand able to soak up debt at any price without regard to showing a loss,....easy to see why everything is screwed up...... IMHO, debt is used to contol currency valuations which I believe to be rather dangerous... no wonder why the Fed. stopped reporting M3 numbers since they are likely a horror story......
The housing bubble was yet another asset bubble that shows the true nature of the beast: inflation. We are seeing a resurgence of stock prices at the end of the year due to excessive liquidity, out of housing and into other paper. I love the discussion of the housing market, because it was most certainly cozed by monetization and debasement of the currency especially during the beginning of the period. Why get a 10yr mortgage when you can refi a 1 year at 1%!! Why not amortize over a 30 year period if the banks allow me? This dragon has not yet been slayed, I predict blood on the streets...
I think that going forward the biggest problem for middle to back part of the curve is that over the last few years you have probably lost money in real terms(all numbers are annualized). The CPI over the 3 yr. period is up 3% and Lehman Agg is up 3.5%. Oh yeah, t-bills are up 3% over the comparable period so for 15x more duration you got and extra 50bp a year! Bill Gross sent out his letter this week and said PIMCO looks for year-end Fed funds at 4.25 and 5-10 year rates about 25bp above. Do the math and you are still taking on way too much duration for just a few basis points of return (and tough to juice up yield with razor thin credit spreads and strangles). Bonds are just too expensive to attract money coming out of stocks â people buy past performance and itâs just not there. So the bond market is left with a lot of hot money (carry traders & leveraged funds) and âstuckâ money (Asian CBs & petrodollars). The only real bulls still in the bond market are volatility bulls (and only a few of them survived a brutal year in the Chicago option pits).
40% of the treasury market is held by foreign central banks that dont have to mark to market ....so with that demand able to soak up debt at any price without regard to showing a loss,....easy to see why everything is screwed up...... IMHO, debt is used to contol currency valuations which I believe to be rather dangerous... Exactly. I think there are very few people who understand this dynamic. The public has no clue. The greater the presence of governments in debt and currency markets the more private investors will be crowded out and forced to take larger risks in order to get returns. hello 100 bn lbo's. Government cannot allocate resources efficiently because it is not there wealth being put at risk in order to achieve profit. In the long run this is very troubling. I think the fed/treasury where really caught off gaurd by asia's continous buying of all US assets.
Beyond the CPI, we are talking real wage pressures here, annualized at a 4% clip now, that's what really worrisome (I don't care if you believe in push or pull inflation, companies having to pay more to hire workers does not bode well for efficiency)... Beyond fast money, you're spot on about Asians being pressured to buy US notes, frig, the majority of their exports are financed by US paper, which we've been pumping out religious for the past 50 yrs...
Most volatilty bulls in the Chicago options pits have been carried out on stretchers since about 1997-1998 (LTCM debacle). For the first time in the 5 years I have been down on the floor there is actually a big PAPER volatility buyer in the form of Countrywide in the 30yr options. They are long around 100,000 out of the money calls vs. futures (long volatility) between the March 114, 115, and 116 calls along with the June 118, 119, and 120 calls. Both these scenarios are monster hedges if the Fed needs to scramble to cut rates by June. Prepayments on mortgages would definitely speed up and there would probably be a HUGE refinancing wave. Other than that Goldman has their typical short volatility position in the 10yr options but then they start to get long volatility from the 107 strike downward and are short every strike from 108 to 110.
the dirty little lie about CPI is that all taxes (local, state and federal) are not components of the index..... not sure about everyone else, but property tax rates are increasing fast around here........ as a cost item, it should be in the index... hope you feel better about this..........