The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Unintended Consequences
December 10, 2010
By John Mauldin

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Ten-Year Yields Are Rising
An Uptick in Consumer Credit? Not!
Some Thoughts for Ben
New York, Cabo, and Winnipeg

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Correct me if I’m wrong, but I seem to remember that one of the reasons for QE2 was to lower rates on the longer end of the US yield curve. Clearly, that has not happened? Today we look at come of the unintended consequences of monetary policy, turn our eyes briefly to consumer debt, and wonder about deflating incomes. There are a lot of very interesting things to cover. (This letter will print long, but there are a lot of graphs. Usual amount of copy.)

But first, the are some changes and upgrades being made to the database that houses the list of my 1.5 million closest friends. That means that some of you will be reading this on the website this week, rather than having the letter sent directly to you. If this letter doesn’t show up for some reason, you can always go to www.2000wave.com and get it directly from the website. We should be back on track by next week. Sorry for any inconvenience.

Second, long-time readers know I have an avid interest in biotech. I am also a serial entrepreneur on the lookout for business opportunities. Some have been successful and others have been learning experiences. On the biotech front, I frequently talk and meet with CEOs and scientists in the biotech space. In this process I have come across what I think is an amazing new product. I have personally been using it and love it! I bought the marketing rights. Next week I will introduce you to it. We are rushing to get the material ready before Christmas, and production efforts on the websites are not up to my normal standards. But since it only goes to my closest friends, I trust you will cut me some slack. And it is an amazing product. More next week.

You can be the judge as to whether I should have jumped at yet another opportunity. But rest assured, gentle reader, that my primary focus is on writing to you every Friday, and it always will be. That is what I love to do and what I seemingly do best. Now, into the letter.

Ten-Year Yields Are Rising

Look at the chart below. The yield on ten-year US bonds has been rising since the beginning of QE2. But it is not just US bonds; European and UK bonds are moving up as well. This has also meant that mortgage rates in the US are up almost a half percent in the last few months. That certainly has not helped housing prices or sales, as it makes housing less affordable. (Chart from my friends at Variant Perception.)

But it is not just the US and UK. Look at what is happening to German bonds, supposedly the safest in Europe. They are up about as much as their counterparts. (Chart from Cowen International and data from Bloomberg.)

And then we look at Japan and we see the same phenomenon. Japanese real rates going up? Really? What is up with that?

In Europe it is now cheaper to hedge against corporate default than sovereign default. That is not the way it is supposed to be.

Read the rest of this entry »

The Global Macro Monitor blog was started b an independent trader and economist and, in a prior life, was a global macro hedge fund PM/trader, headed emerging market bond trading desks on Wall Street, and an economist/global strategist, beginning his career at the World Bank in the mid 1980’s. His unique and unconventional views are reflected on his website at marcromon.wordpress.com.

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We constructed these charts with data from today’s release of the Federal Reserve’s Flow of Funds. They are both stunning and frightening as they illustrate the cardiac arrest that took place in the credit markets. The collapse in credit issuance/borrowing began in 2008 and would have been net negative without the Federal government. In 2009, for example, the Federal government was 141 percent of total net credit borrowings.

If, as the President says, ‘the flow of credit is the lifeblood of our economy”, the country would have died in 2009 had not the policymakers taken the extraordinary measures they did. These charts illustrate how close we were to the abyss and should give a clearer perspective on what Bernanke & Co. were/are up against. They are heroes, in our book, for stabilizing the situation and pulling us back from the abyss. The jury is still out, however, on long-term structural adjustment and preventing a global sovereign debt crisis.

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This entry was posted in Black Swan Watch, Budget Deficit, Charts, Fiscal Policy, Sovereign Debt, Sovereign Risk and

We haven’t run these Chart Store graphs in a few weeks, so lets take a look:

In the beginning of the year, I thought we might blow past 2009′s totals, but it looks like 2010 is going to just barely outpace last year. Strong start, but we look like we will end up within a similar total to last year:

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Chart via No Brainer Trades

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No Brainer Trades brought the above chart to my attention, and its worth spending some time detailing.

“I heard this guy on CNBC . . . well, his opinion is . . . his trades are . . .”

As the chart suggests, these turn out to be amongst the more expensive expressions of opinion that investors have. By definition, if you are relying on other people’s opinions, then you have been making investment decisions based on how these people play to your squishy emotions.

History has shown this to be a an unsuccessful investing process — who manages to touch push your buttons.

If you are relying on someone else’s opinion, then you are not relying on your own research, you are not basing your analysis on data, on history, or on logic. You have no idea whether or not you are making decisions based on high probability outcomes, but the odds are against it.

This is the latest chart in our pantheon of bad decision making . . .

(Thanks, Steve!)

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Previously:
Lagging Psychology at Turning Points (April 15th, 2010)

P/E Expansion & Contraction (September 8th, 2010)

The Greed/Fear Cycle (November 10th, 2010)

See also:
Death From Opinions

Cleveland’s Judge Raymond L. Plianka takes on banks whose predatory lending resulted in blight

Video:
Foreclosures have devastated some neighborhoods in Cleveland, and a housing court judge is making owners and banks pay to keep properties and communities from becoming blighted

http://www.time.com/time/video/player/0,32068,700658086001_2034748,00.html

NSFW:

An Irishman abroad tells it like it is !! :-)

THIS MAN IS AN IRISH NATIONAL HERO !!

We at xfm Dublin, Ireland, WANT this man to return home and run the country :-) Even if this man was in a fucking coma, he could do a better job than Fianna Fail and their wanker banker and developer mates. It will be a cold day in Hell, when another Banker / Builder / Property Developer / Speculator or ‘Fianna Failure Lizard’ wipes the eye of the Irish People. They should stick to shovelling shit ! That is what they are used to, that’s what they are good at.

Via A Blog to Read, we see this Manufacture Royale Opera Time-Piece Watch (Accordian)

The utterly insane price of the Manufacture Royale’s Opera wristwatch: $1,200,000

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Courtesy of NYT

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Louise Story has a front page article in the Sunday NYT that is your must read this morning:

“On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk. In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.”

I keep coming back to this simple fact: If you understand what caused the crisis, the first step in preventing another is working backwards and undoing each of the causes. Front and center is the Commodity Futures Modernization Act that allowed the rampant shadow banking system to develop. It still needs to be overturned . . .

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Source:
A Secretive Banking Elite Rules Trading in Derivatives
LOUISE STORY
NYT, December 11, 2010   
http://www.nytimes.com/2010/12/12/business/12advantage.html

Mark Madoff was found dangling from a black dog leash in his Manhattan apartment living room, while his 2-year-old son was found asleep in an adjoining bedroom. The 46 year old son of a thief, in his final act of cowardice. emailed his wife, in Florida with their older child.

What a delightful family this is.

Two Years Ago, when the Madoff arrest first exploded, the story smelled funny. How could a 70 year old run a $50 billion Ponzi scheme by his lonesome?

According to the trustee recovering assets for Madoff’s “investors,” Mark Madoff, director of listed trading for his fathers brokerage firm (technically separate from the Ponzi investors) was paid $29.3 million from 2001 to 2008. Not only that, the trustee claims he improperly grabbed another $66.8 million for himself, his family and entities on his behalf. And in case that wasn’t enough, Mark Madoff was also accused of falsifying transactions to withdraw $18.1 million from his account by the trustee.

If those numbers are accurate, it raises a question: What was Mark Madoff doing that was worth $16,314,286 dollars per year over that seven year period? It is hard for me to fathom that anything associated with that firm could have led to that sort of annual compensation — at least, in a traditional compensation structure.

Was this merely deserved compensation for a job done well? An example of the family;s generosity to its own? Hush money?

I have no idea.

If the trusteee’s allegations of compensation are true, it sure seems like an awfully big comp package. The specifics of his compensation structure as an employee of his father’s firm strongly imply that the apple does not fall far from the tree — i.e., that even if he wasn’t a thief, like his old man, the deceased certainly was not ashamed to grab a huge pile of cash, deserved or not.

I have not delved to deeply into this sordid mess for some time, as everything associated with this clan is nauseating. Today’s announcement simply was the last straw.

One would imagine that any innocent person, with 2 children in this marriage (more from a previous one), would want to clear their name, if only for the sake of their innocent kids. Apparently not . . .