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  • The Paradigm Shift Has Begun - This Isn't Going To Be Pretty  [View article]
    The ten-year treasury note has risen above 2.5%. While this is still a pittance historically, it is up sharply from the end of April. The rise in the auction rate reflects concerns about short-term rates. Of course the "spread", or the difference between short-term rates and long-term rates, is delicious for those with financial leverage, such as banks.

    Through this thread, I have gleaned that QE and low Fed rates haven't done much to increase inflation or reduce unemployment, but they have helped to make banks richer at virtually no risk, and to keep the interest charges paid by the federal government quite low.

    This all depends on maintaining a mediocre economy, since a spike in GDP might start putting some of that liquidity to work in the normal way, which is financing growth. That would raise prices in general and decrease unemployment, which would raise interest rates. A spike in GDP is not likely, though. We've smoothed out some of the cyclical aspects of the economy by moving our manufacturing base overseas and by increasing overseas sales. Plus, population is remaining stable. And energy prices will be more stable because of domestic production.

    We have achieved Goldilocks. Now can we keep it?
    Jun 23, 2013. 09:18 PM | 1 Like Like |Link to Comment
  • The Paradigm Shift Has Begun - This Isn't Going To Be Pretty  [View article]
    Mark, I'd like to take a stab at answering your question, that is, what could drive bond rates significantly higher. The Fed funds rate is very low right now, .25%. It has the potential to rise very quickly, since there is the potential for a rate increase every time the FOMC meets, which is eight times a year. If you look back at its history, it has risen rapidly in the past.

    Of course, we have an FOMC meeting today (June 19th), and the committee is expected to keep the rate where it has been since December, 2008--.25%. But once it starts raising the rates, those rates can escalate quickly, say .25% or more several times a year.

    Once short-term rates begin to rise, long-term rates will escalate.

    Now I've left a question for somebody else, which is: WHY would the FOMC raise the Fed funds rate (and thus short-term interest rates in general)? Can somebody answer that?
    Jun 19, 2013. 01:31 AM | Likes Like |Link to Comment
  • The Paradigm Shift Has Begun - This Isn't Going To Be Pretty  [View article]
    As am ex-accountant (hmm, is anyone really ever an ex-accountant?), I followed the T-account entries for the most part, and learned something about the Fed in the process. Thanks to all concerned. We've got a steep yield curve on Treasuries, which portends a rising interest rate. We also have a high margin utilization, that is, a lot of people have maxed out their 50% margin in their brokerage account. Worse than that, and virtually unmeasurable, is the fact that primary dealer banks (I'm not sure what those are, but I assume he means "big" banks) are using the reserves created by Fed purchases to buy stocks (thus indulging in the carry trade), thus creating a much higher degree of leverage that most of us are aware of. JS says that something is going to hit the fan at some point and drive the price of stocks down, and there will be no dry powder (I assume that means funds available to buy stocks), causing the bid side of the bid-offer market to disappear, meaning we'll go into free-fall in the stock market.

    Perhaps I should say "funds willing to buy stocks" rather than "funds available to buy stocks". It seems to me that a rise in interest rates will, and probably already has, caused an exit from the fixed income market. Who wants to hold on to a bond whose market value will surely fall. I would assume that that sale of bonds would create cash looking for a home. In addition, isn't there already a pretty hefty supply of cash out there looking for a home? JS, wouldn't that cash be available to buy stocks and create a "bid" side?

    I have another question. When the Fed ends QE, is it going to sell the securities it has purchased, or will it hold what it has for a while. In other words, is there a difference between "stopping" QE and "unwinding" QE?
    Jun 15, 2013. 08:07 AM | 1 Like Like |Link to Comment
  • About That Margin Debt Everyone's So Worried About  [View article]
    Come to think of it, you're right!
    Jun 3, 2013. 05:49 AM | 2 Likes Like |Link to Comment
  • What Happens If Stocks Crash?  [View article]

    Yes, and you can observe the same phenomenon with the UK after the Napoleanic wars (and presumably the War of 1812 with the US), and the US after the Civil War. For history buffs, the US was on the "greenback" standard for a short period after the Civil War, hence the slang term for the currency.

    555, there isn't enough gold in the US Treasury to support even the paper currency at present rates. You would need to increase the value of gold to $3,000 to cover the paper currency outstanding. To cover M1 money supply, you'd need to increase it to about $25,000 an ounce. So, really, gold is a store of value when it creates its own market, since the supply of gold is stable and increases at a predictable rate--it's best to leave it at that. Put another way, it reflects economic trends rather than causing them, a much safer state of affairs.
    Jun 1, 2013. 11:16 PM | Likes Like |Link to Comment
  • What Happens If Stocks Crash?  [View article]
    555, perhaps you could suggest how the US could unilaterally return to the gold standard, since no other country in its right mind would make that move with us. We've come a long way since Bretton Woods, when the US was the colossus of the world's economy. What would be your target price for gold? Could the Chinese ask for payment of their bond holdings in gold? Why is it that no country is on the gold standard? (Answer: lessons learned during and shortly after WWI).

    Mortgage rates have been pretty low since the early 90s and very low since December 2008, when the fed funds rate dipped below 1%. But keep in mind that what pushed the demand for homes (and hence the demand for mortgages) in the 70s, 80s, and early 90s was the household formations of the Baby Boomers (born 1946 to 1961), high employment, unions, manufacturing jobs, a (generally) booming stock market, defined benefit pension plans, job security, high tax rates (hence the value of the home deduction), inflation, low student loan debt, and job security.

    And will the government be pleased to pay, say, 3% more on a total debt of $16 trillion in debt? Hmm, that's going to leave a hole in the budget of $480 billion a year, which is about 75% of the defense budget, or 40% of the total FY13 discretionary spending. Nah, not pleased.
    Jun 1, 2013. 09:00 AM | 2 Likes Like |Link to Comment
  • What Happens If Stocks Crash?  [View article]

    While I think you're overstating the "gloom and doom" scenario, I do believe you're on the right track. The yield curve is rising. For those who don't know what that means, it means that interest rates for bonds are increasing as the term of the bond increases. It's higher for a 3-year bond than a 2-year bond, for instance. Why is that important? Well, the yield curve predicts future interest rates. If it's going up, then interest rates will rise.

    The Fed use QE (quantitative easing) to keep interest rates down. How does it do that? Well, it buys government debt (and some other debt) on the open market, creating an artificial demand for debt. The more demand, the lower the interest rates. But even the Fed can't fight the market forever, so they'll have to "taper" QE at some point. Love that term? When they do, the market will start setting interest rates. The Fed still has the ability to set the Fed funds rate, but in the end it will have to bow to market pressure. And the Fed funds rate is ridiculously low right now. If you take into account inflation (say 2%) and a real return, it should be 4%.

    A material rise in interest rates would create a number of problems for stocks. First, it might spark a recession. Because interest rates would be high, borrowing to spend would be more expensive. Government spending would be reduced to pay higher interest charges on the debt. In addition, stocks would lose favor as longer-term interest rates returned to 6-10% on corporate bonds and preferred stock.

    Of course, gold wouldn't fare well in this scenario. The dollar would be stronger because of strong demand for government debt. And inflation would be low because of the recession--yes, OK, stagflation is possible.

    Most enthusiasm about gold stems from an long-held prejudice against so-called "fiat" currencies, that is, currencies that are not backed by gold and silver. The truth as I see it is that there just isn't enough gold and silver in the world to back the world's currencies. Wealth has increased too quickly to be shackled to a gold standard. So we are dependent upon the experience of centuries (one century in our case) in controlling the supply of money by the use of central banks. Those who believe that the gold standard is a panacea should reflect back to the "good old days" of 1872 to 1913, when deflation and financial panics nearly wrecked our economy and William Jennings Bryan begged the government to stop crucifying mankind on a cross of gold. 1913? Well, that was the year of the Federal Reserve Act, which established your friendly Federal Reserve Bank.
    Jun 1, 2013. 02:48 AM | 5 Likes Like |Link to Comment
  • Will It Be Inflation Or Deflation? The Answer May Surprise You  [View article]

    Well, we're down from 2005's 13 million barrels a day to 5 million in 2013. That's significant by any standard.

    Most sources say we'll achieve energy independence, although it will take a few years. And it looks like we'll be exporting natural gas. This is good news. We have huge reserves of coal and nat gas, and we are developing several large shale oil sites.
    May 23, 2013. 09:53 AM | Likes Like |Link to Comment
  • Will It Be Inflation Or Deflation? The Answer May Surprise You  [View article]
    Kara, could you elaborate a little bit more on your first point? Also, while I agree with you about your third point, I think they're also down because of globalism, specifically companies chasing the cheapest labor dollar.
    May 23, 2013. 06:04 AM | Likes Like |Link to Comment
  • Will It Be Inflation Or Deflation? The Answer May Surprise You  [View article]
    Gee, I don't know. While our debt is still rising, the deficit is falling. As a matter of fact, we had a slight surplus in April (yeah, I know, it's that April 15th effect). We're in the process of ending the second of two long wars. And the economy is recovering, with GDP expected to be up 2% or better in 2013.

    The trade deficit is looking much better. You can take at look at this site: The primary reason, of course, is that energy imports have fallen dramatically.

    Of course, the Fed won't be able to keep up QE forever. Eventually QE will cause an unacceptable level of inflation. When the Fed stops buying treasury debt, the money supply, and the stimulus it provides, will fall. In addition, the demand for treasury debt will fall and coupon rates will have to rise. The Fed funds rate will rise to 4% or better at some point. This will greatly affect the interest costs of everyone. Economic activity will slow and deficits will rise.

    You're predicting a quick flip-flop based on Fed actions. I don't really see an economy of the size of the US going though such radical changes in a short time period.

    But more seriously, you are predicting a collapse of the dollar. I don't see that. The energy picture has changed, the economy is going up (slowly), and we still have a lot of great companies. And by the way, if the US catches a cold, the rest of the world, yes, including China, gets pneumonia. Our deficits fuel the world's economies.
    May 23, 2013. 12:27 AM | Likes Like |Link to Comment
  • The Most Misleading Words In Investing: You Can't Go Broke Taking A Profit  [View article]
    Hello again, Apacheman

    Well, you have a good idea in investing some money in greed and holding some cash out of fear, assuming those are the emotions you're talking about.

    The primary thing I have against this market is that it has gone up too fast, and that the last 13 years have demonstrated that that bodes ill for the market. Contrary to the OP's premise, I'm not sure that the 21st century has been a time to buy and hold. There are always anecdotal exceptions, of course.

    I'll take this opportunity to explain my "bulls in retreat" metaphor, which really is more than cute expression. Why do sharp run ups generate selloffs? Well, first, sharp run ups are often generated with margin credit. Margin debt spiked in 2000 and 2007, running up to incredible highs. We're not at those levels now, but margin debt is going up and is well above anything seen before 2000. As you know, margin calls speed selloffs.

    Another thing that happens when stocks rise quickly is that shorts get squeezed out. While you might applaud that if you're long, it also takes away support for stocks as they fall. Why? Well, because there are fewer buyers for those stocks. The shorts have already purchased at higher levels.

    And finally, of course, momentum changes in either direction tend to overshoot. This is particularly true because retail investors tend to join rallies at the end of the rally, and they are both more greedy and more easily spooked than the so-called smart money.

    And yes, I am easily spooked.
    May 20, 2013. 10:58 PM | 1 Like Like |Link to Comment
  • The Most Misleading Words In Investing: You Can't Go Broke Taking A Profit  [View article]
    As a former GE investor, I can tell you that it makes all the difference in the world when you bought GE. It peaked in May, 2001 at 53.55 and bottomed at 5.87 in March, 2009, so how you compute your gain (or loss) on that stock would depend on when your start date is.

    Similarly, WFC (Wells Fargo) peaked in September, 2008 at 44.75 and bottomed in March, 2009 at 7.80. So you could have a disappointing loss or a significant gain in that stock, as of today, depending on when you bought it.

    Coke peaked in 1998.

    In J&J's case, you could have bought the stock in December, 2012 and made all its gain in the last 8 years, since you could have bought at below its previous peak in April, 2005.
    May 20, 2013. 12:15 AM | 1 Like Like |Link to Comment
  • The Most Misleading Words In Investing: You Can't Go Broke Taking A Profit  [View article]
    Hi, Apacheman

    I don't disagree with anything you say. However, I would mention that the two previous peaks to the S&P, 1527 in 2000 and 1561 in 2008, were followed by calamitous dips to 800 and 683. The one thing I'm convinced of is that we wouldn't recognize a bubble if it stuck to the end of our noses.

    We shouldn't forget that we depend on other countries to buy our debt--and that debt pays a negative real interest rate. Right now that's not a problem. The strategy has been so successful that other countries are trying it. But I'm pretty sure that party will end sometime. When that sometime is, I have no idea.
    May 19, 2013. 11:04 PM | Likes Like |Link to Comment
  • The Most Misleading Words In Investing: You Can't Go Broke Taking A Profit  [View article]
    Tim, thanks for your reply. (And thanks to everyone who had some fun with my "bulls in retreat" metaphor!) In general, I agree with you concerning ownership in a company. I just feel that stocks are overvalued right now, and I have now sold out to 100% cash, including my long-term holdings like McDonalds, PM, and AWK, which is a water utility stock. I'm just expecting a pull-back, at which time I'll get back in at a lower price than I sold for. Of course, that strategy could backfire.

    I don't apologize for playing market sentiment. I follow about 50 stocks, and I know their behavior reasonably well. For instance, I bought FDS (that's a stockbroker's workstation company) on the negative news for Bloomberg (Bloomberg reporters using info from Bloomberg workstation customers) and just before FDS raised their dividend. I turned a 3% profit in 24 hours on 200 shares.

    In this bull market, I have made similar plays on eBay and ACAS, which is a business development company. Both rose quickly and then settled back down. It's a good environment since the bullish sentiment limits the risk.

    But I believe we're overdue for a pullback, so I'll bide my time and sweat a little bit as the market goes up. I'd love to catch a 50% pullback on a good stock--I'd be all over that sucker. But I'll take a 5-10% pullback.

    In short, I'm afraid of a bubble that has inflated both good stocks and bad.
    May 19, 2013. 12:05 PM | 3 Likes Like |Link to Comment
  • The Most Misleading Words In Investing: You Can't Go Broke Taking A Profit  [View article]
    Yes, some stocks go up and up. Some stocks go up and down, up and down. Some stocks go up and then crash to earth.

    Digital Equipment Corp., Wang Labs, Chrysler, Citibank, Bank of America, Countrywide, Enron--and thousands of other stocks--have had their day in the sun and disappeared or fallen sharply.

    I try to buy stocks that have a wonderful business model, like McDonalds or Diageo or Google. I also play investor sentiment, that is, I try to buy stocks that are in favor and ride them up.

    I watch out for rapid moves up in the market, such as what we have experienced recently. I keep thinking back to 2000.

    Stocks are in a favorable position right now because nothing else gives an acceptable rate of return--well, except real estate. But maybe the Fed will change its monetary policy. Maybe investors will decide to cash out while they have good gains. Maybe, maybe--a thousand maybes.

    What if something happens to panic the herd? Bulls in retreat have sharp horns.
    May 17, 2013. 10:38 PM | 4 Likes Like |Link to Comment