Peace in Our Time (Tchir)

Monday, February 13th, 2012

From Peter Tchir of TF Market Advisors

Peace In Our Time

Markets are rallying on the back of Greece’s approval of the austerity measures, and all I can think of is the ill-timed 1938 speech by Neville Chamberlain.  But analyzing that leads to dark places, far too dark for a Monday morning when the markets are up.  So I’ll try and lighten the mood, and only think about a book with talking animals – Animal Farm:

Do not imagine, comrades, that leadership is a pleasure. On the contrary, it is a deep and heavy responsibility. No one believes more firmly than Comrade Napoleon that all animals are equal. He would be only too happy to let you make your decisions for yourselves. But sometimes you might make the wrong decisions, comrades, and then where should we be?

Why do I find it so easy to imagine those words coming out of some technocrat’s mouth?  Why are the Greek people faced with bailout or chaos?  There has never been an alternative to the bailout since no politician has worked on one.  There is plenty of historical evidence showing that countries can default, and not just survive, but thrive.  There are examples of countries letting the banking system fail for their mistakes yet the country has come back stronger than ever (Iceland most recently).  Yet all we get is politicians, inside and outside of Greece saying that not accepting the terms and getting more bailout money would be catastrophe, without a shred of evidence to back that up.  The best part of this, is that Greece would need to spend money to analyze and prepare for bankruptcy, but they have no money.  Sure the EU gives them as much money as they need to fly back and forth to summits, but letting them spend money that may make them go against the plan, well, that’s another story.

While we wait for the next phases of the Greek drama – EU approval of bailouts because of the effort of their technocrat, and PSI announcements, we can focus on the other big lending decision.  Just how much LTRO to take down.  Bankers in Europe are just bunching up the remains of their lunch to throw in the trash and can sit down and attend meetings determining how much LTRO money they will need and the best way to front run it.  Collateral requirements have been reduced – not quite to the point where the banks could pack up the lunch trash and drag it down to the ECB for some money, but headed that direction.

There are no strings on the 1% money from LTRO.  No “austerity” conditions.  Just borrow it and spend.  There are various estimates on how much banks will save in interest costs, with somewhere around 3% sounding about right.  So banks will earn an extra 3% per annum on the assets they buy with LTRO money.  If they anticipate correctly the huge demand (some estimates that this one will be a trillion) they can scoop up assets in advance.  Italian 5 year bonds are up 10 points since LTRO – that is more than 3 years of carry.  So many people get lost in the world of carry and forget how long and slow that is, and how much more important and immediate mark to market is (or at least the perception of mark to market is in this European banking world of accrual accounting).

I continue to believe the next LTRO will be smaller than the first one and that will disappoint the market, but the anticipation ahead of it, coupled with the “success” of Greece may be enough to push markets higher.  I remain highly skeptical and will continue to fade rallies, but will be quick to take some profits on those fades.

And of course, in between starting to write this and finishing, good old Olli Rehn managed to mention how much worse a default would be for Greece (again with no facts) and that it would have caused a chain reaction for Europe.  Last week, the official lines were that the firewall was ready and it was all priced in (immediately disseminated), but now that the masters want to approve aid, they have to mention it could be dangerous not to give the money.  Many of the same people will flip-flop on the issue, but their words will be sent around without hesitation.  Maybe some American Election coverage people can come to Europe.  If they think Mitt flip-flops, they would have a field day with the European politicians (and there are a lot of them).

I think this will be another interesting week, but think the celebration is premature, and possibly way off base as there is a deeper and growing problem bubbling below the surface.  That and the markets for a few minutes actually paid attention to weakness in China and Japan and the fact that TEPCO was getting  even more of its own bailout money to pay for damages from the nuclear power plant problem (that has been getting downplayed for a year).

Tags: Animal Farm, Austerity Measures, Bailout, Banking System, Catastrophe, Comrade Napoleon, Comrades, Contrary, Greek Drama, Monday Morning, Napoleon, Neville Chamberlain, Peace In Our Time, Politician, Politicians, Psi, Shred Of Evidence, Technocrat, Time Markets, Wrong Decisions
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Global services industry stronger than consensus forecasts

Friday, August 6th, 2010

Non-manufacturing/services PMIs for July surprised economists and analysts on the upside. Where the flash estimate for the euro zone caught the pundits totally off guard earlier this month, the non-manufacturing ISM survey also took them by surprise with the PMI rising to 54.3 in July from 53.8 in June. The consensus forecast was for a drop to 53.0.

Although the JP Morgan Global Services PMI slowed marginally from 54.9 in June to 54.3 in July, the non-manufacturing/services PMI surveys in the three major economic zones, the US, euro zone and China, indicated faster rates of expansion. Contrary to the HSBC China Services PMI that reported a slight increase to 52.6 in July from 52.2 in June, the China Federation of Logistics and Purchasing Non-manufacturing PMI survey, which follows the same methodology as Markit, the compiler of the HSBC survey, surged from 57.4 to 60.1 indicating particularly robust growth.

The non-manufacturing sectors in Germany, France, India and China are expanding strongly, while that of Japan is contracting. However, of concern is Italy where the services sector is now contracting, and it seems as if Spain is likely to follow suit soon.

Sources: Markit, CFLP.

Tags: China Services, Consensus Forecasts, Contrary, Economic Zones, Economists, Euro Zone, France India, Germany France, Global Services, Hsbc, India, Ism Survey, Jp Morgan, Logistics, Manufacturing Sectors, Manufacturing Services, Methodology, Pmi, Pundits, Robust Growth, Surveys
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PIMCO Hunkers Down, Not Buying Much Of Anything Anymore In Anticipation Of “Disinflation”

Monday, January 4th, 2010

This article is a guest contribution by Tyler Durden, ZeroHedge.com.

PIMCO is cutting its exposure to all asset classes, confirming what all but equity chasers (yes, futures are up massively as the futures manipulation scam continues unabated) seem to know – the Fed buffet is now closed:

This all leaves us with portfolios that appear, more than at other times, to be hugging the benchmarks with no bold positioning. Some might suggest we’ve become closet indexers, but, on the contrary, we’re making a very active decision to run light on risk. At this point, we know this is not going to be a particularly high-yielding portfolio. You can only eat what’s in the cafeteria, and right now the cafeteria doesn’t have anything particularly appetizing in it.

We expect the next monthly set of data from the Total Return Fund to indicate that the fund is now in aggressive cash retention mode, taking advantage of the last few months of unbridled Fed generosity.

Tags: Advantage, Advertisement, Anticipation, Asset Classes, Benchmarks, Cafeteria, Chasers, Contrary, Cutting, Disinflation, Futures, Generosity, Guest Contribution, Indexers, Manipulation, PIMCO, Portfolios, risk, Tyler Durden
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Jeremy Siegel: Outlook for Government Bonds

Friday, May 15th, 2009

Jeremy Siegel, on his outlook for government bonds:

40 years ago [US] treasury bonds were yielding over 6.3 percent, about twice their yield today. It is mathematically impossible for government bonds to come close to matching those 12 percent returns in future decades. Stocks, on the contrary, can easily repeat their returns over the past four decades, since those returns were near their
historical average…

For the 55-year period from December 1925, when the well-known Ibbotson stock and bond series begins, through January 1982, total real government bond returns were negative. This means that, by rolling over in long-term government bonds, reinvesting all the coupons, and thereby taking no income, investors’ bond portfolios were sinking in value.

Most strikingly, for the 40-year period from 1941 through 1981, government bond investors lost a whopping 62 percent of their value after inflation. A loss in purchasing power over this long a period has never happened in stocks. There has never even been a 20-year period when real returns in stocks have been negative. In fact, the worst 30-year real return for stocks is plus 2.6 percent per year, just slightly below the average real return investors earn with government bonds.

Looking at today’s markets, the forward-looking prospects for government bonds are very poor. Yields on 30-year inflation-protected bonds are 2.3 percent, and yields are only 4 percent on 30-year Treasuries. In contrast, after stocks have fallen 50 percent from their previous high, as they did in March of this year, their subsequent 30-year real returns have always been in excess of 10 percent per year.

The 40-year outperformance of government bonds over large stocks has ended.

As a addendum, Robert Arnott, of Research Affiliates opined about bonds vs. stocks in Bonds: Reversion Cuts Both Ways?

Tags: 1941, 30 Year Treasuries, Addendum, Bond Investors, Bond Portfolios, Bond Returns, Bond Series, Bonds Vs Stocks, Contrary, Government Bond, Government Bonds, Ibbotson, Inflation Protected Bonds, Jeremy Siegel, Outperformance, Poor Yields, Prospects, Purchasing Power, Research Affiliates, Robert Arnott, Stocks Bonds, Us Treasury Bonds
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