Category Archives: Fixed Income

Short Memories

Consumer Confidence was reported this morning to have risen sharply, to the highest since December 2000. Stocks rose and bonds fell, taking this news as a sign of economic strength, one presumes. Obviously the buyers do not remember what happened in 2001. when the market fell to a loss of 27% by September.

Oh, and by the way, there is essentially no historical correlation between changes in the reported Consumer Confidence and changes in actual retail spending. Just sayin’


There is much noise that the Fed will raise interest rates to combat “inflation.”

Over the last year to the end of February, wages are up 2.8% (nominal). The price of oil, as a metric for energy prices, is up 32%.

Guess what is driving “inflation.”

The Saudis are still pumping as hard as they can, but justifying it on the grounds that they are storing the above-quota output, not selling it internationally. It seems to me that a tank in Saudi and a tank in Oklahoma are pretty much fungible, except that we at least think we know how much is in the Oklahoma tanks.

The bottom line is that global inventories of oil are continuing to expand to new records, more or less on a daily basis. The EIA is forecasting that US shale is set to expand production by 109k barrels from March to April, rising from 4.853mmbpd to 4.962mmbpd, and offsetting OPEC’s entire February production cut.

At some point we are going to see a reaction and that will be the end of “inflation.” For a while, anyway.


Speculative positions (in futures contracts, speculators must self-identify) are at historical extremes. Crude is the same, I didn’t find such a nice chart is all.


Edit: Found a crude oil chart.

Charts are from zero hedge.

Malls Hit The Wall

According to Forbes in 2015, the US leads the world in retail space per capita, with about 25 square feet (roughly 50 square feet, if small shopping centers and independent retailers are added). In contrast, Europe has about 2.5 square feet per capita. Number two is the UK, with about one-sixth the retail space per capita of the US. Now that online shopping is replacing store visits, shopping malls are becoming white elephants.

More mall landlords are choosing to walk away from struggling properties, leaving creditors in the lurch and posing a threat to the values of nearby real estate.

As competition from online shopping batters retailers, some of the largest U.S. landlords are calculating it is more advantageous to hand over ownership to lenders than to attempt to restructure debts on properties with darkening outlooks.

Obviously this is a looming bust for commercial real estate – and of course a wave of defaults on the associated debt.

Going Out On A Limb

I think the end of this bubble is beginning, as yields spike and the dollar soars:

“Our revels now are ended. These our actors,
As I foretold you, were all spirits and
Are melted into air, into thin air:
And, like the baseless fabric of this vision,
The cloud-capp’d towers, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve
And, like this insubstantial pageant faded,
Leave not a rack behind. We are such stuff
As dreams are made on, and our little life
Is rounded with a sleep.”

― William Shakespeare, The Tempest

The economy is not strong. There are 100+ million adults not working (“not in the labor force”) out of a total population of 325 million, to say nothing of the myriad of government employees who are employed, but not contributing any value to the economy.

Consumption is being sustained by debt, both private borrowing and government money-printing. By January 2009, the United States had accumulated $10.6 trillion in debt. The gross national debt – just federal government debt – stands at $19.7 trillion as of the end of FY2016. Spending is on a pace to add another $2.4 trillion this fiscal year (2017), surpassing $21 trillion by next September. Krugman applauds, and of course this is Obama, not Trump. Yet.

Debt-funded consumption in excess of income has crowded out savings and therefore investment. As investment has declined, so, logically enough, productivity growth has fallen (see previous post). Simultaneously, government has been growing, making a lethal cocktail for real household disposable incomes, which have been declining for years. Pensioners who think they are in good shape are not noticing that defined-benefit pension funds are already starting to cut benefits and many, especially state and local government funds, are woefully under-funded. Social Security is in negative cash flow, and drawing on the general tax revenue pot to make up the difference. The stock market is ludicrously over-valued and promises zero or negative returns to pension funds for years to come. As Margaret Thatcher notably said “Socialist governments traditionally do make a financial mess. They always run out of other people’s money. It’s quite a characteristic of them.”

Powerful deflationary forces are being unleashed. The world is awash in oil and efforts to keep the price up will eventually fail. OPEC in aggregate will not cut supply because its governments (as well as the non-OPEC ones) depend on the flow of oil money to stay in power. I expect oil to reach the lower $20s if not below. Most of the world is engaged in a race to the bottom, cutting interest rates to devalue their currencies and boost exports. They are therefore exporting deflation to the US. I expect to see CAD in the 0.60s and the EUR in the 0.80s. Consumer price inflation in the US appears comparatively strong due to the inclusion of OER¹ in the CPI, which is not done elsewhere, and due to the uncontrolled rise in healthcare and education prices, funded by government subsidies and debt. These prices end up being a form of taxation by the 0.01%, who are on the receiving end. The protest vote in the US election should be no surprise.

OER, a completely fictional number to start with, is high as a result of low interest rates financing housing bubbles. These will end as badly as the previous lot. I choose not to be a homeowner, largely because I don’t want to face a huge capital loss.

In short, the economy is a Potemkin village. Things are not as they are made out to be. Even a fractional increase in rates may trigger a deflationary crisis, especially considering the shortage of dollar liquidity outside the US.

¹ OER, Owner’s Equivalent Rent, is weighted about 25% of the CPI basket. It is estimated by a telephone survey of selected homeowners, asking them how much they think it would cost to rent their a property like theirs.It has nothing to do with what it actually costs them to own and live in their properties.  I am not kidding. Now do you think CPI means anything?

Trumpeting Inflation?

The bond market is, at least superficially, reacting to the election of Mr Trump as if he was going to succeed in creating inflation where all others had failed.

Not very likely. It has been tried. The program of printing money to spend on infrastructure has resulted in nearly every flat surface in Japan being covered in concrete or asphalt, to say nothing of enormous bridges to nowhere and other follies. But no inflation.

The smart money knows this. My personal suspicion is this is a ruse to drive retail investors out of bond funds into the stock market, while the boyz take the other side of the trade. This supposition is supported by the trading in cheap stocks, particularly in the Russell 2000, an index with an undefined P/E.

Oil, the second most important price (labor is #1) in the real economy is tanking (literally). The dollar is soaring as the yuan (-0.9% to a record low today) and euro (-1.1%) fall, obviously also deflationary. This will not end well.


Well the Trump bond slaughter has not been good to the portfolio. However, the strong dollar and the rapidly falling oil price are both powerful deflationary forces. Dr. Copper spiked, but was rapidly crushed today. Foreclosure filings increased 27% MoM in October, the largest increase since the run-up to the last property crisis. All of this bodes well that, once the powers that be feel that they have achieved their goal of getting the unwashed out of bonds and into equities in time for the real slaughter, happy days will be here again. In which light, it is amazing to see that the Russell 2000, an index with an undefined PE – due to aggregate lack of positive E – is the stellar performer. This smacks of a massive degree of (emotional?) retail participation in the Trump stock rally.

So I’m sitting tight.

BTW, my target for oil is $15-20, EUR is $0.80-0.85 and CAD $0.60-0.65.

Calpers Whiffs

Calpers, the largest US pension fund, just reported its results for last fiscal year, ended June 30. Its investment return for the year was 0.6%, down from the previous year’s 2.4%. And this with a bull market in both stocks and bonds, to say nothing of California real estate.

This is a disaster that isn’t waiting to happen – it is well underway, right in front of our eyes. I’ve beaten the drum of its under-funding in the past, so I’m not going to bother again. In addition to its history of corruption, it is well known for being an obnoxious and left-wing activist shareholder, but this isn’t helping the 1.7 million employees and beneficiaries. The labor unions who choose Calpers’ directors assume that they can take what they want from the public wallet, so they choose activism over savvy, but at some point they’re going to be regretting that choice.

Switzerland Underwater

The entire strip of Swiss government bonds, out to 50 years, is now trading at negative yields.

It seems that US Treasury bonds are finally getting the attention they deserve, offering superior (and positive) yields. At least until Janet Yellen starts fooling around again. New record low yield today, but lots more to go.

A Victory For Democracy

80% (more or less) of British voters turned out to vote yesterday and stunned the British and European establishments by voting to leave the EU.

Many people do not understand that the EU is deliberately anti-democratic. The architects of the EU, their countries in ruins after WWII, had as their primary objective preventing anything like WWI and WWII from ever happening again. No argument there, but the fact that Hitler and the Nazis had been democratically elected led them to conclude that democracy could not be trusted. So the European parliament is only a rubber stamp for the bureaucracy – it cannot originate legislation, which can only come from the un-elected Commissioners.

This imperious rule is ultimately, in my opinion, what caused the British to leave. Turning over sovereignty to distant technocrats was fine when they ruled with a light hand, but in recent years they have become increasingly heavy-handed and oppressive.

Britain may be the first to leave but it will not be the last.

British voters heard the arguments and decided.

The Telegraph’s chief political correspondent, Christopher Hope, put the referendum into historical context.

The 2016 EU referendum is set to the biggest uprising against the people who run the UK since the Peasants Revolt in 1381.

Britain’s bosses, politicians, church leaders, sports stars, bankers, economists and celebrities told the people to vote to Remain in the EU.

And (by the look of it now) the people sent back a massive V sign. Democracy indeed.

The V sign, in the UK, does not mean what you think it means.

Markets are roiled. Of special note, Treasury bond futures are up 7 handles. Wow.

Edit: Excellent piece here in the Daily Mail.