Daily Investment Interpretations

August 16, 2010

2010-8-16:  The markets ended flat today: Modest rebound in Empire State Index for August. The NASDAQ Composite gained 8.04 points (0.39%) to finish at 2,181.87. The Dow shaved off 1.14 points (-0.01%) to close  at 10,302.01, and the S&P 500 inched up 0.13 points (0.01%) to end at 1,079.38. Oil closed at $75.05 a barrel, while Gold rose $10 to $1,227. The VIX subtracted 0.14 to 26.14.
Bond Yields Hit New Lows
    U.S. 10-year yields fall to March 2009 low. Paul Krugman says it well with Permanent Link to Holy Bond Yield, Batman!. Yields on the 10-year Treasury bond closed at 2.59%. (They bottomed at 2% early in 2009.) It was only a few weeks ago that yields on the 10-year Treasury fell below 3%. 
    The yield on 2-year Treasuries is now at %. 
    The yield on 30-year Treasuries closed at 3.74 % after falling below 4% a few weeks ago.. 
    The article explains that the price of 2-year Treasuries has risen 2.07% since the beginning of the year, while the prices of 10-year and 30-year Treasuries have climbed 12.4% and 16.5%, respectively: If Fed opts to buy more Treasurys, it will be a lot. Consequently, bond traders are buying 10-year and 30-year Treasuries for their profit potentials.
    My investment advisory service explains that high-frequency traders have clearly linked bond prices to stock prices in their computerized trading programs. When bond prices go up, stock prices go down. At the same time, it points out that our leading bond trader, Bill Gross of PIMCO, is saying that the dynamics of the bond market don't suggest a double-dip. 
    On the other hand, strategists at CRT Capital Group expect falling yields on longer-term bonds as bond investors lock in yields against the threat of a double-dip recession.
    Tomorrow, the Fed will begin its first purchases of U. S. Treasury bonds.
    Proof of a bond-market bubble  
The Chinese Economy Becomes the World's Second Largest
     Japan eclipsed by Chinese growth and China remains desperately poor. This is an apples-and-oranges comparison. With 1/10th the population of China, Japan would seem to have a per capita level of wealth that's 10 times that of China. However, in terms of real purchasing power, China has about 1/5th the Japanese standard of living. The United States is among the top 10 countries in the world in terms of per capita income, with Japan having fallen to #20, and China at #100, behind Namibia, Algeria, and El Salvador.
Investing in Home Mortgages
    This article, House rules, lists some funds that give modest returns from home mortgages. The best of these, Metwest, has returned 9.7% for the year-to-date.

Sorting Conflicting Stories from the Tower of Babble
    I'm going to try to sort through the contradictory swirl of stories and opinions and come up with some understanding of what's going on. This will have to spelled out piecemeal because of constraints on my time, but here's a fist installment. 
    For the first time since the Great Depression, our traditional (and only) technique for bringing us out of recession, (lowering interest rates) has failed. During the 2002-2003 recession, the Federal Funds Rate rate got down to 1%, and there was talk about how dangerous it would be (" like pushing on a string") if that didn't do the job. But in 2002, 1% was good enough, and: the economy picked back up on its own.
    That didn't happen this time. This time, a 1% Federal Funds Rate didn't even come close to getting the job done. So here we are at the bottom of the Great Recession with our only proven way of lifting us out of recessions having come a cropper. Last year's solution was a one-time stimulus package that was twice as large, as a percentage of GDP, as FDR's largest. (The 2009 fiscal stimulus was $862 billion, or about 6% of the $14.4 trillion, U. S., 2009 GDP.) (On the other hand, FDR's "New Deal" went on for four years, and even four years of the new Deal wasn't enough to put Humpty-Dumpty together again.) That stimulus money kept a Depression at bay while it lasted, and even fueled a mini-turnaround, but now it's largely run out.
Bottom line: Left to its own devices, I'm led to conclude that the U. S. economy is likely to slip into a double dip, or a deflationary morass. This means (at lest to me) that comparisons with recoveries from other recessions are highly suspect. The restocking of inventory (after an unusually zealous abstention from restocking) and the 2009 fiscal stimulus have run their course, and now, there don't seem to me to be any domestic drivers in the pipeline to keep the economy from lapsing into a recessionary vicious circle.
    OK. So why do so many prognosticators still think that the U. S. economy will grow 3% or so this year? How can that happen?
    I can think of two possible mechanisms that might support such a scenario.
(1)  Although the Fed is limited in what it can do from here, it does have options, and it has signaled that it will use them going forward.
(2)  If 50% of U. S, corporate sales take place outside the U. S., might a global recovery keep U. S. corporations afloat even if domestic sales continue to falter?