Peeled off my Treasury (TLT) position into leg higher this am. This article has been circulating among trading desks suggesting Japan is losing control of the nuclear problem.
no positions
Wednesday, March 16, 2011
Blizzard of Yen
Nathan Algren: "How is your poem coming?"
Katsumoto: "The end is proving difficult."
--The Last Samurai
Last nite the Bank of Japan (BOJ) continued to pour 'liquidity' into Japanese financial markets. Total money printing over the past three days has been nearly $700 billion worth of yen. That amount exceeds the objective of the Fed's QE2 program.
At first glance, one would expect the yen to be hammered by this massive wave of money printing. However, the yen is actually higher over the past couple of days.
How can this be? Over the past few years people have been borrowing yen from the BOJ at ultra cheap rates and using the proceeds to speculate in stocks, bonds, and other risky projects. This called a carry trade--borrowing at cheap rates and investing in a project with a higher rate of return. The idea is to make money on the spread between the cost of 'carrying' the cheap loan and the return on the risky project.
The risk to carry trades is that either a) borrowing costs rise or b) returns on risky projects decline. When either occurs, carry traders sell their risky projects and seek to buy back currency in order to pay back their loans and reduce leverage.
Right now, investors want out of risky projects that were funded with borrowed yen. They are effectively short the yen, and to cover their short position they need to buy yen, which is putting upward pressure on price due to higher demand.
Once the urge to close out carry trades sets in, herd mentalities of risk aversion can make this behavior persistent.
It should also be mentioned that carry trades funded by US dollars have increased dramatically over the past couple of years as investors have been exploiting ultra cheap rates offered by the Federal Reserve.
position in US Treasuries
Katsumoto: "The end is proving difficult."
--The Last Samurai
Last nite the Bank of Japan (BOJ) continued to pour 'liquidity' into Japanese financial markets. Total money printing over the past three days has been nearly $700 billion worth of yen. That amount exceeds the objective of the Fed's QE2 program.
At first glance, one would expect the yen to be hammered by this massive wave of money printing. However, the yen is actually higher over the past couple of days.
How can this be? Over the past few years people have been borrowing yen from the BOJ at ultra cheap rates and using the proceeds to speculate in stocks, bonds, and other risky projects. This called a carry trade--borrowing at cheap rates and investing in a project with a higher rate of return. The idea is to make money on the spread between the cost of 'carrying' the cheap loan and the return on the risky project.
The risk to carry trades is that either a) borrowing costs rise or b) returns on risky projects decline. When either occurs, carry traders sell their risky projects and seek to buy back currency in order to pay back their loans and reduce leverage.
Right now, investors want out of risky projects that were funded with borrowed yen. They are effectively short the yen, and to cover their short position they need to buy yen, which is putting upward pressure on price due to higher demand.
Once the urge to close out carry trades sets in, herd mentalities of risk aversion can make this behavior persistent.
It should also be mentioned that carry trades funded by US dollars have increased dramatically over the past couple of years as investors have been exploiting ultra cheap rates offered by the Federal Reserve.
position in US Treasuries
Tuesday, March 15, 2011
Drop Zone
And there's some chance we could fail
But the last time someone's always there for bail
--Toad the Wet Sprocket
Want to see what a crash looks like? Take a look at the Nikkei (NIKK) in two days.
The NIKK is off 17% since Monday. At one point last nite, NIKK futures were about 25% percent lower.
Domestic markets bounced after opening about 3% lower this morning. Final tally found the S&P 500 down about 1.5%.
Bulls will likely drink this news pretty, and a rally to relieve some pressure may be due. But there may be unfinished business, perhaps a lot of it, to the downside.
In any event, risk management seems the order of the day...
position in SPX
But the last time someone's always there for bail
--Toad the Wet Sprocket
Want to see what a crash looks like? Take a look at the Nikkei (NIKK) in two days.
The NIKK is off 17% since Monday. At one point last nite, NIKK futures were about 25% percent lower.
Domestic markets bounced after opening about 3% lower this morning. Final tally found the S&P 500 down about 1.5%.
Bulls will likely drink this news pretty, and a rally to relieve some pressure may be due. But there may be unfinished business, perhaps a lot of it, to the downside.
In any event, risk management seems the order of the day...
position in SPX
Monday, March 14, 2011
GAO Financial Statements
I have a tendency to wear my mind on my sleeve
I have a history of losing my shirt
--Barenaked Ladies
While I'm jotting data, a couple of snippets from the GAO financial statements of United States for FY ending Sept 2010. All numbers below in $billions.
From the income statement (2010):
Consolidated revenue $2,217
Consolidated net cost $4,296
Net operating revenue (cost) ($2,080)
From the balance sheet (9/30/10)
Total assets $2,884
Total liabilities $16,357
They don't do this, but equity here is 2,884 - 16,357 = -$13,473. In the world of markets, negative equity = insolvency.
The GAO includes off-balance sheet actuarial estimates of the present value of the various entitlements (Social Security, Medicare, etc). Their 2010 estimate is $30,857 (a value that seems way too low).
Regardless, if we add these off balance sheet liabilities to the on balance sheet liabilities we get $47,214, which puts equity at -$44,330.
The operative words here are insolvency and leverage...
I have a history of losing my shirt
--Barenaked Ladies
While I'm jotting data, a couple of snippets from the GAO financial statements of United States for FY ending Sept 2010. All numbers below in $billions.
From the income statement (2010):
Consolidated revenue $2,217
Consolidated net cost $4,296
Net operating revenue (cost) ($2,080)
From the balance sheet (9/30/10)
Total assets $2,884
Total liabilities $16,357
They don't do this, but equity here is 2,884 - 16,357 = -$13,473. In the world of markets, negative equity = insolvency.
The GAO includes off-balance sheet actuarial estimates of the present value of the various entitlements (Social Security, Medicare, etc). Their 2010 estimate is $30,857 (a value that seems way too low).
Regardless, if we add these off balance sheet liabilities to the on balance sheet liabilities we get $47,214, which puts equity at -$44,330.
The operative words here are insolvency and leverage...
Federal Outlays
"They want what every first-term administration wants - a second term."
--Robert Ritter (Clear and Present Danger)
Wanted to jot these numbers down so that they're more clear in my head. Taken from OMB data table 3.1 Outlays by Superfunction and Function: 1940-2016.
2010 Federal Govt Outlays
Social Security $707 billion (20.4% of total)
National Defense $694 (20.1%)
Income Security $622 (18.0%)
Medicare $451 (13.1%)
Health $369 (10.7%)
Net Interest $196 ($5.7%)
Education, Training, Employment, Social Services $128 (3.7%)
Veterans Benefits and Services $108 (3.1%)
Total Federal Outlays $3,456
If we combine the Medicare, Health, and Veterans categories, we get a $921 billion 'healthcare' category which is about 27% of total outlays.
The categories above make up the bulk of what have been labeled 'nondiscretionary,' 'mission critical,' or the like, meaning that these categories should be off limits w.r.t. reductions. These categories sum to $3,276, which is 95% of total outlays.
--Robert Ritter (Clear and Present Danger)
Wanted to jot these numbers down so that they're more clear in my head. Taken from OMB data table 3.1 Outlays by Superfunction and Function: 1940-2016.
2010 Federal Govt Outlays
Social Security $707 billion (20.4% of total)
National Defense $694 (20.1%)
Income Security $622 (18.0%)
Medicare $451 (13.1%)
Health $369 (10.7%)
Net Interest $196 ($5.7%)
Education, Training, Employment, Social Services $128 (3.7%)
Veterans Benefits and Services $108 (3.1%)
Total Federal Outlays $3,456
If we combine the Medicare, Health, and Veterans categories, we get a $921 billion 'healthcare' category which is about 27% of total outlays.
The categories above make up the bulk of what have been labeled 'nondiscretionary,' 'mission critical,' or the like, meaning that these categories should be off limits w.r.t. reductions. These categories sum to $3,276, which is 95% of total outlays.
Support Group
I have a tale to tell
Sometimes it gets so hard to hide it well
--Madonna
Should the downward move in the S&P 500 (SPX) continue, what does chartgazing suggest about significant support below?
Pulling the time horizon back to a 3-4 year frame, important support appears to rest around SPX 1225 (about 60 pts below current levels). This level reflects the intersection of a horizontal and trendline support dating back to the Spring 2009 lows.
If/when we get there, SPX 1225 may constitute a meaningful battleground bulls and bears to slug it out.
position in SPX
Sometimes it gets so hard to hide it well
--Madonna
Should the downward move in the S&P 500 (SPX) continue, what does chartgazing suggest about significant support below?
Pulling the time horizon back to a 3-4 year frame, important support appears to rest around SPX 1225 (about 60 pts below current levels). This level reflects the intersection of a horizontal and trendline support dating back to the Spring 2009 lows.
If/when we get there, SPX 1225 may constitute a meaningful battleground bulls and bears to slug it out.
position in SPX
Earthquake Wake
Fearless people, careless needle
Harsh words spoken and lives are broken
--Seal
Death tolls from last Friday's catastrophic earthquake in northern Japan have now topped 10,000--a number that is almost certain to rise significantly higher. The country is now working to stave off additional disasters at a couple of nuclear power plants that have experienced reactor damage.
Last night the Nikkei sold off more than 6%. The Bank of Japan (BOJ) injected $200+ billlion billion of 'liquidity' into the financial system in the form of short term money market credit, and asset (bond and ETF) purchases.
In the midst of the BOJ's money printing, the yen actually rallied last nite. As explained here, one reason for this is that there is an immediate need for cash in Japan. People who have have purchases risky assets with yen borrowed at uber cheap BOJ rates (a.k.a. 'the yen carry trade) are now looking buy those yen back to shed risk and whether the economic storm.
Stateside, there has been some fear that Japan might start unwinding its huge stash of US Treasury debt in order to raise cash as well. Thus far, the aggressive BOJ monetary actions appears to have stemmed any predilection to liquidate US bonds.
This is a dynamic situation that requires careful watching.
position in TLT
Harsh words spoken and lives are broken
--Seal
Death tolls from last Friday's catastrophic earthquake in northern Japan have now topped 10,000--a number that is almost certain to rise significantly higher. The country is now working to stave off additional disasters at a couple of nuclear power plants that have experienced reactor damage.
Last night the Nikkei sold off more than 6%. The Bank of Japan (BOJ) injected $200+ billlion billion of 'liquidity' into the financial system in the form of short term money market credit, and asset (bond and ETF) purchases.
In the midst of the BOJ's money printing, the yen actually rallied last nite. As explained here, one reason for this is that there is an immediate need for cash in Japan. People who have have purchases risky assets with yen borrowed at uber cheap BOJ rates (a.k.a. 'the yen carry trade) are now looking buy those yen back to shed risk and whether the economic storm.
Stateside, there has been some fear that Japan might start unwinding its huge stash of US Treasury debt in order to raise cash as well. Thus far, the aggressive BOJ monetary actions appears to have stemmed any predilection to liquidate US bonds.
This is a dynamic situation that requires careful watching.
position in TLT
Sunday, March 13, 2011
Hold the Line
It's not in the way that you hold me
It's not in the way you say you care
--Toto
It has been said that it's better to draw trend lines with a dull crayon rather than with a sharp pencil, lest one is prone to jump to conclusions about pattern changes.
Such is the current technical state of the S&P 500 (SPX). The uptrend since last March is being challenged. Not decisive enough to confidently conclude that the trend is broken.
But certainly close enough for bulls to be looking over their shoulders.
position in SPX
It's not in the way you say you care
--Toto
It has been said that it's better to draw trend lines with a dull crayon rather than with a sharp pencil, lest one is prone to jump to conclusions about pattern changes.
Such is the current technical state of the S&P 500 (SPX). The uptrend since last March is being challenged. Not decisive enough to confidently conclude that the trend is broken.
But certainly close enough for bulls to be looking over their shoulders.
position in SPX
Saturday, March 12, 2011
Ponzi's World of Debt
All I want is to be left alone
In my average home
But why do I always feel
Like I'm in the twilight zone
--Rockwell
My brother asked me the other day how the entire world could be in debt. Isn't it a zero sum game, he asked, where someone lends and someone borrows? Shouldn't there always be a creditor and a debtor?
This would be true if the borrowing process directly involved lending the underlying economic resources that serve as the basis for exchange. If I chop wood for a living, then cords of wood are my income. I could loan some of my saved income to someone else--say, a baker. The baker would owe me cords of wood in return, or the some agreed upon substitute, perhaps loaves of bread, based on the terms of the contract.
When borrowing involves real economic resources, then there is truly a creditor and a debtor.
Things are different, however, when borrowing involves money in the form of paper currency. The economic purpose for money is to facilitate exchange. Instead of the awkward process of bartering cords of wood for loaves of bread, money makes the exchange more efficient.
When money supply is held constant so that it accurately and consistently reflects quantities of underlying economic resources, then the borrowing process is still a zero sum game--there are creditors and debtors.
Unfortunately, money serves political purposes as well as economic purposes. Bureaucrats can print money to pursue political objectives. When bureaucrats can print money, they certainly will. Thus, the money supply is not stable. Instead, it grows over time (a.k.a. inflation). As money supply grows, it loses its relationship to underlying economic resources.
As money's relationship to underlying economic resources becomes obscured, then precisely who the creditors and debtors are in the borrowing process becomes difficult to determine. It is possible to lend money while consuming all underlying economic income. The primary restraint in this process is the extent to which political will motivates further money printing.
Over time, it is likely that the borrowing process is likely to morph into a ponzi where people lend and borrow printed money from each other. All the while underlying economic resources are consumed rather than saved.
This lasts until all economic resources are depleted.
In my average home
But why do I always feel
Like I'm in the twilight zone
--Rockwell
My brother asked me the other day how the entire world could be in debt. Isn't it a zero sum game, he asked, where someone lends and someone borrows? Shouldn't there always be a creditor and a debtor?
This would be true if the borrowing process directly involved lending the underlying economic resources that serve as the basis for exchange. If I chop wood for a living, then cords of wood are my income. I could loan some of my saved income to someone else--say, a baker. The baker would owe me cords of wood in return, or the some agreed upon substitute, perhaps loaves of bread, based on the terms of the contract.
When borrowing involves real economic resources, then there is truly a creditor and a debtor.
Things are different, however, when borrowing involves money in the form of paper currency. The economic purpose for money is to facilitate exchange. Instead of the awkward process of bartering cords of wood for loaves of bread, money makes the exchange more efficient.
When money supply is held constant so that it accurately and consistently reflects quantities of underlying economic resources, then the borrowing process is still a zero sum game--there are creditors and debtors.
Unfortunately, money serves political purposes as well as economic purposes. Bureaucrats can print money to pursue political objectives. When bureaucrats can print money, they certainly will. Thus, the money supply is not stable. Instead, it grows over time (a.k.a. inflation). As money supply grows, it loses its relationship to underlying economic resources.
As money's relationship to underlying economic resources becomes obscured, then precisely who the creditors and debtors are in the borrowing process becomes difficult to determine. It is possible to lend money while consuming all underlying economic income. The primary restraint in this process is the extent to which political will motivates further money printing.
Over time, it is likely that the borrowing process is likely to morph into a ponzi where people lend and borrow printed money from each other. All the while underlying economic resources are consumed rather than saved.
This lasts until all economic resources are depleted.
Friday, March 11, 2011
Mobocracy
"Do you hear that, Mr Anderson? That is the sound of inevitability."
--Agent Smith (The Matrix)
Occaisionally on these pages, we've observed the incompatibility between democracy, defined as a governmental system grounded in majority decision-making, and liberty (e.g., here, here, here).
GMU professor Walter Williams recently penned an insightful missive on the subject.
The central idea, one that can be linked to thought that founded this country, is that people are born with natural rights that are not granted by any individual, group, or governing body. Those same entities have no just claim over those rights either.
Democratic process is sure to infringe on natural rights--because over time special interest groups that can amass enough votes can trample the natural rights of the minority. Mob rule.
The Framers understood the poor fit between democracy and liberty. Their idea was to design a government grounded in the rule of law instead of the arbitrary rule of bureaucrats.
The Framers' idea remains radical to this day. Mob rule remains conventional thinking and practice.
--Agent Smith (The Matrix)
Occaisionally on these pages, we've observed the incompatibility between democracy, defined as a governmental system grounded in majority decision-making, and liberty (e.g., here, here, here).
GMU professor Walter Williams recently penned an insightful missive on the subject.
The central idea, one that can be linked to thought that founded this country, is that people are born with natural rights that are not granted by any individual, group, or governing body. Those same entities have no just claim over those rights either.
Democratic process is sure to infringe on natural rights--because over time special interest groups that can amass enough votes can trample the natural rights of the minority. Mob rule.
The Framers understood the poor fit between democracy and liberty. Their idea was to design a government grounded in the rule of law instead of the arbitrary rule of bureaucrats.
The Framers' idea remains radical to this day. Mob rule remains conventional thinking and practice.
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