Financial topics

[OLD1953]

In the first place, since China bought those bonds for the purpose of increasing their exports to the US, they already got full value for them.

In the second place, a delibrate attack on the dollar would almost certainly lead to a declaration of war, or at least a suspension of trading pending investigations.

[vincecate]

In the first place, since China bought those bonds for the purpose of increasing their exports to the US, they already got full value for them.

In the second place, a delibrate attack on the dollar would almost certainly lead to a declaration of war, or at least a suspension of trading pending investigations.

When a vendor finances a customer he is not getting full value just by getting the IOU. This is really what China has done, loaned American's money so they could buy things from China on credit.

If China has a bunch of treasuries coming due over the next 2 years and just gets the cash as each comes due, and then the US declares war on China, you can bet nobody will buy treasuries from America ever again. That would kill the dollar for sure.

[freddyv]

This has always been a major underlying consideration of mine in determining how this depression will play out and how it will be different from the last one in the 1930s.

Notice that furnishings and autos in your graph are way down. Now notice what is missing...housing! That is the big one that will keep our economy sinking for years to come.



I've also felt that we would not see really bad unemployment numbers because so many boomers would be retiring. They are likely just to move in with their kids or grand children if things get really tight and while they will be a drag on the economy, especially in comparison to the bubble they blew for the past couple of decades, they will be a stabilizing effect, in a sense. Older people are more stable than younger people and are less likely to panic or throw caution to the wind and gamble everything on the stock market or housing turning around; they will likely just hunker down and adjust. If I'm not mistaken, the average age in the U.S. is now about 10 years greater than during The Great Depression of the 1930s.

This, I believe, will play out, and is playing out in a longer, more controlled depression. But I also believe that because the bubble this time around is much larger than in the 1920's we will have farther to fall. I expect a drop in the stock market of more than 90%, when all is said and done. So far, reality is matching my expectations very well in that a more complex, larger bubble will take longer to implode and will mainly look worse only when all is said and done, but will hopefully not create quite the hardships of the last great depression, at least not here in America.

Fred
http://www.acclaiminvesting.com/

[Higgenbotham]

The Fed took some baby steps toward what essentially amounts to monetization (as I understand it) by saying they will purchase government bonds with what rolls off their MBS holdings, keeping their balance sheet constant instead of reducing it. I haven't seen any figures on that, but would guess it amounts to $10-20 billion per quarter. Has anyone seen any figures on that?

Aug. 17, 2010, 11:09 a.m. EDT
Fed buys $2.55 billion in Treasury bonds
NEW YORK (MarketWatch) -- The Federal Reserve Bank of New York purchased $2.551 billion in Treasury debt maturing from 2014 to 2016 on Tuesday. It's the first buyback operation after officials said last week that the central bank would reinvest cash from maturing mortgage-backed securities and housing agency debt back into the bond market to support the economic recovery. Analysts had expected the Fed to buy $2 billion to $3 billion. Dealers offered to sell the Fed $20.949 billion in debt. The Fed said last week it will buy about $18 billion in Treasury securities in nine operations through Sept. 13. After the results, the broader bond market extended its losses, pushing prices down and yields up. Yields on benchmark 10-year notes rose 7 basis points to 2.63%.

[Higgenbotham]

A friend asked me last night whether you own the stocks you buy. I told him I didn't think so because the DTCC does not put ownership in the name of the true owner nor do they provide any means to do so. I also said that the only way I know of to get ownership in your name is to call investor relations at the company whose shares you want to buy and see if they will sell shares directly (bypassing the exchange) and issue you a certificate or put your name on their books.

Who Really Owns Your Stocks? Hint: It's Not You
Monday, July 20, 2009 | Barbara Cohen

So, do you think you own the stocks you've bought?

Think again.

For those of you who have not heard of the Depository Trust & Clearing Corp. (DTCC) and you own stocks ... sit down. This might change your your whole way of thinking.

http://tycoonreport.tycoonresearch.com/ ... -s-not-you

[OLD1953]

In the first place, since China bought those bonds for the purpose of increasing their exports to the US, they already got full value for them.

In the second place, a delibrate attack on the dollar would almost certainly lead to a declaration of war, or at least a suspension of trading pending investigations.

When a vendor finances a customer he is not getting full value just by getting the IOU. This is really what China has done, loaned American's money so they could buy things from China on credit.

If China has a bunch of treasuries coming due over the next 2 years and just gets the cash as each comes due, and then the US declares war on China, you can bet nobody will buy treasuries from America ever again. That would kill the dollar for sure.

"Attack on the dollar" is generally taken to mean dumping all bonds for whatever the market will bring, as fast as possible. Cashing them in and not renewing them is not an attack on the dollar as I've come to understand the term.

Moreover, China used that leverage vs the dollar for the express purpose of selling goods to the entire world, not just the USA. Sans that, there would be no "Chinese miracle". Cheap at the price, I'd have thought.

[JonLaw]

John,

With respect to the P/E ratio, the best free material I have found has been Crestmont Research at www.crestmontresearch.com.

They have charts showing the generally rising P/E ratios for secular bull markets and generally falling P/E ratios for secular bear markets.

Also, Mike Alexander has now essentially admitted that this Secular Bear market may continue through 2028, although he's still optimistic that it will end sometime around 2020. While he's still posting regularly on the Fourth Turning boards, he just recently did another secular market update at www.safeharbor.com.

I think the real crisis will hit when the soverign debt problems finally reveal themselves.

It will be interesting to watch the U.S. deficits continue to run extremely high to simply replace the big gaping hole in the demand side of the equation now that the rot has been revealed in the private debt issuance industry.

- Jon

[freddyv]

John,

I very much appreciated and agree with your rant on the P/E ratio issue, as you know. But something happened in 2009 that has me staying away from rants and emotions when I am considering how to trade. Of course you are writing a blog and so the rants are perfectly acceptable, and very entertaining, I might add.

What happened in 2009 was that I lost everything I had gained in 2007-2008. That happened because I was too bearish and too hard-headed to invest to win rather than to be right. As the stock market rally went on and on and on I saw most of those who knew the economic truth of what was happening losing money or making wrong calls because they knew what the long-term prognosis for our economy really was but failed to apply data-at-hand to the short term outlook.

So I forced myself to step back and take a good look at what I REALLY knew versus how I was trading and I didn't like what I saw. After all, I knew that this secular bear market was similar to 1929-1932 except that it was playing out over a longer period of time and seemed to be a little deeper. I had known previously that in such a secular bear market gaps get closed as the market declines...sooner or later. The gap left open by the crash of '29 was closed by the bear market rally into April of 1930. Each decline afterwards had a rebound back to close the gap; the previous segment's low was matched by the next segment's high...again and again and again. I had known this and ignored it because I was trading on faith and emotion. BTW, that same pattern is clearly seen only one other time that I have been able to find: during the current secular bear market.

So in the late summer of 2009 I posted here and in my own blog that the DJIA would go to 11,000 before resuming the decline that would take us to the bottom. In April of this year that happened and I bought some SDS, being very patient I bought in when the DJIA was at 11,200, and sure enough, I caught the high almost to the day. Because there was no specific gap to fill I got out on the day of the flash crash and missed that and the subsequent decline. But I have also learned that you stay out of the market unless you have a very specific plan and so I waited until, once again, my ideal priced was reached as the market rebounded to 10,700. I bought SDS, and once again I caught the high almost perfectly. I now sit and wait, watching as the DJIA drops lower and lower, knowing it would because I track all the economic data possible, especially the Consumer Metrics Institute data, which gives a real-time view of the economy that can be verified by traditional economic indicators weeks and months later as consumption has its effect on manufacturing and services. This service is amazing and it is currently free.

Utilizing patience and only making decisions based on cold hard data has made me wonder why everyone doesn't do this...except that everyone else is so busy justifying their positions and cherry-picking facts to fit their beliefs. I now feel almost like I have a time machine into the future of the stock market. It amazes me because it was always right there in front of me and only my inability to see the forest for the trees kept me from it.

I urge every trader out there to do away with your beliefs, ego and preconceptions when you make investing decisions. The best rallies happen during bear markets and the bear market will end at some point. Looking at the Consumer Metrics Institute data, had I known of it, or looking at other economic data would have told me that the market was going to finally fill that gap and right now I would be trading with as much as 4x the money I have now. Yes, I have outperformed the S&P 500 since the bear market started, but barely, and I could have done much, much better, if only I had set aside my ego.

Fred
http://www.acclaiminvesting.com/

[maxpowers]

On bond issuance by US Treasury:

Anyone selling to the US and getting paid in US dollars either can hold dollars in US dollar denominated accounts or us bonds/bills/notes. Imagine that you want to sell something to the US market. You already know that the dollars you receive will probably lose some value in the time you receive it to the time you spend it. So logically you build in some loss estimate in your pricing. In this sense, the Chinese and Japanese have already built in the loss so there is no reason to redeem their bonds/bills/notes. What will they get in return? US dollars? Whoever the Chinese buys from and pay with the redeemed bonds must also have a built in loss estimate for the pricing. In this sense it is really a game of passing the potato around. Now someone may say, well let's force the US to pay in non US denominated currency. OK....How many countries are willing to abandon a fairly productive and stable economy because they think they are getting worthless dollars? Also what would China get paid in if they do not accept US dollars for their surplus account with the US? In this sense there is no US T bubble or anything. The US could decide to not issue any bonds and still be able to fund its internal account easily. In the modern monetary system, the US does not need bonds to fund itself. Bonds are actually use to regulate the money supply. The countries selling to the US could hold non interest paying US dollars or they can hold interest bearing bonds...It is as simple as that.

[OLD1953]

When the PIIGS default or refi or whatever PC term they choose when a country goes flat bankrupt, you'll see such a flight to the US dollar that the bonds held by China will become a real concern. It's not that bad when they lose value every year, but when they start gaining value vs real goods, that's appreciation beyond interest payments, and that will be considered a problem.