Should You Be Worried About a Bond Market Crash?
Talk of a bond market crash has been building for months, and not just among obscure financial bloggers.
Articles sounding the alarm about a bond market crash have appeared time and again in many mainstream publications.
Recent headlines like "Danger Lurks Inside the Bond Boom" (The Wall Street Journal), "How Banks Could Get Blown Away by Bond Bubble" (Fortune), and "Beware the Bond Bubble in 2013" (CNNMoney) have raised concern among investors.
Here's the problem: Interest rates are at historic lows. That makes bond prices relatively high.
There's pretty much nowhere left for rates to go but up. That might be good for buyers of bonds in the future, but terrible for those who hold bonds stuck at low rates.
Central Banks Move to Prevent Recession 2013
With more investors and consumers concerned over the Recession 2013 threat, Europe and China today (Thursday) took action to motivate their sluggish economies and prevent a drastic global slowdown.
It hasn't even been a week since a crucial European summit provided a blueprint for the 17-member Eurozone to pull out of its debt crisis. But already the rally that immediately followed has fizzled. At issue is how European leaders will work out the tricky details for a central banking authority and the expanded use of bailout funds.
Now the European Central Bank (ECB) doesn't have much left in its arsenal to calm fears of a broad economic slowdown in the region. It used one of its last tools Thursday when it slashed its benchmark lending rate by 0.25 percentage points to 0.75%, the lowest level since 1999, when the euro was created.
At this level, the ECB hopes that bankers be more willing to lend and also that investors will open their wallets wider.
ECB President Mario Draghi noted in a press conference following the group's decision that the move was made independently of China's decision to cut rates.
"There wasn't any co-ordination that went beyond the normal exchange of views on the state of the business cycle…economy…or global demand," said Draghi.
Draghi stressed that the cut wasn't aimed to help an individual country, but to assist the entire struggling region.
"We can genuinely say that this measure is addressed to the whole of the euro area, and not only to specific countries," he said.
Reiterating that markets haven't felt the full effect of the ECB's recent moves to increase liquidity, Draghi also cautioned that the bank could only do so much. Draghi said the central bank couldn't do more than it already had to encourage people to borrow or invest.
"Credit is now led predominantly by demand, and if demand is weak, you wouldn't expect string credit growth," Draghi added.
Recession 2013: This Report Shows We're Already Headed There
In fact, former President Bill Clinton said he thinks we are already in a recession – and that was before the latest U.S. unemployment numbers were released, painting an even gloomier picture.
By now most of you have heard about the awful numbers in the discouraging U.S. jobs report for May, where only 69,000 jobs were added – nowhere near the 150,000 expected.
But what's worse about the U.S. jobs report is the trend of long-term unemployment.
Even though the national unemployment rate has dropped from its October 2009 high of 10.1% to its current level of 8.2%, the long-term unemployment levels have not seen a similar drop.
Without improvement in these numbers, fears regarding another recession will become reality.
How U.S. Jobs Trend Will Spell "Recession 2013"
Long-term unemployment, measured every six months, reached a peak of 46% of the unemployed population during May 2010.
That number has only fallen to 42.8%, or 5.4 million of the total unemployed, and has risen of late.
How I Learned to Stop Worrying and Love the Fiscal Cliff
Taking a header off the "fiscal cliff" might be the best thing that could happen to the United States.
It sounds crazy, given all the dire predictions economists are making about the "Taxmageddon" that will arrive on Jan. 1, 2013.
While true, no one is talking about what would happen to the economy after the fiscal cliff crisis of 2013.
If Congress fails to act and allows all the bad things to happen – the expiration of the Bush-era tax cuts and the payroll tax cut, as well as the enforced spending cuts (sequestration) agreed to in the budget deal last year – the federal budget deficit would start shrinking dramatically.
And the fiscal discipline, while brutal in the short run, would jump-start the economy by early 2014.
It's all in a recent Congressional Budget Office (CBO) report, "Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013."
The CBO ran projections based on two scenarios.
One looks at what would happen if Congress does nothing and lets the country go over the fiscal cliff. The other scenario looks at what would happen if Congress dodges the fiscal cliff by extending most, if not all, of the current policies.
Choosing to take a leap off of the fiscal cliff–as has been widely reported– would slam an already faltering U.S. economy. The CBO report says GDP would shrink by 1.3% in the first half of 2013, pushing the country back into a recession.
On the other hand, extending current policies would push GDP up 5.3% in the first half of 2013.
That may sound great, but a funny thing happens after those first six months.
Beware, Taxpayers: The Days of U.S. Bank Bailouts Might Not Be Over
The U.S. government has spent more than $12 trillion to prop up large financial institutions since the 2008 financial meltdown, but more taxpayer money could still be used for U.S. bank bailouts.
A Standard & Poor's report Tuesday said that despite the government's efforts at financial reform through the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. Treasury, U.S. Federal Reserve and Congress could still bail out a "too-big-to-fail" bank if it felt it necessary to contain risk.
"We believe the government may try to avoid contagion and a domino effect if a Sifi [systemically important financial institution] finds itself in a financially weakened position," the S&P wrote in a research note.
S&P acknowledged that policymakers have been trying to make it clear that bank bailouts are over, but that the government's track record says otherwise.
"Time and time again, the U.S. government has found ways, many times reluctantly, to contain systemic risk and limit economic fallout when large financial institutions are on the brink of failure," said S&P.
Strong Commodity Prices: My Four Favorite Ways to Profit From the Rebound
If you're like me, you've been invested in mining companies or oil producers the last couple of months because you expected a return to the strong commodity prices of early 2011.
But if that's the case, like me, you're hurting. Commodity prices are well below the high levels we saw in early May – in fact, they've dropped more than the rest of the market.
The temptation to sell out before things get worse is very strong.
But don't do it …
The preconditions for strong commodity prices are still in place. And at present levels, a number of commodity and energy-producing shares are stone-cold bargains.
Let me tell you why …
Don't Be Fooled by the Price Declines
Against a backdrop of strong commodity prices, these companies had an excellent 2010.
I'm sure you were surprised to see that these same companies didn't do all that well in the first few months of the New Year – even though oil, gold, silver and copper prices were climbing and rare earth prices were going though the roof. The market seems to have believed that these strong commodity prices were actually peak commodity prices – and that producers wouldn't get much benefit from those peaks because they would receive the high revenue for only a short period.
Then when commodities prices dropped from their peaks – oil by about 20%, silver by about 35%, but gold by only 8%, even at the bottom – share prices of commodity producers fell even more. The investor sentiment was very clear: Commodity producers hadn't benefited all that much from peak prices, and now that prices were likely headed down, producers were looking at a stretch in which they would be much less profitable.
But here's what I want you to know: This bearish theory on commodity producers becomes flawed if, in fact, we have not yet seen the peaks that commodities will actually achieve. If that's the case, the benefit to producers from high prices would become much greater, as we would expect the prices to rise further and the high-price period to last longer.
And I would argue that this is precisely where we are today.
The Biggest Heist in History: U.S. Taxpayers Could Be On the Hook for Iraq's Missing Billions
For nearly a decade, U.S. military operations in the Middle East – Iraq in particular – have been criticized as a cumbersome and costly burden on the American taxpayer.
That accusation gained new credence this week when the Pentagon finally acknowledged that nearly $7 billion of Iraqi oil money might have been stolen.
And what's worse is that the U.S. taxpayer could end up paying for the mistake.
Following the March 2003 invasion of Iraq, the United States liberated, or seized, billions of dollars of assets from that country. But since Iraq had no banking system, the money – much of which came from Iraqi oil sales – was placed in an account at the Federal Reserve Bank of New York.
From there, large pallets of shrink-wrapped cash were periodically loaded into tractor-trailer trucks, driven to Andrews Air Force Base in Maryland, and airlifted to Baghdad. Some $12 billion of cash was flown to Iraq in the months following the overthrow of Saddam Hussein.
Retail Sales No Reason for Market Party
Today's retail sales report was far from a reason for the market to party. The media are reporting that on a seasonally adjusted basis, nominal retail sales fell less than expected. An analysis of real retail sales suggests that the underlying trend is weakening, and that contrary to the market's reaction today, the outlook may be less than rosy for stocks.
In order to filter out the effect of sharply higher gas prices and their impact on sales, I looked at the data on a historical basis ex gas prices. According to a breakdown of the retail sales data provided by the Census Bureau, actual, not seasonally manipulated data for nominal retail sales ex gasoline rose by 6.2% on an annual basis. That sounds great, aided no doubt by the weak dollar drawing shoppers to the US from the rest of the world.
Sorry Mr. Bernanke: There Will be a Double-Dip Recession
Despite what U.S. Federal Reserve Chairman Ben S. Bernanke said in his speech at the International Monetary Conference yesterday (Tuesday), it looks very much like we're headed for a double-dip recession.
Indeed, the economic reports of the last week or so demonstrate that the U.S. job machine was never really jump-started after the Great Recession of 2008-09.
The upshot: The U.S. economic recovery is stalling, and we're almost certainly looking at a double-dip downturn.
Recessions are always painful – and double-dip recessions are even more so.
And this second "dip" may be more of the same – a bloody economic downturn that leads into a feeble recovery with unemployment spiking to even higher levels than we're currently seeing.
But there's a slight chance that this double-dip recession could prove quite productive for the U.S economy.
Let me explain.