FOUR LETTER-WORDS

It doesn't take much imagination if one tries to figure out the other side of the bond market.

They're both four-letter words. But here's a hint, gold.

To say gold has been an investment orphan since its 2011 peak around $1,900 an ounce is like saying politicians love to bluster and bloat. So far this year the yellow metal is up 6%, twice the gain in the S&P 500 index return.

Just to be forthright, we don't own any marijuana shares, don't smoke the stuff and try not to labor too much on Sundays. And Taylor, our dog, still laughs occasionally at our snappy one liners. 

If gold were anymore unwelcome today it would look like one's mother-in-law coming up the walkway with a stuffed suitcase unannounced early on a rainy Saturday morning.

Look around. Public confidence in bureaucrats and politicians is lower than whale dung. Bond prices are more inflated than the famous Goodyear Blimp. They took "In God We Trust" off the fiat currency a while ago. 

For years pundits have argued gold doesn't pay anything while you're holding it. Have you looked at your checking or savings account lately? Or how about those supposedly-safe CDs?  

Forget taxes and inflation. Use the old Rule of  72 to see how long it will take to double your money on what your checking or savings account is yielding. Now that's a fun exercise. Next time you have friends over turn it into a parlor game. Just be sure you allot enough time. It's going to take awhile.

We don't sell gold or have a relationship with anyone who does. That's probably our error. We're just saying something our dear old mother used to tell us when we were growing up

 "What you don't know, son, won't hurt you. But it can kill you."

Another one of those four-lettered words.


 

THE BOND BOAT

Want more proof too many are lining up on the wrong side of the interest rate boat?

Today's WSJ: "Rate-Wary Banks Build Bond Shelter."  According to the story, U. S. banks have increased their Treasury investments, joining the so-called in-crowd in their concern over deflation and uncertainty especially about interest rates.

Here's a quote: "In the first quarter, the collective holdings of Treasuries by U.S. banks grew 23%--the biggest shift since the financial crisis and the fifth-biggest on record......As a result banks now hold more Treasuries than they have since 1997, even after adjusting for inflation."

Some cynics might view this as payback to their friends at the Fed, helping to keep a lid on inflation fears and allowing the government to continue financing it's debt on the cheap. There's a spread profit here if one cares to look: Borrowing from depositors and customers for practically zero and booking over 2% income on the bonds.

Now to push the cynical aspect a bit farther, we're not for a moment suggesting that the Fed would ever let the banks know just before they hike rates so the banks can book a profit on those bonds. We're saying you can bet your first born on it.

Banks are feeling the pinch of stronger regulations, declining mortgage business and a drop in securities trading, to list a few of the industry's claimed woes. The solution, according to many bank executives, lower interest rates to ramp up volatility and bring back the mortgage business.

In other words, give them a playing field they like and rally the prices on all those bonds so they can dump them at a profit otherwise we'll have to cut more costs. And we all know what that means, cutting what hardly exists in the financial world today or, for that matter, in corporate America, service.

The bond boat is getting crowded. Just make sure you're wearing a life preserver. What didn't happen in 2014 could be lurking just around the corner in early 2015.

THE BIG HOAX

Generals are not the only ones famous for fighting the last war. Central bankers the globe over know a thing or three about the subject, too.

Forget if you can for the moment energy and food, and that's precisely what they'd like you to do, here's a brief list of rising prices of things despite all the deflation talk and concerns about low inflation among central bankers, airline and movie tickets, tuition and shelter costs, repair services fees and medical costs. 

A front page article of today's WSJ headline reads: "Insurers Push To Rein In Spending on Cancer Care" The first paragraph tells it all. "Insurers are changing how they pay for cancer care, aiming to blunt the soaring costs and push oncologists to adhere to standardized treatment guideline."

Check out your municipal services over the last year or so, things like trash and water or those unwanted but quite costly traffic fines and penalties that for some mysterious reason keep accelerating.

Our guess is the Fed is behind the curve, the economy is closer to so-called full employment than most believe. Much of the hand wringing about slack is just that, misplaced hand wringing. That should get folks thinking about the W word and the next dropped shoe, wages.
 
 Real wages are and have been flat. Many COLAs have been either cut or eliminated. If you're a COLA owner you might prefer the description decimated.

The 10-year Treasury recently hit a low of  2.44% in spite of the fact that many believe the Fed will soon siphon more juice from the punch bowl. That's a big assumption not the least of which is the Fed will get things just right or won't be too slow to recognize their mistake.

The quiver is empty. Standing by to do what ever it takes won't get it this time around. These are bureaucrats. About the only really safe assumption one can make about them is they hardly ever know what they're doing and get it correct. These are the the crowned knights of unintended consequences.

Too many investors are anticipating the horse to stay in front of the cart. But that's why surprises surprise. Look around. Yield-starved investors are desperately chasing anything and everything to sniff out higher returns on their money.

Interest rates are lower than a duck's belly. If the bond market isn't a bubble just waiting to burst, then it don't snow in Minneapolis in the winter time and former Fed Chair Ben Bernanke speaks pro bono to hedge fund mangers on request.

 The late mystery writer Raymond Chandler wrote a classic called The Big Sleep. With all the braying among central bankers about deflation, we suspect these boys and girls are working on another one that should be titled, The Big Hoax.

AROUND THE WEB

At What Cost?
http://www.latimes.com/nation/politics/politicsnow/la-fi-climate-change-impact-chamber-commerce-study-20140528-story.html

Prepare For The Unintended
http://www.minyanville.com/business-news/the-economy/articles/Awash-in-Liquidity-Part-2-The/5/28/2014/id/55108

Pretty Much A Consensus View Here
http://www.bloomberg.com/news/2014-05-26/bond-market-s-message-to-fed-your-4-rate-forecast-is-too-high.html

Where Does The Money Go?
http://www.marctomarket.com/2014/05/great-graphic-us-household-consumption.html

So Soon?
http://globaleconomicanalysis.blogspot.com/2014/05/bank-of-japan-seeks-to-end-stimulus.html

Wage Hike Versus Job Losses
http://www.csmonitor.com/USA/Politics/monitor_breakfast/2014/0219/Minimum-wage-hike-would-cost-500-000-jobs-CBO-director-defends-the-estimate.-video

Unemployment Numbers Jump
http://www.businessinsider.com/german-unemployment-2014-5?utm

Increased Wages Not Much Help
http://www.latimes.com/nation/la-na-minimum-wage-connecticut-20140527-story.html#page=1

We don't often drink tequila, but when we do.....
http://www.businessinsider.com/best-tequila-brands-2014-5

RANDON TUESDAY THOUGHTS

If you're a Pfizer shareholder you should be glad Ian Read and his crew at the big pharmaceutical finally tossed in the towel on the Astra-Zenica deal.

It was smelly from the start. This should be viewed as a victory for the little guy and a clear defeat for Wall Street bankers and their big 2014 bonuses. Now Read will have to lead this huge amalgam and earn his salary, what shareholders are paying him to do.

And the same can be said for Leif Johansson and Pascal Soriot, the two leaders at Astra credited with crafting the anti-takeover scheme that for now has apparently worked. It's now money-where-your mouth-is time for all.

How do you pay these big boys, by putting your confidence and your investment dollars where your mouth is. But be apprised you need to stay focused. Free lunches are the parlor games of bureaucrats and the PC crowd.

What you're buying with your confidence and investment is growth and productivity, not accounting legerdemain or one-off sidesteps. We've said it before and we'll repeat it here. Corporate US taxes are not just too high; they're way too high.

Should dividends and overseas corporate earnings be double taxed? Absolutely not. And that segues into our next thought, the weekend EU election results.



*****

Political pundits will do their best to play down the voter discontent with the EU and its future. It might have even dragged the Dragster, ECB President Mario Draghi, out of his catatonic state and forced him to show the awaiting globe that he indeed has a pair.

But don't forget there are 22 other economic eunuchs on that board. That's what you get when you tolerate committee rule, the hallmark of the EU. Here in US the bureaucrats are doing their best to emulate Brussels, so the outlook for any meaningful change is, as one of my old college professors used to write on my term paper evaluations, grim.

For sure a half-way decent economic recovery will dull memories, something bureaucrats the world over hope for. But it will not significantly, structurally fix much. The Obama administration's foreign policy timidity is another tinder box.     

As noted in today's Financial Times, governments from Japan to Saudi Arabia are starting to get the feeling. Like the words of an old Olivia Newton-John song:  

Let me be there in your mornin'
Let me be there in you night
Let me change whatever's wrong and make it right

They're having increasing doubts about the U.S. wanting to be there. 









 

A LITTLE HELP FROM MY FRIENDS

Everyone from time to time needs a little help.

Nothing like getting that help from your friends like this apparent example posted today at http://www.minyanville.com/business-news/the-economy/articles/Awash-in-Liquidity-Part-I-Why/5/27/2014/.

So why not the Fed to keep a lid on bond yields at taxpayer's expense.

YOU DECIDE

Placing your trust in central bankers is probably the last thing any sentient investor should do.

Their record around the globe is hardly sterling by any measure.  Occasionally, an insider speaks out, usually at the risk of being marginalized by terms like disgruntled, sour grapes or such. It's the same in just about every industry or profession.

Still, we think investors should take the time to hear what these insiders have to say and decide for themselves whenever one comes across such. So here is an interesting article with some quotes from a former member of the ECB.

Read it and decide for yourselves if it has any validity.

http://globaleconomicanalysis.blogspot.com/2014/05/former-bundesbank-vice-president.html

YOU'RE ON YOUR OWN

"... ..COLAs have been growing at record lows levels recently, averaging just 2.47% a year since January 2000. That’s well below the pace of inflation for certain expenditures"

Like the Dos Equis man, we don't often start an article with a quote. But when we do we like to point out the flaw in the quote. This one should have read "inflation for certain expenditures that count." 

Food and energy ought to bubble to mind without much prompting. Aside from rising prices and lagging COLAs, that's not the only thing going on in the COLA world these days.

Three years ago New Jersey jumped into the fray by eliminating its COLA for retirees. It's no secret that many states underfunded their plans during the good times only to have the curtain jerked aside when the wolf along with the bad times showed up the the door of these entities

Here's a quote from New Jersey Governor Chrisitie back then.

“Many states are reducing pension liabilities by lowering or eliminating cost of living adjustments (COLA), or eliminating COLAs for current and future employees. For example, Colorado reduced its 2010 COLA from 3.5% to 0% with a rate of 2% starting in FY2011. Minnesota reduced COLAs from 2.5% to 1-2% depending on the fund, and South Dakota made a 1% reduction in 2010 with future years COLAs based on investment performance.”

President Obama did everything in his power during his first term to set the stage when he froze wages for federal workers and COLA increases for federal retirees for two years. And don't be boondoggled by the cooked up CPI numbers the Federal Reserve tosses around. They're about screwing retirees and anyone on COLAs as much as about revivifying an economy.

And don't count on the courts to save your retirement bacon. A physician-client who provides medical care to police and fire officials in his city, not a small one to be sure, that over the years police have warned him repeatedly, more so now than ever: They cannot protect their citizenry. 

As one sergeant with more than 20 years experience put it, the client says, "You're really on your own."

That's especially good advice for your retirement planning. 


http://burypensions.wordpress.com/2011/06/27/winning-the-cola-war/#ixzz32mCKf1ta

http://blogs.marketwatch.com/encore/2014/05/22/states-cut-colas-for-public-pensions/

http://www.marketwatch.com/story/dont-let-inflation-crack-your-nest-egg-2014-05-24?dist=tbeforebell

REST IN YOUR BLISS

Even a cursory look at this chart shows that real wages for those who really work for a living have been and are flatter than my old girlfriend's chest. And she was a competitive gymnast. 

Click on the link below to see what wages have been over the same period for those 22,000 or so who supposedly toil for the Federal Reserve. You shouldn't be surprised. If you are, then we'll just leave you in your peace with this word: God bless you and your ignorance.

Proper attribution for the charts is listed at the end of the link. 

http://davidstockmanscontracorner.com/these-charts-should-tick-you-off-federal-reserve-salaries-up-13-annually-everybody-else-on-the-flat-line/




Proper attribution for the charts is listed

EUROPEAN ELECTIONS

Here are some quotes from Reuters and other news services picked at random about the European elections.

Ukraine.
Asked by a foreign journalist about relations with Russia, Poroshenko, speaking in fluent English, said he would insist on respect for Ukraine's "sovereignty and territorial integrity". He also said Ukraine would never recognize Russia's "occupation of Crimea", the Black Sea region seized by Moscow in March.

 France
 In France, Marine Le Pen's nationalist movement which blames Brussels for everything from immigration to job losses, was set to take about 25 percent of the vote, comfortably ahead of the conservative opposition UMP on about 21 percent.

President Francois Hollande's Socialists suffered their second electoral humiliation in two months after losing dozens of town halls, trailing far behind in third place with about 14.5 percent, according to projections based on partial results.


Greece
 It was a different story in Greece, epicenter of the euro zone's debt crisis, where the far-left anti-austerity Syriza movement of Alexis Tsipras was expected to take 26-30 percent of the vote, pushing governing New Democracy into second place.

That would appear to reflect popular frustration with the harsh spending cuts the government has adopted in recent years to meet the terms of its economic rescue program.

The surge in support for the far-left raises doubts about how much longer the center-right government can last with a parliamentary majority of just two seats, although government spokesman Simos Kedikoglou said there was no question that the government would not finish its four-year term.

Germany
 Projections by German television indicated that Angela Merkel's Christian Democrats would secure 36 percent of the vote, down from a 23-year-high of 41.5 percent in last year's federal election but still a clear victory.

The center-left Social Democrats were forecast to take 27.5 percent, according to public broadcaster ARD, with turnout up from the last European elections in 2009.

The anti-euro Alternative for Germany (AfD) party won parliamentary representation for the first time with an estimated 6.5 percent, the best result so far for a conservative
party created only last year.

Netherlands
But in the Netherlands, the anti-Islam, Eurosceptic Freedom Party of Geert Wilders' - which plans to forge an alliance with France's National Front - fell well short of its goal of topping the poll.

UK
In Britain, the UK Independence Party, which campaigns to leave the European Union, was set for a strong score after making big gains in local elections held at the same time on Thursday.

From the BBC

The National Front has come first in France's elections to the European Parliament according to exit polls in what PM Manuel Valls has declared a "political earthquake".

Eurosceptic parties appeared also to have made big gains in other countries, coming first in Denmark and Greece.

The centre-right EPP looked set to be the biggest bloc in parliament.

Turnout in the election was 43.1%, according to provisional European Parliament figures - up on last time.

But that would be the first time turnout had not fallen since the previous election - but would only be an improvement of 0.1%.

Business Insider

REUTERS/Remo Casilli

Italy's Prime Minister Matteo Renzi speaks during a confidence vote at the Senate in Rome February 24, 2014.

Europe held votes today for the European Parliament in Brussels and the big headline is going to be the strong showing for right-wing parties.

Indeed in France and the UK, Euroskpetic, rightist parties won big (the National Front and the UKIP respectively).

But from a markets perspective, the rise of anti-Europe parties is only one story.

The other story is that establishment parties did quite well in both Greece and Italy.

In Italy, the liberal party of Italian PM Matteo Renzi scored 40% of the vote, winning handily.

And in Greece, although the leftist SYRIZA party won the greatest number of votes, the coalition of New Democracy (conservative) and PASOK (traditional left) maintained a strong showing. As Nick Malkoutzis puts it, the current government has done enough to survive.

So while the Euroskeptic surge is an issue for the EU, in countries that are particularly vulnerable, the establishment parties are holding on.