TRUST

 

Put your hand in the hand of the man from Galilee is a line in an old gospel tune.

Believer or non-believer, it's about trust. And according to a recent Financial Times blurb, one group you might not want to put your hand in the hands of when it comes to your investment future and interest rates is economists. 

Of  67 economists polled by Bloomberg in April, the Times  reported, every one of them predicted higher interest rates by this October. So far as everyone knows this has yet to happen. Consensus might be comforting, but it's also dangerous.

The explanations for the demise of interest rates in the U.S.10-year Treasury note are legion:

Wrong-footed bond fund managers covering their shorts or playing catch-up after missing the move. Foreign investors looking for a safe port to park their money and at the same time make some money. Pension funds who have to make a reasonable guess about their future obligations. A slower-than-expected-more lumbering U.S. economy coupled with the yield-hungry crowd. The Fed trying to hold the lid on future inflation concerns. All of these and more get tossed around daily in the MSM.

With the exception of  bond yields not much has changed since the start of the year other than equity valuations are less cheap though not so out of whack as to cause more than a sharp and, as many believe, much needed short-term correction. 

There is still plenty of money on the sidelines, most of it retail, as, according to one firm that tracks such things, recently reported, almost twice as much money during the first four months of this year flowed into savings accounts as into equity mutual funds.

Think of it this way. Savings accounts that yield next to nothing and a relentless rising equity market. This is an age old teeter-totter.  One end is fear of being in, the other missing out, setting the stage once again, a cynic might suggest, with an increasingly higher market to pull retail folks in at the later stages to push the market even higher and setting them up one more time for you know what.

So in any quick, sharp pullback, we'd be buyers because until interest rates spite there's still more upside left in this playful, aging puppy.  

That's our view. We hope you trust yours.

BEYOND THE ZIRP ZONE

John Authers in the FT's weekend edition writes in his "The Long View" column: "The dollar has us all entrapped. There is simply nothing that is better, and nothing that is safer." 

Authers is quoting a Cornell University economics professor who, surprise of surprises, has a new book on the subject. What Authers suggests is the dollar despite all the hand wringing will not soon lose its world status as the currency of economic exchange, a terrific and some might say a privileged advantage.

Nor are we suggesting anything different. But there is a consideration here, one that Authers to his credit acknowledges.

At the beginning of 2014 most expected bond interest rates to rise and bond prices to fall. Now as just about everyone on the planet including my gardener knows, it didn't happen. Once again bettors are lined up including the ECB crowd to see the dollar rise along with U.S. interest rates and the euro decline.

You can bet a lot of  EU bureaucrats and politicians are praying for such especially given the recent voting results there. And we're not here to suggest it won't. We've said before and in print that the euro could fall to around 120, probably were it belongs.

But this is really just another example of a "Beggar thy neighbor" stunt to help pull the EU out of its economic doldrums. It does little or nothing to correct structural faults and cracks. It's just another form of putting direct pressure on the wound until the surgeon arrives. But in this case none is coming.

At the start of the year emerging markets were touted as the place not to be. Except for a brief interlude, that appears to be false as investors are once again throwing money there. Emerging market stock funds have shown an increase of money flows for the last three months.

Emerging market shares based on the MSCI are up 3.1% so far in 2014 versus 3.8% for the S&P 500. On a valuation level the MSCI offers the better value trading at a forward p/e ratio around 10 compared to the S&P 500 at 15. The 10 year average for the MSCI is 10.8 versus 13.8 for the S&P 500.

None of this is to suggest you should be piling into emerging markets. The time to get in was back in February when the index was hovering near its lows and investors were following the January touts. The take home here is the unexpected frequently catches people with their drawers down.

To be sure, many will counter that we didn't know that was the bottom. We didn't say we did. Nor do we pretend to possess the skill to devine such. We just take what the market gives us and often times that means fading popular opinion.


With nearly every single solitary interplanetary soul apparently looking for interest rates to go up gradually and orderly, what happens if they surprise by bypassing ZIRP on their way to much higher ground?

AROUND THE WEB

IS THE WAR ON DRUGS CAPUT?
http://www.thedailybell.com/editorials/35358/Anthony-Wile-Is-the-War-on-Drugs-Over/

UK INVESTORS BOOST EM EXPOSURE.
http://www.reuters.com/article/2014/05/30/us-funds-poll-britain-idUSKBN0EA11220140530

THE PROPAGANDA WAR
http://www.spiegel.de/international/world/russia-uses-state-television-to-sway-opinion-at-home-and-abroad-a-971971.html

 SLOWER GROWTH AHEAD?
 http://www.csmonitor.com/Business/2014/0601/Whither-US-entrepreneurs-Why-a-key-engine-of-economic-growth-is-sputtering

THE UP COMING ECB MEETING
http://www.minyanville.com/business-news/markets/articles/Trading-Radar-The-Most-Important-Market/5/30/2014/id/55165

THE TRUH: HARD TO KNOW
http://globaleconomicanalysis.blogspot.com

LOW VOLUME, LOW VOLATILITY
http://www.marketwatch.com/story/volume-vix-and-yields-are-stock-markets-bogeymen-2014-06-01?pagenumber=2

BETTER THAN THEY LOOK
http://www.theautomaticearth.com/debt-rattle-mat-30-2014-the-pretty-girl-and-the-us-economy/

OIL PULLBACK

Oil is due for a pullback.

If  we can trust what we read and read what we trust, the black oozy stuff  should come off it's high pretty soon and provide one with an opportunity.

If you aren't buying it at that time you love working for the man. Most people do. That's why there's that so-called big inequality gap do-gooders, politicians and bureaucrats love to exploit. Expect another spike up first, then the pull back.

Hydrocarbons should be a permanent holding in your portfolio with some profit taking sprinkled in from time to time. People love to hate. That's never going to change. Don't let it stop you from making a profit. They've already tried making it a sin. Now they want to make it a crime.

There is much more at stake here than what the so-called cognoscenti are telling you. Despite all the caterwauling the globe is not awash in oil. And even if it were they would find some way to marginalize it, keep it from trickling down to you. 

Two big oil players, Exxon and BP, just put their thumbs to their noses and waved their fingers at official sanctions against Russia.   

Oil is a substance that goes into the making of so many other products it's meaningless to discuss. Many of these people are folks who've made their booty and now don't want you to make yours. 

Be not afraid. Buy some shares on the pullback. 

AT YOUR OWN PERIL

Populist shock waves rattled through the elite in Germany after last Sunday's election in France led by Marine Le Pen's National Front party.

Since the EU's inception France and Germany have worked together trying to keep the far-flung EU intact. Some of the dismayed German elite are calling the election results a tragedy, a real threat to the stability of the EU. 

What many of these critics fail or refuse to understand is many of these voters don't want their history, their culture and their sovereignty washed away by Brussels bureaucrats. Globalization for all of its so-called advantages, though many will deny it, is about loss of sovereignty. 

To think there wouldn't be a reaction the first time things get dicey is naive and shortsighted. To think that people are going to go gently into that wasteland is just plain arrogant. It's elitism of the first degree. Germany is to France economically as oil is to water. The two don't really mix.

Still another sign of the problem is the disagreement in high places as to whom the next EU president will be.  Jean-Claude Juncker, once the leading candidate, comes with some baggage many view as unacceptable given the recent anti-EU vote.

As one reader wrote to the Financial Times, calling attention to the bad rap populism seems to be getting in the MSM, he listed the dictionary's definition of a populist as "someone who believes in the right and ability of the common people to play a major part in governing themselves."

He concluded with: "It is understandable that advocates of  Brussels centralist government should regard this as a term of abuse but why do you all continue to portray populism as some sort of extremist and undesirable activity?"

And here's your answer, folks. The worst nightmare of bureaucrats and the MSM is the fact that some people are actually paying attention. Fail to do so at your own peril. 

  







 

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.