3/14/11…good morning Japan. Sayonara Takahashi

This week’s economic calendar has a heavy emphasis on manufacturing activity and inflation. The highlights of the week will be the February PPI (Wednesday) and the February CPI (Thursday). We will also get the March Empire State Manufacturing Survey and February Import & Export Prices (Tuesday), February Housing Starts and the Q1 Current Account (Wednesday), and February Industrial Production, February Leading Indicators, and the March Philadelphia Fed Survey (Thursday). There are no economic releases scheduled for either Monday or Friday. In addition to the economic data, there is a FOMC Meeting (Tuesday). Courtesy of Steve Wood, Insight Economics, Walnut Creek, CA

On Friday, TB said the stock market would be down…he was wrong but volume was just 921 million shares with both advance/declines and breadth modestly positive BUT for the first time in months there were just 75 new 52 week highs while new lows surged to 107!!! This could be an ominous sign.

Overnight markets equity markets are weak except China (Hang Seng +0.4%) and India (1.5%), due to the crisis in Japan which caused the Nikkei to plunge 6.2% following Friday’s 1.2% decline! US Futures are also weak (DOW -75; SPX -8.70 and NDQ -19).
This is giving only a slight boost to U.S. bonds however, which are positive to the 10 yr (+¼),  while the long bond is off ¼. Bond manager Jeffrey Gundlach joined Pimco’s Gross and Ray Dalio of Bridgewater in eliminating U.S. treasuries from his portfolios! JGB’s however are rallying 5/8 to 1.20%! Gold is up to $1428 +$6 but Crude is off $1.38 to $99.28…amazing what happens when the specs get scared. This could get exciting!

According to Bloomberg: The BOJ has pumped 15 trillion yen into the economy overnight ($133B) and DOUBLED their asset buying!!! Two nuclear reactors have been flooded with seawater and one had to be shut down and the risk of meltdown remains after an explosion in one of the reactors. Japan Syndrome not China Syndrome!

Meanwhile Ireland’s new Prime Minister Enda Kenny met with Trichet and refused an offer to cut the interest rate on their loan from the EU by 1% IF they raise the corporate tax rate which is currently 12.3% and responsible for attracting U.S. companies there. They want it like Germany’s 30% or the rest of the EU at 33%. Kenny said, go fish!

TB apologizes as the former PM had called the election for March 11…then it was moved up to Feb. 22, and the new government was instilled on March 11…then the PM was off to meet with the EU. No word on rufutiating the guarantees on all bank debt which they should do…and were elected to do. That is their only hope.

Bloomberg Quote of the Day: “There is no such thing as an underestimate of average intelligence.” – Henry Adams…TB doesn’t get it???

TB’s Quote of the Day “The market is a lot like Charlie Sheen. It pretends to have tiger blood…but it is suffering from an addiction to a substance that will ultimately kill it.” – Michael Lewitt, HCM Market Letter. Regarding steadily rising Consumer Confidence he adds: “…these are the same consumers who voted Congress into office (and made Two and a Half Men the most popular comedy on TV). Well said, Michael. TB

Factoids of the Day (from Barron‘s): 8.9 million, average daily volume of derivatives, including stock options in February; 7.8%: increase in derivatives trading from February 2010; 33.4% rise in daily trading of U.S. equity options; 13.7%: February DECREASE in U.S. cash equity trading volume; 22.9%: INCREASE in February trading in EUROPEAN equity trading volume!

The factoids above were include to highlight that the daily volume figures TB reports are not irrelevant and why he focuses on them, the point being that the U.S. stock exchanges have become irrelevant and thus equities are much more subject to manipulation than before. Note that despite TB’s forecast that stocks would close down Friday in the wake of the Japanese quake and tsunami, NYSE volume was under 1 billion shares…one thing we know from the past two years (and recall that the stock rally is just beginning its third year and like a tsunami the surges become smaller after the first month, year, two years…three years is around 10% (which we had in the first two months and caused the managers holding cash to panic as they looked at their calendars and saw quarter end approaching…TB termed this a classic bear trap, even before the quake adding that we might not even make it to “sell in May and go away.”

…the quake and tsunami while devastating (even in the U.S. where the surge of even 4 feet caused major damage to small craft harbors along the west coast), may only prove to be a catalyst for what has been building there for the past thirty years, and will stand to debunk the Japan miracle of zero growth, zero interest rates (long bond only yields 1.%), but a population that has been pouring its savings into their government bonds. All of that as deflation persists…except perhaps in Tokyo hotels…but to extend the analogy a perfect storm is about to erupt with implications for not just Japan, but the entire world.

Ray Dalio of Bridgewater Associates was interviewed in Barron’s and TB, like them, agrees: when Ray Dalio speaks you had better listen. He was very negative on bonds in general, like Pimco – except emerging markets, and very negative on countries that can ‘print money’ like the U.S. and U.K.  China and Brazil despite their growth are a major concern as global demand once again recedes. Ultimately however stocks in countries that print money will do better as they first decline in value but then become not only cheap but even cheaper to a non-U.S. buyer.

To those who think TB supports this case just because it supports his bearishness (but he never said to sell all your stocks, only to focus on common and preferred issues with high yields, high growth rate of dividends, real earnings and no defined benefit plan…the antithesis of G.E in the common but to the government assisting them ,to put it mildly, the preferreds (GEC) are attractive, IF you buy them at par or a slight discount since they can be called on 30 days notice and with all their cash and their ability to issue bonds at a rate well below 6-3/8%, the equivalent of a high-yielding money market fund! Yet, sometimes the bonds trade at a 50 cent premium which means if called you would have a NEGATIVE return worsened by fees. (TB owns GEC in his own and clients accounts having swapped out of the common BEFORE they cut the dividend and were plunging, for near even market price), that would be far from the truth. A week ago in John Mauldin‘s Outside the Box, debt levels of major countries were shown…amazingly Japan is the worst in the world at 900% of revenues vs. Greece at 350% which is normally considered a trigger for default, and the US at 300% or so. But the US can print money. So how does one explain Japan’s 1.27% 10 year yield? The high savings rate in Japan but that is imploding as more of the population crosses age 60…and is now drawing down their savings causing the rate to turn NEGATIVE. Think of this as a double whammy as not only are the people not buying the debt as they have for the past 30 years allowing the country to stay afloat but the low rate will not and cannot attract any global investors…seems like their could be a huge short position in them on arb against say Gilts or U.S. Treasury Bonds??? Could that be one reason that Pimco and others are selling their government bond positions? Long U.S. vs. short JGB‘s?

So imagine if in a very short time period the  price of the JGB 10 year would go from 102 to 83 – which is what would be required if it were to match the yield of the our 10 yr? They could of course buy back the outstanding bonds and replace them…thus flooding the economy with money as it is their own people who hold most of them…or would that help them to finally reflate? Not likely, rather the money would probably end up under mattresses although it could be reinvested but the holders would have 17% less in their savings? Just a musing, so don’t spend a lot of time thinking about it.

But seriously, what does one buy if not U.S. government or Japanese bonds? Gross, Dalio and Gundlach seem to favor emerging market sovereign debt…big caveats for China and India.

On Thursday, TB promised you a summary of the chapter Fannie Follies from All the Devils are Here.  TB offers this in hopes that more people will do as he has and disavow any affiliation to either the Dems of GOP parties and register as ’no party.’ (Originally TB said as Independent forgetting that this IS a party too and we wouldn’t want to get THEIR hopes up as we are not out to destroy the two party system but make the parties accountable to the people who elect them.) Imagine the impact this would have on those two chauvinistic groups who have not served the interests of the people. This would be especially powerful in 2012 as it is a presidential election year. Let’s do something to show them that we are a democracy (democratic republic), not the plutocracy they have created.

Fannie Follies:

In June 2002, Bush spoke to an audience in an Afro-American church in Atlanta. His speech was “Blueprint for the American Dream” and promised homeownership among minorities. His goal was to raise the number of minority homeowners by 5.5 million by 2010!

“Part of being a secure America (?) is to encourage homeownership,”  making it sound like this was part of the war on terrorism. In the audience was the now despised Franklin Raines, CEO of Fannie Mae and Leland Brandsel, CEO of Freddie Mac…both were there at the behest of the White House and BOTH flew back on Air Force One…see how much he loathed them?

But within a year Bush declared war on both Fannie and Freddie…for doing what he wanted? In an effort to make the two GSE’s pare back risk, they attacked them resulting in two of the biggest accounting scandals in U.S. history.

Both GSE’s had donated huge sums to BOTH Dems and GOP’ers who supported their cause and whenever a new House Banking Committee chairman was selected FNMA opened an office in his district and supplied him with a ’fannie pack’, a computer printout of every mortgage they held in his district. If this didn’t get his support they threatened, cajoled, whatever it took to get them to back off on any negative attacks.

Near the end of the Clinton reign, Richard Baker (R) introduced a GSE reform bill. Surprisingly, then Treasury Secretary Larry Summers supported the effort! But it was all moot as they were nearing the end of a lame duck session and apparently Summers merely wanted to sound the alarm on risk. Chief of Staff John Podesta even testified in favor of the bill and it appears that Summers hoped the next administration would continue the charge.

For Greenspan and Summers there was something offensive about GSE’s (not that they would ever do anything about it).

“Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly,” Summers said in a speech to Women in Housing & Finance – the same group Fed Governor Hoenig addressed in his strongly worded speech two weeks ago on systemic risk.

On March 22, 2000,  assistant Treasury Secretary Gary Gensler testified on behalf of Baker’s bill on behalf of the Administration (see the juxtaposition here…Republicans supporting GSE’s AFTER Dems had turned on them…yet all we hear is it was the Dems,,,led by Barney Frank and Chris Dodd…who are clearly guilty but so was half the GOP! – or more.

Despite this, committee members berated Gensler and jumped up to defend FNMA and FHLMC. FHLMC then worked out a deal with Baker…then FNMA found out about it and offered the same compromise. So much for Baker’s crusade.

Then for political capital reasons the new Bush Administration decided to leave both alone

By now OFHEO was the regulator (for whatever it was worth both agencies flatly refused to comply with any requests for information and made a mockery of the regulation but the new head of OFHEO was Armando Falcon Jr. and he stood up to their insolence.

Falcon attacked both agencies and demanded an investigation and when he was about to make the announcement the Administration announced he would be replaced! In the end he wasn’t but it killed the announcement and any further efforts by Falcon…this from the GOP!

TB could go on and on but it is his desire to get YOU to buy the book and learn about the root causes of the entire crisis and why we will have another one…and TB believes far faster and bigger than we think possible. Our government is a disaster…and we know what happens to governments and countries who become decadent and corrupt…and yes, corrupt is the operative here. Please…do something about this…your party sure as hell won’t!

Have a great week,



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