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Signs of the Times

Bob Hoye
Institutional Advisors
Sep 1, 2009

The following is part of Pivotal Events that was published for our subscribers Thursday, August 27, 2009.


Last Year:

"Former Fed Chairman [Volker] says Bear Stearns loan stretched central bank's authority." -Financial Post, April 9, 2008

"The new version of the bailout has new taxes, so according to the constitution is should have originated in the Senate." - Rep. Ron Paul, October 6, 2008

* * *

This Year:

With Bernanke's reappointment, President Obama congratulated the Fed Chairman on his "bold action and out-of-the-box thinking."

Well, that's a new slant on legally dubious knee-jerk and now ancient remedies.

Some services provided interesting coverage:

"Bernanke is Sentenced to 4 More Years" -The Motley Fool, August 25, 2009

"Bernanke's Next Tasks Will Be Undoing His First"

"Bernanke gets rewarded for bravery in defeat.", August 25, 2009

On why the "Cash for Clunkers" is ending:

"NY Dealers Pull Out of the Clunkers Program" -Breitbart, August 19, 2009

"Dealers Stiffed as Clunkers Pile Up." -KRQE, Albuquerque, August 20, 2009

The problem has been that the vast apparatus of government has not been able to remit checks in a timely manner. Dealers have been carrying the mess for too long.



The Long Bond: Support was found at the 115 level, and we thought the initial rally could make it to around 120.

This was reached last week, when we noted the rise had further to go.  Getting through 121.25 could open the door to 123-124, where there is considerable resistance.

Credit Spreads: As we have been noting, the carry trade has been irresistible. For example, junk crashed from a 10% yield at the market high in October 2007 to almost 42% in early March. That represented an outstanding opportunity (which we advised) for a move to spring.

The representative ETF (CYE) soared from 2.82 in early March to 5.82 on August 15. In the final stages the action replicated that seen at two previous important highs. All that was needed was the "sell" from the MACD, which was accomplished a week and half ago.

The initial price break was to 5.37 last week. So far, the test has made it to 5.72 this week.

The action has been another huge compulsion to employ leverage against the double jeopardy of soaring prices and a cheap "carry". On low interest rates, such as for treasury bills, the Fed has little influence. Short-dated notes in the senior currency always fall to exceptional lows during a post-bubble contraction. It is, however, complicit in fostering reckless speculations upon its own reckless experiment in "managing" the economy.

The audacity of central planners has been breathtaking - the hubris should be that as well. It is worth repeating that central banks have virtually no influence upon the curve and spreads.

The next step to the next phase of the contraction, as in the critical turn in the spring of 2007, will be signaled by a change in credit spreads, which seems underway.

The Yield Curve: The change to the next phase of financial distress will also include the reversal to flattening. This is opposite to the killer reversal made in June 2007. Then the world was leveraged for inversion, now after a two-year trend the world is leveraged for steepening.

Should be interesting.

Currencies: One of the keys to this sector has been the official, as well as market hostility to the US Dollar. The former is the magic wand of interventionist economics and the latter has been learned the hard way.

All the wand has been doing is adding to the degree of speculation as well as to the corruption of investment standards. Wall Street, the former bastion of capitalism, had become mesmerized by the FMOC - a committee. More recently, hanging upon bailouts forced from a largely naïve taxpayer.[1] Interventionist theories have not been working, otherwise there would not have been a crisis. The public won't remain naïve forever. Shocking things could happen - they could discover that 2+2 equals 4. It's been done before.

Like other things, corruption could not be isolated and it afflicted fiduciary responsibility. This writer started with Canada's senior investment dealer in 1963, when consumer price inflation began its eventually extraordinary increase. One of the senior partners on the bond side was asked about the effect of price inflation upon the bond-price and coupon.

The main answer was that chronic inflation only afflicted lesser countries in Europe or South America. Canadian and U.S. policymakers had sufficient integrity to resist the evils of depreciation. With this belief, pension funds were virtually full of bonds just as the great bull market in "inflation" and concomitant bond bear got underway.

Then fiduciary responsibility at the federal level was abandoned for magic wands and pension funds tossed theirs out the window and bought the commodity story. From the 1960s to 2007 the certainty of investors went from "corruption was impossible" to "corruption is forever".

In so many words, as late as the early 1960s institutions were hoarding bonds, in the 1970s they started hoarding real estate, in the 1990s it was high tech stocks and on the last mania they were hoarding everything except dollars. The more aggressive leveraged hoarding against shorting dollars.  The latest revival in this took the sentiment on the Dollar down to only 3 percent bulls at the last low, which was at a lower low for the DX.

Short Dollars is the natural position during a credit inflation and the natural consequence is credit deflation with the compulsion to deleverage.

Another bout of the latter has been likely to start after mid-year and become visible in the fall. The next step up in the DX would be a warning.  Think of deflation as hoarding cash.

1 - "If God had not meant them to be sheared, he would not have made them sheep." -Calvera, the bandit who preyed upon the farmers in THE MAGNIFICENT SEVEN


-Bob Hoye
Institutional Advisors

Hoye Archives

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