Bond Markets Grow Faster Than Equities

ΩΩThe bond market is in the news again due to it being an indicator of fear over hope in world markets.  That is, the new stability system that is being slowly developed since the collapse of the easy as pie Japanese carry trade business which fed the credit bubble.  Now, people whose business is to move money around the planet are seeking to preserve their profits somehow instead of expecting great growth with no effort.  This is evidently very disturbing to many economic watchers but this is entirely consistent with the ethics of depressions: protectionism filters into all systems and this means the bond market dominates money markets.

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In Striking Shift, Small Investors Flee Stock Market

With renewed economic uncertainty, American investors have withdrawn a staggering $33.12 billion from stock market mutual funds so far this year.

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ΩΩIt is sadly obvious that many people have been forced to raid their own mutual funds to keep their heads above the economic flood.  True, we are not in an ecological catastrophe such as the floods destroying the lives of the citizens of Pakistan but the debt mess has put a huge number of people underwater in their personal finances.  The difference between the underwater Pakistanis and the underwater Americans is, one is real and the other is fantasy.  So why is the catastrophe in Pakistan going to have little impact on us just like the tsunami that swept away a quarter million+ people and destroyed whole cities or the Haiti earthquake, these had a smaller effect on the world’s activities compared to a bunch of Americans spending beyond their means.

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ΩΩThe financial destruction caused by reckless American borrowing has a global impact far from our own shores due to free trade being horrifically unbalanced.  We owe everyone money and we used a lot of this loot to buy imports or to pay for offshored jobs.  No great catastrophe like the ones hitting distant lands have hit us….yet.  The housing market of California is still nearly entirely physically intact but this is temporary. The Big One: Study shakes up scientists’ view of San Andreas earthquake risk – latimes.com

For years, scientists have said major earthquakes occurred every 250 to 450 years along this part of the San Andreas. The new study found big temblors on the fault every 88 years, on average….The finding adds weight to the view of many seismologists that the San Andreas has been in a quiet period and that a major rupture is possible. A 2009 study, which Grant Ludwig also participated in, suggested that the San Andreas was overdue for a rupture. But Friday’s report offers a much more grim estimate of how frequently quakes have occurred on that segment of the fault.

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ΩΩWhen a heavy hurricane year in 2005 laid to waste more than one community and nearly destroyed New Orleans, this happened during a period when the US was being flooded by a financial typhoon from Japan so it was easy thinking financial markets would give us endless loans to pay for rebuilding any cities laid to waste.  This fountain of eternal wealth made us careless about reality.

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ΩΩI remember when Katrina passed through like a knife through butter: the government announced that we would have a bigger, better New Orleans and figured a good $5 billion would do the trick.  This never materialized.  We spent a trillion on our two wars, instead.  This sucked all the oxygen out of the ‘rebuild New Orleans’ scheme.  But then, there was no real popular moves to do anything at all, instead, we went into another catastrophe: the oil well blow-out.

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ΩΩThis, too, hammered New Orleans and the same communities hammered by the 2005 hurricane season.  But again, it has had very little economic impact due to a good application of oil money poured over the mess.  Tropical Storm DANIELLE has finally formed in the Atlantic Ocean and is probably going to head towards the NYC  area or Boston, we probably will again have to worry about the destruction of property, etc along the lines of Pakistan, for example.  All of this is about the bond market: this is a refuge from economic uncertainties but has its own vulnerabilities: if governments fail, bonds fail.   In Pakistan, all that the government owes is in danger of vanishing due to social and political chaos caused by the floods.

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Pakistan floods leave ally reeling | Antiwar Newswire

With international aid still not coming in fast enough, public anger at the government is likely to swell as millions face months or even years of destitution, risking turmoil just as Washington and the region needs stability in the nuclear-armed state.

“The stakes are very, very high,” said Sen. John Kerry, who visited this week. “We are particularly anxious, all of us, to see the country get back on track.”

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Here is a good example of how bond markets think: Australia’s Hung Election to Deepen Market ‘Jitters’ (Update1) – Bloomberg.com

Australia’s dollar may fall and equities investors may look to other markets after the nation’s federal election failed to deliver a majority government for the first time in 70 years, according to market analysts….Australia’s benchmark S&P/ASX 200 index dropped 0.6 percent last week to 4430.9 — extending this year’s decline to 9 percent. BHP Billiton Ltd, the world’s biggest mining company, tumbled 6.2 percent last week. The nation’s currency slipped 2.8 percent in the last two weeks, as opinion polls foreshadowed an increased chance of a hung parliament.

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ΩΩSimply having a problematic election with no riots, no environmental disasters, nothing really happening except indecision and we get this strong economic downdraft!  Politics and economics are never far from each other: they are totally identical.  This is why economic news without a social or political context leads to mystification.  The sovereign nation has a very direct and huge effect on all aspects of all markets due to the source of control or potential for loss of control feeds very directly into all aspects of markets.

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ΩΩAustralia has replaced the US as the ‘carry trade’ fulcrum and several months ago, I said that much smaller economic power could not sustain the ‘fulcrum’ role for very long and sure enough, it is beginning to fail.  The years of the US/Japan carry trade system, even a child could figure out how to profit off of what was pretty obvious and enduring but when it suddenly collapsed in August, 2007, this led to the collapse of all dependent systems: it was like a tsunami or typhoon or earthquake in effect in all markets.

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ΩΩAustralia’s instability isn’t physical, it is political.  The dual choices with tiny variations on various pet issues leads to strong divisions over meaningless trivia but even this, if it is evenly divides the community, translates into economic troubles!  The US had two extremely close elections even though the political parties are virtually identical when it comes to economics and foreign affairs and both supported free trade, these close elections bred anger, fear and even hysteria.  This also caused the winner of the squeakers, Bush Jr, to resort to blatant bribery to gain political traction and this contributed directly to the US going much deeper into debt on every level.

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ΩΩThe last election was pretty much a landslide for Obama only it was squandered nearly immediately by the impossibility of restoring our economy via spending more money.   That is, the status quo cannot be restored simply by adding more debt, the loss of credit is due to the costs of previous bribery done by Bush.

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Bond market – Wikipedia, the free encyclopedia

The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. As of 2009, the size of the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion [1], of which the size of the outstanding U.S. bond market debt was $31.2 trillion according to BIS (or alternatively $34.3 trillion according to SIFMA).

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ΩΩIf the world bond market is $82.2 trillion and the US portion is $31.2 trillion, this means our obligations in the bond markets is approaching half of all global debts!  This is insane!  And it is directly attached to our immense trade deficits.  That is, when we had those years of $100 billion+ trade imbalances coupled with tremendous government overspending, this debt was the ‘fulcrum’ supporting the Japanese carry trade business.  No other nation accumulated this sort of debt due to them being part of the ‘feeder’ system causing the US trade deficit.

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Bond funds gain — stock funds lose – Fundmastery Blog – MarketWatch

I don’t think it is correct that most of the assets pouring into bond funds came from disgruntled equity fund investors.  Equity mutual funds had modest outflows, but the billions pouring into bond funds dwarfed the equity outflow.

So, the conclusion I draw from that data is that the assets flowing into bond funds are primarily coming from money market funds, Treasury bills, savings accounts and CDs. As the rates on savings instruments has fallen to near-zero in some cases, the urge to move has proved overwhelming.

As one of many examples, MetWest Total Return (MWTRX) has a 6% yield.   Pimco Total Return (PTTDX) has a yield of over 5%.  These seem pretty attractive compared to a CD at 1% or a Treasury bill at a smidgen over zero.

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ΩΩThe Japanese saved their money and sent it into the Japanese carry trade ecosystem that is, the savings at home were nil whereas if they poured savings into the carry trade stream, they got better returns so the money flowed in that direction.  Now, the US in the world’s biggest economy and is being forced to support some sort of carry trade scheme and did this with Australia until this month and is seeking some place to play this game.  Meanwhile, we will see money do a ‘holding pattern’ as it waits to see where the new ‘fulcrum’ will be.  And there is only one country that can be this in the future: China.

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ΩΩFirst, let’s go to the NYT to see Krugman whine about all of this in his usual futile fashion:  Op-Ed Columnist – Appeasing the Bond Gods – NYTimes.com

But, in America, we do have a choice. The markets aren’t demanding that we give up on job creation. On the contrary, they seem worried about the lack of action — about the fact that, as Bill Gross of the giant bond fund Pimco put it earlier this week, we’re “approaching a cul-de-sac of stimulus,” which he warns “will slow to a snail’s pace, incapable of providing sufficient job growth going forward.”

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It seems almost superfluous, given all that, to mention the final insult: many of the most vocal austerians are, of course, hypocrites. Notice, in particular, how suddenly Republicans lost interest in the budget deficit when they were challenged about the cost of retaining tax cuts for the wealthy. But that won’t stop them from continuing to pose as deficit hawks whenever anyone proposes doing something to help the unemployed.

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So here’s the question I find myself asking: What will it take to break the hold of this cruel cult on the minds of the policy elite? When, if ever, will we get back to the job of rebuilding the economy?

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ΩΩThis total idiot has been pleased as punch by free trade.  He fought with tooth and nail, any suggestions of any form of protectionism actions.  Instead, this demented man thinks that we can increase our trade and thus, fix this mess.  But this has been a tragic failure for 35 years!  Instead examining this, he evades this by never, ever mentioning the trade deficit’s history such as providing graphs or charts to explain the obvious.  And here it is, the graph that shows us why we are nearly a third of all money owed on earth:

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ALFRED: ALFRED Graph

ΩΩHow absurd this is!  Why is this graph not published with every possible story about our finances, the present global economic chaos?  Even with the US going into a rattling mess since 2007, the trade deficit is where it was at in 2001!  When it was terrible!   This overhang of foreign debts is the ball and chain that keeps our economy locked in the lowest possible gears and it shows not one sign of improving.  That is, the only way ‘nature’ can fix our trade deficit is to mire us in a perpetual depression so we eventually cannot buy foreign goods, ever again!

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ΩΩThat is, we can’t run up 50% or more international debt totals!  We can’t run $41 trillion in bonds!  Hell—this is ridiculous!   We are only $9 trillion away from this!  And the government debt alone is $1.5 trillion a year and will stay this way for the foreseeable future as we see no end to the trillion dollar Pentagon spending and the trillions used to bail out the bond OTC markets.  Tax revenues can’t rise anymore since jobs offshoring continues unabated.

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ΩΩEven as Krugman wails for more government spending so we can have ‘jobs’ he will not denounce free trade and its dire effects on our job situation at home.  This inability to connect the jobs with trade issues is very depressing.  Blaming bond traders and the bond market for all of this is rank insanity, even childish.  Bond dealers are not stupid, they play the cards they are dealt.  If we keep dealing them royal flushes, we can’t complain if they take the pot if we insist on holding deuces.

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Bond Funds Gain Cash Like Stocks in Dot-Com Era: Credit Markets – Bloomberg.com

The amount of money flowing into bond funds is poised to exceed the cash that went into stock funds during the internet bubble, stoking concern that fixed- income markets are headed for a fall.

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Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.

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Concern that the global economic recovery is faltering, with the U.S. growing at a slower-than-forecast 2.4 percent pace in the second quarter, is prompting investors to pile into fixed-income securities of all types even with some yields at record lows. The new cash has helped fuel a rally and drove yields on investment-grade U.S. corporate debt down to a record 3.79 percent last week, while two-year U.S. Treasury yields fell to an all-time low of less than 0.5 percent.

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The money flowing into bonds is “probably not repeatable on a consistent basis,” said Joel Levington, managing director of corporate credit in New York at Brookfield Investment Management Inc., which oversees $24 billion. “Eventually it won’t be sustainable. Whether that means five years from now or five weeks is a little difficult to tell,” he said.

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ΩΩKrugman doesn’t tell his readers all of this so I must thank Bloomberg news for having some sane information.  This isn’t sustainable!  That is, the US cannot be the sponge soaking up more US debts, more US trade deficits.  So when will this end?  The traders don’t know but they SUSPECT.  Note that Mr.  Levington didn’t say, ‘Never.’  He gave 5 years as the upper limit.

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ΩΩLet us hope it is longer than that.  Or we could begin rebuilding our economy from the ground up, starting today.  That is, forget easy lending saving us.  We can’t owe ourselves money when we owe nearly a third of all world bonds.  The US cannot be a global credit pig forever!  Even if we play the game of owing to ourselves, we have reached the outer limits of what we can owe anyone, anywhere.  There is no grace giving us infinity.

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8 Comments

Filed under .money matters, Free Trade

8 responses to “Bond Markets Grow Faster Than Equities

  1. JT

    “There is no grace giving us infinity.”

    This depression is structural not cyclical.
    No one dares to say it out loud; the jobs are not coming back.
    Building sector was the last domestic employer and way to inject more debt into the economy.
    Now we face the real effects of globalisation and free trade.
    No way around it.

  2. Matheus

    China wants taiwan and all commodities from the world. After that. Dump the dollar.

  3. Matheus

    Wow. sorry for the double post , but look at this: Norfolk Southern To Issue $100 Million In 100-Year Debt

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    ELAINE: I forgive double posts! 🙂

    As for your comments: correct. All of Asia will dump the dollar when we start to try going bankrupt. And 100 year debt instruments are not new. Way back, 350 years ago, the Dutch learned the hard way to not create perpetual debts like this….

  4. Kurt

    JT you are one of the very few who can clearly see what has been going on during the last 30 or so years.
    US has already entered into a depression that will dwarf the 1930 depression. During the last 30 years well paying US manufacturing jobs have been systematically shipped permanently abroad for slave labor wages and they are not coming back. The real unemployment rate is over 20%. There is no sector in the economy to absorb the unemployed. Housing boom was created by Greenspan to partially absorb the displaced workers who had lost manufacturing jobs. Unfortunately, postponing the depression for about a decade with housing boom and consumers feeding the economy with borrowed money will make this depression much more difficult to recover from.
    During the 1930 Depression, US was the biggest creditor nation on the planet. She lent large amounts of capital to foreign countries so that they would import our manufactured goods. Consequently, we had a very favorable foreign trade surplus. The Country also had the most advanced manufacturing sector that was the envy of the planet. We produced everything that we consumed. At the same time we had a large agrarian population that was self sufficient and prosper. Saving rates were also high.
    Compare these conditions to today: Country, both public and private is living on borrowed money. Were it not for the reserve currency status, greenback would not be worth the paper it is printed on. Unlike the private banking cartel called The Fed, which has been printing money lately to buy Federal debt(they have a new name for it. They call it quantative easing, since expressing it as printing money has a derogatory effect). Unfortunately, the states must balance their budgets through barrowing, and most states are broke. Most Public and Private pension systems are also broke. Their actuaries counted on their investments earning around 7% annually. Unfortunately they had to gamble with the employee contributions to achieve those numbers.

    Finally, if you try to figure out the duration of this depression by making comparisons to 1930s you get a better understanding of what we are facing. If it weren’t for the WWII mobilization effort which pulled US out of the Depression, it would have lasted for another decade. In other words, most of us won’t be around when this depression is over. Under the present conditions the only way the Country will begin to pull herself from this Depression will be when she lures back the manufacturing that she shipped abroad for slave labor wages. Unfortunately this will require slave labor wages at home. That is how naked capitalism works.

    Finally the people of US are beginning to see that in the long run, what was good for GM and GE is not necessarily good for the country.

  5. PLovering

    “Any person who drinks artificially fluorinated water for a period of one year or more will never again be the same person mentally or physically.” CHARLES E. PERKINS, Chemist, 2 October 1954.

    http://www.rense.com/general3/fluo.htm

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    ELAINE: It gets awfully crazy in the mental darkness. I bet you also believe that vaccinations kill, too. Yikes.

  6. hanju

    The bond market is almost the biggest irredeemable paper/digital token money bubble on Earth. The biggest is the dreaded “derivatives beast” Elaine points too all the time.

    This bubble is so massive (over $800 TRILLION) at the present time and growing, that it along with the bond bubble represent the anhilation of the western banking system. Counterparty risk must be avoided. Assets like gold/silver are valuable in this once in a lifetime bubble of paper/digital worthless currency.

  7. PLovering

    @ELAINE: “It gets awfully crazy in the mental darkness”

    Uh! Oh! … the joys of fluoridated water.

    http://tinyurl.com/2egjqn2

  8. DeVaul

    I like your description of other countries as “feeder systems” to our economy (if one can call it that). I remember 20 years ago going to the mall (which I rarely did) and being stupified by all the junk for sale in just one department store. I would stand there and look in all directions and see nothing but junk and wonder where it came from, who buys it, and how could this store, which was only one of many thousands, could possibly sell all this crap.

    Well, the truth always comes out in the end. It may take thousands of years in some cases, but it comes out. I was watching Oprah on some new show of hers one Sunday night a few weeks ago and the theme of the show was “hoarders”. One couple had filled every room of their home with junk right up to the ceiling in some rooms, with a tiny path winding through the house. (I will bet this is now the norm.)

    The Oprah crew moved all the junk out and sorted it out in a warehouse. They told the housewife that she had purchased around 3000 pairs of shoes and 3000 purses. At a conservative guestimate of 10 bucks each, that came to 60,000 for just shoes and purses, which only accounted for a tiny fraction of the huge warehouse of junk.

    Needless to say, the purpose of the show was “how to reform hoarders” and not to deal with the things Elaine talks about or even how to confront the fact that our idiotic consumer society has created an epic environmental catastrophe that will last for thousands of years. I dread to think of how many landfills there are in this country, or what actions the mafia are taking to dispose of junk when landfills are already full.

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