Black Swan Insights

Showing posts with label Bank of Japan. Show all posts

JP Morgan Says Not To Worry About Surging Bond Prices

JP Morgan is out with a report telling investors not to worry about surging bond prices and that they do not necessarily mean we are entering a deflationary spiral as some have postulated. Looking back at prior economic cycles, JP Morgan notes that bond yields often bottom out approximately 2.5 years after the end of a recession. So the current rise in price of the 10-year Treasury is not completely unexpected and is simply following the pattern from previous recoveries. The firm also says that the two primary catalysts for the recent rise in bond prices are a decrease in inflation expectations and record buying of US bonds by US households. The current 5-year break-even rate on bonds is 1.3%, down from around 2% reached backed in June. Furthermore, US household purchases of treasuries has surged 46% year over year in Q1 2010. In fact, households are the second largest holder of US treasuries, ahead of Japan and only $100 billion behind China. If that was not enough to arrest deflationary concerns, JP Morgan goes on to mention that the strong resiliency of commodity prices indicates that deflation is a remote possibility at this point. I agree, oil at 75, copper at 3.30, and gold at 1238 hardly make sense if we are entering a deflationary period. The deflation scare mongering is just a ploy by central bankers to print more money. Below is a chart which shows the 10-year Treasury over the last 35 years.

Here is the full report from JP Morgan:

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Yen Surges As BOJ Desperately Tries To Debase Currency

If aliens came down to observe global financial markets they would conclude that we must be insane: case in point the price action of the Yen. It bewilders the intellect that the Yen remains the strongest the currency in the world despite continuous money printing, ultra low interest rates, and an egregiously high debt to GDP of around 220%. If that was not enough to ensure a weak currency, the BOJ and Ministry of Finance openly state they want a lower Yen. Yet in our current bizarro world, the Yen is the ultimate safe haven go to currency during economic turmoil. Reuters is now reporting that the Japanese government and BOJ are again considering ways to weaken the Yen, including direct currency intervention to sell the Yen. This is not a new strategy---from 2000-2004 the BOJ constantly intervened to sell the Yen. Did it work? No but that did not stop them from wasting hundreds of billions trying. Intervention almost always fails as the SNB (Swiss Central Bank) will tell you as they lost around $8 billion trying to weaken the Swiss franc. Central bank intervention only works when it is coordinated by the G-7 like the successful attempt to prop up the Euro in 2000. That was one of the few currency interventions that worked. The BOJ is destined to fail. Who knew it was so hard to debase a currency?

Three month chart of Yen Futures

Black Swan Insights

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No Bond Bubble--- Just Another Fed Machination

Bloomberg has an article about record money flowing into bonds over the last 2 years. A total of $480 billion has rushed into bonds compared to $497 billion that went into dot com stocks between 1999-2000. So does this constitute a bubble? Many economic commentators and bloggers have suggested as much. They regurgitate the usual reasons why bonds will do poorly in the future and should be avoided: low yields, purchasing power to be eroded by inflation, the dangers of following the herd into an investment. I do not think we are in a bond bubble--yet. In fact, investors are simply responding to the Federal Reserve's interventions and market distortion. Since the Fed took rates down to zero, it does not make sense to hold funds in money market accounts, but investors are still fearful of equity markets.What are they to do? Invest in bonds.

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How A Mistake By The Supreme Court Allowed Fiat Money In the US

Here is a very interesting research paper from the Bank of Japan which discusses how the US got off the bi-metallic system and evolved into a purely fiat-money system. The real culprit according to the author is not FDR or Nixon, but the US Supreme Court which failed to properly distinguish between fiscal and monetary policy when deciding the constitutionality of Greenbacks (notes issued by the government to finance the Civil war) and Legal Tender Laws in the 1860's. The Court affirmed the legality based on an incorrect interpretation of the Constitution which allows Congress to borrow money. The Court argued that issuing fiat currency was within the government's power to borrow. These important decisions were vital to destroying America's metallic based monetary system and the purchasing power of the dollar. The author concludes that "that monetary arrangements in the U.S. have departed sharply from those specified by the Constitution, and that the change has been based in crucial ways on invalid reasoning."

Here is an excerpt from the article:

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