1. Widening Yield Curve & the Impact of Quantitative Easing: There is a chart in today's WSJ that shows the widening yield curve between the 2 and 10 year treasury yields since the Fed started to buy treasury bonds and mortgage securities in its quantitative easing effort. WSJ.com
I discussed in an earlier post this same phenomenon, along with the unfavorable impact quantitative easing was having on the value of the U.S. dollar. Will Quantitative Easing Hurt the Dollar/More On Managing the Risk of Lost Opportunity
While I knew the Fed was losing money on its recent purchases, I did not have an estimate of how much money those purchases were under water until I read the Journal article this morning.
According to a study by J P Morgan, the Fed's purchases of securities under its quantitative easing program have lost about 5 billion. Morgan also estimated that this program has cost about $2,500 per borrower for those refinancing their mortgage, and about 2 million have been able to refinance who would not have been able to do so without the quantitative easing. This later estimate seems to me to be more of a guess. Maybe it is time for the Fed to declare victory and just stop what they are doing before they flood the world with even more dollars. Another interesting statement in the WSJ today is that the currency most vulnerable over the near term to quantitative easing is the one most exposed to it, meaning the U.S. dollar. WSJ.com
I discussed in an earlier post this same phenomenon, along with the unfavorable impact quantitative easing was having on the value of the U.S. dollar. Will Quantitative Easing Hurt the Dollar/More On Managing the Risk of Lost Opportunity
While I knew the Fed was losing money on its recent purchases, I did not have an estimate of how much money those purchases were under water until I read the Journal article this morning.
According to a study by J P Morgan, the Fed's purchases of securities under its quantitative easing program have lost about 5 billion. Morgan also estimated that this program has cost about $2,500 per borrower for those refinancing their mortgage, and about 2 million have been able to refinance who would not have been able to do so without the quantitative easing. This later estimate seems to me to be more of a guess. Maybe it is time for the Fed to declare victory and just stop what they are doing before they flood the world with even more dollars. Another interesting statement in the WSJ today is that the currency most vulnerable over the near term to quantitative easing is the one most exposed to it, meaning the U.S. dollar. WSJ.com
2. Taleb and Hyperinflation: There is another article in the WSJ that I found interesting this morning. A hedge fund that gained more than 100% last year with ties to Nassim Nicholas Taleb is opening a fund to bet that the recent massive fiscal and monetary stimulus will lead to hyperinflation.
The minimum entry level for an investment is 25 million, though apparently most have to make at least a 100 million dollar investment. The fund will be run by Mark Spitznagel and Taleb helps to shape the investment strategy. WSJ.com
The minimum entry level for an investment is 25 million, though apparently most have to make at least a 100 million dollar investment. The fund will be run by Mark Spitznagel and Taleb helps to shape the investment strategy. WSJ.com
At first glance, this appears to be a marketing gimmick. While it is probable that inflation will become a problem within a year or two, it is far too early to predict hyperinflation. I do have enough concern about an inflationary problem now to take steps to buy assets that would likely increase in value during an inflationary period, a process started in earnest during the 4th quarter of 2008. This started to make sense to me during the 4th quarter of 2008 when the market was pricing the TIP for example to yield the same as a comparable non-inflation protected security, which meant that nothing was being paid for the inflation protection of the TIP.
The time to buy inflation protected securities at a better price is when the market becomes convinced that deflation is the most likely future alternative and consequently prices inflation sensitive assets accordingly. This occurred with not only the TIP in the 4th quarter of 2008 but with floating rate securities that paid the greater of a guaranteed rate or a percentage over some short term rate like the 3 month LIBOR rate. Those securities were then being priced in my opinion as if the LIBOR float was not worth anything. In an inflationary scenario, that float would be worth a great deal it seemed to me, though as far as I can tell I am the only one who has been discussing it ad nauseum. Floaters: Links in One Post Those securities, at least the ones with both a guarantee and a float provision, provide a measure of protection in both deflation and inflation scenarios. Inflation or Deflation: Bond Alternatives
Another area to allocate funds just in case Taleb is right would be commodities. I have started to invest some funds in commodity ETNs and ETFs, including RJI, RJZ, UCO and UNG. (#5: Afternoon Potpourri May 26 2009/ Bought MSPRA RJZ & ADX/ COMMODITIES AS AN ASSET CLASS;#1 Morning Trades: Bought RJI, Sold DKQ, Bought Google/Pricing American General Finance bonds/OSM & Sallie Mae/Pared BWX);Dynamic asset allocation shifts: from long bonds to commodities;Inching up my % allocation to commodities after being at 0% for almost a year)
Another potential area to increase my investment would be hard asset companies, including REITs and other real estate companies. I have recently added St Joe, PICO, Brookfield Asset, Forest City and Tejon Ranch to my portfolio.
Some of my lottery ticket purchases have been focused on real estate related companies, such as Glimcher Realty, First Industrial, Lexington Property, C B Richard Ellis and CB & L Properties. LOTTERY TICKET PURCHASES: LINKS IN ONE POST
I am also more likely to keep such securities like OSM, in spite of my significant concern about the credit risk, and ETFs like WIP and TIP.
My movement into these more inflation sensitive assets can not be categorized yet as significant, since I do not yet see any reason for swift movement yet.
In summary, I am sufficiently concerned enough about an inflation problem starting a year or so in the future to start buying securities and assets that will hopefully increase in value under that scenario.
3. Prudential: Prudential has decided not to participate in TARP and will instead float a 1.25 billion public stock offering to raise capital. I view that as a positive for my short term bond holding and the longer term bond which I own contained in the TC JZH. I am monitoring for a possible purchase another PRU security.
4. GM BANKRUPTCY: I have never owned any security issued by GM. I have always believed that the company was poorly managed, and that the main goal of the company was never to enhance the position of the shareholders or the owners of GM's debt. Instead, GM seemed to be managed almost exclusively for the benefit of the UAW and other employees. The deal that GM reached with the majority of its unsecured bondholders may assist an orderly and relatively quick bankruptcy proceeding, though I would think that there are many holders of senior debt gearing up for a battle now. Likewise, I have never bought the common stock of Ford, though Ford appears to be better managed now than GM. My sole involvement in any security related to the automobile industry is 100 shares of a senior bond issued by Ford Motor Credit, FCZ.
5. Looking at Charts from the 1930s vs. Focusing on the What is Happening in 2009: Louise Yamada or the Vix Asset Allocation Model: I have some interest in my post dealing with Louise Yamada's comparison of the charts from the 1930s to what has been happening over the past decade. Louise Yamada/U.S. Dollar/ Liberty University
I have respect her work and always give her thoughts serious consideration. I am, however, naturally reluctant to draw conclusions about the likely course of events over the next five years based on what happened in 1938 to 1942. I am just more concerned about what the market is telling me about the future now. One of the indicators that I use is the VIX.
Its movement from a Phase 2 Unstable Vix Pattern back into its pattern prevalent from August 2007 to October 2008 is viewed as a positive by me. It shows movement toward stability in the VIX which is critical for the formation of a longer term investable bull market. So, with all due respect to Ms. Yamada, I will place more emphasis on the the VIX and other current indicators rather than trying to use a chart from the 1930s, to predict what may happen in 2009-2014. But, I would hasten to add that, if she is right, the investments that I have made and will make this year will be at best premature by a few years.
I have respect her work and always give her thoughts serious consideration. I am, however, naturally reluctant to draw conclusions about the likely course of events over the next five years based on what happened in 1938 to 1942. I am just more concerned about what the market is telling me about the future now. One of the indicators that I use is the VIX.
Its movement from a Phase 2 Unstable Vix Pattern back into its pattern prevalent from August 2007 to October 2008 is viewed as a positive by me. It shows movement toward stability in the VIX which is critical for the formation of a longer term investable bull market. So, with all due respect to Ms. Yamada, I will place more emphasis on the the VIX and other current indicators rather than trying to use a chart from the 1930s, to predict what may happen in 2009-2014. But, I would hasten to add that, if she is right, the investments that I have made and will make this year will be at best premature by a few years.
For those new to this blog, and who want to read more than one post, familiarity with the VIX Asset Allocation Model is important, since it is a frequent subject of my posts on a variety of subjects. My major posts are linked in this Gateway Post: USING THE VIX MODEL AS A TIMING INDICATOR FOR LONGER TERM STOCK ALLOCATIONS
A post applying the Model to compel a reduction in stocks in 2007:VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern
Testing the Model for Prior Bull and Bear Markets:VIX and S & P Compared 1990 to 1997
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