Calling a Top

I’m calling a top in bonds in the 10-year and higher maturities.

In too soon, of course, but I did buy some inverse T-bond ETFs today.  Not convinced at all that the rates will start climbing from here (my commitment almost guarantees they keep the bullish trend a bit longer).

Still, I bought some TBT and a bit of TMV today.  I wrote September 32 calls against the TBT, which proceeded down soon after I bought.


PS after the break

In response to those who wondered at my thinking, here it is in a nutshell:

I don’t see us entering a Japanese-style low-rate decade because we started with far less household savings than they did, and because our currency already has all the potential benefits of being a world reserve currency working in its favor.

It can only weaken from here vs. other world currencies, at least due to those two major enhancers.

When you bought JGB’s for 2%, you were competing with Japanese savers, and you were also getting your principal back in a fundamentally very strong currency.  If you look back over the last 15 years or so and pick a 10-year window to buy JGB’s, chances are you participated in the long term secular bull market in Yen/Dollar exchange.  Certainly anyone who bought 110 or 120 yen with a Dollar to lock up in 2% bonds has to be pleased that it only costs them 85 or so Yen to buy those dollars today.

The sovereign debt liquidity crisis in Europe will now fade as our own subprime liquidity crisis did, under a flood of pumped-in liquidity and government-backed credit.  That’s not to say the finances of Greece, Spain or Ireland will be better next year, any more than the plight of subprime borrowers has been fixed in just these past two years over here.

But the super steep discounting will stop.

In late 2008/early 2009, top-rated private label prime MBS traded all the way down to prices in the teens, prices at which every house in the pools could have been foreclosed with 35 cent on the dollar recovery and still give buyers returns of 20% or higher.

That was because all the repo financing dried up, so people had to get “equity” returns on bonds, even after assuming the worst for those bonds.

It’s pretty clear to me that every central banker and every major economy’s political leaders will hold their noses and keep the wheels from falling off the wagon.  We seem to forget that in the post-Lehman days, all the major nations’ leaders chose to provide government guarantees for what was private bank obligations.  And they weren’t all or even mostly liberals or one-world internationalists…. it was a hard-core free marketeer in the White House, an old-style German conservative as Chancellor, a Labor Prime Minister in London, a Gallic nationalist in France… in other words, every political stripe and philosophy.  Faced with the reality of 20% yields required on the very best bonds under the very worst assumptions, they knew to let it run its course was to set the world on a path to a 75% decline in GDP.

The Depression of the 1930’s would have been mild in comparison to the potential for what could have been happening right now.  For one thing, there were a lot fewer people on the planet back then.  For another, half or more of the people alive at that time were within walking distance of food that could be grown and sustain them, without the use of fertilizers or other things that only come if an international trade and finance supply chain is up and working.

So, given the choice between selling out free market principles (which are actually not such hard and fast principles, anyway) and watching half their people face starvation, philosophy lost.  And it will again, should it come to a choice like that again.

Unless we see another large change in our basic economy from enormously cheap energy, I think the deflationary forces will remain in check, even while the debt overhang gets resolved at the household, municipality and sovereign levels.

We might even get smart enough to implement policies that bring about wage inflation.

But that will be for another post another time.



8 Responses to Calling a Top

  1. Jesse Livermore says:

    What’s your thinking? Sovereign default worries? It’s a bubble and rates can’t get any lower? What do you think about Japan as an example where long-term rates have stayed very low for a very long time? Just curious, you’re someone I respect and I’d like to know how you think about these things.

  2. jill says:

    IMHO, the ten year bond rate most likely is headed to 2.3-2.4 area. If correct , the market moves lower together with it. I anticipate this move to last into October 2010 and then perhaps the mother of all bull markets to start( slowly though) in interest rates. Good luck!

  3. hhill51 says:

    will reply to both “jesse” and the following question by jill by editing the main post in the form of a postscript.

  4. […] an interesting conversation yesterday with my friend Howard Hill (who, BTW is calling a top in the 10-year and higher bonds, although he admits probably early) about a phenomena that may soon come to call on various […]

  5. jill says:


    “Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.”

    “Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses:”

    “They created fake demand.”

    • hhill51 says:

      With apologies to Kafka, I told this story from the point of view of those “two guys with a Bloomberg” CDO asset managers…. Enjoy.
      An even more straightforward exposition of the phenomena appeared when details of the Magnetar trade got told by pro-publica.

  6. Jon Rosenbaum says:

    Dorsch analysis and commentary from pg 15 to end is really helpful.
    I has particularly taken by the report written by Morgan Stanley analyst Arnaud Mares. Summaries of this report were posted on VF 3x in last few days.
    I dug this out from Google and found it was also a referenced by Scott:
    I really like how Mares digs deeper into the analysis of the implications of all this national debt.
    Questions remain regarding how far inflation will go to dilute the US and other soverign debt. If US govt net worth as % of GDP is -800% how much inflation thru QE will be needed to dilute this debt away? Feels like it will be staggering. This given what Greenspan says is the maximum growth possible given current productivity of the US of 3%, in addition to very limited ability of govts to tax it all away makes dealing with the debt even more negatively extreme.
    Just my thoughts re how to get my hands around these huge and ambiguous numbers and how bad it probably will get; unless we are positioned with our investments to benefit from the pending debt disaster.


    • hhill51 says:


      My problem with those over-the-top projections of future obligations of the Feds is that they are meaningless when they are many multiples of GDP. Plainly the benefits will be cut rather that growing as those extrapolations project. Also, extrapolation is one of the lousiest predictive techniques there is, especially for anything on an accelerating curve like medical expenses. The reality is that the US system of medical payments has gone about as far into our pockets as it can, so the middlemen who help make our care cost twice what it does in Europe have basically priced themselves out of a job. It will take time, and there will lots of whining about “socialism”, but the reality is that extortionists can only charge as much as the shopkeepers can afford, and once the weekly charge gets too high, the citizens hire a sheriff.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: