Use access key #2 to skip to page content.

goldminingXpert (29.60)

The Case For A Crash

Recs

41

June 02, 2009 – Comments (30)

*NOTICE--THIS POST IS NOT A STATEMENT THAT THERE WILL BE AN EQUITY CRASH IN THE NEAR FUTURE--IT IS MERELY HERE TO INFORM YOU OF THE ALARMING SIGNS THAT INDICATE THAT THERE IS AN ELEVATED POTENTIAL FOR A CRASH*

Let's talk about bonds. I can already here you saying, "but GMX, you've already been talking about bonds." However, bonds deserve more attention than you, I, or just about anybody at Motley Fool gives them. 

First off, we must ask ourselves what bonds indicate. Bonds, simply are obligations between the borrower and the lender. When there is more demand for credit and or when supply of credit diminishes, the interest rates required to connsumate a lending agreement rise. This is the market we are encountering now. Due to the economic collapse, the supply of credit has dropped. Up until recently, demand for credit, however, had been falling even more quickly than supply of credit leading to a decrease in interest rates.

This all changed this spring, however,when the bond market realized that team Bush/Obama was getting loose pockets and started demanding higher interest rates from the gov in return for their investing dollars. The result--interest rates on government debt began to rise. Gov debt is the 1,000 pound gorilla of the American debt market--as the rate on 10/30 year bonds rose, the rate on mortgages, car debt and credit cards began to rise. Team Obama and Team Fed decided this was bad and rolled out "QE." Quantitative Easing was supposed to keep rates low by using the government's funding to purchase up debt. By supplying more bids (more supply) into the bond market, it matched demand and kept rates low--in theory. In practice, the banks have continued to pull credit out of the market faster than the gov can inject credit. Why, honestly, should an insolvent and functionally bankrupt bank lend money to borrowers who will, in all likelihood, never pay them back? Banks pulled in their horns despite the wishes of the gov and so supply of credit continued to fall.

The government kept running on the treadmill, pumping out new lines of liquidity as if they were record labels foisting out package after package of lousy "greatest hits" albums each holiday season. However, the gov's plans have failed. The foreign buyers (i.e. the bagholders) are starting to figure out that lending to the US at low interest rates is a bad idea. Why would anybody lend to the US for 30 years at 4%? There's clearly better opportunities elsewhere. 

As expected QE, like any government intervention, has not only failed, but backfired as interest rates are rising at increasing speeds. We've got a problem and it's growing exponentially. Let's look at other times that interest rates have gone exponential (and the corrolary, as we learned in Econ 101, is that bond prices have collapsed). The early 1930's, 1980, 1987, and 1999-2000 all are interesting examples of when interest rates have suddenly soared. The aftereffect in all these cases--sharp unexpected drops in the stock market. The rise in interest rates in 1999 was a good example. As the tech bubble expanded, the IPO flood took hot money out of the real economy lowering the supply of credit for real businesses. Result, instead of being lent to solid companies, investors bought shares of dumb*ss.com and interest rates had to rise in compensation as supply of savings fell. Result, credit supply decreases, mortgage rates rises, economy sputters, Nasdaq in particular and market as a whole divebombs.

In the 1930s, there was also a collapse in the bond market despite the decade-long deflation. It was an odd situation--falling prices(CPI) yet rising interest rates. We appear to be following the same lead.

Of most interest is 1987. It was a fine year--stocks were rising, times were good, everyone was happy. Then, unexpectedly, the bottom fell out of the gov bond market as bond prices for the long bonds went from over 100 (par) into the 80s. If you don't know bonds--suffice to say that is a huge frickin drop. Bonds aren't supposed to lose 20% of their value in a few months. As bond prices fell (interest rates rising) and the dollar weakened (again, ring any bells?) the market suddenly sobered up. Faced with the prospect of higher debt costs, the lights started dimming on the Leveraged-buyout boom that drove the 1980s, the speculative juice left the market and then the ill-planned out portfolio insurance triggered the crash.

As mortgages rise ever closer to 6% on a 30-year fixed from under 5% a month ago, one has to be worried when they look at the similarities to the early 1980s, the 1931-32 period, and the fall of 1987. Will the sudden dislocation of the bond market combined with capital flight as seen by the rapidly sinking dollar cause another crash? I don't know, but I wouldn't be sleeping easy if I were "all-in" long without some hedges.

30 Comments – Post Your Own

#1) On June 02, 2009 at 6:18 PM, StopLaughing (< 20) wrote:

Rising inflation, falling $, and rising interest rates are a legitimate concern. However, in most recessions as the economy pulls off of the bottom, interest rates also rise in the short run.

The market can run up in the short run.

It is not clear at this point if the modest move up in interest rates from decade lows is due to bottoming of the economy or  the feared crowding out effect that will choke off the market advance.

So far the movement out of US bonds/t-bills appears to be an easing of the fear that drove a flight to quality. The money is moving out of safe bonds and into stocks and junk bonds, a return to risky investments. That is a good sign and not a bad one and is actually lifting the stock market at this point in time.

Down the road an  increase in interest rates could be a real problem and trigger a sell off in the stock market.

Report this comment
#2) On June 02, 2009 at 6:24 PM, DeerHunter73 (73.14) wrote:

At least you made some sence in this one.  As did Stoplaughing. Rates will rise when the bottom has been reached. I wont argue with you there will be a pull back or sell off from the current prices. my guess is back down to 900. I cant see anything in any chart that would suggest or even come close to a sell of of 30% though. Just have to wait an see what happens after the summer. We get out of the summer in the 900 to 1000 range i dont see the sell off/market correction happening. Just a lil FYI

Current live rates as of 6:22 pm eastern time

 

30yr fixed 5.125

 

15yr fixed 4.625 Report this comment
#3) On June 02, 2009 at 6:26 PM, alstry (36.24) wrote:

You are a wimp....say what you really mean....and you and I both KNOW where this is going.....are you ready for Z Day??

:)

Report this comment
#4) On June 02, 2009 at 6:29 PM, mode7 (79.81) wrote:

Do you think the market has already adjusted for this at all in the initial crash or will we see another dip like in the 73-74 crash?

As for recessions & depressions, as long as we don't see a "Dust Bowl" like in the 1930s, it should still maintain it's status as the "Great Depression".

Report this comment
#5) On June 02, 2009 at 6:33 PM, goldminingXpert (29.60) wrote:

Deer, your numbers are total BS. Your friends over at Bankrate are quoting 5.3 now (up from 5.0 last week) and that's low. I don't know any banks offering under 5.5 now without charging you a load of points.

 

Stoplaughing

You'd be right if this were modest. However, it isn't modest--whatsoever. The 10-year has gone from 2.0 to 3.7 in 5 months and the 30-year from 2.5 to 4.5. That's 2 full % points of move which is not minor by any stretch of the imagination. Bonds usually only move tenths of a percentage point per quarter--not per day.

So far the movement out of US bonds/t-bills appears to be an easing of the fear that drove a flight to quality.

And here is your big mistake. I forgive you for thinking this, it is what CNBC claims after all, but the reality is that the flight to fear is STILL ON. Check out the yields on the 13-week note (.1%) and 26-week note (.2%). This are depression prints. People are lending their money for no interest! This is the steepest the yield curve has EVER GOTTEN! Think about that for a second! That doesn't indicate return to risky assets, it just means that supply of long-term credit has fallen off a steep cliff. People are still wanting safety--however, they've quit perceiving the US gov as the be all and end all of safety out past 6 months.

Report this comment
#6) On June 02, 2009 at 6:36 PM, DeerHunter73 (73.14) wrote:

I dont have any friends at bankrate i just used that site last week as a point made in that post. That current rate i just called my bank and thats the current rate there offering. But I like several thousand other Americans get those rates when you are a member of USAA. And yes i can still get below 5% without buying points.

Report this comment
#7) On June 02, 2009 at 6:38 PM, DeerHunter73 (73.14) wrote:

Anyone who's served in the military who posts here will also know about USAA and the rates you get with them. No other bank finance company in the world can touch them.

Report this comment
#8) On June 02, 2009 at 6:39 PM, goldminingXpert (29.60) wrote:

Anyone who's served in the military who posts here will also know about USAA and the rates you get with them. No other bank finance company in the world can touch them.

Why are you claiming my data of public rates is wrong then? I'm perfectly willing to accept that you can get a better deal with a subsidized program. If you walk into Bank of America with good credit today, you're getting 5.625% on a 30-year fixed and you could have gotten it under 5 last week. That's my point.

Report this comment
#9) On June 02, 2009 at 6:46 PM, portefeuille (99.65) wrote:

Could you please save the bonds (and us) from you commenting on them?

climate change, equities, now bonds? what is next?

 

okay go ahead, nobody has to read it ...

Report this comment
#10) On June 02, 2009 at 6:47 PM, DeerHunter73 (73.14) wrote:

 

Rate   Points   Premium  Pricing   APR   Payment  Closing fees

 

4.500%  2.000% $0.004.884%  $1,529.99  $7,379.25

 

4.625%  1.500%  $0.004.932%  $1,542.79  $6,379.25

 

4.750%  1.000%  $0.004.981%  $1,555.66  $5,379.25

 

4.875%  0.500%$  0.005.030%$  1,568.59  $4,379.25

 

Those are all 30 year rates

 

You never asked where i was getting my info now you know. I like so many others get the better rates just being a member. Yes you to can get a loan with them but your rate would be a TAD higher .5% or so not to much thou.

 

 

Report this comment
#11) On June 02, 2009 at 6:51 PM, goldminingXpert (29.60) wrote:

Deerhunter, those rates are not available to the general public. If you tack half a % on the 0.5% point option, you're back up to 5.375% which is right in range of what I've been saying.

Portefeuille--though we obviously disagree on a lot of stuff, we've generally been friendly about it. Please quit being a dick.

Report this comment
#12) On June 02, 2009 at 6:53 PM, DeerHunter73 (73.14) wrote:

Variable Rate Balance $98,900.00

Annual Percentage Rate 2.40% Variable

Maturity Date 07/03/2027

Rate Locks Available 5 of 5

 

Locking an Interest Rate

Obtain a fixed APR of 4.65% for 180 months on a portion of your home equity line of credit balance.

 

This is just one of my accounts that there is a lona on a property that i have for sale. See how low that is? Thats on a 15 year. 30 would be less if i choose to take it.

 

 

 

Report this comment
#13) On June 02, 2009 at 6:54 PM, goldminingXpert (29.60) wrote:

Deer: for the love of God, quit posting private rates. I can't get those rates and neither can 98% of people here.

Please, respond to comment IN THE BLOG POST or quit commenting.

Report this comment
#14) On June 02, 2009 at 6:56 PM, mode7 (79.81) wrote:

Don't forget this is the Internets! Civility is the rarest of all traits online.

 

In your opinion gold, are you expecting another drop in the markets or is the bond market just going to take the wind out of the recent rise in the markets? Personally, I'm making mostly oil plays, since I think it's a fair bet all of these things will lead to inflation.

Report this comment
#15) On June 02, 2009 at 6:57 PM, DeerHunter73 (73.14) wrote:

Ok they are to a degree back to the point buying thing that was talked about. But you were saying my rates were BS and i knew they weren't. you just never asked how i was getting my data. I take it you have heard of usaa? If not go check them out usaa.com. They have charts graphs etc coming out of the wood works. Some agree with what you have been saying some dont. That is the only company, Bank Financial instition that made money in this recession that im aware of.

Report this comment
#16) On June 02, 2009 at 7:00 PM, DeerHunter73 (73.14) wrote:

Answer this GMX, I take it you havent been in the military? Has anyone in your family served and still active and or living? If you can answer yes to one of those you can get the rates. Many dont know that because they dont ask.

Report this comment
#17) On June 02, 2009 at 7:00 PM, goldminingXpert (29.60) wrote:

Yes, I know who USAA is. I have a friend that works for them. My point all along was that the rates of 30-year fixed mortgages available to the average joe are sharply rising and even places with slow data updates such as Bankrate.com are showing rates sharply rising over the past week.

Mode7: I expect equity prices to decline over the coming months. I anticipate oil stocks will outperform the broader market.

Report this comment
#18) On June 02, 2009 at 7:56 PM, mistermiranga (95.94) wrote:

good post...my comment became a post of its own so I moved it.

In short, I am not moving my 401k to cash, just not chasing the current rally and trying to make the case that we are home free and banks are cheap. Just because you can make money on something doesn't make it a good buy. If you lose focus and buy into your viewpoint too fervently you can get spanked. 

Report this comment
#19) On June 02, 2009 at 8:05 PM, portefeuille (99.65) wrote:

By supplying more bids (more supply) ...

By supplying more bids (more demand) ...

Report this comment
#20) On June 02, 2009 at 8:07 PM, goldminingXpert (29.60) wrote:

that was a typo. You are correct.

Report this comment
#21) On June 02, 2009 at 9:03 PM, camarodan64 (97.66) wrote:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=171636&t=01008124766967875841

 

Its all there TBT was the way to go

Report this comment
#22) On June 02, 2009 at 9:10 PM, portefeuille (99.65) wrote:

By supplying more bids (more supply) into the bond market, it matched demand and kept rates low--in theory.

By supplying more bids (more demand) into the bond market, it matched supply and kept rates low--in theory.

-------------------------------

By supplying more bids (more supply) into the bond market, it matched demand and kept rates low--in theory. In practice, the banks have continued to pull credit out of the market faster than the gov can inject credit. Why, honestly, should an insolvent and functionally bankrupt bank lend money to borrowers who will, in all likelihood, never pay them back? Banks pulled in their horns despite the wishes of the gov and so supply of credit continued to fall.The government kept running on the treadmill, pumping out new lines of liquidity as if they were record labels foisting out package after package of lousy "greatest hits" albums each holiday season.

------------------------------- 

This whole paragraph is very awkward. It might help mentioning that there is the Fed and the Treasury (QE: Fed buying Treasuries to, among other things, recapitalise the banks). The effect on consumer credit/mortgages is an indirect one.

Report this comment
#23) On June 02, 2009 at 9:50 PM, guru111melbourne (83.32) wrote:

Hi, I have read a lot of your blog posts and would like to ask a question.  I am young and recently got into stocks before this run up these last couple of months.  I have positions in MO PZE AOB PML PFE GE and ALXN...cigs, oil, china, munis, conglomerate, and new a new drug that is basically a monopoly.  Now my question is as to the run up recently and what I do believe to be a coming pullback would one sell or hold long on the chance of being wrong.

Report this comment
#24) On June 02, 2009 at 9:58 PM, portefeuille (99.65) wrote:

I am young ...

... so is he.

(sorry, go on, please ...)

Report this comment
#25) On June 02, 2009 at 10:01 PM, goldminingXpert (29.60) wrote:

Sell enouth to get your starting capital out and let the rest ride is always a good strategy if you're fearful of missing further gains on stuff that's already up big.

 

portefeuille--sorry it was awkward. I have no editor as I am the editor of everything I write so if it made sense to me, that's what runs. If I were a bigtime blogger, I'm sure I could get an editor but it's just me so please forgive my mistakes.

Report this comment
#26) On June 02, 2009 at 10:16 PM, binve (< 20) wrote:

GMX, As always, Excellent post! All of the die-hard stock market bulls here need to realize that as much as the crash in December was due to a withdrawl of money from global markets into treasuries, the opposite is happening now. Money is leaving treasuries at a surprising pace right now. But big money will decide when to stop that exodus and take these new gains out of the stock market and into, say, short term T-bills, gold, or other instruments. There is no rally based on fundamentals right now. It is simply manipulation and scared/greedy (or both) SWF money greasing some returns before they find a safer parking spot. I am with you. V-shaped bottoms do not mark true bottoms and this rally will end (whenver it does) as abruptly as when it started.

I think your insights are very valuable and I really appreciate the time you take to put them down to share with all of us. I know you have said this on your blogs before (I can't find where right now), but what is your major in college? Is it econ? Anyways, thanks for the post!

Report this comment
#27) On June 02, 2009 at 11:09 PM, rjameson (< 20) wrote:

GMX, I've been sitting on some money that i've been waiting to invest for a while. Do you think it would be wise to invest in gold and silver mining stocks like AUY and SLW as well as oil and iron? Or do you think it would be better to sit things out for a while and see where things go after the end of the summer. Also, what is your opinion on TBT?

Report this comment
#28) On June 03, 2009 at 1:28 AM, goldminingXpert (29.60) wrote:

Econ, yep.

rjameson: I'm not buying anything here, but I will add more mining shares in August (traditionally mining stocks fall throughout the summer for seasonal reasons, so I wouldn't be in a rush to add here, but we we see gold at $880 in August and minig stocks pull back, then yeah, it would be a good time to add those shares.

Report this comment
#29) On June 03, 2009 at 4:15 AM, jester112358 (28.89) wrote:

Excellent post.  Don't let the nit-picking criticisms stop you from writing.  Your thoughts mirror that of the best financial sources like the WSJ which have been discussing the bond price/debt deflation dilemma for some time now.  Greatly enjoy your posts including those on the fraudulent aspects of global warming.

Report this comment
#30) On June 03, 2009 at 9:09 AM, russiangambit (29.37) wrote:

Hunter, what was exactly the point of discussing USAA rates? I can tell you that I refinanced a few weeks ago, 15 yr at 4.25%. Currently the same mortgage is at 4.75%, i.e. 0.5.% move and it happened in 3 days last week. It is bad for mortgage market, refinancing is slowing down.

Report this comment

Featured Broker Partners


Advertisement