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"If you're going to panic, do it fast and beat the crowd." ~ Jesse Livermore

Thursday, February 21, 2013

When Bonds Went Truly Bad

No One Remembers When Bonds Went Truly Bad - Businessweek: "All this consternation and kvetching—“headline risk,” traders call it—over a comeuppance in the bond market. Makes you wonder if investors and Wall Street, with its battalions of freshly hatched MBAs, have enough of a frame of reference for when a bond bear last truly happened: in 1994. . . .Today, according to the Leuthold Group, if corresponding interest rates were to shoot up a mere point from where they are now over 12 months, a T-bond maturing in February 2031 would sustain a total hit of between 6 percent and 11 percent (your yield gets subsumed by the bond’s plunging price)."

FINRA Offers Regulatory Road Map for 2013 | BakerHostetler - JDSupra: " . . . FINRA has identified algorithmic trading, high-frequency trading abuses and alternative trading systems as areas that will be carefully monitored to protect individual investors, as well as the integrity of the markets as a whole. The purpose of increased scrutiny of these systems seems to be a fear that these automated, computer-based systems may not be adequately equipped or capable of reacting to a market event without serious market disruption. 1. Algorithmic Trading - The move toward algorithmic trading in the securities industry continues to be an area of concern for FINRA. Algorithmic trading refers to the practice of designing an algorithm that is capable of executing pre-programmed trading instructions automatically and without human involvement. The ease of use and market risk factors associated with algorithmic trading make this practice appealing to market participants. However, automated trading raises significant concerns due to the perceived lack of a human fail-safe. . . ."

Asian Currencies Tumble. Yes, This Is A Global Currency War. - Forbes: "Market participants naturally suspect that the People’s Bank of China, the central bank, was behind the surprising accumulation of greenbacks.  Traders also believe that recent dollar purchases by China’s state banks are really on behalf of the central bank. Since early December, the meddling of the People’s Bank in the currency market has been evident but not, in the words of Reuters, “overwhelming.”  Stephen Green, the well-known analyst from Standard Chartered, estimates that the intervention last quarter was “to the net tune of $34 billion.” Central bank operations do not have to be large to be effective, however.  Traders, despite strong corporate demand for the renminbi, saw the signals from Beijing and have reined themselves in."

The Dow at 14,000: not as good as gold - NYPOST.com: " . . . . if you take one share of each of the stocks in the Dow index, their combined value as measured in gold is lower than it used to be. The price in paper money may be going up, but the real value is slumping. At about 14,000, the Dow Jones Industrial Average stands at nearly twice the 7,949 at which it stood on the day in January 2009 when President Obama first took the oath of office. But value of the stocks in the index has drifted downward; a portfolio of one share of each stock is worth only 8.3 ounces of gold, down from 9.3 ounces on Jan. 20, 2009. . . . In other words, it wasn’t the price of gasoline that was going up. It was the value of the United States dollar that was going down. This is the part of the policy partnership of Barack Obama and Federal Reserve chief Ben Bernankethat no one likes to talk about. What it means is that there’s little joy on the street — Wall Street or (especially) Main Street — even in a week when the Dow Jones Industrial Average touches a historic high of 14,000. Track the Dow in terms of gold, and you see what a collapse it’s been: The index was valued at 41.3 ounces of gold as recently as 2000. . . ."

The Fed’s Worst Fear - The New York Sun: " . . . Even now, in the absence of any shred of White House fiscal responsibility, the Fed faces a cruel dilemma. It can reduce market support, let bond prices fall and suffer the unhappy consequences. Or it can keep on its present course of trying to satisfy the beast by buying up further trillions of dollars in Treasury paper. The latter is the current course preferred by Chairman Ben Bernanke and Board of Governors bureaucrats notwithstanding the worries of regional Fed presidents..That course inevitably leads to inflation. Over the last four years, the damage to the dollar has been partly meliorated by global investors fleeing weak currencies elsewhere for the relative safety of the dollar. But there has to be a limit to how long that will be true. We already are seeing signs of renewed asset inflation not unlike the run-up that occurred in the first half of last decade. Stocks and farmland are up and housing prices are recovering from their slump. The wealth illusion from asset price inflation makes it insidious. Brendan Brown, London-based economist for Mitsubishi Securities, reminds us that asset inflation is usually followed by asset deflation, and that’s no fun, as the events of 2007 and 2008 testified. More seriously, asset inflation often presages a general rise in the prices of goods and services. Inflation can ultimately destroy the bond market, as it did in 1960s Britain when the socialist Labour Party was trying to save its sinking boat. No one wants to commit to an investment that might be worthless in 30 or even 10 years. Yet, through history, governments have inflated away their debts by cheapening the currency. That process is well underway in the Fed’s abdication to irresponsible government. If Fed policies continue, another huge tax, inflation, will weigh down the American people. The politicians will try to escape public censure, as they always do, by blaming it all on “price gouging” by producers, retailers and landlords. A substantial cohort of the press will buy into that phony rationale and spread it as gospel. The Fed’s dilemma is in fact everyone’s dilemma, given the universality of the dollar. . . . "

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Jeff Randall - Business and politics comments

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