The Banker has an excellent article on this in their Bank Trends section. A picture speaks a thousand words!
Nassim Taleb says in this interview that the debt problems of 2010 are worse than those of 2008, he has re-released his now famous book ‘Black Swan’, and his core belief presently is that recession is not the issue, debt is the issue. Fragility is exacerbated by high levels of debt – we can see that from an Irish context on Sovereign Debt/Bank Debt (whether the problem is real or perceived).
One of the most poignant things Taleb talks about is the failure of stimulus, and he rightly points out that Greece is not being asked to ‘stimulate’ their way out of their debt issues, they are being asked to look for austerity solutions, perhaps Keynesian beliefs might be shunted once again into history?
The point holds true in our opinion, high levels of debt are a wealth destroyer and inhibitor to prosperity, the drag on economies, in particular our own, will be evident for many years to come.
My ongoing love affair with Khan Academy knows no bounds! Salman Khan is one of my favourite educators because he has used youtube as a medium, making his online lessons available to everybody free of charge! This introduction to Bonds is a must see for any of our readers who hear about the bond market and don’t really understand it.
In the USA the 30yr Treasury is often called the ‘long bond’ and it is watched (the yields) very closely as it is the indication on long term rate expectations from within the market. If the NTMA issue 30 year bonds as suggested by today’s Independent it could bring about an important development that we have been advocates of for some time, namely, that of long term fixed rate mortgages.
Banks have a certain level of ‘zero rated funds’, this is money that is not incurring cost in terms of interest payments to the customer, they generally tend to come about in current accounts. Many people keep a certain amount of money in a current account from month to month, when you add all of this together across the institution there is normally a certain foundation or base level of funds constantly there. The zero rated funds are generally where the funding area where fixed rates come from, and the fixed rate mortgage prices are based upon a comparable (normally a sovereign …
In this video Paddy Hirsch talks about Bonds, Notes and Bills helping to break down how debt is described based on its tenure and also a little about how they work. This is worth watching twice if you have heard ‘Government Bonds’ mentioned in the past but didn’t really get what they were talking about.
Charlie Rose talks to Paul Krugman, in this interview we see an opinion that is contrary to the previous interview with Pete Peterson in which higher debt levels are encouraged. This is a fascinating opportunity to look at two sides of financial thought, that of the practitioner and that of the academic.
Peterson is totally adverse to defecits whereas Krugman is happy to see them baloon in order to get the Keynesian reaction in the market that he believes will come about, so now we have a grand scale and real life experiment, something that hasn’t really existed since the 30’s, that of seeing what comes about as a result of massive bailout plans when markets collapse, my hope lies with Krugman but by heart is with Peterson.
Typically the bond market is something that institutional investors, sovereign funds, and the very wealthy tend to invest in. Take for instance Dolmen Securities ‘Bond of the week’ (which is CRH this week), when I enquired about minimum order sizes I was told it was €50,000.00 which is fine if you are a bank but the majority of private investors would not have that kind of money to put into a bond – or at least not at that price tag or it would affect their diversification. Dolmen are a great house btw, I like their analysis, and in general what they do. However, CRH are trying to raise a bond in a market where literally everybody is trying to raise funds or roll over debt.
The competition is high, the US Treasury and HM Treasury in the UK are leading the way, that’s before we even get into municipal bonds and corporates. So what can be done? The Treasury in the US have alwasy taken the view …
Tom Keene of Bloomberg talks about the Fed and the results we may see of the solutions being put in place by Ben Bernanke. He makes the interesting and valid point about Ben Bernanke being one of the best living historians of the Great Depression and why it puts him in the unique position of being able to navigate the situation the US economy is in. 50 beeps in the 10 year treasury equates to nine big figures on Euro Dollar, so going from $1.30 to $1.39. Tom also talks about savings rates. Great viewing.
We have felt for quite some time that the risk of deflation will be met by monetary and fiscal stimulation to the point where it will give rise to several strong years of inflation. This extract is by James Grant of ‘Grants Interest Rate Observer‘. The question of ‘when’ the scales will tip in favour of inflation away from deflation is likely to be at some point in 2010.
This is why we are letting our clients know that we are watching the long term bond yields and when we see a divergence either in short to long or medium term to long we will be encouraging people to consider a longer term fixed rate. When the five year and one year cross that might be a good time, meanwhile, because more rate cuts are expected in 09′ it would not be the time yet for this kind of move.
We don’t have a crystal ball but we are keeping our eye on the bond market so that we can try to gauge …