Baseball91's Weblog

February 12, 2009



In a nation where we were looking for leaders to lead, I am filled with doubt about this young president’s ability to make good policy, and execute.  It was a time of hard choices which go with actually governing.  It was time for the executive to use his mandate to lead Nancy Pelossi and Harry Reid.  I trusted the president.  I did not trust Congressional Democrat Party leaders. 


Because the suffering of the rest of the world was becoming more visible, the focus on deflation shifts now to the growing risks of worldwide deflation.  The currencies of Baltic nations and Bulgaria are soon to come under increasing pressure this year, which will likely set off a chain reaction.


The bond market would signify the health of the economy more than the equity markets.  It was going to be a brutal six months for stocks.  The yield on the benchmark 10-year Treasury note fell to 2.76 percent from 2.82 percent, and the10-year Treasury note rose 12/32 to 108 12/32.   Bill Gross had said that if the benchmark 10-year U.S. Treasury note sold at a yield above 3 percent at an auction, this would increase the chance the Federal Reserve will buy longer-maturity Treasuries. When the Federal Reserve does start buying government debt, that will be a “big day” for bonds and currency markets, said Bill Gross. 


In his op eds, Bill Gross has been moving to Treasury inflation-protected securities (TIPS).   Expected inflation has risen over the past 2 months to 1%. (Historically, more like 3% to 4%).  These TIPS will soar, if we do experience high inflation, stagflation, or hyperinflation like the nay-sayers are predicting.  With the government running the printing presses 24 hours a day in an effort to ward off deflation, it’s hard to believe the U.S. won’t see a pickup in inflation once the financial crisis abates. TIPS come with an added layer of protection against deflation: When they mature, the Treasury promises to pay back at least the amount you paid. In other words, if you buy TIPS and hold to maturity, you can’t lose money. 


The bond market is expecting deflation, or falling prices.  Chance Carson in wrote, “There is little doubt that fears of inflation have recently shifted to forecasts of accelerated economic de-leveraging and to the growing risks of worldwide deflation. This reversal in sentiment has sent TIPS prices plummeting and has driven yields higher.  Deflation is likely to continue for several more months. But the growing likelihood in the next several years is that burgeoning Federal stimulus programs will lead inflation higher, perhaps to unprecedented levels rivaling the late 1970s, when inflation peaked above 14%. TIPS will thrive as inflation heats up.”


“In a January 19, 2009 interview with Barron’s, Bill Gross said he expects big payoffs in TIPS within the next six months, as the de-leveraging cycle slows and asset managers are re-liquified. He explained that TIPS “can go up 10% to 20% in price, simply on the basis of optimism that deflation has been averted.”   Chance Carson in on February 11, 2009   


John Bogle, former CEO at Vanguard, has written that over the last 50 years, the world had changed from one where 92 percent of all stocks were owned by individuals and 8 percent by institutions to a world where 24 percent of stocks owned by individuals and 76% owned by institutions.  Bogle wrote that another insight of Hyman Minsky was also prophetic where the institutional complexity of the credit derivative world “may result in several layers of intermediation between the ultimate owners of the communities’ wealth, and the [business and individual] units that control and operate the communities’ wealth.”


John Bogle wrote,”This separation between ownership and control has now come to pass. In a mere half-century, we have moved from an ownership society to an agency society, a change I’ve described as ‘a pathological mutation in capitalism.’” 


And a lot like the Alex Rodriguezes of the world, in the age of free agency, Bogle wrote “these new agents—institutional money managers advising mutual funds and retirement plans—have far too often placed their own financial interests ahead of the interests of fund owners and retirement plan beneficiaries, ignoring the interests of their own principal.”


John Bogle concludes:  “As Benjamin Graham observed, in the short run, the market is a voting machine, but in the long run it is a weighing machine. Put another way, “The fundamental things apply as time goes by.”


1 Comment »

  1. Plug a Link

    Comment by baseball91 — October 7, 2011 @ 3:57 AM | Reply

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