RR Phantom
Location : Wasted Space
Job/hobbies : Cayman Islands Actuary
 |  Subject: Wall St lemmings just going wild about staid old bonds  Sat Aug 28, 2010 3:18 am | |
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Global sharemarkets are running scared right now, with traders developing ulcers as they await the latest signals from The Hindenburg Omen.
The brainchild of Jim Miekka, a 50-year-old former physics teacher who has never worked on Wall Street, the Omen has become the investment equivalent of the Ouija board for fearful New Yorkers who suddenly have taken fright.
Devised in 1995, the Omen tracks the number of stocks simultaneously hitting yearly peaks and troughs along with a range of other technical measures, and in the past month the red light on the Omen has flashed three times.
If there is any criticism to be levelled at The Hindenburg Omen, it is that it is a little too successful - it has predicted four times as many market crashes as have occurred in the past 15 years.
But traders across the Atlantic are now hanging off Miekka's every word as the blind, gun-loving guru - a potentially dangerous combination in itself - suddenly has become the toast of talk show television.
For those looking for a more reliable indicator on what the future may hold, however, there is a far more established measure, one that has dominated and controlled Wall Street and global sharemarkets for decades. It is called the government bond market. And right now, it is in a frenzy.
Money is piling out of the sharemarket by the billions and into bond markets, creating one of the biggest booms in history.
What that tells you is that the smart money is betting on a slowdown in global economic growth, perhaps even the feared double-dip recession.
Most people think of Wall Street and the New York Stock Exchange as one and the same thing. The truth is, the sharemarket is a mere blip on the radar screen that encompasses Wall Street.
The bond market rules everything. It is far bigger and far more important, which explains why most of the big swinging dicks that control the Street's major investment banks have come not from the stock exchange floor, but from bond markets.
It is a murky world, lampooned by stock traders as dull and boring, trading in government issued paper. Shrouded in secrecy, it is characterised by minimal disclosure where the two golden rules of investment banking are strictly applied.
Rule No. 1. Don't tell anyone anything until after you've done it.
Rule No. 2. Don't tell anyone anything.
But for all their secrecy, bond markets over the decades repeatedly have been a more accurate reflection of what is happening in the economy and a leading indicator to sharemarkets.
When sharemarkets got out of kilter with reality in the late 1980s, the bond market recognised the trend months before the Black Monday crash.
More recently, in mid 2007 the bond market began sending out signals that lending had reached dangerous levels and that the funding taps would soon be turned off.
Wall Street stock traders, whose indestructible optimism must be fuelled by a voracious appetite for Prozac, shrugged aside the concerns, sending sharemarkets to record highs by November that year. And then reality caught up and global finance suffered its biggest hit since the 1930s.
Even then, as markets crashed through 2009, there was the familiar spiel, delivered almost daily to anyone up early enough to watch the carnage of the Wall Street close. ''Hey Nicole, what we have here is a purrfect buying opportoonity.''
It is a smart strategy to buy when prices are low. But, unlike any other commodity, investors are loath to buy stocks if they believe they will be even cheaper in the future.
It seems few people are buying the stockbroker spiel these days. So far this year American mutual funds have pulled more than $US37 billion ($41 billion) out of the sharemarket and placed it in the bond market.
And in the past few weeks those fears about the future of the American economy have been heightened by a series of poor economic statistics for housing and employment.
That has raised concerns about the ability of corporate America to live up to their forecast earnings. If they don't, then share prices will have further to fall.
That is one reason for such a massive transfer of wealth into the relatively staid world of bonds. Government bonds and treasuries are safer than stocks, for the simple reason they are backed by the government and generally deliver more conservative returns.
But here is where it gets complicated. Those bonds and treasury notes sold by the US government are traded on an open market. And if a bond yielding 3 per cent suddenly is in hot demand, its price rises and the yield drops. Investors have been playing that market like the sharemarket, and those that got in early have made a killing as bond prices have risen.
The amount of cash piling into the market has pushed yields on treasuries down from 1.5 per cent to 1 per cent this year, reflecting a view from investors that US authorities will keep a lid on official interest rates in an effort to boost the economy.
That is a remarkable event. For, given the US government will need to raise huge amounts to repay its debts, you would expect the opposite to be occurring right now; yields should be rising as the government tries harder to raise scarce cash.
Instead, it is the opposite. Given the parlous financial state of the European Union and the problems confronting the US economy, along with sluggish growth in Japan, it is little wonder investors are looking for safe havens and are concerned about the future of stocks.
And given the shake-out on sharemarkets in recent years, financial newspapers are now marvelling at how investors in staid old bonds - the things that used to deliver paltry returns - have outperformed those who put all their cash into stocks.
But therein lies another problem. Investors are like lemmings. They rush to buy expensive investments on the hope they will go even higher rather than look for value.
And US stockbrokers, green with envy about the cash drain from their domain into Dullsville Central, now are pointing to the bond market as the next big bubble.
And they ought to know. They have created plenty in their time.
ANCAPS: ANARCHO-CAPITALISTS |
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