Will Trigger the Next Collapse of Fixed Income and Stocks?
By Victor Sperandeo with the Curmudgeon
Destruction of Fixed Income Market?
The fixed income market has become incredibly distorted. From a historical perspective, you have to be a blind, deaf and dumb politician and/or bureaucrat to not see the obvious coming destruction. How about a 300 year new low in yields? Yet Fed policies have not been effective in boosting economic growth much above 2% for the past seven years.
To not see the destruction ahead reminds me of the famous movie Casablanca and one of the many great lines - "Make it ten, I'm only a poor corrupt official," pertaining to a twenty franc bet that Captain Louis Renault couldn't afford to make with Rick (Humphrey Bogart).
Well the bet here is the world economy. The only answer politically is more debt, lower interest rates- even negative nominal rates- and extreme regulation. A few data points:
· It's been said that at JP Morgan Chase you can't tell the regulators from the banking employees as there are so many of the former.
· Never is the word "tax-cut” or "less regulation" mentioned by any main street economist.
· The U.S. has increased its Gross Debt (not including off budget debt) at a 9.2% annual rate from January 1, 2009 -to- December 31, 2014 (+69.6%). The government’s favorite number: "debt held by the public" is compounding at 12.66% in the same period (+104.5%)!
So what can be a catalyst to the decline in debt prices other than the Fed and global central banks changing monetary policy?
Geopolitical Hot Spots as Market "Correction" Catalysts:
Bonds and stocks fall during inflation and war. At 300 year low yields and near all-time highs for stocks, some external and unexpected event will likely trigger a "correction" if not a new bear market.
Many of the world's nations are fighting for more power and the world is becoming a dangerous place in general.
Yemen is an important place to watch. The civil war going on started by the "Houthi" rebels against the U.S. backed Hadi government. The Shiite Muslim Houthis are supported and funded by Iran. Their 100,000+ fighter force effected a coup that forced Hadi to leave the country. That precipitated Saudi Arabia - the leader of the Sunni Muslim world - to attack several installations of the Houthis in Yemen. This caused threats from Iran to Saudi "to stay out of Yemen's affairs" and thereby caused Iran to send a navy armada to Yemen's coastline.
It should be noted that the Saudi's are a predominantly Sunni nation, while Iran is almost completely Shia. Each is competing for dominance of the Islamic world. The conflict in Yemen could thus be viewed as a "proxy war." Also, Yemen is adjacent to three fourths of Saudi Arabia's southern border. For the Saudi's to ignore this problem would be potential suicide. They're taking the problem very seriously.
From the lead story in Sunday's NY Times, titled Sale of U.S. Arms Fuels the Wars of Arab States:
"To wage war in Yemen, Saudi Arabia is using F-15 fighter jets bought from Boeing....As the Middle East descends into proxy wars, sectarian conflicts and battles against terrorist networks, countries in the region that have stockpiled American military hardware are now actually using it and wanting more. The result is a boom for American defense contractors looking for foreign business in an era of shrinking Pentagon budgets — but also the prospect of a dangerous new arms race in a region where the map of alliances has been sharply redrawn."
The average man knows Iran is trying to conquer and control the Middle East and obtaining a nuclear bomb would virtually do it. The escalation of "war" in Yemen is of keen interest to many nations. Russia and Iran have been hurt greatly by oil being cut in half in seven months. Getting oil back to $100 or more ($150?) is definitely in their best interests. It would be relatively easy to blow up a Saudi pipeline to cause the oil price to move up sharply.
Also, Russia is selling S-300 missiles to Iran, which caused Israel to threaten sale of weapons to Ukraine, which then caused Russia to threaten Israel. And so it goes...
Obviously, being long an allocation of oil here is not imprudent in my view. Technically oil also looks strong. This is the most potential market moving event of the day.
Greece is really fully discounted as a known event. If it defaults who would be surprised? It's worth noting that Greece has been broke for a very long time, but still is not dead. This is a lesson on how hard it is for a nation to go bust with backing and a printing press.
The May 7th election in the UK is very important, in my opinion. If UKIP (the UK Independence Party) wins it will be a real change for the better, in my view. Their leader- Nigel Farage- is perhaps the most free market potential person in politics today. His talks are a real change from your everyday politician. Mr. Farage wants the UK out of the EU as a member state. He believes Britain can prosper outside the EU by blocking migration.
Miscellaneous Events to Watch:
Other very important events that should be watched, understood and carefully considered are generally not covered well by the mainstream media. They include:
· The "Con Con" (a Constitutional Convention) in the U.S. which could completely change America as we know it. Article V allows the States to call a convention that circumvents Congress and could change the U.S. Constitution. Article V is being fought for currently in many States. If 75% of states agree to it - bingo we are in a different world.
This initiative started with Mark Levin - a conservative writer who wrote a book that suggested passing amendments to the Constitution known as "The Liberty Amendments." One of those is a balanced budget amendment to solve the ever growing U.S. national debt problem. The difficulty here is that once a Con Con starts, no one can control it. ANYTHING GOES!!! Most conservative supporters have no idea what they are doing. Who the delegates are is unknown.
A partner of mine who was a (5 star) Supreme Court lawyer confirms this. It is a complex legal undertaking. This is not the way to fix the problem as the Constitution has been shredded, but still exists in some form. The issue is not the laws, but rather following the laws in the Constitution that matter.
· Agenda 21 critical, but not important in the short run. It is a non-binding, voluntarily implemented action plan of the United Nations with regard to sustainable development.
· The Trade agreements TPP (Trans-Pacific Partnership) and TTIP (Transatlantic Trade and Investment Partnership) are intermediate problems. These are not about trade, but about a "New World Order" and big goodies for big corporations. They are called "free trade agreements," which is like saying the Affordable Care Act is "affordable" to all. The TTIP trade talks are being held in secret (between the U.S. and EU), like all of Obama's ideas.
"All discussions about TTIP have been hypothetical, since the negotiations are taking place in secret. I’ve seen the secrets of TTIP, and it is built for corporations not citizens," said Molly Scott Cato in this blog post.
World Bank economist Ruiz Devesa has approvingly noted that the TTIP objective is total "integration" of the U.S. and the EU, not merely economic and trade cooperation. This means political integration as well like the EU. How's that working?
Historical Quotes to Ponder:
In most cases, the people who attempt to control too much fail, but they may have an agenda that is not obvious. The following quote may cause us to ponder clearly what to consider today:
"Together, they would watch everything that was so carefully planned collapse, and they would smile at the beauty of destruction." by Markus Zusak, The Book Thief.
After the Constitution was discussed Benjamin Franklin was asked: "Well Doctor what have we got- a Republic or a Monarchy?" Franklin replied: "A Republic, if you can keep it." This is the critical issue all Americans face today.
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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