Notes From Underground: The Debt Wars Are Getting Stale–Each Day Positions Harden

The seriousness of the U.S. DEBT CIRCUS cannot be overstated but evidently not from a market perspective. U.S. Treasuries have continued to be well bid as many investors still run to the TREASURY market in times of uncertainty. Besides the “rush” to safety in the BONDS, the FED has so badly perverted the market’s pricing mechanism that it is very difficult to determine the genuine impact of the Washington default countdown. European sovereign debt has been trashed during the last 20 months as there was no real central bank support to the market as the EFSF was a late comer to the scene and was provided with meager provisions.

The FED on the other hand has purchased $2 TRILLION worth of assets making it much harder to discover value. Many of the world’s foremost investors have lost a great deal of money. Thankfully it has been only DOLLARS trying to short the U.S. Treasury market. Are the losses indicative of poor analysis or rather a factor of running into an immovable object?

But in a world where MONEY is still  able to roam  the globe in a fairly unfettered fashion, other investment opportunities are provided. The havens, GOLD and SWISS FRANC, have rallied in synchronicity as they have appreciated almost 14% since January. Commodities, for the most part, have gained in price, except for those commodities being down because of increased supply–grains and cotton. Many BOND sales people argue that the haven allure for the DEBT is still relevant but as the long as the FED is the largest player, along with the captive investors such as PENSION FUNDS and INSURANCE GROUPS, the board is too complicated. For nimble investors, it is far easier to access alternative markets in search of return. It is time to be freed from FED BONDAGE.
The venerable Jeremy Grantham of GMO has a new quarterly piece out about the importance of the agricultural sector as an investment. Grantham is not touting GRAIN FUTURES but rather the concept of farm land, water, fertilizer and the technology of versus new farming techniques as the path for financial gain over the next decade. Readers of NOTES FROM UNDERGROUND know that this has been a favorite theme going back 20 months. When BHP tried to acquire Canadian-based POTASH, NFG applauded when the deal was squashed by the CANADIANS as they didn’t want a foreign entity controlling such a strategic asset. Early this year, the merger between URALKALI and SILVINIT resulted in the Russian fertilizer firm controlling 45% of the world’s potash reserves.
Recently, Belarus President,  Lukashenko, was courting Chinese investors to buy a 25% stake in the national fertilizer company, BELARUSKALI, keeping it out of URALIKI‘s control. The Chinese are scouring the globe for fertilizer and potassium, signifying the importance that agriculture will have in a world with increased wealth. The Belarusians are looking to have some independence from Russia while at the same time trying to raise some much-needed funds. Uralkali, though, has not exited the process and is still seeking to buy the available assets of BELARUSKALI to gain further control of global potash production. Just a reminder to pay attention to the fertilizer stocks as the Chinese and other emerging nations are searching to enhance their agricultural output. THROW IN THE CHEAP DOLLAR AND GLOBAL AG STOCKS WILL BE THE TARGET OF THE WORLD’S SOVEREIGN WEALTH FUNDS.
 A quick hitter on the OIL MARKET: It has been a while since NFG discussed oil as it has been range bound after the IEA attempt to force the market lower by releasing 60 MILLION BARRELS from global strategic reserves. For all the short trades out there you should be aware that Japan has ramped up its imports of sweet crude. Post-FUKUSHIMA, two-thirds of Japan’s nuclear reactors are shut down and operating at 37% capacity. In a BLOOMBERG article from July 22, Christian Schmollinger reported that the added demand from Japan has put a premium to Indonesian crude. It is uncertain as to when Japan’s nuclear production will return to normal so the market will continued to be buoyed by this new source of demand. Sometimes a very strong YEN has its benefits as the financial impact of higher oil prices is offset. [IN JULY 1983 it cost 7760 YEN to buy a BARREL OF OIL, WHILE TODAY A BARREL OF OIL COSTS—-7753 YEN.]  Read that again carefully.

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14 Responses to “Notes From Underground: The Debt Wars Are Getting Stale–Each Day Positions Harden”

  1. Craig Shaw Says:

    Yra,

    Can you please comment about prices in equities and bonds declining together and what this means for the markets.

    Regards

  2. Mbs Says:

    Yra-
    Adding to Craigs comment…. Can I add the downward pressure on the dollar as well as the move lower in bonds and equities together. The triple threat and its implications.

  3. yra Says:

    Will do—I will write that scenario up as a blog in itself for that would be the market saying that is has grown tired,very tired of U.S assets and would be a return to the late 1970’s,early 1980 and it took rates going very high to turn that around.The DOLLAR is of course weak,very weak—don’t use the INDEX as it gives a false impression.In my mind the DOLLAR INDEX should be renamed the RESERVE CURRENCY INDEX as the EURO makes up so much of its value.The YEN,SWISS,AUSSIE,CANADA are all at or nearing all time highs against the DOLLAR,and yet people try to tell me the DOLLAR is holding up well.Again,a sell off on the three elements would signal that investors were leaving the U.S. until further notice.The BONDS though are difficult because of the FED’s role and large foreign based Treasury owners would not be smart to panic into this uncertainty,so you are left to contemplate what hedges Japan and China may have to counter DOLLAR and U.S. asset weakness—–hard assets are a very logical choice.An oil company here,a potash company there–it adds up

  4. Arthur Says:

    Great post Yra… George Soros bye, bye, any thought?

  5. yra Says:

    Arthur—George Soros is the ultimate believer in regulation for his “open Society” as it attempts to create balance and fairness–using the excuse of the SEC provides rationale—probably following Druckenmiller and others who are trying to adjust to a algorythmic dominated world and with 24 billion of his own to manage –really no big deal

  6. rob syp Says:

    Ways to play the agricultural scenario you described are ETF symbols MOO and DBA.

  7. JediTrader Says:

    Yra-

    I have been following your blog since I read about you in the book, Inside the House of Money, and find your thoughts to be very insightful and educational. I worked in the cbot for a year after college but had to take another job to pay bills etc, but am very passionate about markets.

    Right now I need to learn more about bond markets as I do not know much about them. You constantly refer to spreads on various government notes and what they indicate – which has me scratching my head. Any book suggestions? I plan on getting back in the trading business soon and appreciate any help on my journey.

    thanks

  8. Arthur Says:

    Thanks, there is a perfect understanding between us.

  9. yra Says:

    Jedi—nay book on the FED and Banking will do.It is amazing that so few people discuss yield curves and their impact on markets.Maybe Professor Waspi will provide some of the references form finance classes at the U of I

  10. JediTrader Says:

    Yra-

    Yea it blows my mind as well. Funny you say that because I studied economics at UIUC, and it was a topic that just wasn’t covered thoroughly in any courses I took. Thanks for the advice though and i’ll look forward to posting comments in the future!

  11. kevinwaspi Says:

    Yra (and all),
    Thanks for the nod on suggested reading related to the yield curve, and interest rates in general. If a person were starting from square one, I’d recommend they begin with an “oldie but goodie”. The title is “Inside the Yield Book”, by Sidney Homer and Martin Leibowitz, c.1972 by Prentice Hall. I have no idea if the book is still in print, I used it in my first fixed income class in grad school, and it’s still on my shelf! Homer and Leibowitz were both with Salomon Brothers, and explain bond basics and strategy from both theory and practice. Remember, this is from the time when Salomon was a good old partnership, and one of the premier bond houses.
    For more specific yield curve math and cause/effect, I’d suggest a few chapters in “Fixed Income Analysis”, by Frank J. Fabozzi. This is available from a variety of publishers/sources as it has been used for study purposes in the Chartered Financial Analyst (CFA) program over the past 5-6 years. The 2004 edition on my shelf is published by Frank J. Fabozzi Associates. Specifically, I’d recommed Chapter 4, “Understanding Yield Spreads”. It covers a little history of monetary policy, theory on the term structure of interest rates. Chapter 5 is “Introduction to the Valuation of Debt Securities” which is good for seeing the value of bonds through the lens of the term structure of interest rates, as well as the term structure of credit spreads. Chapter 6, “Yield Measures, Spot Rates, and Forward Rates” brings all of the basics together.

    Those sources are for good fundamentals, nice stuff to build on, but to really understand, you’ve got to see things in context. That means continual reading of market dynamics. The fact that you’re reading Yra’s Notes From Underground already earns you an A+; you’re exposed to one of the best global-macro minds in the business! I also have some favorite websites I read and here are a few (no preference in their order of presentation).
    1) http://stlouisfed.org/ The Federal Reserve Bank of St. Louis has one of the best internet based databases out there on all aspects of the economy and interest rates. Throw in the “white papers” and policy discussions and you can see a surprising variety of thought, not just the “official statement” of policy. The Fed of Minneapolis as well as the Dallas and Kansas City Fed have occasional, rich reading too.
    2) http://cxa.marketwatch.com/finra/BondCenter/Default.aspx This link is to The Financial Industry Regulatory Authority (FINRA)’s bond database. This is the industry’s “self regulatory” authority, and one of the few windows into the opaque world of bond trading including corporates, municipals and treasuries. Occasional good commentary, as well as ability to look at last trade prices and activity on corporate and municipal issues, information that is not easy to find unless you work inside a bond house.
    3) http://www.standardandpoors.com/home/en/us Heros or Heels, whatever your opinion on the rating firms is at the moment, you should probably pay attention to what they show you in their white papers and commentaries.
    4) http://seekingalpha.com/ This is the “Seeking Alpha” website. Consider the source as you look through here, but there are some very well done pieces here from time to time.

    Last, regular reading of current events and the thoughts of experienced successful people. I’ve already mentioned Notes; This is a terrific forum. Add to that regular reading in the Financial Times, Barrons, The Wall Street Journal, and The Economist and you’re going to get good exposure to logical and illogical economics. I firmly believe that in order to be good at spotting a gem, you need to sift through a lot of tailings.
    Sorry to be so long winded, but I hope this was helpful.
    Kevin

  12. Craig Shaw Says:

    Thanks Yra, look forward to the blog

  13. Greg Says:

    Prof. Waspi,

    Nice reading list. Looking forward to getting back to school and perhaps discussing ways to increase our “liquidity” during such volatile times…

  14. JediTrader Says:

    Prof Waspi-

    Wow, thanks for so much feedback! This is exactly what I was looking for as I want to improve my understanding of yield curves.

    Yra-

    My first post was a request for some advice and I got way more than expected. Thanks and looking forward to discussing global markets here on the blog!

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