WHO'S NOT SELLING BONDS?
First, the US Treasury has hundreds of billions of dollars of bonds to sell to fund the trillion dollar deficits Congress is mandating.
Second, the Federal Reserve will be selling the trillions of dollars of securities they have purchased in the recent expansion of the monetary base.
Third, and finally, any investor who owns bonds will be selling to avoid the coming bear market.
Paterson is advising its clients to continue to extend the maturity of liabilities past the 5 year mark, and look at 10 year liabilities, or more.
TACTICS
Continue to shorten the maturity of assets and use money market arbitrage to improve earnings.
Consider borrowing long term deposits.
Use extreme caution on long term lending.
STRATEGY
Warn senior management and the board that a disaster is in the offing.
The flood of money recently added by the Fed will either cause inflation or increases in long term interest rates - or both.
Showing posts with label inflation. Show all posts
Showing posts with label inflation. Show all posts
Monday, May 04, 2009
Sunday, November 16, 2008
Apology
For the past three months Paterson has been busy working with existing and new clients to avoid the disaster in the credit markets.
My apologies to students, casual readers, and potential clients for the absence of this weblog.
Paterson is back, explaining the situation and suggesting tactical and strategic plans for dealing with the extended downturn.
My apologies to students, casual readers, and potential clients for the absence of this weblog.
Paterson is back, explaining the situation and suggesting tactical and strategic plans for dealing with the extended downturn.
Saturday, August 09, 2008
Markets at Major Turning Points
Gold at Major Support
Most of the evidence suggests the bounce will be small, and prices will continue to drop. But, traders don't bet it that way.
Bond Refunding Successful
US Treasury sold $27 billion of notes and bonds following the largest increase in CPI since the Volcker years.
Treasury Note Futures
Treasury Bond Futures
Note that ond prices surged following a successful auction.
Corporate Bond Spreads Falling
Stocks finding Support
NYSE Composite
S&P 500
Russell 2000
SUMMARY
10 years from now this time will be seen as a major turning point in stocks. With inflation banished, and the bull market in bonds ended, only stocks will have the investment potential for the future.
Remember, stock prices rise when interest rates come down and stay down.
Most of the evidence suggests the bounce will be small, and prices will continue to drop. But, traders don't bet it that way.
Bond Refunding Successful
US Treasury sold $27 billion of notes and bonds following the largest increase in CPI since the Volcker years.
Treasury Note Futures
Treasury Bond Futures
Note that ond prices surged following a successful auction.
Corporate Bond Spreads Falling
Stocks finding Support
NYSE Composite
S&P 500
Russell 2000
SUMMARY
10 years from now this time will be seen as a major turning point in stocks. With inflation banished, and the bull market in bonds ended, only stocks will have the investment potential for the future.
Remember, stock prices rise when interest rates come down and stay down.
Friday, June 27, 2008
Inflation and the Bond Market
Bonds sank through support this month and are now back at May's support levels, now resistance for this instrument.
The question now is how low will prices go, and how high will long rates rise?
To answer this question we look at the money supply and the dollar. The first causes inflaton, and the second makes inflation worse.
MONEY SUPPLY
The monetary base is growing, but growth has been slowing for years.
This is a good sign for inflation, showing the Fed's commitment to control the supply of high-powered money.
In recent months, however, growth has accelerated slightly, but not enough to cause inflation.
Bank generated money has grown substantially in the past years, as businesses work their way through the recent Fed-caused disaster.
In recent months, growth in this leading indicator has slowed, leading to renewed confidence in the Fed's management of interest rates and the money supply.
In summary, inflationary pressures are not building, and there is no need to raise interest rates.
INFLATION AND THE DOLLAR
Price rises in the United States are connected to the falling dollar. Import prices are soaring as international demand for primary commodities pulls at suppliers.
The rise in commodity prices is directly related to the fall in the value of the dollar.
Notice the plunge in the dollar in 2006, and the simultaneous rise in PPI.
TACTICS
Prudent A/L managers will continue to lengthen liability maturities, shorten asset maturities, and work for higher spreads in lending.
Money market arbitrage is more profitable than ever, and those clients pursuing this activity have found their yields soaring dramatically.
The key to this business is a careful analysis of credit quality. High quality credits have been pushed off the curve hundreds of basis points, providing opportunities for lenders with excess cash.
STRATEGY
Now is the time to report to senior management and the Board on the A/L condition of the portfolio.
The institution is liquid, carrying good credits, good spreads, and profitable liabilities. In short, we are ready to lend to our existing customers, and prepared to take business from our weaker competitors.
The Asset/Liability department can take a bow.
The question now is how low will prices go, and how high will long rates rise?
To answer this question we look at the money supply and the dollar. The first causes inflaton, and the second makes inflation worse.
MONEY SUPPLY
The monetary base is growing, but growth has been slowing for years.
This is a good sign for inflation, showing the Fed's commitment to control the supply of high-powered money.
In recent months, however, growth has accelerated slightly, but not enough to cause inflation.
Bank generated money has grown substantially in the past years, as businesses work their way through the recent Fed-caused disaster.
In recent months, growth in this leading indicator has slowed, leading to renewed confidence in the Fed's management of interest rates and the money supply.
In summary, inflationary pressures are not building, and there is no need to raise interest rates.
INFLATION AND THE DOLLAR
Price rises in the United States are connected to the falling dollar. Import prices are soaring as international demand for primary commodities pulls at suppliers.
The rise in commodity prices is directly related to the fall in the value of the dollar.
Notice the plunge in the dollar in 2006, and the simultaneous rise in PPI.
TACTICS
Prudent A/L managers will continue to lengthen liability maturities, shorten asset maturities, and work for higher spreads in lending.
Money market arbitrage is more profitable than ever, and those clients pursuing this activity have found their yields soaring dramatically.
The key to this business is a careful analysis of credit quality. High quality credits have been pushed off the curve hundreds of basis points, providing opportunities for lenders with excess cash.
STRATEGY
Now is the time to report to senior management and the Board on the A/L condition of the portfolio.
The institution is liquid, carrying good credits, good spreads, and profitable liabilities. In short, we are ready to lend to our existing customers, and prepared to take business from our weaker competitors.
The Asset/Liability department can take a bow.
Thursday, October 04, 2007
Stock market surges following record volume
The NYSE Composite Index is bumping against record highs following record volume back in August of 2007.
As the chart below shows, stocks are still in a bull market, begun back in early 2003, and will continue higher until the Fed signals the end of monetary expansion by raising short-term rates again.
INFLATION AND THE STOCK MARKET
If inflation is coming, as we forecast in a previous weblog entry, stocks will outperform bonds by a substantial margin - perhaps as much as 10% - until the Fed realizes how badly it's blundered and starts raising the Fed Funds target again.
As inflationary pressures push into the economy, businesses will use this opportunity to raise prices on all goods and services, fattening income, earnings, and dividends.
INFLATION AND THE VALUE OF THE DOLLAR
Inflation is also lowering the value of the dollar against most trading-partner currencies, making imports more expensive, and raising domestic US prices.
The lower-valued dollar will also make exports cheaper, boosting the sales and stock prices of major US exporters.
ASSET ALLOCATION
For all these reasons Paterson Financial has moved a portion of the portfolio out of two year notes and into the NYSE composite.
The fraction of assets held in fixed income securities should be reduced to no more than 30% of assets and aggressive managers might go as low as 10% in fixed income securities.
Very aggressive money managers will consider dividend-free equities as typified by the NASDAQ 100.
Notice the index has more than doubled since the lows of 2002 and will lead the way as stocks trade higher.
If the index doubles again in the next 4 years prices will approach the highs seen last in the year 2000.
CONCLUSION
Until the Fed sees the error of its ways, prudent money managers will reduce fixed income holdings past the two year note, and will continue money market arbitrage.
STRATEGY
Asset managers must re-introduce growing inflation into their models.
The board must be notified of the potential for increasing input and output prices, interest rates, and the stock market.
Senior managers must review lending policies and procedures to make sure to place a sufficient spread in all fixed income business, and ensure a match of asset and liability maturities.
Hedging programs must be examined for opportunities presented by occasional spikes in long term debt prices.
TACTICS
Extend the amount and maturity of liabilities.
Prepare bond offerings and use the CBOT in advance of bond sales if prices spike upwards.
Increase spreads on all loan transactions.
Be aware of Treasury refundings and take advantage of price changes.
Begin active hedging on a small scale, selling into overbought US Bond futures.
As the chart below shows, stocks are still in a bull market, begun back in early 2003, and will continue higher until the Fed signals the end of monetary expansion by raising short-term rates again.
INFLATION AND THE STOCK MARKET
If inflation is coming, as we forecast in a previous weblog entry, stocks will outperform bonds by a substantial margin - perhaps as much as 10% - until the Fed realizes how badly it's blundered and starts raising the Fed Funds target again.
As inflationary pressures push into the economy, businesses will use this opportunity to raise prices on all goods and services, fattening income, earnings, and dividends.
INFLATION AND THE VALUE OF THE DOLLAR
Inflation is also lowering the value of the dollar against most trading-partner currencies, making imports more expensive, and raising domestic US prices.
The lower-valued dollar will also make exports cheaper, boosting the sales and stock prices of major US exporters.
ASSET ALLOCATION
For all these reasons Paterson Financial has moved a portion of the portfolio out of two year notes and into the NYSE composite.
The fraction of assets held in fixed income securities should be reduced to no more than 30% of assets and aggressive managers might go as low as 10% in fixed income securities.
Very aggressive money managers will consider dividend-free equities as typified by the NASDAQ 100.
Notice the index has more than doubled since the lows of 2002 and will lead the way as stocks trade higher.
If the index doubles again in the next 4 years prices will approach the highs seen last in the year 2000.
CONCLUSION
Until the Fed sees the error of its ways, prudent money managers will reduce fixed income holdings past the two year note, and will continue money market arbitrage.
STRATEGY
Asset managers must re-introduce growing inflation into their models.
The board must be notified of the potential for increasing input and output prices, interest rates, and the stock market.
Senior managers must review lending policies and procedures to make sure to place a sufficient spread in all fixed income business, and ensure a match of asset and liability maturities.
Hedging programs must be examined for opportunities presented by occasional spikes in long term debt prices.
TACTICS
Extend the amount and maturity of liabilities.
Prepare bond offerings and use the CBOT in advance of bond sales if prices spike upwards.
Increase spreads on all loan transactions.
Be aware of Treasury refundings and take advantage of price changes.
Begin active hedging on a small scale, selling into overbought US Bond futures.
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