Market Euphoria May Turn to Despair If 10-Year Yield Jumps to 3%

A search on this analyst on wiki shows that he predicted a number of crisis accurately before.

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(18-02-2018, 09:45 PM)Life is a game Wrote: A search on this analyst on wiki shows that he predicted a number of crisis accurately before.

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You gonna sample the strategy itself, not just the winners to prevent confirmation bias.

Respectfully, he has good writing skills (for an economist) and i think he is a maverick in his own sense. But that's all i would leave it at. As the old adage goes, the stock market predicted 9 out of the last 5 recessions. It might be apt here.

Just 2 examples:
https://www.valuebuddies.com/thread-1419...l#pid21374
http://english.caijing.com.cn/2009-09-16/110251471.html

After a few years of reading, i came to a conclusion that with my limited time, it might be more beneficial to use my time on readings from folks who have skin in the game.

Just read the scmp article..

Quote:Another factor that would make this market pop rather than fade is the US budget. The latest budget points to a US$1 trillion (US$7.8 trillion) deficit for the foreseeable future. That means the dollar interest rate will be high. Japan kept interest rates at zero after its bubble began to deflate, because its domestic savings were funding its ballooning fiscal deficit. The US depends on foreign capital for its blowout deficit. The high dollar interest rate means that the bubble must expand or pop.

I am not so sure why many are always harping on the total debt of US. They are basically irrelevant as long as US are leading the world in future technology and development.
Just like Singapore that has a debt of more than 100% equivalent to GDP, we all know that it is irrelevant since the real net asset of Singapore is likely to be much higher than its debt.

The hidden net asset of US is enormous. Many of them are not valuated but their services and products can only be accessed if you own US dollars and with the permission of US government.
Eg..
A degree in Harvard, MIT, stanford??
Qualcomm, Intel processors, Nvidia GPU??
Amazon, Apple, Microsoft, Google, Facebook??

Lesser known but they are irreplaceable now...
Texas Instruments, Analog Devices...

Buying a wide body plane??
Boeing.. you can choose airbus but that's all..

Future??
A trip to Mars?
Self driving car?

So, since US is quite generous in offering all these products and services to the world to improve our life, the rest of the nations on these planets, unfortunately or fortunately, will have to pay their dues by buying US dollars. Anyway, even if you let it drop, they will just raise the price of their irreplaceable products and services. In NS term, LPPL.

Can China or Europe take the role for US?? Unlikely.

Of course, US is also dependent on the product and services of other countries. But, it is not impossible to replace Singapore with another country if there is a need to do it.

(19-02-2018, 11:44 AM)yeokiwi Wrote: Just read the scmp article..

Quote:Another factor that would make this market pop rather than fade is the US budget. The latest budget points to a US$1 trillion (US$7.8 trillion) deficit for the foreseeable future. That means the dollar interest rate will be high. Japan kept interest rates at zero after its bubble began to deflate, because its domestic savings were funding its ballooning fiscal deficit. The US depends on foreign capital for its blowout deficit. The high dollar interest rate means that the bubble must expand or pop.

I am not so sure why many are always harping on the total debt of US. They are basically irrelevant as long as US are leading the world in future technology and development.
Just like Singapore that has a debt of more than 100% equivalent to GDP, we all know that it is irrelevant since the real net asset of Singapore is likely to be much higher than its debt.

You are right about debt not the only metric to look at. 

Singapore is a net creditor country ( our foreign asset minus debt/liability position) 
Whereas USA is a net debtor country (biggest in the world) 

IIRC Japan , Germany , China are now the top three creditor nations in the world in that order. Have to note though that a lot of China and Japan's assets are actually in foreign assets like US Treasuries. 

However the economy is quite dynamic and lots of factors play a part.

@Yeokiwi Bro. But I thought last recession was due to toxic debt? US is always on the forefront of technology no doubt. But so is Japan in the past which has been in depression for the longest time. Debt itself is only healthy when it is used to support innovation meant to help mass human beings but not toxic debt on some technology where only the minority rich ppl can afford. A big population in this world are still in extreme proverty. Flying car in space or live in Mars is a dream for many. US cannot forever come out with out of reach technology and QE to support it themselves. QE in itself already shows that US support their own technology with great passion but I can't say the same with other countries. Unrealistic goals will create toxic debt eventually.

@weijian I'm just trying to show there are 2 sides to a coin. We should not just write off any warning from analyst just because we think they are not worth our attention. Imo his warning is with good intentions.

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Hi Life is a game bro,

My point is that US debt is not really a big deal. The country competency is more important. For a one trick pony country like Venezuela, the economy is devastated once the oil price drops.

The 2009 recession is not really that bad on US. Life still goes on and i do not think they suffer any drop in living standard.

For a country like US that monopolizes popular product and services in the world, US dollar will always remain popular.

(19-02-2018, 11:44 AM)yeokiwi Wrote: Just read the scmp article..

Quote:Another factor that would make this market pop rather than fade is the US budget. The latest budget points to a US$1 trillion (US$7.8 trillion) deficit for the foreseeable future. That means the dollar interest rate will be high. Japan kept interest rates at zero after its bubble began to deflate, because its domestic savings were funding its ballooning fiscal deficit. The US depends on foreign capital for its blowout deficit. The high dollar interest rate means that the bubble must expand or pop.

I am not so sure why many are always harping on the total debt of US. They are basically irrelevant as long as US are leading the world in future technology and development.
Just like Singapore that has a debt of more than 100% equivalent to GDP, we all know that it is irrelevant since the real net asset of Singapore is likely to be much higher than its debt.

The hidden net asset of US is enormous. Many of them are not valuated but their services and products can only be accessed if you own US dollars and with the permission of US government.
Eg..
A degree in Harvard, MIT, stanford??
Qualcomm, Intel processors, Nvidia GPU??
Amazon, Apple, Microsoft, Google, Facebook??

Lesser known but they are irreplaceable now...
Texas Instruments, Analog Devices...

Buying a wide body plane??
Boeing.. you can choose airbus but that's all..

Future??
A trip to Mars?
Self driving car?

So, since US is quite generous in offering all these products and services to the world to improve our life, the rest of the nations on these planets, unfortunately or fortunately, will have to pay their dues by buying US dollars. Anyway, even if you let it drop, they will just raise the price of their irreplaceable products and services. In NS term, LPPL.

Can China or Europe take the role for US?? Unlikely.

Of course, US is also dependent on the product and services of other countries. But, it is not impossible to replace Singapore with another country if there is a need to do it.

The article does not refer to total debt, but to the annual deficit. Nor is it the deficit per se that the writer is concerned with, but the effect of that deficit on interest rates, and the effect of those interest rates on the prospects for bubbly stock markets. 

Over the period of QE the Feb bought 2.5 trillion of US Government bonds. $2.5 trillion that did not have to be funded via the normal bond market. Now, the Fed is not buying, and is actually looking to reduce its balance sheet. So there will be bonds from the Fed unwinding coming into the market. Meanwhile, the US government will be greatly increasing the rate of bond issuance to cover:

1. The existing budget deficit
2. The effects of the Trump tax cuts
3. The effects of the Trump infrastructure plan
4. Increased military spending
5. An increase in budget deficit due to the Fed unwinding, which will mean the Fed feeding less 'profit' back into the budget (this is currently covering about 20% of the annual deficit)
6. Higher interest rates, which we are already seeing and which also lead to a higher deficit

So, a flood of new bonds hitting a bond market, which, due to QE, has not been used to anything like that rate of issuance. It is not a question as to whether or not those bonds can be sold, but the effect of the increased supply on bond prices and therefore long term interest rates and mortgage rates. Interest rates have been so low for so long that even modest rates, historically, could be a game changer for markets.

Technically IIRC the Fed is not unwinding the balance sheet actively per se but 1) not reinvesting the interest coupons 2) letting debt mature and not reinvesting. This should not be confused with OMO which targets interest rate not Fed holdings per se, though there might be a knock-on effect

US can withstand $1t new debt because it is still the world’s defacto reserve currency hence there is always an inherent demand. Even Japan, Germany or China cannot have that kind of annual deficit without significant impact to confidence, FX & economy. That said, as per my previous posts on this topic, means if the prowess of USD is in doubt, be it rise of RMB, demise of petro$, confidence in the USD (hence a strong USD is in the best national interest) etc, something will have to give. Twin deficit doesn’t apply too much to US per se

Up to a point, the US can sustain a very large deficit.

The large deficit, when held by foreigners, is simply a IOU for services in USD priced in nominal dollars. As long as the holders of the debt do not demand actual goods and services but just recycle the nominal money, then there's no problem. To get to a large debt, you either need to print money or deny money supply to the domestic population - guess which approach is true?

So the potentially negative issues are:
1. Asset inflation. Despite the US stock market hitting highs, I see not a big sign of that in asset markets. This is a sign that people are just recycling capital over and over without using it to buy assets.

2. what happens when a big holder of US debt decides to damage US interests by selling the debt (of course it damages themselves as well) possibly for political, not necessarily economic reasons. The US Dollar weakens, bringing down the value of those IOUs, inflating US import bills.

The UST 10 year is actually down >5% YTD with 50bps move... wonder if people still remember what Buffett said about the long bond? S&P is still up YTD and down "just" 5% from Jan Peak to now

Actually Russia tried to do exactly that in 2008 to damage US interests, even opening inviting China to do that. Scary part was that Russia actually did sell out while China held on. China knows they need a stable USD and treasury market for now as RMB slowly internationalises, but I'm not sure if the Trump admin understands that a strong USD is in the best interest of US

I actually think that as a business man, he will tend to have a simplistic mercantilistic mindset and favor a weaker USD. With deluge of UST supply, Fed not buying and weaker USD, I'm not sure if a steeper yield curve in this case is actually indicative of a growth economy.