Prepare for Boredom...?

Wall Street attaches some significance to the “January Effect”, which basically says that January predicts the whole year. In fact, when the market is up in January, it is usually up 10.4% for the whole year. If it is down in January, the year is essentially flat. January 2010 was down 2.9%, suggesting a flat year. Since the market was so hot the last part of 2009, a cooling off period is quite appropriate and probably good for us.

Another rule of thumb is that, during election years, the second half of the year is better than the first half. The thinking is that uncertainty about the election outcome is greatest early in the year, but the “smart money” already has the election figured out before it happens, reducing uncertainty.

This suggests that 2010 will be a boring year for traders, who make short term bets, and a good year for investors, who invest in long term trends, so they can think about those long term trends. For those who need to worry, think about the problem of sovereign debt in general and Greek bonds in particular, as well as the continuing lack of transparency for the derivatives, which Warren Buffet defined as “financial weapons of mass destruction” and were a huge contributing factor to the Great Recession.

Worry is never boring . . . darn it!

Successful Rehab?

Today’s announcement that the GDP grew at 5.7% was clearly good news. In addition, the Chicago Purchasing Managers Index jumped from 58.7 in December to 61.5 in January. If that wasn’t enough, consumer sentiment increased from 72.8 in December to 74.4 in January. What a great day!

OK, celebration over . . . the question immediately becomes whether the good news is sustainable? Or, is this just an inevitable snapback from inventory levels being depleted during the Recession and now being re-built?

As I’ve written before, this economy is showing a Nike-shaped recovery, i.e., a rounded bottom with a slow recovery. The damage was too profound for a rapid recovery, and the current political disarray is not helping. Nonetheless, the recovery will continue, just not as sharply as today’s numbers indicate. But, as cardiac patients can progress successfully before having another heart attack, I am currently concerned about the problem with Greek bonds. Their debt substantially exceeds their GDP (roughly 120% vs 80% in the US). Their profligate ways have caught up to them, and they are having trouble selling more bonds, to keep spending without raising taxes. Holders of existing bonds have gotten crushed. Farmers are already blocking roads to demonstrate against cutting farm subsidies and other governmental services. It is all too reminicient of the “Asian Contagion” in the late 1990s. This could be different, if the European Union will use this opportunity to show a benefit to membership, like providing tax benefits for Europeans who buy Greek bonds, for example. But, it bears careful watching!

In 2007, the world economy had a cardiac event, originating from the financial systems. If we have another one in the near future, it will be from soverign debt. But, how do you make a soverign government rehab itself?

A Thousand Points??

CNBC super-star Jim Cramer said the loss of either Fed Head Ben Bernanke or Treasury Secretary Tim Geithner could cause the Dow to immediately drop a thousand points. If either happened un-expectedly, Cramer might be right, but I doubt either will happen. Ben Bernanke is clearly guilty of not seeing the recession coming, but very few economists did. However, once it happened Bernanke was extraordinarily innovative combating it. He used everything in his toolbox and then invented some more. If only to unwind what has been done, it is in the best interest of the United States that he be re-appointed, and I’m confident he will be.

I’m more agnostic about Tim Geithner. There is no pending Senate action on him anyway. However, he has done a good enough job to keep his job, but this is an election year, and a sacrificial lamb may be required. The market will most assuredly not drop a thousand points if he resigns “to spend more time with his family”. He will then be inundated with job offers and become a wealthy man.

President George H. W. Bush used to talk about a “thousand points of light” illuminating our nation’s future. Two of them would be Bernanke and Geithner.

More Form Than Substance

The Tea Party demonstrators were livid at the big banks, especially when the taxpayers had to bail them out. It is fair to say that profits were privatized, while losses were socialized. This means the banks and their shareholders got to keep the profits, while the taxpayers got to pay for their losses. Their anger is understandable. President Obama, anxious to prove he has heard the Tea Party complaints, went on the attack today.

During the Clinton Administration, the Glass-Steagall Act was repealed. This law kept commercial banks separate from investment banks. Commercial banks accept consumer deposit and commercial loans. They are more conservative, and commercial bankers make decent salaries. Investment banks help companies raise money from the stock and bond markets. Most of the new financial products like derivatives were developed by and traded by the investment banks. They are not as conservative, and investment bankers make huge, maybe obscene, salaries. The President’s comments would start separating the two functions again.

Today, the stock prices of the big banks got crushed, but a curious thing happened. The regional banks, like SunTrust, did great. Clearly, the market sees them as the winner in this effort to re-regulate an industry that needs to be re-regulated. Bringing back Glass-Steagall would help reduce risk but is also unnecessary, if we would start by enforcing the existing regulations. (The Bernie Madoff scandal is a perfect example of that.) Many analysts agree with that position. But, we ALSO need meaningful punishment for excessive risk-taking. There are many bond salesmen who lost their great jobs and are now unemployed, but sitting on some beach AFTER making millions of dollars. Why wouldn’t they take excessive risk?

Today’s comments by the President were required political theatre, and I expect the big banks to recover shortly, once the uncertainty wears off.

Good News = Bad News?

Hyman Minsky was an economics professor at Washington University in St. Louis. He pointed out the credit availability is cyclical, i.e., that credit will expand until it bursts. In other words, credit doesn’t slowly deflate or get paid down. It bursts! Describing the 1998 financial crisis that began in Russia and ended with the collapse of Long Term Capital Management, Paul McCulley of Pacific Investment Management in California described that bursting as the “Minsky Moment”. Currently, analysts argue whether that Moment for this crash was in June or August of 2007.

Of course, that was in a pre-globalized world. Today, credit to Americans is going down, while credit to America is going up. Neither Presidents, professors, nor economists have any control over the world’s “bond vigilantes”. To sustain an annual deficit of $1.4 trillion, we need to sell a record amount of bonds, but who will buy them? The Chinese have politely said they are starting to get “a little worried”. (Of course, the Fed could buy them all, but the dollar would get crushed.)

Here’s the good news: There is no immediate problem. Estimates are that our debt level, as a percent of GDP, will not catch up to Japan for at least ten years. Here’s the bad news: There is no way to fix a problem, under our method of governing, unless it is an immediate problem.

Here Comes Santa Claus...???

Today, on Christmas Eve, the market set a new high for the year. That is always good news, even if it is still down 25% from its high two years ago. Often called a "Santa Claus Rally" (SCR), the market is usually good this time of year and extends through the first two trading days of the New Year. But, does it predict a good year for next year? As it turns out, a good SCR doesn't necessarily mean a good next year, but a bad SCR usually predicts a bad next year. So stay tuned for the news next week.

More importantly, I do wish you and your family a warm, healthy Holiday Season....and a bull market next year.

Golden Vices???

For many years, I managed the portfolio for a wonderful gentleman in Williamsburg, who died a few years ago at the age 99. He was a great guy, and I miss him. Coincidently, his son-in-law was Morgan Stanley’s legendary investment strategist, Barton Biggs, whom I have followed closely over the years and have read both of his books. Last week, he was interviewed by Advisor Perspectives and updated his thoughts. You can read the short interview at:

http://www.advisorperspectives.com/newsletters09/Barton_Biggs_on_Undervaluation_in_the_SP_100.php

But, there is one subject that made me laugh. Talking about gold as an investment, he said: “What is the P/E ratio on gold? What’s the yield on gold? It doesn’t have one, whereas I can prove to you that US high-quality, large-cap stocks are as cheap relative to value and to their history as they have been in hundreds of years. As Winston Churchill once said of one of his political opponents – who was vegetarian, a teetotaler and very liberal – the same is true of gold; it ‘has all the virtues I dislike and none of the vices I admire.’”

The only disagreement I have with him is that a good part of the current demand for gold results from the concern that the dollar will lose its status as a reserve currency, and that may have caused the demand curve to have permanently shifted to the right, which is “econo-speak” for a fundamental change in supply and demand, which drives the price upward. While I am bullish on gold in the long run, it did get ahead of its fundamentals recently.

Regardless, Barton Biggs is a genuine sage, and I recommend him to you!

Farewell to Arms............

Long-time readers know that I have proudly served for many years on the certification committee of a prestigious national investment association. For a number of reasons, we recently began making the examination process more difficult, which was fine. But, we became increasingly technical, finding a formula for every question. I recall Warren Buffett saying “Don’t do equations with Greek letters in them.” Given the collapse of almost every asset class last year, the whole concept of Modern Portfolio Theory has been called into question. However, instead of incorporating new information into our concept of investing, I felt we were desperately clutching what we were originally taught, fearful it might need to be updated.

It was a very wise person indeed who said “neither investing nor war making nor love making is hard science”. Nothing supplements education like years of experience, proven judgement and the ability to keep learning. I felt like we were giving a new toolbox full of shiny tools to a bunch of grade-school kids calling themselves financial advisors.

........connected to the shin bone.......

Last week’s trouble in Dubai is connected to this week’s trouble in Greece, whose credit rating was decreased both Monday and Tuesday and that is connected to Spain, whose credit rating was reduced today. This has raised worries for the safety of foreign bonds in general, which sold down, as people ran for safety. Because the dollar is still the safest currency in the short run, they bought dollars, which increased the value of the dollar. And, since an increasing dollar hurts our exports, which are fundamental to the “new normal”, the stock market drops. Got that? Data is never free-standing. It is always connected.

Long time readers know how little I think of bond funds, i.e., mutual funds that invest in bonds. Those mutual funds that invest in long term bonds are the worst. Nonetheless, if you must invest in foreign bonds, I would only do it via a large bond fund that specializes in that. Some analysts believe foreign bonds are a separate asset class because they are not perfectly correlated to any other asset class. Frankly, the only use I have for those funds is to benefit from the depreciating dollar. If you think the dollar will continue to depreciate, one good way is to hold un-hedged foreign bonds, preferably in a bond fund. (Un-hedged means you are exposed to swings in currency values.) I’ve bought more in the last six months than ever before. Don’t forget, you will lose money if the dollar appreciates, as it has done for the last few days.

I’m confident the long term trend of the dollar is down . . . which makes imports inflationary . . . which is connected to the shin bone . . . which is connected to the hip bone . . .

Take a baby aspirin, and enjoy the weekend!

As I write this, it looks like the market will open about 200 points down, entirely due to the news that Dubai’s biggest company has asked for a “standstill” on almost $60 billion in debt for six months. Will this trigger the systemic heart attack that worries me? Probably not! Even if the lenders had to write-off their entire loan as worthless, which is silly to contemplate, it is only a small sliver of the total $1.5 trillion that is expected to be written off over the next two years. A more legitimate concern is that Dubai will fire-sale their other assets, driving down market prices, in order to raise cash. Most of those assets are in the UK, including a large ownership interest in the London Stock Exchange itself. However, this “chest pain” will undoubtedly reduce investors’ appetite for risk, slowing or stopping the markets rise. But, that’s OK, because the market has gotten too far ahead of the economy and needs a rest. It is even well ahead of its own 50-day-moving-average. It needs to slow down now to avoid a more disruptive drop later.

For the economic cardiologists among us, the thing to watch is not stock market closing prices, but the cost of credit default swaps. These derivatives played a large part in triggering the crash in September of last year. Unfortunately, information is hard to obtain on them. Nobody even knows how many there are. There is no central exchange to keep track of them. A mere $60 billion related to Dubai would mean nothing. But, that can be leveraged a great deal, thru derivatives called “CDOs squared”. A trillion dollars worth could easily produce the heart attack I fear. We need a central exchange NOW!

One thing is certain: The market will over-react. It has a long history of that, and it is especially true following a recession. The next few days could be ugly, but you don’t need to go the emergency room. I’ll let you know when you do!

Dr. Bernanke: STAT

While data about our economic health has been improving rather consistently since the Crash of 2008, I’ve become very concerned that the patient might suffer an unexpected heart attack. The problem now is the same as the problem then. We still have not figured out how to intelligently regulate derivatives, which Warren Buffett described as “financial weapons of mass destruction”. But, heart attacks are often triggered by something exogenous, e.g., sudden exertion, surprises, etc. So, what would trigger our economic heart attack?

A few years ago, many economists fretted about the Yen-carry trade. At that time, investors were borrowing Yen in Japan at essentially zero interest rates and buying dollars in Australia or New Zealand, for example, which paid as much as 7%. They kept the difference in interest earned in Australia and interest paid in Japan as their profit. Their risk was that Japan might raise interest rates, which would cause the Yen to appreciate, which would then make it more expensive for the investors to buy enough Yen to repay their loans. This is the greatest risk to the investment strategy of “currency carry trades”. When the reversal happened, Japan paid a heavy price as the value of the Yen suddenly spiked, which made their exports un-competitive worldwide overnight.

Recently, famed pessimist Nouriel Roubini, who accurately predicted both the timing and the intensity of The Great Recession, claimed the Yen-carry trade was nothing compared to the new Dollar-carry trade, calling it “the mother of all carry trades”. I suspect he is right. The world is awash in dollars right now, borrowed at no cost and invested in more risky assets elsewhere, which has been a major factor driving up stock markets worldwide this year. However, when the market feels the Fed is ready to raise rates, we can expect a vast amount of more risky assets, such as international stocks, to be sold quickly, driving down their values. It will happen suddenly.

Will that trigger the heart attack I fear? Probably!

Will the patient be better prepared for a reversal of the Dollar-carry trade if we better regulate derivatives before then? Absolutely!

I wish it wasn’t so boring that Congress cannot pay attention . . . paging Dr. Bernanke!

Why did we send in the clowns?

Late last year, a client wisely predicted that China would emerge from the crisis before the U.S. His reasoning was interesting. He thought that great problems require great decisions, but that the U.S cannot make great decisions like China, which is governed by engineers, while the U.S. is governed by lawyers. I've thought about this alot!

Yesterday, I heard from David Gergen, advisor to five different U.S presidents, of both parties. He pointed out that our founding fathers intentionally created a difficult legislative process. However, they had no expectation that the process would later be made ever more difficult with (1) the problem of filibusters, requiring 60 votes instead of 51, (2) the complexity of requiring CBO analysis of all spending bills, (3) the pointless "food fights" created by the media to sell advertising and (4) the "quiet conspiracy" between Republicans and Democrats to protect safe seats during re-districting every ten years, which pushes candidates to the extremes instead of the center.

If the founding fathers could have seen what would happen, would thay have made the legislating process so difficult? But is it too late to send in the engineers?

But, what is the recipe?

Today, I listened to one of my favorite thought leaders, John Mauldin of Dallas, author of Bull's Eye Investing. He spoke of the difficult state of the U.S. economy and the few but painful choices we have:

1. The Argentine Solution - induce hyper-inflation to "inflate away"
the huge indebtedness of our country. He gave this a 1% probability.

2. The Austrian Solution - induce a collapse to eliminate the weak,
effectively flushing away the problems but creating 30%
unemployment now,while insuring the good times will return sooner.
He also gave this a 1% probability.

3. The Eastern Europe Solution - following the Soviet collapse,
that part of Europe had no choice but to make huge re-structuring
changes. However, given our inability to re-structure the health
care system, which "everybody agrees needs to be re-structured",
how can the U.S. effectively make the necessary decisions within
our current political system.

4. The Glide-Path Solution – announce an exit strategy for the huge
government deficit to expect an eventual return to the good times
at some point in the future, without trashing the dollar in the
meantime. This, he said, is our best hope!

My judgment is that he is correct, but we will have to experience all of the above before the good times return. We will experience significant inflation, as soon as deflation is eliminated. We will allow some companies to fail, as we did with Lehman. (We should have allowed GM to fail.) We will make some re-structuring decisions, e.g., health care, energy, or whatever. (The real restructuring we need is to improve our decision-making system, which was devised in the 18th century.) And, of course, the Fed has already made numerous comments about devising an exit strategy but cannot put a timeline on it, for obvious reasons.

It is not a simple trade-off between raising taxes or cutting spending. There are real strategies to be implemented.

Q: Which one is best?
A: All of the above!

Below Thursday’s Headline

Thursday’s big 200 point rally of the Dow was ignited by the surprisingly strong GDP report for the third quarter. It was a healthy 3.5%, which was substantially stronger than the 3.2% that was widely expected. Of course, when the market realized that number was “juiced-up “on steroids from the stimulus, the market dropped almost 250 points the next day.

But, nobody noticed some other good news on Thursday. For the week, the Federal government had to sell a whooping $123 billion in Treasury bonds to cover continuing large deficits. Normally, the bids for such bonds are twice as much as the amount offered. This week, there was three times as much. With all the concern about whether the U.S. could continue to finance its huge deficits, this was very good news. Even better, 75% of that demand for Treasury bonds came from Americans, not foreigners. Can you handle even more good news? Historically, commercial banks have kept about 20% of their assets in Treasuries. Today, it is only about 14%, which means they will be buying more of our Treasuries as they heal.

The nightmare scenario is that we are unable to sell our bonds, either because the credit of the US government is questionable or because the strength of the US dollar is questionable. The first does not appear reasonable, as our bonds are selling nicely. The second is more worrisome. Long term, the dollar must depreciate, to help our exports and to help create the inflation needed to manage our heavy debt burden, by “inflating it away”. But, it must be done slowly!

Finally....Real Progress

During the 1990s, our trade deficit averaged about 2% of GDP but started rising in 2000. In December of 2006, I wrote this was not sustainable and possibly dangerous, as it approached 5% of GDP. The latest figures show it has decreased to only 3% of GDP and hopefully still dropping.

One reason is the weakening dollar makes our imports more expensive and our exports cheaper for foreigners to buy from us. Another reason is that China’s trade surplus has decreased from 10% of GDP to only 6.5%. That’s progress . . . real progress!

We’re watching a fundamental realignment of the global economy. It will be bumpy, but the worst is behind us . . . and, that’s also real progress!

Sobering Reminder

That’s how the President referred to yesterday’s unemployment release that another 263 thousand Americans lost their jobs. Since the recession began in December of 2007, over 7.2 million people have lost their jobs. Even 54 thousand government jobs disappeared last month! And, we are many months away from any good news. Unemployment improves only after the economy improves. If this is a “double-dip” recession, jobs could continue to disappear for another two years, which would be a political debacle for the current administration. Unfortunately, there is little they or anybody else can do about it.

Economists often talk about U6 unemployment, which is the number of unemployed people plus the number of people working part-time who want to work full-time, plus those people who have given up looking for work. There are now 17 million people who want to contribute to the GDP but cannot. That is a valuable national resource being wasted.

A Light at the End of the Tunnel.........?

Long time readers know I have expected a retest of the March lows. While the stock market has remained strong during the traditional September/October correction . . . so far, . . . I’m still worried. The Great Recession did a great deal of damage, unemployment will come down very slowly, and the economy must become more export oriented and less consumption oriented. That takes time. The lows of the Great Depression came about fifteen months after the Crash of ’29.

Now, it could be the lows of the Great Recession came in March of 2009, only six months after the crash in September of 2008. I hope so . . .

Another factor arguing that the worst is past us is the inventory cycle. Inventory levels have fallen a record eleven straight months. At some point, inventories must be rebuilt. At that point, the economic recovery will begin. I hope so . . .

Lastly, the continuing decline in the dollar will accelerate our transition from a consumption oriented economy to a more export oriented one. I hope so . . .

Take a side!

Economists and securities analysts usually work together well. Sometimes, when they do disagree, it is more apparent than real. The current disagreement is such a case. Economists remain glum, while analysts are giddy. Why? Because U.S. economists have a consensus forecast of a 2.4% growth rate next year, while analysts expect earnings of the S&P 500 to increase 25%. How can there be such a difference? Two reasons: First, the S&P contains the 500 largest U.S. companies, and they disproportionately benefit from international growth. Their growth is not limited to the U.S. Second, the earnings growth we have seen this year has been from cutting expenses, not revenue growth in a shrinking economy. That means their earnings per share are “spring-loaded” to jump as soon as revenue increases drop straight to the bottom.

So, who’s right? I hope they both are!

Re-appointment of Ben Bernanke

Yesterday's re-appointment of Ben Bernanke as Chairman of the Federal Reserve System was wise a decision! Sure, he was slow recognizing the subprime problem, but he showed true innovative genius once he engaged. Although there is never any way to prove it, I am confident he prevented the Great Recession from becoming another Great Depression!

But, rewarding a person for a job well-done understates the significance of this re-appointment. If nothing is done to unwind all Bernanke has done, inflation is a certainty! Unfortunately, unwinding these actions will be politically unpopular. It will be easier to unwind them by Bernanke than someone else, who is more beholden or less familiar with the details. Bernanke knows his legacy is ruined if it doesn’t prevent inflation. This was the best thing President Obama could have done in the short run to prevent inflation in the long run.

What a difference a year makes.......

I learn so much from my friends. This is from one of them, i.e., Ben Valore-Caplan, CEO of the highly respected Syntrinsic Investment Counsel in Denver. He reminds us of our reality a mere twelve months ago.

• At market close on launch day, the Dow stood at 11,417, about 23% above the
current 9,315.
• George Bush was President.
• Oil stood at 113 versus 67 today.
• Barack Obama was en route to Denver to accept the Democratic nomination.
• Few people had heard of Bernie Madoff. Those who had heard of him thought
that they were lucky.
• Citigroup was trading at about 17.5 (now trading at 4.3), AIG over 400 (now
26.6), and GM at 10 (now trading as Motors Liquidate at 0.90).
• Sarah Palin was a relatively obscure governor of Alaska. Now she is neither.
• Many thought that the worst of the US stock market correction was over (the
S&P 500 actually rose in August 2008 before a precipitous September-October-
November 20 decline of 42%).
• Lehman Brothers was a major investment bank (until mid-September).
• Many hedge fund investors still did not know what “gates” were or how easy
they were to put up.
• Inflation as measured by CPI stood at 5.6% (the highest in 17 years), just
prior to massive negative changes in CPI in October and November. CPI this
week is at 0.0%.
• The Olympics in China were proceeding without the hitches many had expected.
Few outside the State Department had heard of Uighers.
• Health care reform was something from the early 1990s.
• Town hall meetings were generally confined to small towns in New England.
• Former Goldman CEO, Hank Paulson ran the US Treasury Department while former
Goldman Chairman, Stephen Friedman, ran the New York Federal Reserve.
Goldman stock was at 158 one year ago; it is at 158 today. Curious.
• The Tamil Tigers controlled much of north and east Sri Lanka.
Stanford Group was selling 10% CDs issued by their bank in the Caribbean.
• Housing starts of 950 million in August 2008 had economists wondering if the
housing market had stabilized at last.

Life moves on . . . thankfully!

Clap...clap...clap...

Was I the only person applauding Monday when the Dow dropped 186 points? It blew a little froth off the market, which is a good thing! There is a loose but direct relationship between the financial markets and the overall economy. The Conventional Wisdom is this: if the economy improves, the market usually senses this and starts improving 5-8 months sooner. While we have clearly enjoyed a strong V-shaped recovery in the markets, I expect a long U-shaped economic recovery. While we are at or near the economic bottom now, does anything expect a rapid rebound in the economy? The market is ahead of itself and needs to blow off steam . . . and froth too!

Linearism

I just finished reading The Fourth Turning by William Strauss and Neil Howe. It makes the point that generations have a predictable flow, starting with growth (the prophets) followed by maturation (the nomads) and then entropy (the heroes) and finally destruction (the artists). The World War II generation could not have foreseen that “America would soon become so confident and institutionally muscular, yet so conformist and spiritually complacent." My generation of Boomers could not have “predicted that America was about to enter an era of personal liberation and cross a cultural divide . . "

My daughter’s Gen-X could not have predicted “ that the nation was entering an era of national drift and institutional decay. And, the millennial generation could not have predicted “a decisive era of secular upheaval” or a period of unraveling.."

They then make the point this generational evolution has happened many times in the past and is not to be feared. It argues we think too much in terms of linearism, which sees the future as a straight line, instead of a series of cycles. Think of the next generation as being more like The Greatest Generation! (There is also a wonderful quote from Mark Twain that “nothing is older than our habit of calling everything new.)"

From an investment standpoint, it should offer solace to those who fear the sky is falling, that this time is different. We have been thru a crisis many times, and better times always follow. It means our asset allocation should not be for Armageddon but for the inevitable and eventual re-birth.

The Feast Continues...thankfully!

I attended a meeting yesterday and listened to the fear some investors have of China, particularly its ability to crush the dollar by dumping all their dollar-denominated holdings, such as US Treasuries. Their angst is understandable but misplaced. Dumping the Treasuries would create huge losses for themselves and risks sending the world, including themselves, into a genuine depression. Indeed, during a recent visit to the White House, the Chinese leadership expressly assured the President that they would continue buying our Treasuries, which is certainly not a warning to dump Treasuries.

But, such assurances are just pretty words. However, the proof is that they do continue to buy our Treasuries as promised, but there is a difference. They are now buying more 10-year issues and fewer 30-year issues, which limits their exposure to a collapse of the US. In addition, they are spending their huge dollar reserves, which are not invested in Treasuries, to buy assets around the world, especially in Africa. This also limits their exposure to a collapse of the US.

Today, the US Treasury issued another $15 billion in 30-year Treasury bonds. There are always more bidders for the bonds than there are bonds to sell. This is called the Bid-to-Cover ratio and is normally about 2.3 times. Today, it was 2.54X, which means there is considerable appetite remaining for those bonds. While that appetite is not infinite, there is certainly still plenty left.

While the world continues to feast on our debt, the Fed needs to provide us with an “exit strategy” very soon, to keep the guests at the dinner table.

Canary in a Coal Mine??

Nassim Taleb is the brilliant author of the “Black Swan”, which described how huge, unpredictable events occur, such as the current market collapse. This morning, he said the current Chairman of the Fed, Ben Bernanke, has performed poorly and should not be re-appointed when his tenure as Fed Chair expires in January. A survey of economists by The Wall Street Journal was also released today, showing 71% of them disagree with Taleb and think Bernanke should be re-appointed by President Obama.

I also think Bernanke has done a remarkably agile job and hope he will be confirmed. It was fortunate that we had one of the leading authorities on the Great Depression as Chair of the Fed during the Great Recession. But, the re-appointment of Bernanke is a “canary in a coal mine” for me. If he is re-appointed, there is a chance the inflation could still be controlled. However, if he replaced by someone less independent, as any President would naturally hope, I fear a return to 1970s-style of inflation. We'll see . . . .

No Champagne Yet!

Friday’s jobs report was great . . . or the headline was great, that unemployment dropped from 9.5% to 9.4%. Also, over 700 thousand workers were losing their jobs in January, compared to “only” 244 thousand last month. Still, how can the rate of unemployment decrease when 244 thousand workers lost their jobs?? Simply, hundreds of thousands of people have quit looking for work. They have gone to part-time work, gone back to school, gone home to live with Mom & Dad, given up, or whatever. If all those people are added in, the total “under-employment rate” is a staggering 16.3%.

Certainly, the financial markets are suggesting the recession is over, but whatever happened to the “toxic assets” . . . remember those? We may have "ring-fenced" them, but they are still a problem. Also, have we made the derivatives market transparent yet, which was the other primary cause of this collapse? There is still work to do, much work!