Commentary for the Week of March 8

T-bonds have gotten trounced since late January, when long-term yields, which vary inversely with price, touched a millennial low of 2.23%. On Friday they spiked as high as 2.87%, reflecting the growing eagerness of investors to reduce their bond exposure ahead of a presumed credit-tightening later this year. But suppose everyone is wrong and the Fed continues to pussyfoot and prevaricate as it’s been doing since the last rate hike, in 2006? We continue to view that as the most likely scenario, even if the entire investment world seems to regard tightening as all but certain. Going sharply against the consensus, Rick’s Picks has been asserting for nearly two years that the Fed will never raise rates. Obviously, this forecast has to be wrong sooner or later. However, our point is that “later” could prove to be much later than investors appear to expect. Moreover, when interest rates finally do rise, we think the move will be driven by calamitous market forces rather than Fed policy. In the meantime, the Fed is in the untenable position of needing to strike fear in the hearts of credit-happy investors at a time when the central bank should be loosening, at least in theory. That’s right: loosening! For if the Fed were to tighten, it would turn the dollar’s already steep rally into a vertical spike. That would have catastrophic implications for the economic world. For starters, the quadrillion dollar derivatives bubble would deflate, since the entire Ponzi game is built on borrowed dollars. Players counting on inflation to make it easier to repay those dollars would experience the opposite, and ruinously so. No Bluffing a Strong Dollar The dollar’s strength has already begun to take a heavy toll on the earnings of some of America’s biggest multinational firms, including megabanks, because their

[Following is a letter that my friend Doug Behnfield, a Colorado financial adviser whose thoughts have been featured here many times before, sent out to clients as the new year began. Doug is an unapologetic deflationist like your editor -- a point of view that has served him well in recent years. Although February has been disappointing for investors weighted in long-term bonds, Doug sees them recovering, and yields falling even lower, as the U.S. economy fails to gain strength. For our part, Rick’s Picks has predicted a drop in long-term rates below 2%, and possibly to as low as 1.63%. If so, those who hold T-Bonds and long-term munis stand to reap substantial capital gains, since the longer the maturity, the more leveraged these assets are to even small changes in interest rates. RA] hope verb 1. want something to happen or be the case. “Hang me just ez high ez you please but please don't fling me in dat briar-patch!” -- Bre’r Rabbit *** The performance of the bond market in 2014 took practically everyone by surprise (except for yours truly and a few money managers like my friends at Hoisington Management). Here is an excerpt from a great article in the New York Times that tells the tale: “For Bond Investors, That Other Shoe Still Didn’t Drop”: “If you asked anyone at the beginning of 2014 where the rate on the 10-year Treasury would end the year, I don’t think anyone would have said lower, and most would have said one percentage point higher,” says Stephen Kane, a group managing director at TCW, which manages $110 billion in fixed-income portfolios, including the Metropolitan West Total Return Bond fund. "Yet the bellwether Treasury note ended 2014 at 2.17 percent [it hit 1.72% today] after starting it at 3

In these all-too-interesting times, the headline I found most disturbing last week, from The Wall Street Journal, was this one:  ‘Greek Troubles Cause Barely a Ripple’. This was not mere hubris but arguably something worse, since investors have aggressively been putting their money where their mouths are. A salient result, the Journal reported with no hint of alarm, is that “the bonds of other weak European countries have hardly ever been stronger.” Indeed, this is how very desperate capital has become in search of decent returns.  But then, why would investors stop lending Other People's Money to basket cases like Greece, Portugal and Spain as long as Germany, the only European country with real skin in the game, isn’t threatening to ring down the curtain? On Friday, when news crossed the tape that Greece and its creditors had agreed to kick the can down the road for four more months, Wall Street rejoiced in the way we might have expected: Stocks ratcheted up to new record highs, and a torrent of institutional money moved in the blink of an eye from Treasury Bonds into dubious europaper issued by the basket cases. Not that institutional traders actually believed anything of significance had happened. No, they routinely buy into this sort of non-news, and into the latest claptrap from the Fed, because they know the knee-jerk idiots at the trade desk next door – i.e., the competition -- will be buying it. For its part, Germany hasn’t eased the terms of any agreement it might hope to conclude with Greece. But for the time being, the status quo has been frozen in place, and that is all that’s needed these days to send stocks into spasms of jubilation. Deliberately Stepping in Harm’s Way For our part, we went short ahead of the

Yale’s Robert Shiller believes a bond crash is coming, although he stops short of saying when or why. In a recent interview with CNBC, the Nobel Prize-winning economist offered no rationale for a collapse in T-bonds other than that yields are too low. Well, yes, they’ve been held near zero by the Federal Reserve for several years, and there is nothing normal about that. Obviously, something’s got to give. As the late Herb Stein famously said, if something can’t go on forever, it will stop. But when? And why? Shiller’s interviewer did not think to press him for an answer, although he’s a full-fledged oracle in a mainstream-news world where anyone who uses the word “crash” risks being treated like a circus freak. To be sure, the crashes Shiller is credited with predicting correctly were the easy ones. Quite a few gurus in the not-ready-for-prime-time blog world saw them coming – shouted warnings from the rooftops, as the record will attest. Even the village idiot could have seen the housing crash coming (although, as John Paulson demonstrated, it took a devious kind of genius to figure out how to cash in on it). But when you predict, as Shiller has, that the T-bond market will collapse – which is to say, deflate or hyperinflate itself into oblivion -- you are effectively forecasting the end of the financial world as we know it. That kind of talk may not fly on CNBC, but in the blog world it is a given not only that a collapse is inevitable, but that anyone who argues that it can be postponed indefinitely is unworthy of a thinking person’s attention. The Big One My guess is that although Shiller sees the Big One coming, he has stopped short of describing the endgame, even in his

Nearly six years into a supposed economic recovery, the Great Recession persists for most Americans. Payroll statistics released Friday would have us believe the economy is heating up, but how can this be so? Both statistical and anecdotal evidence directly contradict a rosy “official” picture that has fixated increasingly on brisk growth in McJobs, and on a boom in car sales that would not exist in the absence of ultra-easy credit and cut-rate leases. Home sales have been erratic, marked by price appreciation mainly at the high end and a persistent dearth of first-time buyers. The market for starter homes remains comatose because lending standards have tightened, and because underemployed twenty-somethings are understandably skittish about piling mortgage debt on top of the $33,000 they already owe, on average, for college. On the retail front, vacancies are growing and likely to become far worse in the years ahead. Radio Shack’s bankruptcy, announced last week, was a body blow to suburban malls across the U.S. Ultimately, few of them will survive when department stores join the list of casualties. Bergdorf’s, Neiman Marcus, Nordstrom’s and a few other retailers that cater to upper middle-class shoppers are safe as long as the U.S. avoids recession. But stores that attract a less well-heeled clientele are not long for this world. Sears, for one, is about to die a well-deserved death after 40 years of mismanagement. This has temporarily helped prop up competitors such as Kohl’s, Target, Ross and K-Mart, but even they are fighting for their lives. Deflation’s Perfect Storm These developments are all deflationary, but the macro picture is even moreso, since a strong dollar is starting to shrink the value of profits earned abroad by U.S. multinationals. In Q4, Apple alone, by selling more phones than ever, and at higher prices, was able

The Fed has done it again, purporting to manage our expectations with yet more, excruciatingly public dithering over the timing of a rate hike. The central bank is now saying there will be no policy change before June at the earliest. This latest little piece of kabuki can only add to the credibility of our own forecast, which is that that the Fed will never raise rates. Okay, we were being facetious when we first made that prediction a couple of years ago; never is indeed a long time. But what kind of odds would you take to wager that there will be no rate hike for at least another ten years? You could probably get thirty-to-one from economists, editorialists, pundits and other useful idiots who never seem to tire of telling us that a rate hike is imminent. Realize that you would be within a year of collecting on the bet if you’d made it back in 2006, when the last rate hike was announced. Things were different then, as readers will recall. For one, the danger of crashing the financial system with a small turn of the monetary screw was not as great. The dot-com crash was a distant memory, and, outside of the doomsday blogosphere, the gestating housing bubble was not a concern. These days, however, the banking system is as shaky as a drunk on a high wire. Still worse is that the drunk has much farther to fall, since the financial leveraging that has occurred since 2009 is so vast as to be almost beyond calculation. The derivatives bubble is estimated by some to be as large as a quadrillion dollars. But even if you accept more conservative valuations of around $300 trillion, you’re still talking about a highly flammable gas-bag of digital money that

Baby Boomers should be rooting with all their might for the repeal of Obamacare, since it’s going to be Medicaid for everyone if the widely despised law is allowed to become entrenched. Medicaid was designed for the poor and provides reimbursement rates so low that many doctors have come to shun Medicaid patients.  They are going to start shunning Medicare patients as well, since an implicit goal of the Affordable Care Act is to squeeze physician and hospital payments down to Medicaid levels. As this change takes place, the healthcare system in general will increasingly resemble its Medicaid poor cousin, with the following consequences: Doctors will become increasingly choosy about whom they accept as patients. Concierge care will divide the patient population into haves and have-nots. We’ll all wait much longer to see a specialist. Certain procedures, such as hip and knee replacements and bypass surgeries, will become drastically rationed. New doctors will be in critically short supply, since medicine as practiced under ruthlessly intrusive Government control has already stopped attracting the best and brightest students. Why would they want to spend half their lives training for a job, and going hundreds of thousands of dollars into hock, just to work for The Government? Hospitals, on the other hand, are loving Obamacare, since it has turned their emergency rooms into profit centers where every patient that comes in the door is guaranteed to have a ‘sponsor.’ A predictable result is that emergency rooms, particularly in urban hospital, will become increasingly crowded and crazy. Doctors and physician groups that have signed on with hospitals will discover they’ve made a deal with the devil. While this may have helped them claw back some of the pay they lost when The Government arbitrarily cut reimbursements to private practitioners, the hospitals will eventually be

After America: Get Ready for Armageddon is almost as depressing as its title. Mark Steyn’s 2011 book, which I’m reading now for the first time, gives statistical heft to the doomsday thread that animates this forum form time to time. There’s no point in trying to save the Republic, Steyn warns, because it’s too late; it is too far gone. The Nanny State has become all-pervasive, meddling in every detail of our lives in ways that even King George III would have rejected as too intrusive. Still worse is that the unelected bureaucrats who toil ceaselessly at crushing the energy, initiative and vitality from the economy are not only everywhere, they are paid far more than their counterparts in the private sector.  Steyn notes that in 2009, the average civilian employee of the U.S. Government earned $81,258 in salary plus $41,791 in benefits, for a total of $123,049. The private-sector worker, meanwhile, received a mere $50,462 in salary and $10,589 in benefits, for a total of $61,051. That’s why the latter will be working until they are 80 to pay for government workers who retire with absolute security as early as 55. As for electing Republicans to obstruct a Marxist president who is hell-bent on destroying America, Steyn reminds us that the loyal opposition is as much a part of the problem as the Democrats they would seek to rein in. This is even more obvious now than it was when Steyn published the book. Back then, we might have hoped that Obamacare, the most destructive piece of legislation ever enacted by Congress, as well as the largest new tax ever levied on America’s middle class, would have been repudiated and rescinded by now.  Instead, the GOP has been taking potshots at the ACA’s gratuitous tax on medical devices while

As 2015 began, I browsed the still-robust magazine rack of the Boulder Bookstore for signs of the current Zeitgeist – the intellectual fashion of these times.  As fate would have it, the Zeitgeist experienced a tectonic shift last week with the horrific events in Paris. The violent crimes visited on humanity by four psychopaths who murdered gleefully in the name of Allah will undoubtedly have altered the way we relate to the billboards of popular culture. Our view of the world will have darkened a bit, opening the way for disturbing new strains of nihilism in the arts. Fiction, painting, poetry and theater – if not dance, which remains vibrant  -- are all about to descend a few further steps into the chill of night. Let us consider herewith how things were just before tidal darkness resumed its onslaught against the printed word. A sampling of magazine covers from New Year’s Day, circa 2015: Harper’s Bazaar: Whatever else we may worry about in 2015, it apparently will not be the year that Jennifer Aniston goes over the hill.  See for yourself. Elle: Nicole Kidman, on the other hand, may be a worry. This is the first tarted up picture we’ve seen of her where she didn’t look like her incomparably gorgeous old self. And what’s with the platinum hair? A too-gay art director, perhaps, with an axe to grind? Or did she simply pull a Renee Zellweger? You be the judge. Hipmania: Only in post-feminism America could a magazine hope to entice readers with this teaser: “Search no more: Your genderqueer paper doll is here.” If the magazine world is about to have that silly grin wiped from its face, Hipmania will undoubtedly be among the last to submit. Esquire: Struggling to find an audience ever since men stopped reading