| "Treasuries Can't Lose" Posted: 12 May 2014 08:50 PM PDT Whenever I hear 0% or 100% I start to question things. Certainly, the odd that the moon crashes into the earth tomorrow is as close to 0% as one can get, but what about the notion "Treasuries Can't Lose"? I am a long-term treasury bull right now. But I would never suggest they cannot lose. However, Jeffrey Gundlach, co-founder and chief executive officer of DoubleLine Capital LP, is willing to state just that. Please consider In Gundlach's 'No Normal' World, Treasuries Can't Lose Jeffrey Gundlach, the star fixed-income manager whose mutual fund beat 97 percent of its rivals the past three years, has a simpler explanation for why investors have gotten the bond market so wrong this year: the aging of America.
More retirees mean a shrinking workforce, leading to less spending, slower inflation and greater demand for low-risk, income-producing investments. RBC Capital Markets, one of the 22 dealers obligated to bid at U.S. Treasury auctions, says annual growth in the working age population will slow to 0.2 percent in the coming decade from 1.2 percent in the 10 years before the financial crisis. This helps explain why the best and brightest erred in calling for a bear market in U.S. bonds -- and why benchmark Treasury yields may stay low for years to come, according to Gundlach.
"That's one of the reasons why yields are not just going to explode on the upside," Gundlach, who oversees $50 billion as the co-founder and chief executive officer of DoubleLine Capital LP, said in a May 7 interview with Tom Keene from Bloomberg's headquarters in New York. "Part of this equation is the demand for income from the growing number of retirees."
"Household income is being challenged at the paycheck-level, but increasing at the demographic level because of a great bulge of baby boomers retiring," the 54-year-old money manager said. "Those that are working have to work that much harder to have GDP stay at the same level."
The number of Americans 65 years old or more will balloon by 14.5 million this decade, the biggest increase versus the total population going back to 1900, according to data compiled by the Census Bureau. The ranks of the elderly will double over the first three decades of this century to 72 million and equal almost 20 percent of the population.
Older Americans will also buy more Treasuries for steady, low-risk income, said Gundlach, who was named "Money Manager of the Year" by Institutional Investor magazine for 2013. I am sympathetic to the arguments presented by Gundlach. I even made similar arguments at Wine Country Conference (videos will be available shortly). However, it is a huge mistake to suggest something is 0% or 100%. No one knows for certainty what the Fed will do, how the US economy will react, or how the global economy will react. Treasuries can lose here, and they might, even though my bet is with Gundlach. Moreover, anlysis should not stop there. For example, 5-year treasuries may lose money even if 30-year treasuries gain. I like treasuries here, especially long-duration, but it is hugely wrong to make statements "treasuries cannot lose". Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Separatists Ask Putin to Annex Donetsk Following Referendum; Sanction Hypocrisy and Warship Sales Posted: 12 May 2014 11:38 AM PDT Separatists in Donetsk claim a turnout of 74.9% in a referendum on self-determination with 89.7% voting in favor of self-rule. Ukraine says turnout was 32%. I suspect the truth is somewhere in between but that's a pretty wide gap. Even 32% turnout seems respectable given the circumstances. The Ukrainian government claims the election was a farce and the US called it illegal. Nonetheless, Separatists Urge Russia to Annex Donetsk in Wake of Referendum. In a statement, Denis Pushilin, one of the separatist leaders in Donetsk, said the rebels had asked Moscow to consider absorbing the self-proclaimed Donetsk People's Republic, "based on the will of the people and on the restoration of a historic justice".
"The people of Donetsk have always been part of the Russian world," he said. "For us, the history of Russia is our history."
The US, France, Germany and Britain have been pushing for broader economic measures against Moscow if it derails Ukraine's election on May 25.
However, ministers in Brussels did not reach agreement on the election being a trigger point for a third phase of sanctions. The 28 member states concluded only that they would "pay particular attention to all parties' attitude and behaviour towards the holding of free and fair presidential elections when deciding about possible future measures".
In a statement on Monday, the Kremlin said: "Moscow respects the choice of the people of the Donetsk and Luhansk regions and hopes that implementation of the referendum's results will proceed in a civilised manner through dialogue between representatives of Kiev, Donetsk and Luhansk, and without a repeat of violence."
"The farce which terrorists in cahoots with separatists call a referendum is nothing more than propaganda to cover up for killings, kidnappings of people, violence and other serious crimes . . . which are inspired by the leadership of the Russian Federation, whose aim is complete destabilisation of the situation in Ukraine, derailing presidential elections and overthrowing Ukraine's leadership," Mr Turchynov said in a statement.
Sergei Lavrov, the Russian foreign minister, on Monday accused Kiev and the US of refusing to engage in dialogue with the separatists. "It's a pity that some people in Washington and Kiev are opposed to starting a dialogue with the regions," he told reporters in Moscow. "The fact that the OSCE's road map has not been given out publicly is further confirmation that Kiev is not ready to talk with the people [of southeastern Ukraine]." France to Honor Warship Contract Russia While the US pressures European nations for more sanctions, many of which on individuals who have nothing to do with the crisis, France Won't Cancel Warship Deal with Russia France will press ahead with a 1.2 billion-euro ($1.66 billion) contract to sell helicopter carriers to Russia because cancelling the deal would do more damage to Paris than to Moscow, French diplomatic sources said on Monday.
The long-discussed French sale was Moscow's first major foreign arms purchase in the two decades since the fall of the Soviet Union. Former President Nicolas Sarkozy had hailed the signing of the Mistral contract as evidence the Cold War was over. It has created about 1,000 jobs in France.
Russia's Mistral purchase would give it access to advanced technology, alarming some of France's NATO allies. Sanction MadnessAt a meeting today to discuss more sanctions, the EU and US agreed to sanction 13 more individuals but did not name names. In addition, the EU also slapped asset freezes on two firms in the Crimean region. In the stupid bluff of the day, British Foreign Secretary William Hague reiterated the EU's threat to move to wider sanctions on whole sectors of the Russian economy if the tension in Ukraine does not subside. Precisely who is responsible for the tension? And who is in control of Donetsk? If Hague isn't bluffing, the threat is just plain stupid. Either way, warship sales to Russia must go on! So does the madness, hypocrisy, bluffs, threats, and endless stream of propaganda from both sides. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Gazprom Sends Ukraine Gas Bill, Will Halt Shipments on June 3 if Unpaid Posted: 12 May 2014 10:02 AM PDT Russia has given Ukraine three weeks in which to pay its gas bill, otherwise shipments stop. The only way Ukraine could pay the prior bill is funds from the IMF. Future gas will be prepayment only. Bloomberg reports Gazprom Threatens to Halt Gas Shipments to Ukraine on June 3. Tomorrow, OAO Gazprom (GAZP) will send Ukraine a bill for June, Chief Executive Officer Alexey Miller said today at a meeting with Russian Prime Minister Dmitry Medvedev. If the bill isn't paid by June 2 the neighboring country won't receive any Russian gas from 10 a.m. the next morning, Miller said.
"It's time to stop coddling them, notify them tomorrow and move them to pre-payments," Medvedev said during the meeting. "I think that all possible ways to settle this situation -- one way or another -- were undertaken by Gazprom."
Stopping shipments to Ukraine may have a knock-on impact on the rest of Europe because about 15 percent of the region's gas travels through the country's Soviet-era pipeline system.
Russia is moving Ukraine to prepayments because it owes $3.51 billion for fuel delivered in 2013 and through April this year, Miller said today. The neighboring country hasn't paid for 9.42 billion cubic meters of Russian fuel, which is equivalent to Poland's annual consumption.
Ukraine has the opportunity to pay as it received the first $3.2 billion of an international aid package last week, Medvedev said. While it's able to start paying off the debt to show its desire to settle the problem, Russia doesn't see any willingness of that, he said.
Ukraine refuses to prepay for Russian gas and is ready to settle the debt if Gazprom returns an "honest, market price" for gas, Ukrainian Energy Minister Yuri Prodan said last week. Gazprom raised the price it charges Ukraine for gas by 81 percent in April, to $485 per 1,000 cubic meters, more than any EU member pays.
Russia will consider a compromise on natural gas prices with Ukraine only after its neighbor pays its debt for previous supplies, Russian Deputy Energy Minister Anatoly Yanovsky told reporters earlier today in Moscow. Ukraine is willing to pay for gas but only if Russia lowers the bill. Russia will only lower the bill if Ukraine pays past debts. One side or another has to give. But if the situation is resolved, the IMF will effectively send billions of dollars to Russia when the US and EU have sanctions in place (and threatening more of them). Does any of this make any sense? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Japan's Current Account Surplus Collapses Posted: 12 May 2014 01:13 AM PDT Japan has piled up record trade deficits month after month, thanks to Abenomics. The Yen is down about 26% from the 2011 high, but contrary to expectations, the Yen decline did not sufficiently boost exports. However, the value of imports soared, primarily due to rising energy costs. The saving grace is that although Japan had a trade deficit, investment gains more than offset the difference. That's about to change. The Wall Street Journal reports Japan Current Account Surplus Smallest on Record. Japan posted its smallest current account surplus on record in the fiscal year that ended in March as structural changes in the economy undermine Prime Minister Shinzo Abe's efforts to achieve growth through exports.
The ¥789.9 billion ($7.76 billion) surplus in the broadest measure of a nation's trade with the rest of the world was sharply lower than the ¥4.2 trillion surplus registered a year earlier, data from the Ministry of Finance showed Monday. Until recently, the country routinely produced a surplus in excess of ¥10 trillion a year.
When Mr. Abe came to power 17 months ago, he introduced an inflation target and called for aggressive monetary easing. That helped weaken the yen's export-crippling strength. But to his surprise, exports have yet to catch fire. So far the weaker yen has merely made imports more expensive at a time when the nation is more reliant on fossil fuel from other countries.
A current account deficit means a nation is spending more than it earns from trade and investment. A country that builds up liabilities with foreign creditors through chronic current account deficits could face funding problems if investors decide to withdraw their financing.
BNP Paribas predicts Japan will record an annual current account deficit next year, while Credit Suisse thinks it will happen after 2017.
Having largely giving up on achieving a balanced budget, Japan's current goal is to stabilize the debt situation by 2020, mainly through sales tax increases, around the current debt-to-gross domestic product ratio of 240%. But according to a government panel report released on April 28, even that won't be enough to bring the situation completely under control beyond 2020, as baby boomers reach 75, an age associated with a huge increase in medical and elderly care expenses, much of which are funded by the central government. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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