The Great Rotation Part II

In this second video (4m 19sec), those hoping for a "great rotation" from bonds to stocks might start by looking for smaller rotations within the equity market. James Mackintosh, investment editor, says the signs are mixed.

The Great Rotation Part I

In this January 31st FT video (5m 18sec), David Bowers, global strategist at Absolute Strategy Research, discusses the main issue in asset allocation with Long View columnist John Authers.  Financial panic has subsided into mere nervousness that a great rotation by investors from bonds into equities could be imminent.  Is the shift in monetary regime clear enough yet, and there is a danger of over-exposure to defensive equities or 'bond proxies.'  

Are Treasuries Turning?

The bull market in US Treasuries is three decades old. 

 

Michael Mackenzie, US markets editor, tells Long View columnist John Authers in this January 25th video (5m 10sec) that this could be about to change.   The rise in equities as a harbinger of a strengthening economy suggests bond yields are set to rise.  

A Historic Day for the 10-year U.S. Treasury Note

In this video (4m 25sec), the FT's Michael Mackenzie takes to the floor during the final 20 minutes leading up to the sale of $24bn in 10-year treasury notes as the bond market passes a key test of investor sentiment with record demand for the new issue:  

http://video.ft.com/v/786844760001/A-historic-day-for-the-10-year-treasury-note

Uncle Sam can still sell paper.   But for how long?

Can a company be more credit-worthy than its government?

In this June 10 2010 video, the Financial Times investment editor, James Mackintosh explains that in 2008, McDonald's became more credit-worthy, according to its bonds and credit default swaps, than the US government. Back then, it was seen as an oddity but now investors are starting to sit up and pay attention.  Mackintosh explainss why the spreads don't really make sense. (3m 3sec)

U.S. High Yield Default Spread Premia

March 10 2010  John Authers says that it is good news that the credit market is much less newsworthy than it used to be.  What are junk spreads compared to likely losses form default?  Deutche Banks provides some estimates and the trends.  (2m 57sec)

Is Our National Defense As Sound as the Dollar?

In the 1950s, Egypt nationalized the Suez Canal.  Britain and France invaded.  America opposed the invasion.  The Eisenhower administration had no need to sent the marines.  It simply threatened to sell sterling bonds and vetoed IMF support for the pound forcing its devaluation. Pecunia was indeed the nervi belli.  Egypt kept the Canal.  One can picture a British gentleman, a veteran of the colonial wars, muttering over his brandy "I could understand superior arms, but the balance of payments?"

Greece, whose debt is owed in euros, a currency it can not print, is facing a major debt crisis.  While the country itself is an experienced deadbeat (Greece spent half its modern independent existence in default), its debt crisis is is putting great strain on the euro and the euro zone governments. 

Yet Greece's fiscal wantonness is not any worse than that of the U.S., which can print the currency it borrows in.  How secure are we in borrowing and borrowing?  Harvard professor Nigel Ferguson is an insightful student of financial history who knows what he is talking about. He warned in the Financial Times last week (2/10/2010) that "A Greek crisis is coming to America." 

Surveying the wreckage fiscal stimulus has wrought, Ferguson courts all the popularity of a biblical prophet by warning us "What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch."  I might add Keynes himself would agree. 

Ferguson writes, "On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic."

The bond markets may seem rather remote from our national security, but beware. Great empires require sound money and a good credit rating. Constantine's solidus held its value for 700 years and the Roman empire survived another thousand years in the East. Alexander Hamilton correctly viewed Great Britain's ability to borrow funds as essential to its military success as its navy.  America's currency and its debt earned a reputation worthy of trust which we rode to becoming a superpower.

Yet, sadly, neither a sound dollar nor a triple A credit rating seem high on Mr. Obama's national security agenda.   

Sic transit gloria.

Greece and the Fed's Exit Strategy Move Bank Stocks

U.S. banks have $176 million dollar exposure to the sovereign debt of the PIGSs (Portugal, Ireland, Greece, and Spain.)

Michael Corkery in the Wall Street Journal's "Deal Journal" asks, "So just what is the exposure of U.S. banks to debt in these four nations? 'Overall, we believe that the direct risk of the large U.S. banks to Ireland, Greece, Portugal and Spain is modest,' writes Barclays analyst Jonathan Glionna in a research note.


"Barclays analysts estimate the 10 largest U.S. financial institutions have a total of $169 billion of their loans tied up in the four troubled Euro nations. That is about about 19% of those banks’ combined Tier 1 capital, or the cash cushion that banks keep to absorb bad loans. Looking at the combined exposure of the 10 largest banks and the other 63 U.S. banking firms that supply cross border information to the Federal Institutions Examination Council, the total exposure is $176 billion. By country, the overall exposure of those 73 banks is $82 billion to Ireland, $68 billion to Spain, $18 billion to Greece and $9 billion to Portugal."


Alistair Barr reports on the effect of this and the Fed's exit stretegy on Market Watch. 







Speaking of PIGS, the UK's debt is starting to smell of bacon to use Ian Bremmer and Nouriel Roubini's phrase. Sara Schaefer Muñoz reports that British banks have a heavy exposure to UK soverign debt.  What about the Yanks?