Bonds get rocked! Is the low-rate era over?

My January 2012 “contrarian” view is playing out.

…”Who knows? Here’s a contrarian view: 2012 kicks off a new major bull spurred by the new global money printing bubble (tech, housing, now gov spending and QE). Corporations can certainly put up bigger profits due to stagnant wages and huge price hikes. However, governments will be a victim of their own success as individuals ditch fixed income and pile into stocks and rates creep up to far (possibly too fast, if it doesn’t turn into a stampede).”

http://www.moneyandmarkets.com/why-the-cascade-of-downgrades-has-barely-begun-48761#comment-6626

I see that inflation is arriving on our shores from overseas due to foreign wealth (the growing middle class and nouveau riche in China, India, Brazil, etc) replacing sagging domestic demand in our economy. Emerging market citizens are earning more than ever and the value of their currencies continue to grow; one result is that we are seeing them “eat our lunches.” This is a major part of what is driving corporate earnings growth for both domestic and multi-national companies, and I think is a major reason why people tell me that, despite the soaring stock market, they don’t feel “richer”. Tthis is also due to the lack of participation by both retail investors and the numerous others who are not part of the “investor class”. Domestically Americans have had relatively stagnant wages and poor job growth; we’re driving less (using less fuel) and the housing market remains anemic. The US’s biggest export in 2011 was refined fuel products (gas) helping to drive up gas prices and we’re seeing mini-housing booms (in places like Miami) where foreign cash is flooding in to buy US properties helping to drive up housing prices there too. Oh, and of course, as foreigners pare back their treasury purchases they continue to pile into US stocks.

But here are a few signs of rot amongst this Bull market (I could write a 100 page disseration but I’ll pick three issues that I think are worth watching):

1. China has indeed come out and told the market to expect ~7.5% GDP growth

–I think officially they will meet this target, but unofficially there is (and will be a lot of hidden rot). China has even more tools it uses to juice GDP #’s than the US gov. During the financial crisis they counted their stimulus package in GDP on day 1 of its announcement BEFORE it worked its way through their system as consumption. Using that methodology governments don’t even have to worry whether stimulus actually works. If used here the US government could notionally increase GDP #’s right before the end of a quarter by announcing a tax cut or stimulus package (results be damned) and adding that amount to GDP.

2. Greece officially defaulted and the related CDS contracts were allowed to be triggered. There are reports that even MORE Greek debt is being hidden and carried “off balance sheet”. There is currently 50% youth unemployment in Greece; 110 German bond holders are planning on suing Euro banks and Greek government; and the German finance minister has stated that nobody could exclude a third Greek bailout.

–I think that the actions of the Troika and the ECB’s money printing through the LTRO will work…for now. The Greek people (indeed perhaps all citizens of the OECD countries) will continue to face a decreased standard of living and the yolk of austerity as they are forced to live “more” within their means. I say “more” within their means because I suspect that more accounting fraud will occur to cover up government spending deficits that are above healthy and agreed to levels; and are therefore unsustainable in the long run. I think, like an unmentionable disease, though Greece will flare up again in the future (perhaps in a few years). It’s now widely accepted that Greece will likely serve as a template for dealing with the remaining insolvent European countries.

3…and on the housing front–for the first time in its 78 year history the FHFA could require a cash infusion (BAILOUT) from the Treasure due to increased losses from home mortgages.

http://online.wsj.com/article/SB10001424052970204795304577221222265037002.html?mod=WSJ_hp_LEFTWhatsNewsCollection

–I’ve said it before, the US government has been acting as the new sub-prime lender since the financial crisis; I’ve read some reports indicating they provide around 90% of the funding the mortgage market (with the remaining 10% coming from private investors). In the DC area, where I live, nobody I know or have heard of through second hand sources is saving up 20% for a down payment; heck, most barely put down 5-7%. Although they continue to lie and hide the rot I think we can trus that banks’ balance sheets are much improved since, in one final theft, they were able to launder hundreds of billions in toxic debt (trillions) to the Federal Reserve, Fannie Mae, and Freddie Mac. They were also given a $25 billion pass for the foreclosure and mortgage filing frauds they committed on an industrial scale. The statute of limitation for all of their widespread crimes will run out they will largely get away with it. If you or I could steal obscene amounts of money where the only consequence for being caught was that we had to give SOME of it back we would certainly do this for a living too.