April 30, 2009

1) The whir of the printing presses again spooked the bond market, taking ten year Treasury bond yields up to 3.14%, and the 30 year to 4.10%, a one year high. This is going to be a recurring event over the next several years, and a short in long term Treasury bonds should be a core position in any portfolio. My favorite play here, the Power Shares Lehman 20+ ETF (TBT), a 200% short play on the sector, has been on an absolute tear, up 40% since January. We are early days into this trade, and once inflation hits, the TBT could see a spike to $200 in its lifetime.

2) If you are looking for a great leading barometer of risk taking by hedge funds, take a look at the euro/yen cross rate. After trading as high as ??170 in 2007, it plummeted to a low of ??114 earlier this year. It then took off like a scalded chip three weeks before the S&P 500 made its prophetic 666 low on March 9. This is a valuable cross rate to track because traders can finance their positions for free by borrowing in yen and investing in other currency denominations. Although the chart below looks remarkably like that of the Dow, my bet is that hedge fund money is pouring into commodities and emerging markets and their corresponding stocks in the US. Think commodity producers and technology. Watch the euro/yen.

3) I met with one of my old college professors last night, Dr, Robert Heller, former CEO of Visa and governor of the Federal Reserve Board. Dr. Heller thinks that the next crisis to hit the financial markets will be a spike in interest rates similar to one that took the prime rate up to 20% in the early eighties. Obama is running the printing presses at such a furious rate that an explosion in inflation in 2011 or 2012 is virtually guaranteed. Treasury bond markets will get decimated. The only way to protect portfolios from this deluge is to buy low yielding Treasury inflation protected securities (TIPS). The US needs large banks with a global presence to stay internationally competitive. Dr. Heller argued that the only regulatory solution to the current melt down of the financial sector is to fence off the risk and deposit taking operations of the big institutions. The extreme volatility caused by hedge funds is keeping the 'real' long term investors, individuals and pension funds, away in droves. I think this means that Morgan Stanley (MS) and Goldman Sachs (GS) will have to stop pretending to be banks and 'come out' as the mega hedge funds they really are. The only professor to ever give me an 'A' in an economics class, Dr. Heller still has the same fire he possessed at UCLA 35 years ago.

4) If you can't find jobs for your workers, just deport them. That seems to be Japan's answer to the soaring unemployment rate brought on by a collapse in the country's exports, down 45.6% YOY. During the late eighties, when companies were wringing their hands over labor shortages, the government launched a program to import workers from Brazil and Peru. Thousands of decedents of Japanese plantation workers who emigrated there a century ago applied, with names like Juan Suzuki and Pedro Tanaka. Today there are thought to be as many as 366,000 in the Japanese-Latin American community. The government has offered free air fares and moving subsidies. The move is reminiscent of the mass deportation of Turkish workers by Switzerland, the 'gastarbeiters', during the eighties, also for economic reasons. The policy is especially puzzling, given that with the world's lowest fertility rate, a labor shortage is believed by many to be the greatest challenge to the country's long term economic viability. But ethnic purity has always been a priority of many conservative Japanese politicians who found the move towards a multiethnic society unsettling.

QUOTE OF THE DAY

'We may be in the seventh inning, but unfortunately it's a double header', said Jack Dunne of FTI consulting, a restructuring specialist.