(UUP) Archives

How America's Plunging Education Surplus Will Damage Your Portfolio

For the first time in 40 years, the number of foreign students applying for American colleges and universities is declining.

The drop is particularly noticeable at University of California, Berkeley, where Asian students account for about 10% of incoming freshmen. This is turning the Golden State's education budget upside-down, because foreigners pay almost triple the tuition of in-state residents, some $41,942 a year for the 2018-2019 school year.

Trump's China bashing has been widely reported throughout the Middle Kingdom, scaring away prospective applicants.

Who wants to attend school in a country at war with the homeland - trade or the shooting kind?

So has the upturn in attacks in the US on minorities, be they religious, ethnic, national, or otherwise.

Trump certainly made that attitude crystal with his attempted immigration bans, now blocked by the courts.

Students are worried they will be physically attacked, or deported by an aggressive immigration department. That is if they can even get into the country in the first place.

It isn't just California schools that are getting hit. Institutions of higher learning across the nation are reporting similar drawdowns.

Foreign students are instead applying to British and European schools, or not going abroad at all to save money.

If this sorry trend continues, it will cause substantial damage to the American education system, the US economy as a whole, US influence abroad, and the US dollar (UUP).

Higher education has grown into a gigantic service industry for America, with a massively positive impact on our balance of payments, generating an impact on the world far beyond the dollar amounts involved.

According to the nonprofit Institute of International Education, there are 819,644 foreign students in the US today.

This combined student body pays an average out-of-state tuition of $25,000 a year each totaling some $24 billion. The positive impact on the US balance of payments and the US dollar exchange rate is huge.

China is far and away the dominant origin of these students, accounting for 235,597.

South Korea and India take the No. 2 and No. 3 slots, thanks to the generous scholarships provided by their home governments. Saudi Arabia and Brazil are showing the fastest growth rates.

A fortunate few, backed by endowed chairs and buildings financed by wealthy and eager parents, land places at prestigious universities such as Harvard, Princeton, and Yale.

The top destinations of foreign students are the University of Southern California in Los Angeles, CA, the University of Illinois at Urbana-Champaign, Indiana's Perdue University, and New York University, with each of these claiming 9,000 foreign students.

However, the overwhelming majority enroll in the provinces in a thousand rural state universities and junior colleges of which most of us have never heard.

Many of these schools now have diligent admissions officers scouring the Chinese hinterlands looking for new applicants.

A college degree once was a uniquely American privilege. In 1974 the US led the world, with 24% of the population getting a sheepskin.

Today, it has fallen to 16^th, with 28% completing a four-year program, lagging countries such as South Korea, Canada, and Japan.

The financial windfall has enabled once sleepy little schools to build themselves into world-class institutions of higher learning, with 30,000 or more students.

They boast state-of-the-art facilities, much to the joy of local residents and budget-constrained state education officials.

Furthermore, the overwhelming leadership of education industry is steadily Americanizing the global establishment.

I can't tell you how many times over the decades I have run into the Persian Gulf sovereign fund manager who went to Florida State, the Asian CEO who attended Cal State Hayward, or the African finance minister who fondly recalled rooting for the Kansas State Wildcats.

Remember the recently ousted president of Egypt, Mohamed Morsi? He was a former classmate of mine at the University of Southern California. Go Trojans! Do you think he was singing "Fight on For Old SC" in his jail cell?

Those who constantly bemoan the impending fall of the Great American Empire can take heart by merely looking inland at these impressive degree factories. These students are not clamoring to get into universities in Beijing, Moscow, or Tokyo.

Not a few marry and permanently settle in the US, while many others take their American brides home. Saudi Arabia is home to some 50,000 such wives, who had to agree to sharia law and give up driving to obtain resident permits.

It also explains why the dollar is so strong in the face of absolutely gigantic, structural trade deficits.

When a foreign student pays tuition to a US school, it is treated as an export of a service in terms of the US balance of payments, much like a car or an airplane, our country's largest exports.

Rising exports mean that more dollars are staying home and fewer are going abroad, strengthening the value of the greenback.

And $24 billion and change offsets a lot of imports of cheap electronics, clothing, and toys from China.

The US has plenty of capacity to expand this trade in services. More than 70% of foreign students are concentrated in just 200 of the country's 4,000 colleges.

The University of California has blazed a path that many other cash-strapped institutions are certain to follow. During the financial crisis, the world's greatest public university saw two back-to-back 40% budget cuts from Sacramento.

So, it made up the shortfall by bumping up foreign admissions from 5% to 10%, largely from Asia. They must pay $38,000 a year in tuition, compared to $18,000 for in-state residents.

What is the upshot of all of this for the locals? It is now a lot harder to get an "A" in Math at UC Berkeley.

March 22, 2018

Diary, Newsletter

Global Market Comments
March 22, 2018
Fiat Lux

Featured Trade:
(THE FED SIGNALS HALF SPEED AHEAD),
(TLT), (UUP), (FXE), (FXY), (FB),
(WHY YOU WILL LOSE YOUR JOB IN THE NEXT FIVE YEARS, AND WHAT TO DO ABOUT IT)

Fed Signals Half Speed Ahead

Diary, Newsletter

OK, the number is out!

The Fed just raised interest rates by 25 basis points, taking the cost of overnight money for the big banks to a 1.50%-1.75% range.

The boiling frog analogy comes to mind. Keep raising the temperature so slowly you don't notice it until your portfolio eventually gets cooked.

I believe we have two years of quarter point rises ahead of us like clockwork. This will invert the yield curve in a year, meaning that short term interest rates will exceed the 10-year US Treasury bond, now at 2.87%.

A bear market in stocks ALWAYS follows in six to 12 months. So, make hay while the sun shines, because this bull is rapidly becoming a short-dated option, with only a year or more life left to it.

How could I be wrong? Inflation accelerates, forcing our august central banks to raise rates in one shot by 50 basis points instead of the expected 25.

That would really set the cat among the pigeons, and trigger our next Dow 1,000 point down day.

My long-term economic forecast is still holding water that the benefits of the tax cuts will be entirely offset by rising interest rates and costs, keeping GDP growth at 2.5%...and then to zero.

The unfolding global trade war may also take down global growth and bring forward the next bear market and recession by months, if not a full year. Watch those headlines!

At the end of the day, we will be left with zero economic growth (a recession), higher interest rates, and A LOT more debt, both at the personal and the national level, and naturally exploding deficits everywhere.

That certainly is how the foreign exchange market is reading it, which completely savaged the greenback today. The dollar (UUP) got slaughtered against the Euro (FXE) and the Japanese Yen (FXY). Bonds actually rose on the news, which is why I'm out of that market.

It all works for me, as there will be more trading opportunities playing out in this scenario than pimples at a high school prom.

The biggest imbalance in the current tax policy is allowing multinationals to bring trillions of dollars home by paying minimal tax.

The overwhelming majority of these are big technology companies, meaning that the money is coming back here in the San Francisco Bay Area, causing local asset prices to explode.

I just received a letter from a local real estate broker telling me that the value of my home has risen by 27% in the past year to $5 million, and that now is the best time in history TO SELL!

They may be right.

Will ?Brexit? Cause the Next Recession?

Diary, Newsletter

Economists around the world have been scanning the horizon with their high powered Zeiss binoculars in search of the cause of the next global recession.

It has been a conundrum of the first order because a recession has NEVER taken place in the face of LOW interest rates and LOW oil prices.

However, we may have just found the trigger.

The possible impending departure of the United Kingdom from the European community has cataclysmic implications for economies everywhere.

We?ll know for sure when the referendum is held on June 23.

Yikes! I?ll be in England then!

The move is being driven by the same factors present in the American Republican Party presidential nomination race.

Working class Brits have lost jobs to a tidal wave of immigrants from the rest of the EC, whose common passports allow unfettered access to Old Blighty.

Take a weekend trip to London, and chances are that the desk clerk is from Poland, the porter is from Croatia, the waitress is from Italy, and the cleaning ladies are from Spain and Greece.

Actual Englishmen are to be found only in distant suburbs, or in unemployment offices.

The recent influx of immigrants from the Middle East has also placed a massive strain on the country?s social services resources.

Visit your local neighborhood National Health GP, and you will share the waiting room with foreign refugees missing arms or legs, or bearing near fatal combat injuries. It?s almost like visiting a wartime MASH unit.

Net net, the view is that EC membership is costing England jobs and money, probably in the billions of pounds per year.

As with the US, the populist view is at odds with the economic reality.

While the UK is a net contributor to the Brussels budget, that misses the point. It is greatly outweighed by the additional economic growth generated by EC membership.

Goods flow freely, duty free between all 23 member countries.

A manufacturer in Birmingham, Leeds, or Manchester doesn?t think twice about jumping on the Channel train to call on customers in Paris, Munich, or Copenhagen.

I often sit next to them during my summer continental travels and also get an update on whatever business they may be in.

A British departure would take nearly 20 years of business integration and dump it into the dustbin of history.

That would be a crushing loss for the British economy, which would lose much of the nearly ?200 billion pounds worth of exports it sent to the EC in 2015. These exports have grown at an impressive 3.6% a year for the past 15 years.

It would also deliver a fatal blow to the City of London, the financial center for all of Europe and one of its largest employers.

I can see the dominoes fall from here.

Europe would lose a similar amount of trade with the UK, taking a chunk out of GDP growth there.

A weak Europe brings a stumbling China, which relies on the continent as its largest customer (yes, even bigger than the US). And a wobbling China will certainly torpedo US exports, increasing volatility in our own financial markets.

In fact, the EC is the world?s largest economic entity. It is hard to see trouble there not spreading everywhere.

The turmoil is already easily visible in the foreign exchange markets. The British pound (FXB) has suffered a gut churning 10.5% nosedive over the past four months to a new ten year low. It has also smothered in the crib the recent rally in the Euro (FXE).

A newly resurgent dollar (UUP) is starting to once again cast a shadow over US multinational earnings.

It seems like the UK is determined to shrink to a smaller country, either by hook or crook.? Only last year, Scotland mounted a campaign to split off from the UK, an effort that eventually failed.

However, it is another one of those cases of being careful what you wish for.

How do you spell ?GLOBAL RECESSION??

Caveat Emptor

I Don't See Anything Yet

Bring Back QE!

Diary, Newsletter

You wanted clarity in understanding the current state of play in the global financial markets? Here?s your #$%&*#!! clarity.

You should expect nothing less for this ridiculously expensive service of mine.

But maybe that is the cabin fever talking, now that I have been cooped up in my Tahoe lakefront estate for a week, engaging in deep research and grinding out the Trade Alerts, devoid of any human contact whatsoever.

Or, maybe it?s the high altitude.

I did have one visitor.

A black bear broke into my trash cans last light and spread garbage all over the back yard. He then left his calling card, a giant poop, in my parking space.

Judging by the size of the turds, I would say he was at least 600 pounds. This is why you never take out the trash at night in the High Sierras.

Ah, the delights of Mother Nature!

We certainly live in a confusing, topsy-turvy, tear your hair out world this year. Good news is bad news, bad news worse, and no news the worst of all.

The biggest under performing week of the year for stocks is then followed by the best. Net net, we are absolutely at a zero movement, and lots of clients complaining about poor returns on their investment.

I tallied the year-on-year performance of every major assets class and this is what I found.

+16% - Hedged Japanese Stocks (DXJ)
+15% - Hedged European stocks (HEDJ)
+13% - US dollar basket (UUP)
+10% - My house
0% - Stocks (SPY)
0% -? bonds (TLT)
-5% - Japanese Yen (FXY)
-11% - Euro (FXE)
-12% - Gold (GLD)
-18% -? Oil (USO)
-27% -? Commodities (CU)
-27% - Natural Gas (UNG)

There are some sobering conclusions to be drawn from these numbers.

There were very few opportunities to make money this year. If you were short energy, commodities, and foreign currencies, you did very well.

Followers of the Mad hedge Fund Trader can?t help but know and love these ticker symbols. They?ll notice that our long plays were found among the asset classes with the best performance, while our short bets populated the losers.

The problem with that is most financial advisors are not permitted to place client funds in the sort of inverse or leveraged ETF?s that most benefit from these kinds of moves (like the (YCS), (EUO), and (DUG)).

That left them reading about the success of others in the newspapers, even when they knew these trends were unfolding (through reading this letter).

How frustrating is that?

What was one of my best investments of 2015?

My San Francisco home, which has the additional benefit in that I get to live in it, have a place to stash all my junk, and claim big tax deductions (depreciated home office space, business use of phone, blah, blah, blah).

Of course, I do have the advantage of living in the middle of one of the greatest technology and IPO booms of all time. Every time one of these ?sharing? companies goes public, the value of my home rises by a few hundred grand.

The real problem here is that investing since the end of the Federal Reserve?s quantitative easing program ended a year ago has become a real uphill battle.

While the government was adding $3.9 trillion in funds to the economy we traders enjoyed one of the greatest free lunches of all time. It made us all look like freakin? geniuses!

Just maintaining their present $3.9 trillion balance sheet, not adding to it, has left almost every asset class dead in the water.

Heaven help us if they ever try to unwind some of that debt!

Janet has promised me that she isn?t going to engage in such monetary suicide.

The Fed is continuing with Ben Bernanke?s plan to run all of their Treasury bond holdings into expiration, even if it takes a decade to achieve this. And with deflation accelerating (see charts below), the need for such a desperate action is remote.

Still, one has to ponder the potential implications.

It all kind of makes my own 43% Trade Alert gain in 2015 look pretty good. But I don?t want to boast too much. That tends to invite bad luck and losses, which I would much rather avoid.

What! No QE?

What?s Really Happening in the Middle East

Diary, Free Research, Newsletter

Long-term observers of financial markets are befuddled, confused, and amazed at their complete lack of interest in the rapidly unfolding events in the Middle East.

It seems that the more horrific the atrocities, the higher stock prices want to climb.

Go figure.

ISIS is in fact accelerating the most important geopolitical event so far in this century, the rapprochement of relations between the U.S. and Iran, which have been in a deep freeze for 40 years.

A serious dialogue has not been held between these two countries since 52 hostages were seized at the American embassy in Tehran in 1979 and held for 444 days.

The Mullahs in Iran can?t help but notice last week?s U.S. air strikes to protect Shiite cities from a Sunni slaughter at the hands of ISIS. Suddenly, our natural enemy in the region has become our natural ally.

The Iranians have even offered to back up our air power with their ground forces, an offer the Obama administration has so far wisely turned down.

Don?t worry about ISIS. Their threat is being wildly overrated by the media.

There is a reason why terrorist groups have never held territory before. That makes them a big fat target for drones, smart bombs, and all the other types of fire that we rain down upon our enemies from above. This may be the first war in history entirely fought by drones on our side. That means it will be cheap, without casualties, and over quickly.

So what will the new treaty and peace between the U.S. and Iran bring us?

So far, Iran has agreed to a freeze on its nuclear enrichment program in exchange for international inspections and the unfreezing of $100 billion of their assets. Secret negotiations are being held intermittently in Geneva, Switzerland (I stopped by to say hello a few weeks ago).

This is unbelievably positive for all asset classes, except energy. This is the cause of the recent collapse of oil prices, which are now 65% off their 2014 high.

The US is now in a tremendously powerful negotiating position. If Iran dumps their nuclear program to our satisfaction, Iran then gets the carrot.

It will rejoin the world economy, unfreeze the rest of its assets and recover $100 billion a year in trade. The country?s banks will be allowed to rejoin U.S. dollar clearing, the $1 trillion a day CHIPS and SWIFT systems, their absence from which has been a deathblow to their international trade.

Its oil exports (USO) can recover from 750,000 barrels a day back to the pre crisis level of 3 million barrels. If it doesn?t then it gets the stick again in six months, resuming their economic freefall.

The geopolitical implications for the U.S. are enormous.? Iran is the last major rogue state hostile to the US in the Middle East, and it is teetering. The final domino of the Arab spring falls squarely at the gates of Tehran.

A friendly, or at least a non-hostile Iran, means we really don?t care what happens in Syria.

Remember that the first real revolution in the region was Iran?s Green Revolution in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards.

The true death toll will never be known, but is thought to be well into the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.

At the end of the day, the majority of the Persian population wants to join the relentless tide of globalization. They want to buy iPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all.

Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have abjectly failed to cater to these desires

If Iran doesn?t do a deal on nukes soon, it?s economy with sink deeper into the morass in which they currently find themselves. The Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite.

The Obama administration is now pulling out all the stops to accelerate the process.

The oil embargo former Secretary of State, Hillary Clinton, organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain.

Yes, Russia and China are doing what they can to slow the process. This is what the Ukraine crisis is really all about, an attempt to keep oil prices high, Russia?s biggest earner.

But conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 40%.? The Iranian Rial has collapsed by 50%.

Let?s see how docile these people remain when the air conditioning quits running because of power shortages. Iran is a rotten piece of fruit ready to fall off on its own accord and go splat. The US is doing everything she can to shake the tree.

No military action of any kind is required on America?s part. No shot has been fired. That?s a big deal when the shots cost $10,000 apiece.

The geopolitical payoff of such an event for the U.S. would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.

Oil will has completely lost its risk premium, once believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $20 a barrel.

This price drop seen so far amount to a gigantic $2.18 trillion trillion tax cut for not just the US, but the entire global economy as well (92 million barrels a day X 365 days a year X $65).

Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare.

ISIS is a short.

At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.

The implications for the financial markets will be enormous. The US will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992.

As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom.

A collapse in oil imports will cause the U.S. dollar (UUP) to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse.

With the US government gone as a major new borrower, interest rates across the yield curve will fall further. The national debt completely disappears by the 2030?s (as it almost did during the late 1990?s).

A peace dividend will also cause US GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food.

The Dow will soar to 30,000 and the S&P 500 (SPY) to 3,500, the Euro collapses to parity, gold rockets to $2,300 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel.

Some 2 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up.

We will enter a new Golden Age, not just at home, but for civilization as a whole.

Wait, you ask, what if Iran develops an atomic bomb and holds the US at bay?

Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program large enough to threaten the United States. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime.

According to them, Iran has been within a month of producing a tactical nuclear weapon for the last 30 years. I'm still waiting.

The head of the miniscule effort they have was assassinated by Israeli intelligence two years ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).

If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago.

Even if Iran had one nuclear weapon, would they really want to attack a country with 6,700, the US?

There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.

I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do.

The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.

If the advent of a new, docile Iran were going to lead to a global multi-decade economic boom and the end of history, how would the stock markets behave now?

They would remain in a long-term bull market, much like we have seen for the past six years. That?s why 10% corrections have been few and far between.

The Problem is That it?s a Hollow Threat

Aim This One at the Bears

Why Are Bond Yields So Low?

Newsletter

Investors around the world have been confused, befuddled and surprised by the persistent, ultra low level of long term interest rates in the United States.

At today?s close, the 30 year Treasury bond yielded a parsimonious 2.01%, the ten year, 2.62%, and the five year only 1.51%. The ten-year was threatening its all time low yield of 1.37% only two weeks ago, a return as rare as a dodo bird, last seen in August, 2012.

What?s more, yields across the entire fixed income spectrum have been plumbing new lows. Corporate bonds (LQD) have been fetching only 3.29%, tax-free municipal bonds (MUB) 2.89%, and junk (JNK) a pittance at 5.96%.

Spreads over Treasuries are approaching new all time lows. The spread for junk over of ten year Treasuries is now below an amazing 3.00%, a heady number not seen since the 2007 bubble top. ?Covenant light? in borrower terms is making a big comeback.

Are investors being rewarded for taking on the debt of companies that are on the edge of bankruptcy, a tiny 3.3% premium? I think not.

It is a global trend.

German bunds are now paying holders 0.35%, and JGB?s are at an eye popping 0.30%. The worst quality southern European paper has delivered the biggest rallies this year. Portuguese government paper is paying only 2.40%, and is rapidly closing in on US government yields.

Yikes!

These numbers indicate that there is a massive global capital glut. There is too much money chasing too few low risk investments everywhere. Has the world suddenly become risk averse? Is inflation gone forever? Will deflation become a permanent aspect of our investing lives? Does the reach for yield know no bounds?

It wasn?t supposed to be like this.

Almost to a man, hedge fund managers everywhere were unloading debt instruments in January. They were looking for a year of rising interest rates (TLT), accelerating stock prices (QQQ), falling commodities (DBA), and dying emerging markets (EEM). Surging capital inflows were supposed to prompt the dollar (UUP) to take off like a rocket.

It all ended up being almost a perfect mirror image portfolio of what actually transpired since then. As a result, almost all mutual funds are down so far in 2014. Many hedge fund managers are tearing their hair out, suffering their worst year in recent memory.

What is wrong with this picture?

Interest rates like these are hinting that the global economy is about to endure a serious nose dive, possibly even re-entering recession territory?or it isn?t.

To understand why not, we have to delve into deep structural issues, which are changing the nature of the debt markets beyond all recognition. This is not your father?s bond market.

I?ll start with what I call the ?1% effect.?

Rich people are different than you and I. Once they finally make their billions, they quickly evolve from being risk takers into wealth preservers. They don?t invest in start-ups, take fliers on stock tips, invest in the flavor of the day, or create jobs. In fact, many abandon shares completely, retreating to the safety of coupon clipping.

The problem for the rest of us is that this capital stagnates. It goes into the bond market where it stays forever. These people never sell, thus avoiding capital gains taxes and capturing a future step up in the cost basis whenever a spouse dies. Only the interest payments are taxable and that at a lowly 20% rate.

This is the lesson I learned from servicing generations of Rothschild?s, Du Ponts, Rockefellers, and Getty. Extremely wealthy families stay that way by becoming extremely conservative investors. Those that don?t, you?ve never heard of, because they all eventually went broke.

This didn?t used to mean much before 1980, back when the wealthy only owned 10% of the bond market, except to financial historians and private wealth specialists, of which I am one. Now they own a whopping 23%, and their behavior affects everyone.

Who has bee the largest buyer of Treasury bonds for the last 30 years? Foreign central banks and other governmental entities, which count them among their country?s foreign exchange reserves. They own 36% of our national debt, with China in the lead at 8% (the Bush tax cut that was borrowed), and Japan close behind with 7% (the Reagan tax cut that was borrowed). These days they purchase about 50% of every Treasury auction.

They never sell either, unless there is some kind of foreign exchange or balance of payments crisis, which is rare. If anything, these holdings are still growing.

Who else has been soaking up bonds, deaf to repeated cries that prices are about to plunge? The Federal Reserve, which thanks to QE1, 2, and 3, now owns 22% of our $17 trillion debt. Both the former Federal Reserve governor Ben Bernanke, and the present one, Janet Yellen, have made clear they have no plans to sell these bonds. They will run them to maturity instead, minimizing the market impact.

An assortment of other government entities possess a further 29% of US government bonds, first and foremost the Social Security Administration, with a 16% holding. And they ain?t selling either, baby.

So what you have here is the overwhelming majority of Treasury bond owners with no intention to sell. Only hedge funds have been selling this year, and they have already done so, in spades.

Which sets up a frightening possibility for them, now that we are at the very bottom of the past year?s range in yields. What happens if bond yields fall further? It will set off the mother of all short covering squeezes and could take ten-year yield down to match the 2012, 2.38% low.

Fasten your seat belts, batten the hatches, and down the Dramamine!

There are a few other reasons why rates will stay at subterranean levels for some time. If hyper accelerating technology keeps cutting costs for the rest of the century, deflation basically never goes away (click here?for ?Peeking into the Future with Ray Kurzweil?).

Hyper accelerating corporate profits will also create a global cash glut, further levitating bond prices. Companies are becoming so profitable they are throwing off more cash then they can reasonably use or pay out.

This is why these gigantic corporate cash hoards are piling up in Europe in tax free jurisdictions, now over $2 trillion. Is the US heading for Japanese style yields, or 0.39% for 10 year Treasuries?

If so, bonds are a steal here at 2.55%. If we really do enter a period of long term -2% a year deflation, that means the purchasing power of a dollar increases by 35% every decade in real terms.

The threat of a second Cold War is keeping the flight to safety bid alive, and keeping the bull market for bonds percolating. This could put a floor under bond prices for another decade, and Vladimir Putin?s current presidential run could last all the way under 2014.

All of this is why I?m out of the bond market for now, and will remain so for a while.

**Why Are They So Low?**

The 120/120 Battle

Diary, Newsletter, Research

Foreign exchange traders are an odd lot. They tend to maintain a laser like focus on specific numbers that are utterly meaningless to us mere mortals, but which have momentous importance to themselves.

Right now, one is hearing the battle cry over the 120/120 targets. Specifically, traders want to take the yen down to Y120 to the US dollar, and the Euro down to $1.20 by the last trading day of 2014.

They may well get their wishes.

Powering the moves is the biggest policy divergence between central banks in a decade. The US Federal is threatening to take interest rates up every other day.

In the meantime, lower interest rates beckon in Europe and Japan as their economies lurch from one disaster to the next, dragging their own currencies down.

Accelerating the move is the gasoline that has been thrown on the economic fires caused by? You guessed it, plunging gasoline prices in the US, which is quickly turning into a massive stimulus program.

Wonder why Wal-Mart (WMT) has suddenly taken off to the races? It?s because their impoverished, gap toothed customers have suddenly received big cash bonuses, thanks to the war for market share among the members of OPEC.

Even a penny drop in the price of petrol adds $1 billion a year in consumer spending. Gas is so cheap that we might even break the $3 level here in high tax California.

Higher interest rates are great for the greenback because they prompt foreign investors to send more money here faster to chase higher returns than available at home.

The sharpest bond market move in history, taking ten year Treasury yields from 1.86% all the way up to 2.38% in four weeks, makes this view even more convincing.

Followers of this letter already know that the currencies have been in deep doo doo all year. That?s why I have been aggressively pushing out Trade Alerts to buy the dollar (UUP) and sell short the Euro (FXE), (EUO) and the Japanese yen (FXY), (YCS) for the past six months.

Readers have been laughing all the way to the bank.

The really thrilling part here is that this is only the beginning of a decade long move. My final target for the yen is Y150 and $1.00 for the Euro. This could be the trade that keeps on giving.

There are also important spillover implications for the stock market. It means more money for stocks at higher prices. The S&P 500 at 2,100 by yearend now looks like a chip shot, and we may probe even higher.

So why am I currently lacking any current positions in the currencies in my model trading portfolio? We are now at the end of extreme moves in all asset classes over the past month.

So, while everything looks hunky dory (a street in Yokohama where the cheap geishas used to hang out) in the markets, risk is, in fact, rising.

I have to admit that, being up 42.5% year to date, I have gotten spoiled. I am holding back for the low risk, high return type of entry points for new trades that my readers have become addicted to.

When I see one, you?ll be the first to know. Watch this space.

Gosh, I love this job.

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A Euro Collapse At Last!

Newsletter, Research

European Central Bank president Mario Draghi pulled the rug out from under the Euro (FXE), (EUO) this morning, announcing a surprise cut in interest rate and substantially adding to its program of quantitative easing.

The action caused the beleaguered currency to immediately gap down two full cents against the dollar, the ETF hitting a 15 month low of $127.40.

Surprise, that is, to everyone except a handful of strategists, including myself. Apparently, I was one of 4 out of 47 economists polled who saw the move coming, beating on my drum out of the coming collapse of the euro for the past six months.

I put my money where my mouth was, slamming out Trade Alerts to sell the Euro short, and sometimes even running a double position.

Of course, it helps that I just spent two months on the continent splurging at 90% off sales, and afterwards feasting on $10 Big Macs and $20 ice cream cones. Europe was practically begging for a weaker currency. Shorting the Euro against the greenback appeared to be a no-brainer.

A number of key economic indicators conspired to force Draghi?s hand this time around. August Eurozone inflation fell to a feeble 0.3%. France cut its 2014 GDP estimate at the knees, from 1.0% to 0.5%. Unemployment hovers at a gut wrenching 11.5%. To the continent?s leaders it all looked like a deflationary lost decade was unfolding, much like we saw in Japan.

Call the move an hour late, and a dollar short. Or more like 43,800 hours late and $4 trillion short. The US Federal Reserve started its own aggressive quantitative easing five years ago. The fruits of Ben Bernanke?s bold move are only just now being felt.

A major reason for the delay is that having a new currency, Europe lacks the breadth and depth of financial instruments in which it can maneuver. The Euro will soon be approaching its 15^th birthday. Uncle Buck has been around since 1782.

The ECB?s move is bold when compared to its recent half hearted efforts to stimulate its economy. Its overnight lending rate has been cut from 0.15% to 0.05%, the lowest in history. Deposit rates have been pushed further into negative territory, from -0.10% to -0.20%. Yes, you have to pay banks to take your money! A QE program will lead to the purchase of 400 billion Euros worth of securities.

Am I selling more Euros here?

Nope.

I covered the last of my shorts last week, after catching the move in the (FXE) from $136 down to $130. That?s a major reason why my model trading portfolio is up a blistering 30% so far this year.

At $127, we are bang on my intermediate downside target. But get me a nice two or three cent short covering rally, and I?ll be back in there in a heartbeat. My next downside targets are $120, $117, and eventually $100. My European vacations are getting cheaper by the day.

To review my recent posting on the coming collapse of the Euro, please click here ?The Euro Breaks Down, here ?Unloading More Euros? and here for ?The Time to Dump the Euro is Here?.

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Here Comes the Next Peace Dividend

Diary, Newsletter

I was amazed to see the Dow Average open up only 60 points this morning, and oil to fall a mere $1.50, given the enormous long term implications of a real nuclear deal with Iran. Over the decades, I have noticed that Wall Street isn?t very good at analyzing international political matters and the implications for their own markets. This appears to be one of those cases.

The news over the weekend about a freeze on Iran?s nuclear enrichment program in exchange for international inspections and the unfreezing of $4 billion of their assets is unbelievably positive for all asset classes, except energy. It came much sooner than expected. It proves that the administration?s preference for economic sanctions over military action has been wildly successful.

The US is now in a tremendously powerful negotiating position. If Iran dumps their nuclear program to our satisfaction it can get the carrot. It will rejoin the world economy, unfreeze the rest of its assets, and recover $100 billion a year in trade. Its oil exports (USO) can recover from 750,000 barrels a day back to the pre crisis level of 3 million barrels. If it doesn?t then it gets the stick again in six months, resuming their economic freefall.

The geopolitical implications for the U.S. are enormous.? Iran is the last major rogue state hostile to the U.S. in the Middle East, and it is teetering. The final domino of the Arab spring falls squarely at the gates of Tehran. A friendly, or at least a non-hostile Iran, means we really don?t care what happens in Syria.

Remember that the first real revolution in the region was Iran?s Green Revolution in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards. The true death toll will never be known, but is thought to be in the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.

At the end of the day, the majority of the Persian population wants to join the tide of globalization. They want to buy iPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all. Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have abjectly failed to cater to these desires

If Iran doesn?t do a deal on nukes soon, it?s economy with sink deeper into the morass in which they currently find themselves. The Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite. The Obama administration is now pulling out all the stops to accelerate the process.

The oil embargo former Secretary of State, Hillary Clinton, organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain. Yes, Russia and China are doing what they can to slow the process, but conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 40%.? The Iranian Rial has collapsed by 50%. Iranian banks were kicked out of the SWIFT international settlements system, a deathblow to their trade.

Let?s see how docile these people remain when the air conditioning quits running this summer because of power shortages. Iran is a rotten piece of fruit ready to fall of its own accord and go splat. The US is doing everything she can to shake the tree. No military action of any kind is required on America?s part. No shot has been fired. That?s a big deal when the shots cost $10,000 apiece.

The geopolitical payoff of such an event for the U.S. would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.

Oil will lose its risk premium, now believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $30 a barrel. This would amount to a gigantic $1.66 trillion tax cut for not just the U.S., but the entire global economy as well (87 million barrels a day X 365 days a year X $100 dollars a barrel X 50%). Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare. Hezbollah is a short.

At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.

The implications for the financial markets will be enormous. The U.S. will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992. As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom.

A collapse in oil imports will cause the U.S. dollar (UUP) to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse. With the U.S. government gone as a major new borrower, interest rates across the yield curve will fall further.

A peace dividend will also cause U.S. GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food. The Dow will soar to 30,000 and the S&P 500 (SPY) to 3,500, the Euro collapses to parity, gold rockets to $2,300 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel. The 60-year bull market in bonds ends.

Some 1 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up. We will enter a new Golden Age, not just at home, but for civilization as a whole.

Wait, you ask, what if Iran develops an atomic bomb and holds the U.S. at bay? Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime. According to them, Iran has been within a month or producing a tactical nuclear weapon for the last 30 years.

The head of the miniscule effort they have was assassinated by Israeli intelligence two years ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).

If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago. There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.

I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do. The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.

If the advent of a new, docile Iran were going to lead to a global multi-decade economic boom and the end of history, how would the stock markets behave now? They would rise virtually every day, led by the technology sector (XLK), industrials (XLI), and the banks (XLF) (C), offering no substantial pullbacks for latecomers to get in.

That is exactly what they have been doing since August. The markets are telling us that a treaty of real substance is a done deal.

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