Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

U.S. Treasury 10 Year Bonds Bubble At 2% Yield, US Nominal GDP Growth Heading Down Towards 0%

Interest-Rates / US Bonds Aug 19, 2011 - 03:55 PM GMT

By: Andrew_Butter

Interest-Rates

Diamond Rated - Best Financial Markets Analysis ArticleI’m a little slow, but perhaps someone can tell me what happened to the crowd who were jumping up and down screaming that US Treasuries were a bubble when the yield was 3.7%? If that was a bubble in 2009 and 2010 then 2.0% has to be an UBER-BUBBLE so you would think those guys would be having foaming-at-the mouth fits by now, I don’t know what happened to them, perhaps they all got sore throats?


The valuation model presented here started out in February 2010 in response to all the noise being generated by the Treasury Bubble Crowd; what the model said (then) was that yields would go down, which they did until Ben started buying under QE-2 and then they went up until Bill Gross sold at the top of the market at precisely the point this model said yields were going to go down to 3%, which they did.

http://seekingalpha.com/article/272975-valuation-and-u-s-debt

So far so good, so how does that work? When you build a valuation model you feel more confident if you can get to a similar answer by at least two independent routes, typically those are income capitalization and depreciated replacement costs, but there are other ways, I always try for a minimum of two, at least when someone is paying me.

In this case the first line of reasoning was based on the idea that you can define the “fundamental” of something bubbling, or what people who do valuations (at least in line with International Valuation Standards) call “other than market value”, from the square root of the top multiplied by the bottom.

The green line on the chart is a valuation estimate. That’s what I do, valuation; to me it makes no difference if it’s twenty-year old jack up barge, a Costa Coffee franchise, or someone’s left-foot, the principles are the same.

That’s nothing to do with economics by the way; valuation is an estimate of what you can sell something for in certain defined circumstances, that’s it. It’s a prediction of what might happen in the future, nothing else; and what many people don’t understand about valuation, is that when the circumstances change, the value changes too; the acid test is were you in the ball-park.

The credit crunch was all about valuation, the valuations got messed up and so everyone paid 35% more for houses than they should have (or pulled out “equity” based on that), and banks used that as collateral, and the rest was just inevitable. Perhaps as part of its role as a “regulator” the Fed might consider mandating that valuations used to work out capital adequacy of moron-banks are done using International Valuation Standards, instead of the Voodoo Valuation Standards used by the rating agencies? Just a thought, for next time America is considering shooting herself in the foot, not that I care, I’m not American.

The second line of attack was looking for a nominally independent driver; a good place to start on that sort of investigation is nominal GDP:

That didn’t surprise; the analysis on the chart basically says that you can predict the yield on US Treasuries from the moving average of the past four years of nominal GDP growth, there is nothing particularly new there; plenty of other people know that, although that’s the first time I saw anyone doing a simple regression.

But there is not a lot of what International Valuation Standards calls “market-derived-data”, (from USA at least) about what happens if nominal GDP starts going negative, but in any case that’s a four year leading indicator, which I call a driver, in the sense that I suspect nominal GDP “drives” yields.

So that brings us to now and what that valuation model says is that a 2% yield on US Treasuries is not “correct” right now and was probably a result of some sort of mania.

The reason for the mania could be because of “X” or “Y, although personally I’m not very interested in what particular drug the deadbeats are using, from the point of view of valuation, the reason is irrelevant.

There again, since the survival of USA might be at stake, perhaps the FBI or Homeland Security should be put on the case, or even better how about the team that proved there were WMD in Iraq? Perhaps drone attacks on some bankers and kick-back addicted members of Congress might improve things? I’m sure if that idea was put up in a referendum in USA, it would get a 90% approval rating.

Anyway, at some point, probably quite soon (a few months), it’s likely that the 10-Year will head up back towards 3%, like it did after the last mini-bubble caused by traders front-running the Fed in anticipation of QE-2.

GDP (Nominal):

One thing is that when they get released (in November 2011), it looks likely that the Q3 numbers for nominal GDP in USA (covering July thru September), will let’s say “disappoint”.

There are four (valuation) predictions there, lets see if they pan out, like the last ones did? But see – I put numbers on my predictions, how many “gurus” do that?

The Year of the Rabbit

2011 is the Year of the Rabbit, and when I did my predictions back in January for the Chinese new-years which starts on 4th February, on the subject of US Treasuries I remarked:

If ever nominal GDP in USA starts to take off, US Treasuries will too, I’ve got the 10-Year pegged for 3% in March (now it’s 3.4%), plenty of people think I’m wrong. I say there was a bit of a bubble after the rumour got out that there would be QE-2 and the dealers played with Ben like a cat with a mouse by front-running the price, here’s a tip Ben, if you want to spend $600 billion on something, don’t tell everyone first.

http://www.marketoracle.co.uk/Article25852.html

I’m not too ashamed about that although I gotta admit I did get the timing of the return to 3% totally wrong (by about four months).

My implicit assumption then was that nominal GDP would grow by 3% minimum, that was based on looking it up in the back-page of The Economist, how much of that was going to be inflation or “real” is of course irrelevant to valuation.

This is the first time I’ve attempted to “do” GDP, although I did notice that Nouriel Roubini who is often right on matters of economics (and often wrong about everything else), had something to say about that recently. His view was pretty similar to these conclusions, this is what he said:

The first half of 2011 showed a slowdown of growth – if not outright contraction – in most advanced economies. Optimists said this was a temporary soft patch. This delusion has been dashed. Even before last week’s panic, the US and other advanced economies were odds-on for a second severe recession.

America’s recent data have been lousy: there has been little job creation, weak growth and flat consumption and manufacturing production. Housing remains depressed. Consumer, business and investor confidence has been falling, and will now fall further…

Until last year policymakers could always produce a new rabbit from their hat to trigger asset reflation and economic recovery. Zero policy rates, QE1, QE2, credit easing, fiscal stimulus, ring-fencing, liquidity provision to the tune of trillions of dollars and bailing out banks and financial institutions – all have been tried. But now we have run out of rabbits to reveal.

http://survivalandprosperity.com/2011/08/10/nouriel-roubini-another-severe-recession-might-be-impossible-to-avoid/

I’ll go along with that, apart from the bit about rabbits, if you run out of rabbits to pull out of the hat in the Year of the Rabbit, all hope is lost!!

I don’t think things are THAT bad, and in any case, perhaps there is a silver lining, perhaps the realization is slowly starting to sink in to the minds of the corrupt morons in US Congress that you can’t create economic growth by getting the Fed to playi with the base rate, and build bubbles, whilst denying any responsibility?

Here are some other rabbits that could be pulled out of the hat, which would turn America round:

1: Impose a 3% wealth tax on all personal assets more than $5 million of anyone who enjoys the protection of America (including non-Americans domiciled in USA and 6% on any who are members of Congress),  that would bring in $1.5 trillion a year. And if anyone objects, well they can just go away and live in Mogadishu or somewhere, they will find out pretty quick that the cost to protect their wealth in places like that is a lot more than 3% a year.

2: Halve US military expenditure - $500 billion a year, the past ten years have proved beyond doubt that throwing stupid money at the military does not make America, or Americans, safer.

3: Put a $4 tax on gasoline to bring what end-user pay up to the same level where oil consumption is not subsidized by the government; that would generate $500 billion a year plus a reduction in the amount of money America has to borrow to pay foreigners to import it.

4: Eliminate corporate income tax which hardly brings in any money anyway, and was the main driver for off-shoring, do that and it would make sense for US corporations to start investing (and creating jobs) in USA again.

Do that and America will balance her budget in 2012 and unemployment will go down to 7% by end 2012 (U-3). It’s either that or QE-3 and there is no evidence that third-time-lucky will cut it this time around, any more than the previous versions.

Meanwhile, personally, I’m just sitting on the dock of the bay, offshore, watching the tide come in. I love nature, sunsets blow me away, and I’m looking forward to the spectacle of America doing the suicide thing…should be spectacular…from a distance.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2011 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in