Thursday, August 26, 2010

"Debt Man's Curve"

I stumbled upon Jason Farkas this evening.

August 26, 2010
Debt Man’s Curve: It's No Place to Play

We chose a parabola to depict the situation of debt issuers because debt gets exponentially harder to repay or refinance as the interest rate rises, especially for large debtors. So problems tend to intensify exponentially the higher up the curve one goes -- just as the angle of a parabola's ascent grows steeper.

Great chart inside. Definitely worth a look.

August 22, 2010
History: Currently Rhyming and Repeating Itself

1937: Negative real interest rates fail to prevent another round of economic contraction.

I mentioned something similar here. Negative real interest rates failed to provide the desired effects twice so far. We're currently working on attempt #3.

July 14, 2010
This Is an Unfolding Depression, Not an Ordinary Recession

However, there is a problem with the Fed’s data set and, therefore, with its conclusion. The Fed’s selected time frame does not include any deflationary periods, which makes it a less-than-robust model (that is, one that won't work in all economic environments). In fact, it’s reminiscent of the models used to price mortgage-backed securities. You know, the ones that didn’t bother to consider what might happen if house prices fell. So, if the inputs fail to include all scenarios, when an unexpected scenario hits, the conclusions are likely to be as wrong as AAA subprime ratings.

Bearish since 2004. Just moved to all cash in my IRA and plan to keep it that way unless serious bargains appear. I've never done that before. It's a first. I'm also sitting on much more cash than normal outside of my IRA.

12 comments:

Troy said...

There was another Dead Man's Curve:

http://research.stlouisfed.org/fred2/series/CMDEBT

"I don't have any solution, but I certainly admire the problem" -- Ashleigh Brilliant

Anonymous said...

Mark,

What are your thoughts on buying a high-yield bond mutual fund now?

If we are going deflationary, isn't that a good idea?

I know you are all about capital preservation as you are retired, but how about for non-retired?

Is there a big risk with these compared to stocks? or are they already too high? Too dangerous even for a small portion of a portfolio?

My screener for 6%+ yield came up:

PONDX - PIMCO Income Fund
PYHRX - Payden High Income Fund
RITFX - American Funds American Hi Inc Tr R5

PONDX has some IT company bonds and some Fannie Mae bonds...maybe a bond fund that comes even more from IT would do best - seems like despite a depression, IT still does well overall.

Coba

Stagflationary Mark said...

Troy,

I think I live by that quote here. I'm glad I'm not in charge of fixing the problems. I'd be impeached! They'd see it in my face every time I held a press conference and every time I supplied a chart to show where we are headed, lol. ;)

Anonymous said...

Ha! Morningstar screener shows no bond funds that are technology centered.

Stagflationary Mark said...

Coba,

It depends on where you really think we are headed. I certainly can't say for sure where that is.

If we do slide into a depression, then it would seem capital preservation would be the top priority. Companies will fail. The best time to buy the bonds of these companies would be after you find out which ones survived.

Put another way, a company weakened by the depression, but is still a survivor, should do quite well on the other side. Most of its competition will be gone.

Bed Bath & Beyond

Since the liquidation of Linens 'n Things, Bed, Bath & Beyond has no major retail competition except Wal-Mart and Target.

That may still be some pretty stiff competition. Time will tell.

From April...

Retail Reports Show Consumer Sector Remains Dark

No individual unemployed for more than 26 weeks, struggling to pay for rent and food is going to race out to their nearest Bed Bath & Beyond (BBBY), Best Buy (BBY), or any other retailer for that matter upon receiving a desperately needed unemployment check. Someone needing extended benefits is in rough shape, and even when they do show up -- more likely at a Walmart (WMT) or Family Dollar (FDO) -- it’s for absolute essentials.

I believe Cramer’s take on the consumer sector is downright wrong. As much as reality continues to hurt, consumers are in a dark place. And there's literally no evidence of them emerging from that place any time soon.


I too heckled Cramer's take.

Sarcasm CALAMITY

Here's something else to consider, even if you could pick the survivors would the bonds bought today be a good value? There might be a mass exodus from all risk, and high yield is certainly risky.

Note what SPDR Barclays Capital High Yield Bond (JNK) did back in 2008.

Anonymous said...

Here are my counter-arguments:

1) The huge downturn of 2008 probably already shook a lot of dead wood out of many sectors. Auto and finance sector excepted.

2) These are mutual funds of many bonds, not single bonds - hopefully that would negate some of the risk.

3)Since I am not retired yet, a little extra yield in part of my portfolio would help. I am 50%+ in cash already, if you count CDs in Chinese Yuan as cash.

I am going to review the holdings though before doing anything. Are Fannie Mae now explicitly USG backed? I saw PONDX had a lot of those. If you are holding cash in USD, isn't the main risk the same: that the USG will start to renege?

I looked at some international bond funds - they include stuff like Israeli and Brazilian electricity company bonds - I think those bonds will do much better than Bed Bath and Beyond.

The main suspicion I have with the bond sector that its another bubble forming in bonds as everyone races for them. These are already up 30% from the lows.

I think I will do some more research and see if I can find some more ideal candidates than from my rough screen.

Stagflationary Mark said...

Just keep in mind that more money was lost AFTER the 1929 crash than during it.

I'm of the belief that this country has far too many restaurants for what is coming next.

If you are holding cash in USD, isn't the main risk the same: that the USG will start to renege?

The risk is not the same. The government cannot and will not rescue the typical junk bond.

'Junk' Bonds Hit Record

"On the supply side, the market has seen a tremendous amount of demand from retail investors," says Fitch's Mr. Schmalz. "With positive fund flows each week since the middle of July, retail investors have cash to put to work."

I'll pass.

U.S. junk bonds suggest 25% chance of double dip

High-yield bond spreads, the extra yields they pay over U.S. Treasuries, are almost 100 basis points higher than their historical average even though the default rate has eased to less than half of its historical average, Mr. Fridson said. "Those two things don't match, and I'm hard-pressed to find anything else [other than recession fears] that explains that discrepancy," Mr. Fridson said.

I'm a revert to the mean kind of guy.

High-yield bonds are fairly valued for a 25% recession risk and have substantial upside if economic news improves, Mr. Fridson said.

You only want to be betting on junk bonds if you think the economy really is improving long-term. That could be true, but I'm not a believer.

Anonymous said...

"The government cannot and will not rescue the typical junk bond."

Fannie Mae bonds are in PIMCO's PONDX fund...is that a junk bond they won't rescue? LOL.

http://portfolios.morningstar.com/fund/holdings?region=USA&t=PONDX&culture=en-US

Frankly, I am not sure what the USG won't rescue at this point.

Anonymous said...

You will note the PONDX has a lot in cash, too. So, its seems like a popular position. I'd be buying a bond fund that has 38% in cash.

My Canadian liquor store trust lost 6% today, too.

Anonymous said...

So, instead of buying 38% cash, and paying for the privilege of them managing it, I could do that myself.

Coba

Stagflationary Mark said...

Coba,

So, instead of buying 38% cash, and paying for the privilege of them managing it, I could do that myself.

Yeah, no kidding. Nothing pays off better than a managed cash fund, lol.

TIP was getting a bit like that if you think about it.

How much SHOULD I be paying someone to manage 5-Year TIPS paying 0% over inflation that are almost guaranteed to lose money after taxes?

Stagflationary Mark said...

Coba,

One more thought. 38% cash means 62% something else.

Perhaps I just irrationally cringe when I hear PONDX because its very name is 60% of something else. PONZI! Hahaha! Sigh.