Looking Up at the Debt Overhang

November 12, 2012

• Another decade of ultralow interest rates? A successful fund star’s big call… and our own reservations
• An emphatic no: Greg Guenthner on why last week’s sell-off does not mark a new market bottom… and the trading guidance that results
• A new meaning to “four more years”… The milestone that arrives for the U.S. in 2016 (maybe)
• Banker rule No. 1: Don’t make your bank look bad… and the guy who broke the rule with his taped tantrum
• “Rich guys with funny names”… When we thought it was over, a single email opens a new front in the War on The 5

  Interest paid on Treasuries sits near its lowest point since Alexander Hamilton was Treasury secretary. (If you’re not up on your history… Hamilton served under Washington, the United States’ first president.)

Still, “rates aren’t going up anytime soon,” comes word from Van Hoisington, replete with a deep Texas drawl.

Mr. Hoisington is the chief money manager at the firm that bears his name.

(If Bill Gross is the “bond king,” Hoisington is a demigod. Gross’ Pimco Total Return Fund is up less than 10% over the past decade. The Wasatch-Hoisington U.S. Treasury Fund (WHOSX) — applying Hoisington’s Treasury-only strategies — is up nearly 40%. Yet… Gross is a media star. Hoisington, not so much. Go figure.)

“With his twang,” writes our managing editor Chris Mayer, “mane of silver hair, big gold ring, brass-buttoned blazer and folksy manner, he reminded me of an old college football coach at an alumni fundraiser.”

Mayer has seen Hoisington make the same call on Treasuries, or a variation thereof, at least three times in the last five years — most recently at Grant’s Fall Investment Conference in New York.

  “This is not a normal cycle,” says Mr. Hoisington explaining his thesis. “The U.S. is bogged down in debt. It takes a long time to correct.”

He’s studied 26 episodes of “debt overhang.” They last an average of 23 years, as large governments larded down by debt slowly suffocate their economies.

Below is a favorite chart of Hoisington’s. “He chose these particular debt panics,” Chris explains, “because debt levels reached (or exceeded) what we have now. As you know, we live today with the aftermath of the housing bubble.

“Look,” says Chris, “at how many years we have to live with low interest rates — if we should follow the historical pattern of prior debt panics.”

Bad news for savers, no doubt. But good news for real estate — one of the few sectors that get Chris excited these days. “Our real estate plays ought to do particularly well, as they make the difference on the large spread between their low borrowing costs and the high yields on the properties they own.

“I have been wrong for a long time in thinking that interest rates would go up,” he adds. “They haven’t. For once, though, I wasn’t shaking my head incredulously after a Hoisington presentation. This time, I fear he may be right — again.”

One final takeaway, Chris says: “Low interest rates could prop up stocks generally, because returns will be hard to dig up elsewhere.”

  In any discussion involving Treasuries, we’re obligated to remind you: In early 2010, we offered up our New Trade of the Decade — “sell U.S. Treasury debt, buy Japanese stocks.”

Despite Mr. Hoisington’s forecast, we stand by our call. “The market can remain irrational longer,” Lord Keynes famously said, “than you can remain solvent.” We’re not revoking the trade… but as with the last decade’s trade, it looks like we may be taking this one down to the wire as well.

Our call to “sell the Dow, buy gold” issued in 2000. The Dow was at record highs. And gold, trading at $282, was persona non grata of all asset classes.

The Trade of the Decade didn’t turn profitable until 2008.

  Stocks today? The major indexes are flat. Holiday trading is thin. The bond markets are closed.

Gold is up about $5, to $1,735. Silver has shed a few cents, currently at $32.56.

  “I know a ‘selling climax’ when I see one,” writes Greg Guenthner, taking today’s 5 on a slightly risque turn. (You may know a “selling climax” by another name — a bottom. Also potentially risque.)

We’ll spare you the suspense: The stock market action last week wasn’t it — even with its 420 loss in the Dow on Wednesday and Thursday.

  “Selling climaxes are the beginnings of a reversal,” says Greg, warning traders to be careful trading in this environment. “They usually are accompanied with high volume. They also tend to catch traders and investors by surprise.”

For proof, he points to October of last year, when the S&P bounced hard off 1,100.

“The late July crash was nasty,” Greg writes, “sending the S&P from 1,350 to 1,100 in a matter of days. So breaking below the August lows should have spelled disaster for stocks in October. Psychologically, investors were already on the run. It looked like the bottom was ready to fall out at any moment.

“But instead of pushing new lows, the market staged a massive rally. It was as if someone threw a switch and everyone on Wall Street started buying. First, the market climbed to breakeven on the day. Then, during the last hour of trading, stocks vaulted higher across the board. I don’t remember seeing one downtick during that entire hour.

“That moment of capitulation turned into an incredible buying opportunity.”

  The situation today, Gunner warns, is nothing like that.

“Pre-washout,” Mr. Guenthner writes, “I’d like to see some big ‘red days’ in a row, the market really overselling. That will help set up a potential bottom. But right now, the market isn’t as oversold as it was in early June…”

Bottom line: Don’t trade the broad S&P right now. Successful traders will have to be selective… pick their targets.

  Gunner’s search for a “selling climax” is playing right into our hands. Recall from Friday’s episode that our technical trading duo is about to embark on an experiment.

They believe they can teach anyone — doctors, lawyers, small business owners, engineers, dog walkers, artists — how to trade successfully in any market. Even one whose bottom remains out of sight.

They’re seeking at least 75 people to prove to us they can take ordinary folks and turn them into accomplished traders, able to turn a $1,000 grubstake into $5,240. We’re outlining terms of a wager, in which we’re taking the other side of the bet.

Here’s an in-house secret: We gave them an out a couple of weeks ago. We knew that fiscal cliff issues could set the markets on a wild ride the rest of this year. So we told them — despite months of hard work and preparation — we’d be willing to put off the experiment till early 2013.

“Hell, no!” was the reply we got. “There’s no better time than now to put our system to the test,” Jonas insisted. “This is the best time for people to protect themselves, and even profit,” Greg added. “Why would we put it off now?”

Why, indeed?

So the experiment is on. It starts Thursday — a mere three days from now. Their task: to show you how to turn a $1,000 grubstake into $5,240. Participation in the experiment will take only a few minutes of your time… and won’t cost you a thing. Even if you’re just curious, you can check out their ideas, right here.

  141 years down… four to go.

The Organization for Economic Cooperation and Development (OECD) — the club of 34 Western industrial democracies — figures China will overtake the United States as the world’s largest economy by 2016. So would end a run that began in 1871, if The Economist’s start date is to be believed.

Of course, the OECD wonks performed their prognostications the usual way — projecting current trends far into the future. Thus can they predict an average 3% annual growth in GDP from now until 2060.

“None of these forecasts is set in stone,” admits OECD Secretary-General Angel Gurria, hedging the org’s bets. “We know that bold structural reforms can boost long-term growth and living standards in advanced and emerging-market economies alike.”

That is, if politics allow for “bold structural reforms.” One can only imagine what he might have in mind… or whether a vision for what’s next is necessary at all to make such a statement.

  The racial slur adds a nice touch. Over the weekend, this video made its way around the Internet.

“I’m gonna burn your f***ing house down,” Olivier Desbarres says at one point, “You have no respect. You know what? You’re f***ing animals. Chinese f***ing animals.”

Mr. Desbarres was chief of foreign exchange strategy in Barclays’ Singapore office… was being the operative verb. The industry’s reputation for massive fraud and inside banksterism aside, it’s just not a good idea to be “caught on tape” having a meltdown with some construction workers near your home. You might make the bank look bad. And lose your job.

The video gets better once Olivier realizes he’s being recorded. Even more so when he starts hurling sheet metal at the employees.

  “Mr. Wiggins,” a reader begins (spelling our ‘funny name’ incorrectly), “we pay your firm to provide insights on investment opportunities.” It took a trend to make us realize our email “Obama Camp Claims Referendum on Progressive Agenda” had caused some consternation among readers.

“I speak for many of your firm’s clients. Keep your politics for friends and like-thinking associates. I find them intrusive, and they have no place in your financial service, unless you have evidence that a political action will substantially affect your service to me… your customer.”

  “And more than three months of conservative grumbling and moping is likely,” adds another, referring to the letter’s opening line. “And further dishonesty… and deluded ‘spin.’ It’s mostly you rich guys with funny names and big incomes that will see increased taxes. Not many relative to our population.”

The 5: Of course, since it’s only a minority population, that would make it “right.” [Damn those funny-named people. Eat the rich!]

  “If the word ‘socialism’ makes you nauseous,” our reader continues, “try ‘sharing.’ Romney would have increased military spending and would not have eliminated drone warfare — which I agree is despicable and could still happen here in the U.S.”

The 5: What nauseates us is your assertion, by omission, that Romney would have been an alternative to socialism.

  “Stop it,” a third whines. “Your demonizing of our president has failed. Now get with the program with support and positive attitude.”

“Is it not time to stop whining about high taxes and regulations?” asks a fourth, prattling on about how awesome it must be to pay higher taxes in Sweden and Canada.

The 5: Aww… we didn’t mean to demonize anyone. Our apologies. By all means, let’s get the Swedes and the Canucks on board with our tax and health care agendas.

  In an effort to appease “many of our firm’s clients,” we’ve rewritten our invitation as if — horror of horrors — the other guy had won the election:

Click to enlarge.Of course, the invitation stands either way.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Of the 10 questions on Jonas and Gunner’s free “trader’s quiz,” nearly 50% of takers have whiffed on question No. 3. Questions 9 and 10 appear to be rather challenging too.

Maybe you can show them up. Take the quiz for free. If you do, you’ll automatically gain a spot in Jonas and Gunner’s excellent experiment… in which they aim to show at least 75 participants how to turn $1,000 into $5,240 in five days… in any trading environment. Also free. Here.