Homogenous bond market

“The Kings, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle”.

“Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee”.

Bill Gross, March Investment Outlook

Below are some articles I have found interesting in the last week:

1. Hugh Hendry's latest investor letter out of his Eclectica Fund and his Absolute Macro Fund. He has sold over half of his 2 year forward curve steepeners in the UK. As of the end of January, currency positions represented 31% of their NAV, while government bonds (greater than 10 year) represented 18.3%. Looking at his top ten holdings, you see quite a mix of macro bets and equity plays. What's interesting is that ALL of Hendry's top 10 equity holdings are tobacco or cigarette companies. Overall though, the vast majority of their Absolute Macro holdings are appropriately in macro bets with currencies and fixed income. They also have a 1.5% short equity allocation via Eurostoxx put options.

2. Here is an in-depth look at Greek finances (Industrial Output, PMI, retail sales, car sales, borrowing needs, tax and income policy).

3. In a related topic, the difficulties Greece face is eloquently summarized by George Soros.

4. Martin Wolfe recently wrote an article in the Financial Times "The world economy has no easy way out of the mire". This blog analyses the article and its' gloomy conclusions.

5. “Industry investment research is often more useful in defining what assumptions are already factored into share prices than highlighting what is likely to move them going forward. Much of what passes for “analysis” in the investment industry is simply the extrapolation of current trends into perpetuity.” – Argonaut February letter my Barry Norris. I couldn’t have put it better myself and this analysis is rife in such a turbulent and uncertain market. This is a clever piece though, touching on the access-to-debt party we all had at Germany’s expense from 1999. The writer queries the sustainability of Chinese growth rates in the absence of fixed asset investment growth and all the associated commodity EM consequences.

6. Bill Gross from PIMCO focuses his entire March letter on sovereign debt. He basically discusses the prospect of a more homogenous type of bond market as per the quote above.

7. “Empires on the Edge of Chaos” - Niall Ferguson theorizes about the consequences of things going wrong in complex systems (argues that the scale of disruption is nearly impossible to anticipate). This is heavy reading.

8. “The Idiocy of Hope” - Marc Faber from January (pls request this from me). Investment considerations in 2010 include weakness in the Yen and Japanese government bonds (so strength in equities), preference for large cap high quality stocks and avoidance of small caps (I guess the credit access trade) and finally a nervousness of the near unanimous consensus that emerging markets will continue to outperform US equities.

9. “Japan – Past the Point of No Return”: Presentation (pls request this from me)focusing on one fact that's been known for a while: the Japanese savings rate is declining as their population ages. But, the main thing to take away from that is that the Japanese will become net sellers of bonds and this has consequences. In order to fight off the yen's depreciation against the dollar, Japan will have to sell some of their dollar reserves. That's a much bigger deal than it sounds when you consider that Japan is the largest holder of US treasuries. Conclusively, Katsenelson argues that the US economy should work things out naturally rather than relying on continuous stimulus spending so we don't end up like Japan.

10. Paul Krugman: “The Fed, and equally importantly the ECB, is seriously underestimating the deflationary danger. The basic rules haven’t changed: a slack economy puts downward pressure on inflation. One measure of core inflation is the Dallas Fed’s trimmed-mean personal consumption expenditures deflator, in two big recessions and aftermath, 1981-82 and 2007-2009. There’s a hint here in the data of stickiness as inflation gets close to zero. But zero isn’t a magic number: even falling inflation raises real interest rates when nominal rates can’t fall”.