Sunday, February 6, 2011

Asset Classes

In a discussion about about a possible rout on bonds, and a flight to where I had a response:

most likely into PMs. would you buy into an overbought, over manipulated market?
I thought about this a bit and came up with this

Although it is generally accepted that Bond traders are a bit smarter than their equity slinging cousins, most Bonds are not owned by the traders, they are owned by large pension plans, mutual funds, or asset allocation plans run by HBB for individuals (the old 60/40 split between bonds and equities). Many of those entities dont' really know that bonds are overvalued, much less that equities are also. Back to the bond traders -- they are either themselves salesmen or they process orders for the company salesman, but ultimately, financial product are sold (not bought, the buyer is usually an fairly uninformed participate, or poorly informed).

Other project I have worked on in the last few weeks is getting a relative measure of the size of asset classes. I am far from done, but my research implies that all the Gold in the world (currently mined) totals to about 1.3T, Equities maybe 18T, Bonds/Cash Equivalents maybe 60T, and property/buildings maybe 60T to 100T. These are very rough and I am shooting from the hip a bit, but the relative sizes are not absurd. It is actually hard to find that information, sometimes that difficulty implies to me that I am on the right track.

When one thinks of money leaving an asset class I believe there are basically 3 mechanisms.
  • Change in Leverage
  • Move to cash
  • Move to other asset class

In the Ponzi world the most important and far reaching effect is reduction in leverage, many of these asset classes are owned using leverage as the source of ownership, when leverage is reduced that asset value just vanishes, in the same way our heroic central bankers conjure money out of nothing.

Asset sold and move to cash in some currency

Asset sold or traded for another asset class.

We are far above long term trendlines on many asset classes. When I figure out the rest of this equation I will let you know :-)

And another person chimed in with this, see my interpretation at the bottom, but it boils down to my current thought that bond holders are currently holding some pretty low yielding  paper, with the potential for a 35% haircut or worse at any time of default.    However, they don't want to just buy some US issued debt ALSO at low rates and long holding periods.    So they are waiting for higher rates to dump their low paying risky crappy paper and buy new higher rate paper backed with the full faith of the Federal Goverment.

For some time, I was thinking why is bondzilla quiet? Don’t they know eventually this will blow up and they will lose money? now we have the answer...they are waiting for FED to be cornered, to be sure they can’t just print away...In the same period, they will flip the bird to European market, as most of Spain’s debt has to be refinanced by April...most of the POMO bonds are recent issues, like two weeks stop issuing you stop prepared for bond market to take revenge in next two months...If you ask, why crash it now, unlike Benny, bond market is aware of Ponzi and Bill Gross wrote openly that it will not go on forever...they know it will and badly as some point...Forcing deflation, and FED to stop, gives them little bit of extend and pretend game...same for dollar...but system is fundamentally broken, and this will not fix broke municipalities...

 Another thought -- my "street" indicator, when I get unsoliticated financial comments from customers or tradespeople, my antennea (hidden under the tin foil hat) goes up.   This weekend a customer offered the fact that "muni's are in deep trouble".    I often use these little slice of life indicators as contrarian ideas--not for taking action, but for an increased level of "On Guard".

A reader contributed the following:  THANKS!  See his link for a future projection also

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Insightful and Useful Comment!