Market Review: Zombie Investing
Like the crocuses and daffodils in the flower box outside our window, bond yields have been blooming.
It’s the season. Look at a two-year chart of the ten-year Treasury bond. Yields seem to rise in spring and then wilt for the rest of the year.
Last week, ten-year yields sprouted 9 basis points to 4.60%, their highest weekly closing level since June 2004. Meanwhile, two-year yields bloomed 16 basis points this week to 3.85%, their highest level since August 2001.
That rates are rising is no surprise. We’ve been expecting it for years. That they got so low – below 4% just seven short weeks ago – is the conundrum. After all, there hasn’t been a whiff of stagnation in months. We’ve seen growth. We’ve seen inflation. Output. Consumption. Employment. Peace. Improvement…in short, the perfect environment for rising bond yields.
We blame the zombies. Bond-buying zombies.
Zombies is how GaveKal economist Anatole Kaletsky describes the mindless investors who buy treasury bonds. By far the most important zombie-cohort, he says, is the private savers and retail investment institutions of Japan.
"We suggested last month that probably the best explanation for today’s ‘conundrum’ of global bond yields was the asset-liability matching of Japanese private savers," he says. "Why have the Japanese been buying so many U.S. bonds? Let us try to go beyond the two easy explanations: that Japanese banks and insurers act on manipulative ‘guidance’ from the Ministry of Finance or that they are simply mad. The alternative explanation is that yields of 4% plus on foreign bonds are irresistibly attractive to savers who live in a financial system permanently distorted by zero rates."
But what’s this? Could the sweet fragrances of spring be bringing the zombies back to their senses?
According to new research from Goldman Sachs, there’s evidence that the soulless private Japanese investor is no longer drooling and moaning at the idea of holding Treasurys…
Dow Jones reports that "Goldman Sachs chief interest rate strategist Francesco Garzarelli and strategist Hina Choksy noted…that total net sales of foreign bonds by these investors so far in 2005 has reached Y6.7 trillion ($63 billion) – the largest three-month decline in holdings since March 2002. The economists estimate about half of these sales involved U.S. Treasurys."
If the undead are snapping out of their trance and selling Treasury bonds, where might the money go, we wondered?
On Thursday, we found an interesting piece of data from Bloomberg: "Average residential land prices rose in Tokyo’s five main wards last year for the first time since 1987, indicating Japan’s slump in property values may be ending. Commercial real estate prices in those five areas also gained for the first time in 14 years."
Furthermore, said Bloomberg, "nationwide land prices, which fell 5 percent and extended a 14-year slide, dropped at the slowest pace since 2000."
The data suggests the zombie bond buyer may be packing up and heading home. Whether this marks the bottom of a long bear market in Japanese real estate remains to be seen.
The Daily Reckoning
March 27, 2005 — Baltimore, Maryland
P.S. Zombie-slayer Chris Mayer is as rational as they come: He used to be a commercial loan officer! Now – as a disciple of Benjamin Graham – he writes a newsletter on value investing called the Fleet Street Letter.
While this long-term approach to wealth building is simply unbeatable, some speculative subscribers would rather TRADE their way to riches. Chris finally bowed to their pressure and made his personal trading system, based on Dow Theory, available to his readers.
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THIS WEEK in THE DAILY RECKONING: What a cracking line-up of essays this week…We’ve got Marc Faber, Chris Mayer, a new one from long-time DR friend Rick Ackerman, and your usual contributions from Bill Bonner and of course, the MoGu…
AMERICA’S BEST AND BRIGHTEST 03/25/05
By Bill Bonner
"Instead of setting out to improve the world one war at a time, U.S. presidents should take a page out of former President Harding’s book, and take up a hobby to keep out of trouble – like gambling or chasing women…"
THE DECAY OF PAPER CURRENCY 03/24/05
By Chris Mayer
"In the 20th century, the rising cost of living is nothing new. Since the creation of the Federal Reserve, the dollar has lost about 95% of its purchasing power. Luckily, there are other options for making sound investments…"
PUTTING YOUR ASSETS ON THE LINE 03/23/05
By Marc Faber
"Millions of Americans have been viewing their humble abodes as their own, personal ATM. Marc Faber wonders when people will realize that they shouldn’t have everything riding on their household assets…"
BORROWERS SHOULD GO FOR BROKE 03/22/05
By Rick Ackerman
"The new bankruptcy bill may deter some debtors from further ‘credit card kamikaze,’ but if property prices decline, the bill could leave millions of homeowners underwater on their mortgages. Read on…"
ATTENTION TO DEFICITS DISORDER 03/21/05
By The Mogambo Guru
"Some people go through life with blinders on, happily oblivious to the state of the economy; they never give the trade deficit or inflation more than a fleeting thought. Sadly, The Mogambo doesn’t have the luxury of ignorance…"
FLOTSAM AND JETSAM: Chris Mayer is on the hunt for an obscure book called ‘Margin of Safety.’ If you have it, Chris may make you an offer…
I’ve been looking for a copy of Seth Klarman’s book ‘Margin of Safety’ for several years. If you don’t know who Seth Klarman is, let me just tell you that he is one of best value investors around. His Baupost Group partnerships have returned nearly 20% annually since 1983, and Klarman has also developed a reputation for his insightful and witty writing.
Anyway, I finally found a copy on eBay and made a bid. Soon thereafter, I got an e-mail from eBay saying that I’d been outbid. Who outbids me? What other person on this planet could possibly be looking for such an obscure title? Why, none other than my pal and colleague Dan Ferris, editor of Extreme Value. There is extreme irony in this, dear reader. Two value guys outbidding each other for a book called Margin of Safety.
Neither of us got the book, unfortunately. When I called Dan about it, we had a good laugh. Of all the people I know in this business, Dan is the one guy whose investment philosophy most closely resembles my own. And it seemed incredible that, of all the people scrounging around for stuff on the Internet, I would run into Dan.
In my next issue, I was thinking I might write a bit about Klarman and some of his investing insights. I have his annual report to shareholders for 2004 (courtesy of another buddy of mine), and it’s filled with insight and important concepts. Depending on how much space I have, I may put an article about it in next month’s issue or, if not, you’ll see it in an upcoming hotline.
In the meantime, if any reader has a copy of the book and is willing to part with it, let me know. I’ll make you an offer. Drop me a note at firstname.lastname@example.org.
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And the Markets…(courtesy of the Rude Awakening)
WTI NYMEX CRUDE