The bear market in Treasuries will worsen, because of a glut of government bonds. Instead, consider high-yielding mortgage securities and certain munis. (Video)
We’re talking about U.S. Treasury securities, not housing. At the end of 2008, risk-averse investors poured into Treasuries, driving down yields to the lowest levels in decades. The 30-year Treasury bond fetched less than 3%, and short-term T-bills carried yields of zero.
Since then, the economy has shown signs of bottoming, the credit markets are functioning more normally, and the stock market has roared back from its March lows. Treasuries now are in a bear market, while bullish enthusiasm has taken hold in other parts of the credit market, including corporate bonds, municipals and mortgage securities, all of which had fallen from favor late last year. The 30-year Treasury, for instance, has risen to a yield of 4.10% from 2.82% at the end of 2008, cutting its price by 20%.
Barron’s called a top in Treasuries and a bottom in the rest of the bond market in an early 2009 cover story (“Get Out Now!” Jan. 5). We weren’t alone in recognizing some of the nutty year-end developments. Warren Buffett highlighted the sale in late 2008 by his Berkshire Hathaway of a Treasury bill for a negative yield. Buffett wrote in Berkshire’s annual letter in February that when “the financial history of this decade is written…the Treasury-bond bubble of late 2008” may rank up there with the housing bubble of the early to middle part of the decade. – How does the market look now? Treasuries still look unappealing for several reasons. Yields are very low by historical standards, the government is issuing huge amounts of debt to fund record budget deficits, and the massive federal stimulus program ultimately may lead to much higher inflation.
Category: Taxes
Finance It Again Tim Geihtner
They say you don’t recognize history while you’re living through it, but it won’t be long before there’s no doubt about the historic character of what’s happening now. In the not too distant future, everyone will look back on this period and shake their heads, at both the disruption to our economy and many of our solutions to it. And when that day comes and today’s events can be seen with real clarity, we will all turn to each other and ask, “What were we thinking?”
Oh, well. There is at least one man today whose mind is already focused on where he will be standing many years from now. He has coolly witnessed the turmoil inflicted on our financial system and is dispassionately observing the panic that has overtaken us all in its wake. And, knowing that foolish decisions almost always follow emotional trauma, he alone is standing out front, gladly waiting to receive the fruits of the outrageous decisions we seem ready to make. He is Sergio Marchionne, the CEO of Fiat, and he is undoubtedly a genius without peer.
Encouraging Words
Consider if you will what is happening in the automobile industry today: A near catastrophic collapse in new car sales in most countries of the world. One might think that this signals consumers’ inability to purchase new cars, either for lack of a job or — as we have been told since last September — because they can’t get a loan for their transportation needs. But those issues are not really the problem. Many of the jobs lost were low paying jobs and therefore not new car buyers, for the rest, loans are readily available.
The Machinery Behind Health-Care ReformHow an Industry Lobby Scored a Swift, Unexpected Victory by Channeling Billions to Electronic Records
When President Obama won approval for his $787 billion stimulus package in February, large sections of the 407-page bill focused on a push for new technology that would not stimulate the economy for years.
The inclusion of as much as $36.5 billion in spending to create a nationwide network of electronic health records fulfilled one of Obama’s key campaign promises — to launch the reform of America’s costly health-care system.
But it was more than a political victory for the new administration. It also represented a triumph for an influential trade group whose members now stand to gain billions in taxpayer dollars.
A Washington Post review found that the trade group, the Healthcare Information and Management Systems Society, had worked closely with technology vendors, researchers and other allies in a sophisticated, decade-long campaign to shape public opinion and win over Washington’s political machinery.
Automation certainly makes sense, but we taxpayers should not be subsidizing it….
America’s Triple A Credit Rating at Risk
Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.
That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.
Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.
The US, despite the downturn, has the resources, expertise and resilience to restore its economy and meet its obligations. Moreover, many of the trillions of dollars recently funnelled into the financial system will hopefully rescue it and stimulate our economy.
What I Learned in My 16 Years on the Tax BeatWhat I Learned in My 16 Years on the Tax Beat
Nearly 40 years ago, as a recent college graduate, I made a painful discovery: I couldn’t figure out how to do my own federal income-tax return.
That was embarrassing, and it made me wonder what other Americans do. So I wrote my first major tax story: I asked five different tax-preparation services in the Atlanta area to prepare returns for a family of four with fairly typical finances. The results: At one extreme, a tax expert said the family was entitled to a federal income-tax refund of $652.04. But another said the family owed $141 — a difference of $793.04.
That experience made me feel somewhat less dumb, but the article didn’t have much impact: Since then, our tax system has evolved from a mess to a nightmare. The pace of change has accelerated in recent decades as lawmakers increasingly have tried to use tax laws to reward or punish conduct. The number of pages in the CCH Standard Federal Tax Reporter, which records tax law, regulations and related material, has soared to 70,320 from 26,300 in 1984.
More than 60% of all individual returns are signed by professional preparers, up from 46% in the mid-1980s. Joel Slemrod, an economics professor at the University of Michigan, estimates that the time and money individuals spend on tax compliance now comes to about $90 billion a year.
How Bailouts Can Butcher Capitlism
One unhappy hallmark of the Great Recession is a dramatic spike in financial distress. Moody’s predicts that the default rate on corporate debt–which helps foretell bankruptcies–will be three times higher this year than in 2008. Home foreclosures are already at record highs, and going higher. Defaults on credit cards and other consumer debt will crest right behind mortgages.
The Obama administration is on the case, bailing out banks and homeowners and aiding dozens of industries either directly, through a financial-rescue scheme that could top $2 trillion, or indirectly, through the $787 billion stimulus bill. Automakers, furniture companies, real estate developers, and even porn magnates have their hands out.
[See a tally of the bailout efforts so far.]
Those efforts ought to help soften a sharp recession. But the unprecedented aid to the private sector may also unleash new problems, the way antibiotics have generated stronger strains of bacteria. “There’s something fundamental about the need for failure,” says Syd Finkelstein, a professor at Dartmouth’s Tuck School of Business and author of Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You. “We’re tinkering with the genetic DNA of a capitalist society.”
The Quiet Coup
The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.
Fed & Treasury: Putting off Hard Choices with Easy Money (and Probable Chaos)
Brief remark – from early reports regarding the toxic assets plan, it appears that the Treasury envisions allowing private investors to bid for toxic mortgage securities, but only to put up about 7% of the purchase price, with the TARP matching that amount – the remainder being “non-recourse” financing from the Fed and FDIC. This essentially implies that the government would grant bidders a put option against 86% of whatever price is bid. This is not only an invitation for rampant moral hazard, as it would allow the financing of largely speculative and inefficently priced bids with the public bearing the cost of losses, but of much greater concern, it is a likely recipe for the insolvency of the Federal Deposit Insurance Corporation, and represents a major end-run around Congress by unelected bureaucrats.
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Last week, the Federal Reserve announced its intention to purchase a trillion dollars worth of Treasury debt by creating the little pieces of paper in your pocket that have “Federal Reserve Note” inscribed at the top. In effect, the Fed intends to monetize the Treasury debt in an amount that exceeds the entire pre-2008 monetary base of the United States.
Apparently, the Fed believes that absorbing part of the massively expanding government debt and maybe lowering long-term rates by a fraction of a percentage point will increase the capacity and incentive of the markets to purchase risky and toxic debt. Bernanke evidently believes that the choice between a default-free investment and one that is entirely open to principal loss comes down to a few basis points in interest. Even now, the expansion of federal spending as a fraction of GDP has clear inflationary implications looking a few years out, so any expectation that long-term Treasury yields will fall in response to the Fed’s buying must be coupled with the belief that investors will ignore those inflation risks.
The Political Class & Taxes, More
Oh-oh, looks like more tax troubles for another Democrat in Washington.
California’s Rep. Pete Stark, a senior House Democrat who helps write the nation’s tax laws, has been claiming a $1.7 million Maryland home as his principal residence in recent years, although he represents the Golden State’s 13th District on the east side of San Francisco Bay.
The 77-year-old Stark has saved himself nearly $3,900 in state and county taxes by claiming the six-acre waterfront estate as his principal residence, according to an investigation by Bloomberg News.
Maryland law allows the tax break only to those residences used “for the legal purposes of voting, obtaining a driver’s license, and filing income tax returns.”
Notified of the discovery, a state official said an investigation would be launched.
How Rich Countries Die
This is a book report on The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, by Mancur Olson. There isn’t a whole lot about how nations pulled themselves out of their medieval stagnation (see A Farewell to Alms for that), so a better title for this still-in-print book from 1982 would be “How Rich Countries Die.”
Table 1.1 shows annual rates of growth in per-capita GDP for each of three decades, the 1950s, 60s, and 70s, in a range of rich countries. Contrary to our perception of the U.S. as a growth dynamo and the Europeans as sclerotic, France and Germany tremendously outperformed the U.S., as did most of the other countries. If we have grown larger it is because our population has expanded much faster than the European countries.
Chapter 2 summarizes Olson’s groundbreaking work on how interest groups work to reduce a society’s efficiency and GDP. Some of this work seems obvious in retrospect and indeed Adam Smith noted that businessmen rarely met without conspiring against the public interest. There are a handful of automobile producers and millions of automobile consumers. It makes sense for an automobile company, acting individually, to lobby Congress for tariffs. The company will reap 20-40 percent of the benefits of the tariff. It doesn’t make sense for an individual consumer, however, to lobby Congress. It will cost him millions of dollars to lobby against Congress and preventing the tariff will save him only a few thousand dollars on his next car purchase. The economy suffers because some resources that would have been put to productive use are instead hanging around Washington and because cars are more expensive than they should be.