These market continue to go sideways although the numbers moving up and down don’t make it look that way. The economy is not doing well, it is stagnated and world events are causing concern to those who have taken the time to watch. There are a lot of problems in this world which might cause these markets to collapse quickly so one needs to be careful. Just another brick on the wall of worry.

Below is an long interesting article on the bond bubble. I cut some of it out but put the link if you want to read the whole article.

THE MYTH OF THE GREAT BOND “BUBBLE”
by Pragmatic Capitalism

Read complete article here:

http://pragcap.com/the-myth-of-the-great-bond-bubble

……There is ever increasing chatter of a bubble in the U.S. bond market. This idea of a bubble has become pervasive due to the myth that the U.S. government bond market can and will collapse under mounting fiscal burdens and the idea that bonds are “expensive” when compared to other assets.

Over the years investors have become increasingly concerned about the risk of sovereign default in the United States. China officially “hates” us. Alan Greenspan is frightened that the bond vigilantes are merely sleeping. Jeff Gundlach is worried that the United States is already insolvent. But are these concerns justified?

This brings us to a key question. What exactly is the U.S. government bond market? In a country with monetary sovereignty in a floating exchange rate system (USA & Japan, for instance) the bond market is really nothing more than a mechanism through which the central bank controls the money supply. It doesn’t actually fund anything as it does in Europe or under a gold standard. This is best understood by studying the bond auction data in the USA. Despite constant shrieking of a potential lack of buyers in government bonds over the years we continue to see incredibly high demand for US debt. The auctions are always oversubscribed. They never fail. Why is this? Why do the buyers keep coming back for more? The simple answer is because the government puts the buyers there. The auctions are designed not to fail. How is this you ask?

The government bond market is merely a monetary tool that the central bank utilizes to control the cost (or supply) of money by controlling the level of reserves in the system. So, when the government auctions bonds they are merely targeting reserves in the system. This action is mandated by Congress as an accounting tool and so is seen as a source of funding, however, in reality the Central Bank is merely draining reserves that the Treasury already spent into existence – reserves that were deposited at various banks (read this process in greater detail here). Therefore, it’s incorrect to argue that there won’t be buyers of U.S. bonds – with the banks earning 0.25% on their reserves and the government offering anything above that (depending on duration) the trade is a no-brainer for the banks who hold these reserves. The government is basically offering them free money and the Central Bank keeps control of the money supply in exchange (at least in theory). What is not occurring is some sort of funding mechanism. The Fed could care less if the auctions are 2X, 3X or 4X oversubscribed. They don’t get extra money when this occurs. They don’t get a gold coin that can then be spent. So long as they meet the 1:1 bid to cover the auction is a huge success because they drained their targeted reserves and convinced Congress that we aren’t going bankrupt.

Over the years the classic hyperinflationist or defaultista argument has been that China will stop buying our debt or that Japan will stop buying our debt. But the problem with this argument is that China is not our banker. Japan is not our banker. What do we care if they buy our bonds? They desire to net save with the U.S. and we happily send them pieces of paper with old dead white men on them to satisfy this desire. In recent months Chinese net holdings of U.S. debt declined:

“China’s ownership of US government debt has dropped to the lowest level in at least a year, Treasury data showed Monday, in a sign Beijing is increasingly keen to diversify out of US bonds.

The cash-rich Chinese government reduced its US Treasury bond holdings to 843.7 billion dollars in June, the lowest level since at least the same month last year, the Treasury said in a report on international capital flows.

The June data was lower than the 867.7 billion dollars in Treasury bonds held by the Chinese in May and 900.2 billion dollars in April.”

But U.S. treasury yields continue to plunge. The demand for this paper is enormous even though the largest holder of these bonds appears to be getting scared off. The demand is well beyond what the Fed even requires (as previously explained). While the Chinese fret about U.S. insolvency we’ll gladly keep sending them pieces of paper in exchange for real goods and services. If they desire to save less (which actually benefits their citizenry) then the United States will save more domestically (not all bad if you ask me). But ultimately, what they decide to do with those pieces of paper is their business and is not going to sink the U.S. economy.

Many of the arguments in favor of a bond bubble can be debunked by reviewing the hyperinflationist argument over time. For instance, in January of 2009 The Telegraph had a provocative piece titled “The bond bubble is an accident waiting to happen”. The author, Ambrose Evans-Pritchard, said the bond vigilantes were asleep and that China and Japan would soon stop funding the US need for debt:

“The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.

It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.”

The only thing that appears lazy in this whole argument (aside from the argument itself) is the bond vigilantes, who, 18 months after this piece was penned, just refuse to wake up! Unfortunately for Mr. Evans-Pritchard China has already begun reducing their holdings of treasuries and the bond yields have continued to tick lower. He went on to describe how Mr. Bernanke was about to be the cause of horrid inflation and how we weren’t at all similar to Japan:

“Investors have drawn a false parallel with Japan’s Lost Decade, when bond yields kept falling, forgetting that Tokyo waited seven years before resorting to the printing press. Mr Bernanke has no such inhibitions. He has hit the nuclear button in advance.”

Unfortunately, that nuclear option did not prove inflationary at all and we are looking more and more Japanese by the day. Although the Fed’s actions changed the composition of bank balance sheets and helped trigger a mean reverting move in some asset prices it has not caused even one iota of inflation. In fact, recent data shows that the private sector appears to be at serious risk of retrenching and could take prices down with it. In a de-leveraging cycle, the Fed has far less control over the money supply than many presume. Bernanke’s great monetarist gaffe was based on this idea that saving the banks would save the economy which would save the private sector. But that has been proven entirely false as Bernanke’s focus on saving the banks has actually translated into very little private sector good. Without a steep acceleration in borrowing I would argue that Mr. Bernanke has failed entirely. Hence, his frustrating battle with disinflation (and risk of deflation).

Some market participants have gone so far as to compare the U.S. bond market to the Nasdaq bubble. This is simply not a fair comparison. The Nasdaq declined 90% from peak to trough. If you buy a 10 year government bond and hold it to maturity you will receive your principle back in full in addition to the coupon payments. If inflation jumps from the currently low levels to 5% you will be sacrificing 2.5% per year in real terms. Certainly not a winning pick, but nowhere near what the apocalyptic results of the Nasdaq bubble were. To reinforce this point I would highly recommend reading this paper from Vanguard which nicely summarizes the risks of the current low rate environment:

“When evaluating the potential risks in the bond market, it is critical to remember exactly why bonds are an integral part of a well-thought-out asset allocation plan—to diversify the risk inherent in the equity markets. Simply put, while the fear of rising interest rates may be legitimate, a potential bear market in bonds is dramatically different from a bear market in stocks (or other risky assets). In fact, unlike stocks, where the common definition of a bear market is a 20% decline in prices, to most investors a bear market in bonds is simply a period of negative returns. And to date, the broad U.S. bond market has never experienced a –20% return. Indeed, it’s the magnitude of returns that is the key differentiator between bad periods for bonds versus stocks. For example, the worst 12-month return for U.S. bonds since 1926 was –9.2%, while the worst 12-month return for U.S. stocks was –67.6% (12 months ended
June 1932).

In another example, the worst calendar year for the broad bond market was 1994, when due to an unexpected upward shift in interest rates, the bond market returned –2.9% (in 1995, the bond market returned 18.5%). Contrast this to the experience of stock investors in 2008, when the Standard & Poor’s 500 Index lost more than –2.9% in 27 individual trading days.”

When it comes to this whole debate the most important factor is the mere reality of our economic plight. As we all know by now, we are currently confronted with the threat of deflation, 9.5% unemployment, 74.8% capacity utilization, falling home prices, durable goods orders that are more than 20% from their peak levels, rising unemployment claims, equity prices that are 30% from their peak and high historical private sector debt levels. When your options are 0% cash, unstable real estate and equity in what appears like a weak economy that 2.6% government bond doesn’t sound so bad. Perhaps not the best bet in the world, but irrational? Certainly not. As Vanguard says, when compared to the long-term growth potential of equities bonds currently look like a fairly good hedge.

So, you can see that it is not accurate to describe the U.S. government bond market as even remotely comparable to the “bubble” occurrences we have seen in other asset classes throughout history. Even at its worst “valuations” the U.S. government bond market has performed relatively well when compared to the well known “bubbles” of history.

In summary let us remember that a bubble (as it pertains to markets) is an irrational psychological market environment resulting in extreme disequilibrium and ultimately some form of systemic collapse. These characteristics are not currently attributable to the U.S government bond market. Given the economic environment (and potential outlook for equities) it is not irrational for investors to seek a very safe interest bearing asset in a time of high uncertainty and 0% interest rates. In addition, as shown in the examples above, it is highly improbable that the US government bond market will collapse as the market itself is designed solely as a monetary tool. Lastly, while bond investors might be susceptible to losses history shows that it is not accurate to imply that they are susceptible to a “collapse”. While a 10 year U.S. treasury at 2.6% might not be the world’s greatest bargain it’s entirely incorrect to argue that there is a “bubble” in government bonds. In fact, I would argue that the term is not even applicable.

This market is up big time today based on some made up reason by Wall Street. The truth is this market is going nowhere currently and therefore it is impossible to make money in it no matter which way you invest (up or down). So why bother unless you are a day trader or like to gamble. The numbers and events we are seeing are very strange and cannot be depended on to give you direction.

The Dow Jones 30 industrial stocks yield more than the 10 year treasury. That was a headline this morning…..
…… this is only the second time in history that the DOW yield has exceeded the yield on a 10 year treasury. The competition for invested dollars has always been between the safe U.S. treasury and the more risky stock market. Usually, that risk has always meant that the higher yield for the risky stock market the less risk you are taking when comparing the lack of risk in government bonds. Investors today are saying that buying growth is not important; they do not want risk. However, at what level is taking risk worth it? That is the issue. Since in over 100 years this is the second time this has happened it is hard to guess what it all means for the future. One thing seems certain: this inversion of yield will not stay this way. Either stocks will go up in price, treasury’s will go down in price (up in yield), or both. Stocks could go down as well which would push the yield on the DOW even higher in comparison to treasuries. That outcome means a fall into a Depression possible just not probable.

It would be nice if I could figure out which way this market was going. It is going sideways right now which to some indicate consolidation in preparation of a big move. But, which way is it going to move? It is hard to bet on either direction and that is exactly what you would be doing, betting, if you get into this market. Here is an interesting article:

Why the Market Will Keep Falling
by Mark Gomes–Seekingalpha.com

Economic indicators have been on the decline for several weeks now. However, it took until this week for investors to flee from equities. To understand why the market took so long to respond to the souring data you have to understand that a Catalyst is usually required for stocks to begin moving in unison with reality. You also have to understand that a Catalyst is the fourth, but most important, of four keys key to successfully timing a move in the market (or individual stocks for that matter):

1. Understand the environment–Observing what’s happening in your neighborhood can help, but it isn’t enough. You need a broad view of what’s going on with business and economics, in the U.S. and worldwide. Several objective sources can be found on the Internet.

2. Understand when the government and/or Fed will intervene and if the intervention will help–When the economy is in danger, the government and/or Fed will inevitably intervene to save the day. If you short the market and an intervention occurs the next day, you’re probably going to lose money.

In this case, my feeling has been that the government wouldn’t do much, because “stimulus” has become a dirty word with the public. With elections looming, nobody in Washington can afford to risk angering the electorate. Thus far, that has proven half-right. Unemployment benefits were on death’s door, but were eventually reinstated. That was a good way of pumping money into the economy without making too many people angry. In addition to this, the Fed has been making some minor moves of its own. This is also a savvy political move, because the public doesn’t generally associate the Fed with a political party.

The bottom line is that intervention remains possible. Keep in mind, almost any intervention will hurt the value of the dollar, but the government and Fed seem perfectly willing to sacrifice the dollar to keep GDP from falling (the definition of “recession”). Also keep in mind that a falling dollar almost always generates higher stock prices.

3. Understand if the market reflects reality–Most of the time, this is pretty easy. If reality looks bleak and the market hasn’t dropped, something has to give. Either stimulus is on the way or the market is due to roll over. In this case, the government and Fed have both made some moves (as I discussed above), but I don’t think it’s enough. Based on the market’s reaction over the past couple of days, investors seem to agree with my view.

4. Understand the Catalyst–The market doesn’t always respond to reality in real-time. In fact, experience has shown that it almost never does. Back in November of 1999, there were clear signs that the Internet bubble was bursting. Despite this, the market didn’t peak until March of 2000. If you shorted the market in November of 1999, you could have gone bankrupt–a harsh reward for being right about what was coming. Similarly, in May of 2007, it was clear to me that the real estate bubble was coming to an end. However, the market churned higher until October, some 5-months later.

Knowing what’s going to happen next is great, but knowing what will make investors act on that reality is what will make you rich.

Most recently, I published a SeekingAlpha article entitled “Which Way Is the Market Going Next?”. In that article, I wrote that the economy was starting to turn south again. I also stated my opinion that the market would start reflecting this reality “very soon”. Over the next week or so, the NASDAQ slid from 2,242 to 2,160…but almost as quickly rebounded, shooting above 2,300. Only in the past couple of days has the market fallen back below 2,242.

Assuming we are now in the midst of a correction, my call took a month to be proven correct. The reason my timing so far off was a misinterpretation of the Catalyst–the event(s) that would make investors believe (and more importantly, act on) my interpretation of reality. In this case, I felt that investors would simply see the writing on the wall and start selling stocks, despite what I felt was going to be a relatively healthy Q2 earnings season.

That was my mistake. As good earnings rolled in, investors ignored signs of a bleaker future in favor of reports of a brighter past. Then, as earnings season wound down, investors refocused on the economy, but believed that the Fed would come to the rescue at this week’s FOMC meeting.

It was a valid argument, but as it turns out, the Fed’s stated plan-of-action proved disappointing. Worse yet, with elections coming in November, the Fed is likely to honor its tradition of maintaining its status quo in the months leading to an election (for fear of being seen as politically biased).

With no more positive Catalysts upon which to cling, investors are left with no choice but to face reality. Thus, the Catalyst for a market decline was born.

In the coming weeks, I believe we’ll see more signs of economic degradation. With earnings season winding down and the Fed meeting behind us, positive Catalysts appear to be exhausted for now. Barring a surprise government or Fed intervention (unless, barring a full fledged crisis), the near-term Catalysts are likely to be negative, lighting the way to further stock market declines

The Hindenburg Omen has been around for years in technical analysis and here it presents itself again. I never know whether to belief this stuff or just consider it crazy. Another bad thing is I am getting a strong feeling I should start moving into this market by buying some large caps. When I start working on feelings instead of study I usually lose money. So, I will present the Hindenburg Omen here and let you make your own decision while I go out and look at some large caps to buy.

The Hindenburg Omen Has Arrived
www.zerohedge.com — 08/12/2010

Easily the most feared technical pattern in all of chartism (for the bullishly inclined) is the dreaded Hindenburg Omen. Those who know what it is, tend to have an atavistic reaction to its mere mention. Those who do not, can catch up on its implications courtesy of Wikipedia, but in a nutshell: “The Hindenburg Omen is a technical analysis that attempts to predict a forthcoming stock market crash. It is named after the Hindenburg disaster of May 6th 1937, during which the German zeppelin was destroyed in a sudden conflagration.” Granted, the Hindenburg Omen is not a guarantee of a crash, and the five criteria that must be met for a Hindenburg trigger typically need to reoccur within 36 days for reconfirmation. Yet the statistics are startling: “Looking back at historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77%, and usually takes place within the next forty-days.” The last Hindenburg Omen occurred during the lows of 2009. Today, we just had another (unconfirmed) Hindenburg Omen. It is time to batten down the hatches – something big is coming.

As a reminder, the 5 criteria of the Omen are as follows:

• That the daily number of NYSE new 52 Week Highs and the daily number of new 52 Week Lows must both be greater than 2.2 percent of total NYSE issues traded that day.
• That the smaller of these numbers is greater than or equal to 69 (68.772 is 2.2% of 3126). This is not a rule but more like a checksum. This condition is a function of the 2.2% of the total issues.
• That the NYSE 10 Week moving average is rising.
• That the McClellan Oscillator is negative on that same day.
• That new 52 Week Highs cannot be more than twice the new 52 Week Lows (however it is fine for new 52 Week Lows to be more than double new 52 Week Highs). This condition is absolutely mandatory.

Today, all five conditions were satisfied. June 2008 was another such reconfirmed event, and as Barron’s pointed out then, “there’s a 25% probability of a full-blown stock-market crash in the next 120 days. Caveat emptor.” Boy was the emptor caveating within 120 days (especially if said emptor was named Dick Fuld). Which brings us to the present: should the Omen be reconfirmed within 36 days, all bets are off.

These markets continue to flash with ups and downs but are going nowhere. The “bears” are crying the world is coming to an end and the “bulls” are saying this is the time to be buying. The government seems to be doing a good job of screwing up the economy by giving us no clear direction and borrowing big time. Below is an interesting article but clearly has a European view.

The economic fallacy of ‘zombie’ Japan
Paul Krugman and others have got Japan wrong: Americans should be so lucky as to get a Japanese-style lost decade
Steven Hill — Guardian.co.uk,

Japan has been getting a raw deal from the so-called economic experts. Consider this: in the midst of the great recession, the United States is suffering through nearly 10% unemployment, rising inequality and poverty, 47 million people without health insurance, declining retirement prospects for the middle class and a general increase in economic insecurity. Various European nations also are having their difficulties, and no one knows if China is the next bubble due to explode.

How, then, should we regard a country that has 5% unemployment, the lowest income inequality, healthcare for all its people and is one of the world’s leading exporters? This country also scores high on life expectancy, low on infant mortality, is at the top in numeracy and literacy, and is low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions, doing its part to reduce global warming. In all these categories, this particular country beats both the US and China by a country mile.

Doesn’t that sound like a country from which Americans and others might learn a thing or two about how to get out of the hole in which we’re stuck?

Not if that place is Japan. During and before the current economic crisis, few countries have been vilified as an economic basket case so much as Japan: it’s been hard to find any reference to the country without some mention of its allegedly sclerotic economy, its zombie banks, its deflation and slow economic growth. This malaise has even been called “Japan syndrome”, sounding like a disease to warn policymakers, as in “you don’t want to end up like Japan.”

No one has been more influential in defining this narrative than Nobel Prize-winning economist Paul Krugman. Throughout the 1990s, and still today, Krugman has skewered Japan’s economy and leaders. In the late 1990s, Krugman wrote a series of gloom-and-doom articles, complete with equations and titles like “Japan’s Trap” and “Setting Sun”, bluntly stating:

“The state of Japan is a scandal, an outrage, a reproach operating far below its productive capacity, simply because its consumers and investors do not spend enough.”
But let’s look at some of the Japanese metrics during that time. Throughout the 1990s, the Japanese unemployment rate was ready for this? about 3%, half the US unemployment rate at the time. During that allegedly “lost decade”, Japan also had universal healthcare, less inequality, the highest life expectancy, low infant mortality and low rates of crime and incarceration. Americans should be so lucky as to experience a Japanese-style lost decade.

Reopening the case of Japan raises some important questions. How do economists such as Krugman decide what to value and prioritise, or what to measure? What is an economy for? To produce the prosperity, security and services that people need? Or to satisfy economists and their equations, theories and models?

In the current debate over fiscal stimulus versus deficit reduction for economic recovery, various economists now are criticising Germany. Krugman has written that the Germans “seem to be getting their talking points from the collected speeches of Herbert Hoover”. Krugman, a stimulus hawk, is criticising Germany for the same thing for which he has criticised Japan – not spending, or consuming, enough to stimulate its economy.

Yet, in the early 1990s, when the US was plagued by large deficits and recession, the Clinton administration didn’t employ Krugman-type fiscal stimulus. Instead, it cut the deficit. By the end of the decade, the US budget showed a sizable surplus and the economy was booming.

Japan’s economy has been and remains successful. So is Germany’s. They have reached an economic steady state in which they don’t need roaring growth rates to provide for their people. But for the economic Cassandras, apparently, it doesn’t matter if people’s needs are being met; what matters is whether their theories and equations balance.

Unfortunately, there is a common sense aspect to this that gets lost amid the rhetoric. Two lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth in this age of global warming are severe. In other words, the real game is no longer strictly about economic growth; it’s about sustainability and learning to do more with less. The era of US-style trickle-down economies is over for wealthy countries because trickle-down is neither economically sound nor ecologically sustainable. The developed nations must lead the way towards a different path of development.

This is not an easy challenge, yet it is the course that Japan and Germany have chosen. Americans would be wise to learn from them. If the US didn’t have such a trickle-down economy that has produced so much inequality if it was, in fact, better at sharing its wealth perhaps it wouldn’t need so much fiscal stimulus and growth.

Below is the “bear view” of the markets. I kind of have to agree with it which means I am not an active trader right now. Now is the time brave traders venture into these markets and make the big money they will talk about all next year. But at the same time this is the time that many traders will get their heads handed to them. The smart move might be to just take a break from these markets. Which I am doing. I am waiting for a clear direction which may never come because the market is always climbing the wall of worry and there is never a clear direction.

Economic Uncertainties No Longer!
Sy Harding — Aug. 10, 2010 — businessinsider.com

Fed Chairman Bernanke can move on from his warning of a couple of months ago that there are “unusual uncertainties” in the economy. There may still be uncertainties in the stock market, but no longer in the economy! It is almost surely headed into a recessionary period again.

We’ve had the collapse of the housing industry since April when the home-buyer rebates expired, foreclosures running at an even faster pace this year than last year, and most recently pending home sales declining 2.6% in July, with the usually positive summer selling season drawing to a close. The homebuilder sentiment index, which had been improving last year and into May of this year, plunged in July to its lowest level of confidence since April of 2009.

With consumer spending accounting for 70% of the economy, we’ve seen a reversal that began in June, retailers reporting disappointing same store sales for July, and consumer confidence plunging in June, and most recently in July to its lowest level in nine months.
The ISM Mfg Index declined in June for the fourth straight month, while factory orders fell 1.2% in June. On Tuesday, the National Federation of Independent Business reported its index measuring the confidence of small business owners fell in July. The NFIB noted that nearly 75% of respondents said now is a bad time to expand their business, that small businesses see “sub-par growth in the second half of the year.”

These reports of important homebuilder, consumer, and business confidence plunging are not harbingers of hope for the second half.

And in spite of forecasts from early in the year that economic growth would slow this year, but not until the second half, there was the recent 2nd quarter GDP report that showed economic growth slowed to only 2.4% in the 2nd quarter, much slower than forecasts of 4% a few months ago, and 3% just weeks before the report was released.
Hopes have been moving forward to each next report, most recently to last Friday’s employment report. But it was also a dismal failure, showing an additional 131,000 jobs were lost in July, and only 71,000 new jobs were created in the private sector versus forecasts of 100,000, while the new private sector jobs previously reported for June were revised down sharply from 81,000 to only 31,000.

There was hope that China’s strong economy would provide a boost to U.S. exports and help soften the second half slowdown.

That hope was shot down Monday night with the report that China’s trade surplus spiked up in July to its highest level in a year and a half, mostly as a result of a sharp decline in import growth. The country’s trade surplus jumped to $28.7 billion in July from $20.2 in June, much higher than the consensus forecast of a decline to $19.6 billion. And imports rose only 22.7%, slowed significantly from the increase of 34.1% in June, and well below the forecast that they would increase 30.2%. The much slower spending on imports is another sign that China’s economy is slowing faster than expected, and is not good news for other countries, including the U.S., hoping to export more goods to China.

The ongoing downpour of bad news for the U.S. economy just won’t take a rest. On Tuesday morning it was reported that business productivity in the U.S. dropped at an annualized rate of minus 0.9% in the 2nd quarter, the first decline since the fourth quarter of 2008, when that recession was just getting underway.

It seems clear that the uncertainties that began developing in the 2nd quarter have worsened and become certainty; that the economy is slowing sooner and faster than forecasts, with few hooks remaining to hang hopes on that it can avoid dipping into a recessionary period for a quarter or two.

All one has to do is look at this video to realize that business is uncertain what Washington is going to do next and therefore are making no expansion plans here in the U.S. This means no hiring which means high unemployment. You can figure out the impact on the markets on your own.