Highlights of the Week of; September 2, 2013


220px-Ben_Bernanke_official_portraitimagesEuropean Central Bank To Leave Interest Rates Unchanged

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of September 2nd, 2013:

  • Rising Treasury bond-yield, in Europe and the United States of America
  • Disappointing USA Job report of, Friday September 6th 2013.

Rising Treasury bond-yield in Europe:
The shifting mentality about the European Union’s economic growth is being felt acutely in spiking bond yields, of those European nations that aren’t financially stressed, after data indicate the continent may finally be emerging from its recession.

European government bonds on Thursday September 5th dropped, sending German 10-year yields to the highest in 17 months, as the European Central Bank kept the benchmark interest rate at a record-low 0.5 percent amid signs global growth is stabilizing.

German two-year note yields climbed the most in two weeks, even after ECB President Mario Draghi said on Thursday September 6th, the interest rates will remain low. Germany’s 10-year bond yield rose 10 basis points, or 0.1 percentage point, to 2.04 percent, at the close of the market in Europe at 4:30 pm London time, after reaching 2.05 percent earlier in the day , the highest since March 21, 2012.

As can be seen from below chart the 10-year German note, closed the week yielding 1.95 percent.

German 10-year bond, 1 year chart

Austrian, Finnish, and Dutch 10-year yields also reached the highest in more than a year as France’s borrowing costs rose at an auction, on Thursday, September 5th, the most since President Francois Hollande was elected.

France’s 10-year yield increased as much as 11 basis points to 2.64 percent, the highest since July 2, 2012, to close the week on 2.55 percent, as can be seen from below chart.

France 10-year Bond 1-year chart

The rate on similar-maturity Austrian bonds gained as much as 11 basis points to 2.47 percent and the yield of the Dutch 10-year note reached 2.47 percent on Thursday.

Spain’s 10-year yield rose 10 basis points to 4.61 percent, while the rate on similar-maturity Italian bonds increased 12 basis points to 4.54 percent.

Swedish 10-year bond yield reached 2.75 percent on Thursday, the highest since July 2011, and climbed to as much as 140 basis points more than the rate on the two-year note, the widest spread since February 2011.

Please see below 1-year chart the 10-year Swedish Note

Swedish 10 year bond yield

Treasury bond-yield in the USA rising to almost 3 percent:
The yield on the bellwether 10-year Treasury note touched 3 percent on Thursday in intraday trading for the first time since July 25, 2011, to close the week on 2.938 percent as can be seen from below 5-day chart of the USA 10-year note.

5 day chart USA 10-year note

The punishing sell off in the U.S. Treasury market has taken a surprising turn, with yields on shorter maturities getting swept higher at a startling pace. The rise defies a widely held view that they would remain anchored at historic lows by the Federal Reserve’s pledge to keep a lid on short-term rates.

Disappointing USA Job report of, Friday September 6th 2013:
The Labor Department’s snapshot of the job market in August had several discouraging details underneath a relatively mundane headline number, which showed the economy added an estimated 169,000 jobs.

The dominant story about the job market is no longer the country’s 11.3 million unemployed people or the painfully slow pace of hiring. It’s the growing portion of the working-age population that has dropped out of the labor force and isn’t even looking for a job, which fell to its lowest level since 1978, as can be seen from below chart.

USA Labor force participlation rate

At the same time, earlier estimates of job growth in July and June were revised sharply downward, and hiring over the summer months was largely driven by low-wage sectors like retail, food services and health care.

PGM Capital comments:
Bonds are long-term IOUs, and yields rise when the economy gains steam, reflecting the increased demand for loans. Higher yields are good for savers and for people, such as retirees, who use investment income to augment pensions and Social Security.

The spike in the 10-year Treasury yield since May this year of almost all mayor industrial country in the West is alarming but shouldn’t be surprising. Investors know that the printing press of Central Banks in Europe, USA and Japan, will lead to an economic improvement, combined with higher inflation.

As a consequence of this, Investors know that the day will come when the economies will have recovered enough and the inflation has gained momentum, for the Central Banks to normalize their policies. Yields in that environment will go higher and bond prices will drop, which will be more than a bit disturbing for income-focused investors. This is the reason why investors now pro-actively have start dumping their Government bonds, with rising bond yields as a consequence.

Investors should be careful not to fall into the trap of thinking the 3 percent yield now available on the US-Treasury bond represents a buying opportunity, we believe that the bond-market is in a Hugh bubble and that we are just in the beginning of a massive sell-off of the bond market.

History shows, that the bonds of many companies, municipalities and foreign governments became wallpaper during the Great Depression as their issuers went bankrupt and defaulted. Even AAA bonds temporarily fell in value during the Great Depression.

We believe that the financial lessons from the Great Depression have significance NOW.

It is also worth mentioning that, around the summer of 2008, the Fed began expanding its balance sheet at a historically rapid rate. People speak of the Fed “buying” assets; but it can’t buy assets, because it produces nothing of value with which to trade. Thanks to a monopoly privilege conferred upon it by Congress, the Fed is allowed to manufacture new banknotes and swap them for primarily U.S. government bonds, in order to keep the interest rate down.

This process inflates the supply of dollars. By inflating, the Fed steals stored effort from others and transfers it to the issuer of the bonds for which the Fed swaps its new dollars.

The Fed has been inflating the supply of dollars at a stunning 33 percent annual rate over the past five years as can be seen from below chart.

FED Balance Sheet

Sooner or later this created money will come into the USA Economy,  which is the main reason, why investors are expecting runaway inflation and are buying Gold and Silver as a protection.

The fact that prices of Gold and Silver didn’t sell off, last week, despite the fact that most (Technical) analyst were predicting a big round of profit taking in this precious metals, can be considered very bullish for the future price of these precious metals.

Regarding the USA-Job report of last Friday, below video blog of the CEO of Euro Pacific Capital, Mr. Peter Schiff, sustain our view on this matter.

As can be seen from below chart, the number of people not in the labor force  increased to record 90 million Americans who are no longer even looking for work.

USA Labor Force Participation

And even worse, the labor force participation rate plunged from an already abysmal 63.5 percent  to 63.3 percent

– the lowest since 1979! –

But at least it helped with the now painfully grotesque propaganda that the US unemployment rate is “improving.”

If you agree with the above it is advisable to reduce your exposure to “Fixed Income Securities”, and to add Precious metals, their miners and some leverage (2x-, 3x Bull ETF) Gold, Silver and miners ETF, to your portfolio.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Gold, Silver and other precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Yours Sincerely

Eric Panneflek

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