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http://www.nytimes.com/reuters/business/business-markets-yen.html

I think this is, like, big news, with, like, big implications for bond market, but damned if I know what.
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Loki:

Japan has 2 types of US$ buying going on.

1. They have a trade surplus with us (as does most of the world). That means they have a lot of US$'s sitting around every day. They take these US$ and buy treasuries, GSE debt, etc. This helps prop up the prices of bonds, keeping yields low.

2. Japan also intervenes in the FOREX markets to weaken the Yen and drive up the US$. They do this to keep Japanese goods attractive to US buyers (this is important because Japan is an export driven economy). To intervene, they sell Yen to buy US$'s. This drives up the US$ and drives the Yen down maintaining the range they want. This leaves Japan again with lots of US$ lying around. They use these US$'s to buy treasuries and GSE debt again. This has the same effect as the buying done to offset their trade surplus.

Therefore, they are saying they will stop buying US$'s as FOREX intervention which means they now need to buy less treasuries. Less buyers = lower prices = higher yields.

Personally I don't buy it. They say they will still intervene when they see excess volatility. To me that means they will continue to support the US$.


Splotto

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Splotto,

I actually did kid of know that, but thanks for the detailed lesson anyway.

Japan, like the US, is in a bind. It can't really keep US interest rates artifically low and dollar high indefinitely, but if it stops, US interest rates go up and import prices go up (and inflation in US), squashing Japan's export economy, not to mention US economy, as higher interest rates destroy housing market, etc.

As your pessimist gurus say, at some point the piper must get paid. I'm still not really sure whether it's deflation or inflation or stagflation or stagdeflation (courtesy Kent), but in some way US consumers will not be able to live as high off the hog on borrowed time and money.
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Japan, like the US, is in a bind. It can't really keep US interest rates artifically low and dollar high indefinitely, but if it stops, US interest rates go up and import prices go up (and inflation in US), squashing Japan's export economy, not to mention US economy, as higher interest rates destroy housing market, etc.

As your pessimist gurus say, at some point the piper must get paid. I'm still not really sure whether it's deflation or inflation or stagflation or stagdeflation (courtesy Kent), but in some way US consumers will not be able to live as high off the hog on borrowed time and money.


Rather then spend all that money debasing the Yen to try to keep exports going, Japan would have done better over the last 2 years to spend the money by giving everyone in Japan certificates for free Japanese made goods. They would have had the same effect.

Also, the US$ has a LONG way to fall before our products could compete here with those from Japan. I think Americans would have been a little fed up with $4 gas long before the Japanese goods surpassed ours in price.

Splotto
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What "he", or "me", or what both of us said.....

I'm still not really sure whether it's deflation or inflation or stagflation or stag-deflation (courtesy Kent), but in some way US consumers will not be able to live as high off the hog on borrowed time and money.

Lokicious


In any event....could be the "worst of both worlds"....a-coming.

KBM (aka the Bond Bear)
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Hey Kent,

Did you hear they just announced closing of big car visor plant in Holland, MI: home base of Calvinism?
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Humm, no didn't "see that", but not surprized. Prob. one of the old Prince Mfg units that supplied GM, IIRC?

Yeah, Holland was the home of the "Calvanists", who couldn't tolerate the "open society" of Grand Rapids....<grin>

Strangely now, 20 years after I left that part of the world, Holland has a very mixed population now with a large minority of Mexican "legal" residents. Seems Holland went the way of Grand Rapids afterall........<grin>

Still stay in touch with friends there, after all these years, and they complain about it constantly. Seems the Tex-Mex folks are "taking the good jobs" in the area, at lower wage levels of course.......;o) And while furniture is still the largest local employment manufacturing sector, automotive is quickly catching up to it, throughout W MI.

The more things change, the more they stay the same.

Glad I left. Much "calmer", saner place, i.e. Richmond, and a damn sight more beautiful, then most any other State I've ever worked in.

KBM (A "Right Coaster", by the Grace of God)

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Thanks to all the regular contributors. I became convinced that very
rough times are ahead. I just sold 16 rungs(2010 - 2025) of my 22-year
Munis ladder, which I painstakingly built over last 12 years. Now, I
hold over 50% of my networth in cash, and have to find safe abode for
this cash. Preservation of Capital is the First and Second consideration
Third is income. Any suggestions will be greatly welcome.

sangalsk
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Is it correct to assume that you sold because you think you may need the principal prior to 2010, 2011, etc.?
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Missash,
It is not true. The reason for liquidation was my views
and outlook on interest rate to be that of Splotto and company. I don't
know any way of buying an insurance against a potential large, slowly
occuring increse in interest rates. In my humble opinion,
RYJUX or RRPIX are good trading vehicles, but can't be used as a hedge.

Half of the proceeds are planned to be put in safe, very short-term instruments. Any suggestions?
For the other half, I am considering three funds, HSTRX, HSGFX and PCRIX. These have been all mentioned on this Board.

Thanks SPLOTTO, LOKICIOUS, MISSASH, BRUCE and others.

sangalsk

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Sang:

You are right in line with Dr. Gordon:

http://www.financialsense.com/editorials/gordon/2004/0329.html

Splotto
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sangalsk......if you were not planning on trading the munis, what do you care what the price does between now and maturity. You'll collect the coupon and get your principal back at maturity. Are you concerned that the issuers will go belly up in the interim?
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missash, short answer is may be! Let me elaborate a bit.
I believed this part of my Portfolio to be rock solid, except for
interest rate risk (each issue was AAA, insured).Now, I don't know, but
the probability of some defaults, and insurer failing does not appear to be zero, or even close to zero.
Normally, I wait for evidence to start unfolding, before I take action.
In this case, waiting could be disastrous, because price would go down
significantly due to interest rate rise, and widening of spreads in
this low-liquidity market, before major deterioration in the first failing issue would start.
With a heavy heart, I asked two different companies to bid me one
bottom-line price for all the 25 securities (maturing 2010-2025) as a
package, accepted the higher bid. The deal was finalized on phone. Faxed
them securities transfer papers.

Now,the more difficult issue for me is to decide on SAFE good investments to put the proceeds (about 50% of our total portfolio)!
.
I have been reading Dr Gordon, ever since he was mentioned a month or so ago by you, I believe, and learnt about Permanent Portfolio Fund.
Other funds he mentions, I have already read about them. I certainly
would be putting some of the money into these funds. Incidentally,
he was kind enough to comment on my holding 65% of my Port in MUNIs.
He just wrote one word, "incomprehensible"! That helped me to act on
my decision immediately.

Any other ideas for temporary abode for the money to be ultimately ,put into SAFE, Long-Term investments, yielding 5+ percent instruments?

Thanks to the authors on this Board for my CONTINUED EDUCATION. You
are great.

Kind regards,
sangalsk





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"Any other ideas for temporary abode for the money to be ultimately ,put into SAFE, Long-Term investments, yielding 5+ percent instruments?"

Sorry, but my answer would be: not bloody likely.

Think of it this way: you just cashed in bonds that had good yields for a capital gain (I presume). When a bond fund does this, they are locking in gains that essentially substitute for the higher yields they were getting. If they then reinvest in lower yielding bonds with lower interest rate risk, the total return is still going to be greater (if interest rates go up) than if they had sat pat. This is what you just did.

In this low rate environment, you simply are not going to find "safe" yields of 5%, unless you go with some very long corporates (and hw safe are those really?). Your best bet is to ladder, either CDs, treasuries, TIPs or a combination. If you can figure out a ladder with an average of 5 year maturities (you'd need treasuries or TIPs) you can probably get about 3.5%; a little less with a 6 months to 5 year CD ladder. Then roll over to longer maturities as the short maturities come due. If rates go up, you'll catch that any maybe get your 5% over time. But there's nothing safe with 5% now. If you find anything, plase, please, let me know, but believe me, I've looked high and low and have been settling for 4% 5-year CDs as the least of the evils.
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Sorry, but my answer would be: not bloody likely.

Think of it this way: you just cashed in bonds that had good yields for a capital gain (I presume). When a bond fund does this, they are locking in gains that essentially substitute for the higher yields they were getting. If they then reinvest in lower yielding bonds with lower interest rate risk, the total return is still going to be greater (if interest rates go up) than if they had sat pat. This is what you just did.

In this low rate environment, you simply are not going to find "safe" yields of 5%, unless you go with some very long corporates (and hw safe are those really?). Your best bet is to ladder, either CDs, treasuries, TIPs or a combination. If you can figure out a ladder with an average of 5 year maturities (you'd need treasuries or TIPs) you can probably get about 3.5%; a little less with a 6 months to 5 year CD ladder. Then roll over to longer maturities as the short maturities come due. If rates go up, you'll catch that any maybe get your 5% over time. But there's nothing safe with 5% now. If you find anything, plase, please, let me know, but believe me, I've looked high and low and have been settling for 4% 5-year CDs as the least of the evils.


If these are taxable funds, then you could start looking at holding individual muni's from your own state. It is certainly a way to maximize your income.

Splotto
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For the life of me I can't understand why you did what you did, especially if they were AAA and perhaps even some of them were "insured". For income, I've been using Reits. Bought many of them at 10% yields a few years ago. Average Reit yield is now down to about 6% because of price appreciation (>30% last year). Reits are generally overvalued presently (see excellent article in this week's Barrons), but you could consider dollar cost averaging a percentage of your muni proceeds, or wait for a long overdue selloff.
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Lokicous, I apologize for poorly framing my request. I am looking for
"temporary abode" for that part of this cash, which I don't want to invest in any equity type, and later invest in 5% treasuries. In the
interim, whatever best I can get, as long as the principal is secure.
Locally, MMA is paying better than CDs, upto 3-years. I have not investigated TIPS yet
Thanks for the ideas.
Kind Regards,
sangalsk
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Lockicious/Splotto/everyone,

I wonder what about the 5 year CDs offered by Pentagon Federal Credit Union ( www.penfed.org ) , at APR of 4.88%, but I believe it is not FDIC insured. Is this a cause for worry.

I haven't invested any money in CDs yet, but wondering what your views are on this particular offer. For good/bad my money is sitting in ING direct earning 2%

tia...
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