Yield Conundrum

Just a quick note, I was glancing over the monthly report from ContraryInvestor.com titled "The Last Asset Bubble?" and noticed some interesting questions being asked. Thus, I can only assume that at some point, we as society started to ask the wrong questions because we found out that the right questions (read: hard questions) were going to be pushed aside and I mean this on a wide scope, not just finance and economics. Well, I believe the folks at ContraryInvestor.com penned a very well written article that make the right points and ask the right questions.

Moreover, I should mention that I don't invest based on any of these points, some do used the flawed Fed Model, I don't.

They include:

"Now that supposedly AAA rated CDO's and SIV's are hitting the credit rating skids almost daily, we've got a lot of captital looking for anything retaining (at least for now) AAA status. So we certainly need to realize that a lot of what is happening along the Treasury curve these days is not completely reflective of and driven by forward US domestic economic prospects solely, but rather reflects the theme/unintended consequence of systemic credit market deleveraging, along with the heightened attraction of capital preservation for many of those either in or formerly in a good bit of distress."

"When it comes to the financial sector, and the banking crowd specifically, lowering nominal short term rates set against current yield curve dynamics does nothing but increase interest rate margin pressure in an already wildly competitive and overpopulated lending environment."

I agree and I would add that, the majority who believe the financial sector is going to just another "rough phase," look at the facts! For the financial complex to be healthy, they require a normal yield curve. Right now this is not the case.

"Is anyone asking why the 30-year and 10-year are at levels when the Fed Funds rate was 1%?"

I pretty much asked the above question based on the facts interpreted by contraryinvestor.com. Further, the Fed Funds Rate is currently at 3%, how is this supposed to make sense.


"For how long will yields in the 2% and low 3% range be attractive to foreign buyers? Has the foreign community looked at the numbers and started to ask the same questions we have in terms of just how much upside is left in Treasury bonds as investment vehicles from here?"

Why isn't anyone asking this question? How does this make sense?
"C'mon, buying Treasuries two years out at recent levels has nothing to do with fundamental investing or acknowledgment of basic economics. But it does have everything to do with the most basic of all human behavior and emotions - fear. Fear coupled with relative lack of AAA credit supply, or even the perception of lack of supply, can do very strange things to prices over very short spaces of time."

Interesting enough?

Again, just as an update on the only business I recommended that I thought represented an opportunity to be a part owner in ORH. Their bond portfolio for sure has profited as well as their CDS portfolio. ORH is pretty much a child of FFH run by the brilliant, yet humble Mr. Watsa.

Until next time, take care.

Disclosure: I am part owner of ORH and FFH.