DCG Financial Blog

The Japanese Converting to Shorter Term Bonds

dcgfinan — Sat, 08 Nov 2008 23:05:43 +0000

A report from Optibolt reads on Friday that the Japanese are buying US Bonds expiring in December and selling Bonds expiring in March.

This is a clear sign that some of the major banking parties in Japan are forecasting a further crash in the Bond markets in January of 2009.

Bonds Low in Range Attracting Hard Cash

dcgfinan — Fri, 18 Apr 2008 15:47:23 +0000

Bonds Have reached a low in the annual range today.

This has made the bonds more attractive to traders in Bonds and Currency.

This low in bonds has caused a major correction in Gold, the Euro and the Yen.

Oil and the S&P have maintained highs.

We have seen that the S&P as of lately is dependent on cash coming from the sale of bonds (low bonds) to maintain new highs. We have also seen that record oil prices have been supporting DOW and S&P companies involved in the Oil business either directly or through corporate finance.

What is unique about today is that the Euro and the Yen broke a trading range strong against the dollar and fell into a weak price range. Gold although at a new high when it went bear has reached some support going back over the last several weeks.

I would expect the gold to recover first from this bear run on the favored yen,eur,and gold.

I would expect that none of these favored assets will recover if the US Bond price stays low. The selling of bonds may be the market expression of the Federal Reserve bailout process. There was an announcement today that the Federal Reserve is limited in the degree to which it can bail out the US market. This announcement was made contemporaneously with what appears to be an attempt by institutions to sell bonds and maintain the US markets.

I believe the money coming from Gold, Japan and Europe has come to by the bonds at new lows, and that the money supporting the Market and Oil are coming from the sale of bonds.

If this is the case, if the bonds drop sharply again, it is likely the market will have an up day.I believe that this is an attempt by the Fed to break the trading range high that has been established in US equities over the last 70 days.

I don’t know how or when the fed will be exhausted but it will be exhausted.

In recent bond market crashes interest rates have skyrocketed while the risk of the nations bonds has increases. The bond markets crash and the currency loses its value as the currency is exchanged away from the sovereignty. In our case we have seen no interest rate hike because the nation is not in question. The market has taken the hits, and the buying of bonds by the population and the selling of bonds by the institutions has been the source of the capital to maintain the trading range of the last two months.

Bonds are now at a range low. This makes the bonds attractive to those who are not involved in bonds on a day to day basis. These are large banks and international movers, who wait for months to see prices that meet their criterion.

The Bond prices may continue to drop as the Fed sells them off to produce cash as part of its market stabilizing operations. This will temporarily keep the eur, yen and gold at bay while things are worked out internally. On the day following a run up in the bond prices the EUR JPY GOLD long term run will run on course to express our hyperinflation situation.

Continued bad economic indicators such as unemployment consumer confidence and foreclosures will virtually guarantee the hyperinflation scenario.

As for today I expect Oil and S&P may run up for a day while the EUR JPY will hold or take another hit. Gold will most likely recover because it is at a range low, although this pattern indicates it may also be subject to profit taking specifically for the purpose of buying low bonds. Gold today is a good case of technical versus tactical analysis coming into conflict. If I knew more about Gold in relationship to Bonds historically I could make a better statement about the next move in the Gold market and I might be able to resolve the technical versus tactical conflict.

Gary states that the interest rate on the two year note is having a major hike this month. This has caused a pullback in gold.

This compounds the weight of an analysis that Gold traders are moving into bonds. We now know that they are not only moving in to take a low price on 30 year but also to take advantage of a 2 year interest rate hike.

My wife states that the run on the EUR as she heard it from the news, was as follows.

“The dollars crashed two cents today while the euro stayed high.”

What is amazing about this sentence is that it can only be propaganda.

The value of a currency is always measured in relationship to another currency. Exchange rates are the values of currencies. So when the dollars is said to drop we must ask against what? When the euro stays high we must ask against what?

In my opinion there are several things going on here. The euro is a very highly politicized and popularized foreign currency. Due to all of the tax advantages and educational advantages more business will move to Europe. Money doesn’t always follow the business. The German Central Bank has a credit analyst who I had the pleasure of talking to one day. He showed me a study in United States debts in which he showed how safe Credit Cards and Mortgages are in the United States.

The joke is on him.

Benjamin Franklin

dcgfinan — Fri, 15 Feb 2008 17:11:34 +0000

Essay On Paper Currency, Proposing A New Method For Fixing Its Value

Franklin wrote of his plan for fixing the value of currency, then new to America. It helped him win a contract to print the Pennsylvania land bank notes, and laid the groundwork for the paper currency in use today.

To the Author of the General Magazine

It appears by the Resolutions of the Honourable the House of Commons of Great Britain, that it is their Opinion, that the Issuing Paper Currencies in the American Colonies hath been prejudicial to the Trade of Great Britain, by causing a Confusion in Dealings, and lessening of Credit in those Parts; and that there is Reason to apprehend, that some Measures will be fallen upon, to hinder or restrain any future Emissions of such Currencies, when those that are now extant shall be called in and sunk. But if any Scheme could be formed, for fixing and ascertaining the Value of Paper Bills of Credit, in all future Emissions, it may be presumed such Restraints will be taken off, as the Confusion complained of in Dealings would thereby be avoided. Something of this Kind is here attempted, in hopes that it may be improved into a useful Project. But I shall first set down a few plain Remarks touching the Fluctuation of Exchange, and the Observations on the Ballance of Trade; in order to render what follows the more clear and intelligible.

I. Even particular Man, that is concerned in Trade, whose Imports and Exports are not exactly equal, must either draw Bills of Exchange on other Countries, or buy Bills to send abroad to ballance his Accounts.

II. The Exports and Imports in any Colony, may be managed by different Hands, and the Number of those chiefly implored in the latter mar greatly exceed the Number of those implored in the Former. Hence it is evident there may sometimes be many Buyers and few Sellers of Bills of Exchange, even whilst the Exports may exceed in Value the Imports: And it is easy to conceive that in this Case, Exchange may rise.

III. The British Merchants, who trade to the Colonies, are often unacquainted with the Advantages that may be made building of Ships there, or by the Commodities of those Colonies carried to the West Indies, or to Foreign Markets: And for that Reason, frequently order all their Remittances in Bills of Exchange, tho’ less advantageous; which must encrease the Demand for Bills, and enhance the Price of them.

IV. A great Demand in Europe for any of the Commodities of the Colonies, and large Orders for those Commodities from the British Merchants to their Factors here, with Directions to draw for the Value, may occasion Exchange to fall for a Time, even tho’ the Imports should be greater than the Exports.

V. Hence it appears, that a sudden great Demand for Bills in the Colonies, may, at any time, advance the Exchange; and a sudden great Demand abroad for their Commodities may fall the Exchange.

VI. Gold and Silver will always rise and fall, very near in Proportion as Exchange rises and falls; being only wanted, in those Colonies that have a Paper Currency, for the same Use as Bills of Exchange, viz. for Remittances to England.

VII. When few People can Draw on England, or furnish those who want Remittances with Gold or Silver, Paper Currency may fall with respect to Sterling-Money and Gold and Silver,(by which the British Merchants always judge it) and yet keep up to its original Value in Respect to all other Things.

VIII. From all these Considerations, I think, it appears that the Rising or Falling of the Exchange can be no sure Rule for Discovering on which Side the Balance of Trade lies; because that Exchange may be affected by various Accidents independent thereof. But in order to determine this Point with more Certainty, it should be considered;

IX. That whatever is imported, must, first or last, be paid for in the Produce or Manufactures of the Country: If the Commodities exported in one Year be not sufficient to pay for what is imported, the Deficiency must be made up by exporting more in succeeding Years; otherwise the Colony becomes Debtor for so much as the Deficiency is; which at last must be discharged (if it is ever discharged) by their Lands.

X. If this has been the Case with any Colony; or if the Debt of the Colony to Great Britain has been increasing for several Years successively, it is a Demonstration that the Ballance of Trade is against them: But on the Contrary, if the Debt to Great Britain is lessening yearly, or not increasing, it is as evident, that the Ballance of Trade is not against them; notwithstanding the Currency of that Colony may be falling gradually all the while.

I shall now, proceed to the Scheme for fixing the Value of a Paper Currency, viz.

XI. Let it be supposed, that in some one of the Colonies the Sum of 110,000 in Bills of Credit was proposed to be struck, and all other Currencies to be called in and destroyed; and that 133l. 6s. 8d. in these Bills should be equivalent to 100l. Sterling; which likewise would make the said Bills equal to Foreign Coins, at the Rates settled by the Act of Parliament made in the Sixth Year of Queen ANNE. At which Rate, according to this Scheme, it may be as well settled as at any other.

XII. Let One Hundred Thousand Pounds be emitted on Loan, upon good Securities, either in Land or Plate, according to the Method used in Pennsylvania, the Borrowers to pay Five per Cent per Annum Interest, together with a Twentieth Part of the Principal, which would give the Government an Opportunity of sinking it by Degrees, if any Alteration in the Circumstances of the Province should make it necessary: But if no such Necessary appeared, so much of the Principal as should be paid in, might be re-emitted on the same Terms as before.

XIII. The other Ten Thousand Pounds to be laid out in such Commodities as should be most likely to yield a Profit at Foreign Markets, to be ship’d off on Account of the Colony, in order to raise a Fund or Bank in England: Which Sum, so laid out, would in two Years time, be returned into the Office again by the Interest Money.

XIV. The Trustees or Managers of this Bank to be impowered and directed to supply all Persons that should apply to them, with Bills of Exchange, to be drawn on the Colony’s Banker in London, at the aforesaid Rate of 133l. 6s. 8d. of the said Bills of Credit for 100l. Sterling. The Monies thus brought in , to be laid out again as before, and replaced in England in the said Bank with all convenient Speed: And as these provincial Bills would have, at least, as good a Credit as those of any private Person; every Man, who had occasion to draw, would, of Course, be obliged to dispose of his Bills at the same Rate.

XV. It is by Means of this Bank, that it is proposed to regulate the Rate of Exchange; and therefore it would be necessary to make it so large, or procure the Trustees such a Credit London, as should discourage and prevent any mischievous Combinations for draining it and rendering the Design useless I know of no Inconvenience that could arise by allotting double the proposed Sum for that Service, but that the annual Interest would be lessen’d; which in some Governments has been found a useful Engine for defraying the publick Expence. But if only a Credit should be thought needful, over and above the said Sum, and upon some Emergency Recourse should be had to it, the Interest Money would soon afford sufficient Means for answering that Credit.

XVI. The Trustees might further be impowered and directed, to take in Foreign Coins, at the Rates prescribed by the Act of Parliament, from those who wanted to change them for Paper Currency, and to exchange for those who wanted Gold and Silver. This, it is imagined, might reduce those Coins again to a Currency, which now are only bought and sold as a Commodity. Or, if it should be judged more advantageous to the Credit of the Paper Currency, Part of the Proceeds of what should be sent abroad, might be returned to the Province in Gold and Silver, for creating a Fund here.

XVII. I hope it will appear upon examining into the Circumstances of the Paper Money Colonies, by the Rule proposed above, that the Ballance of Trade has not been so much against them as is commonly imagined; but that the Fall of their Currencies, with Respect to Sterling, and to Gold and Silver, has been chiefly occasioned either by some such Accident as are above shewed to influence it; which by this Scheme will be all prevented: Or to their being issued without any good Foundation for supporting their Credit, such as a Land Security, and company. However that be, I think, there can be no room, upon our Plan, to fear, that the Credit of the Paper Currency can be injur’d, even though the Ballance of Trade were against the Colony, while their Bank in London can be duely supported.

From the sad Consequence of a losing Trade, viz. that of having th Property of the Lands transferr’d to another Country, it appears absolutely necessary for every Colony, that finds or suspects that to be its own Case, to think timely of all proper Means for preventing it; such as encouraging Iron Works, Ship Building, raising and manufacturing of Hemp and Flax, and all other Manufactures not prohibited by their Mother Country. They might likewise save considerable Sums, which are now sent to England, by setting up and establishing an Insurance Office. This, I think, might effectually be done by an Act of Assembly for impowering the Trustees of the Loan Office to subscribe all Policies that should be brought to them, on such Terms as should be settled by the said Trustees jointly with a Committee of Assembly, at a Meeting for that Purpose, once a Month, or oftener if necessary. Besides the saving to the Country in the Article of Trade, it would probably yield a considerable yearly Income towards the Support of Government; it being evident, that most prudent Insurers are great Gainers upon the Whole of their Insurances, after all Losses are deducted.

Upon the Execution of this Scheme, I am persuaded, two very great Advantages must accrue; First That the Export would be increased, and consequently bring the Ballance of Trade more in favor of the Province: And, Secondly, that the Rate of Exchange would be fixed and ascertained; which ’tis hoped, would effectually remove the Prejudices which the Merchants in England seem to have conceived against the Paper Currency in the Colonies.

The General Magazine, February, 1741