PIMCO's Bill Gross on Treasury Yields at the Zero-Bound, Deleveraging Cycle

Bill Gross, co-founder of PIMCO and manager of the $244 billion PIMCO Total Return Fund, wrote in his February Investment Outlook ("Life - and Death Proposition") that the Fed's extended zero percent interest rate policy and short and intermediate-term Treasury yields at the zero-bound could have unintended consequences. The last paragraph pretty much sums up his growth outlook.

"Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.

Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time."

Source: PIMCO 

Congressional Budget Office Sees Big Decline In Budget Deficit/GDP Between 2012-2022 (Slides)

Source: CBO.gov
A few days ago the Congressional Budget Office (CBO) released its budget and economic projections for the years 2012-2022 (pdf). I embedded the slides after the jump. The blog Pragmatic Capitalism has an interesting post on the release: "CBO: Budget Deficit To Drop “Markedly”, Threatens Economic Stability Stability." Under CBO's baseline scenario, unemployment falls, the budget deficit as a percentage of GDP declines, interest rates rise steadily, inflation stays under control, labor income rises to GDI (gross domestic income), net business fixed investment rises, and residential housing investment remains weak with the number of vacancies. Under their alternative scenario, however, they see the budget deficit/GDP percentage declining less than expected for a number of reasons.

Poland Gives Green Light to Massive Fracking Efforts - Guest Post

Guest post John C.K. Daly of OilPrice.com

Poland Gives Green Light to Massive Fracking Efforts

There is perhaps no more controversial energy source after nuclear than "hydraulic fracturing," or "fracking," of subterranean shale deposits containing pockets of natural gas.

Video: Flying Nano Quadrotor Robots Moving In Formation!

This is a must see video. Watch flying "nano quadrotor" robots swarming around a room and moving in formation. They are like the robots in the movie Batteries Not Included. They were developed at the University of Pennsylvania's General Robotics, Automation, Sensing and Perception (GRASP) Laboratory. I found the video originally on Slashdot.

Watch Bloomberg TV Live

Watch Bloomberg TV that streams live on Bloomberg.com (or specifically Bloomberg.tv).

Applying Fibonacci to Stock Market Patterns - Guest Post by Elliott Wave International

Guest post by Elliott Wave International (I'm an affiliate partner as well)

Applying Fibonacci to Stock Market Patterns
It's easier than you might think!
February 1, 2012

By Elliott Wave International

Patterns are everywhere. We see them in the ebb and flow of the tide, the petals of a flower, or the shape of a seashell. If we look closely, we can see patterns in almost everything around us. The price movements of financial markets are also patterned, and Elliott wave analysis gives you the tools to interpret those patterns.

The Fibonacci sequence is vital to Elliott wave analysis -- as a matter of fact, R.N. Elliott wrote that the Fibonacci sequence provides the mathematical basis of the Wave Principle. Once you understand the Fibonacci sequence, it's easy to apply it to the markets you trade.

Watching German Bund Yields, BUNL (Bund Future ETN), EUR/USD (2/1/2012)

German government bonds (bunds) and the euro will be interesting to watch as Greece either makes a deal with Greek bond holders to take a 70% loss to reduce its debt load by 100 billion euros, which would allow the next rescue loan from the EU (mainly Germany) and International Monetary Fund (AP), or sees a disorderly default. To make things even more interesting, the European Central Bank "is planning a second round of three-year bank loans next month (LTRO), after lending 489 billion euros ($645 billion) in December" (BusinessWeek), to add more emergency liquidity to the banking system and for banks to buy distressed sovereign debt like a carry trade. Portugal is getting hit as well. On early Monday morning, Portuguese bond yields, its spreads to German bunds, and 5-year CDS rose to new highs.

Tom DeMark mentioned last week on Bloomberg TV that German bunds were exhausted to the upside and could collapse if a signal was triggered. German bunds moved up since then (yields down), but they could be setting up again. Bund bears are fighting a strong uptrend. Egan-Jones downgraded Germany's credit rating from AA to AA- on January 18. Sean Egan, co-founder of Egan-Jones, told CNBC's Fast Money and Fox Business that they downgraded Germany because its debt/gdp ratio was rising, and it will have to "absorb the cost" of supporting other eurozone countries on the brink (Greece, Portugal) through bailout funds (EFSF etc.). But, Egan mentioned that German bond yields would stay down in the short-term because it remains the safest credit in the eurozone during the sovereign debt crisis, and the ECB is pumping liquidity into the system to keep rates down (as mentioned above). It's similar to why U.S. Treasury bonds rallied after they were downgraded by S&P. Below are charts of 5 and 10-year German bund yields, BUNL (the German Bund Futures ETN), and EUR/USD. EUR/USD is trying to climb back above the recent uptrend line. It is currently at 1.31734, +0.79%.

DeMark Still Thinks S&P Tops at 1338-1342, With Perhaps An Intraday Spike to 1375

UPDATE: Tom DeMark told Bloomberg TV's Adam Johnson yesterday that the S&P will still top out between 1338 and 1342 (closing prices), with perhaps an intraday spike to 1375. DeMark said the long-term trend is "recycling". I blogged about DeMark's previous Bloomberg appearance here. The S&P 500 hit an intraday high of 1,333 last Wednesday, which is where the 2007 downtrend hits, but pulled back to 1,312 today. As noted on my previous post, there are still two more uptrend lines to break to confirm further downside ahead, in my opinion. DeMark created the DeMark Indicators, which traders use to measure market exhaustion. I've been following what DeMark's been saying in the media since January 2011, and he's been mostly right on his major market calls.

10-Year Portuguese-German Yield Spread Spikes to 14.51 (New High), 10-year Yield at 16.45% (Charts)

The 10-year Portuguese/German yield spread is up 8.56% right now at 14.51! This is a new high it looks like. The spread measures Portugal's credit risk to Germany, since Germany is the safest sovereign credit in the eurozone. Look at the 1-year chart below of the spread. It is going parabolic! The 10-year Portuguese government bond yield is hitting a new high as well, up 8.1% at 16.45%. And last but not least, Portugal's credit default swaps hit a new high. Is there a bailout or default event coming?

EUR/USD Lower Ahead of Greek Debt Talks, EU Summit (Market Links)

While waiting for news on the Greek debt deal and EU summit, here are some headlines in the meantime and a chart of EUR/USD at 1.317 (-.05%). Look at the perfect uptrends in the descending channel. The March E-mini S&P future is at 1305.5 (-0.53%).

Goldman's Tom Stolper Conducts Sunday Hitfest On The USD (1/29/2012, Zero Hedge)

Cutting Into Muscle - The Record Corporate Margin Juggernaut Has Just Rolled Over (1/28/2012, Zero Hedge)

Bubble Watching: Hainan Edition (looking at the property bubble in China) (1/30/2012, Also Sprach Analyst)

China Signals Limited Loosening as PBOC Bucks Forecast (1/29/2012, Bloomberg)

Hedge Funds Lift Bets to Two-Month High as Rally Accelerates: Commodities (1/29/2012, Bloomberg)

ROBERT SHILLER: A Housing Bottom? What Are They Thinking? (interviewed by Henry Blodget at Davos, Business Insider)

Recession Scares DoubleLine's Gundlach More Than Rising Rates (1/24/2012, Forbes)

Global Oil Production Update: A Strange Future Has Arrived (1/29/2012, Gregor.us)