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Published by: richardck50 on Dec 14, 2010
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Unintended Consequences
 1 12/11/10
Ten-Year Yields Are RisingAn Uptick in Consumer Credit? Not!Some Thoughts for BenNew York, Cabo, and WinnipegBy John Mauldin
Correct me if I’m wrong, but I seem to remember that one of the reasons for QE2 was to lower rates on the longer end of the US yield curve. Clearly, that has nothappened? Today we look at come of the unintended consequences of monetary policy, turn our eyes briefly to consumer debt, and wonder about deflating incomes.There are a lot of very interesting things to cover. (This letter will print long, but thereare a lot of graphs. Usual amount of copy.)But first, the are some changes and upgrades being made to the database thathouses the list of my 1.5 million closest friends. That means that some of you will bereading this on the website this week, rather than having the letter sent directly to you.If this letter doesn’t show up for some reason, you can always go towww.2000wave.comand get it directly from the website. We should be back on track  by next week. Sorry for any inconvenience.Second, long-time readers know I have an avid interest in biotech. I am also aserial entrepreneur on the lookout for business opportunities. Some have beensuccessful and others have been learning experiences. On the biotech front, Ifrequently talk and meet with CEOs and scientists in the biotech space. In this processI have come across what I think is an amazing new product. I have personally beenusing it and love it! I bought the marketing rights. Next week I will introduce you toit. We are rushing to get the material ready before Christmas, and production effortson the websites are not up to my normal standards. But since it only goes to myclosest friends, I trust you will cut me some slack. And it is an amazing product. Morenext week.You can be the judge as to whether I should have jumped at yet another opportunity. But rest assured, gentle reader, that my primary focus is on writing toyou every Friday, and it always will be. That is what I love to do and what Iseemingly do best. Now, into the letter.
Ten-Year Yields Are Rising
Look at the chart below. The yield on ten-year US bonds has been rising sincethe beginning of QE2. But it is not just US bonds; European and UK bonds aremoving up as well. This has also meant that mortgage rates in the US are up almost ahalf percent in the last few months. That certainly has not helped housing prices or sales, as it makes housing less affordable. (Chart from my friends at VariantPerception.)
Unintended Consequences
 2 12/11/10
10y Govt Bond Yields
     A    p    r   -     0     9     M    a    y   -     0     9     J    u    n   -     0     9     J    u     l   -     0     9     A    u    g   -     0     9     S    e    p   -     0     9     O    c     t   -     0     9     N    o    v   -     0     9     D    e    c   -     0     9     J    a    n   -     1     0     F    e     b   -     1     0     M    a    r   -     1     0     A    p    r   -     1     0     M    a    y   -     1     0     J    u    n   -     1     0     J    u     l   -     1     0     A    u    g   -     1     0     S    e    p   -     1     0     O    c     t   -     1     0     N    o    v   -     1     0
US Europe UK
 But it is not just the US and UK. Look at what is happening to German bonds,supposedly the safest in Europe. They are up about as much as their counterparts.(Chart from Cowen International and data from Bloomberg.)And then we look at Japan and we see the same phenomenon. Japanese realrates going up? Really? What is up with that?
Unintended Consequences
 3 12/11/10In Europe it is now cheaper to hedge against corporate default than sovereigndefault. That is not the way it is supposed to be.
Companies vs Sovereigns CDSs
     M    a    y   -     1     0     M    a    y   -     1     0     J    u    n   -     1     0     J    u    n   -     1     0     J    u     l   -     1     0     J    u     l   -     1     0     A    u    g   -     1     0     A    u    g   -     1     0     S    e    p   -     1     0     S    e    p   -     1     0     S    e    p   -     1     0     O    c     t   -     1     0     O    c     t   -     1     0     N    o    v   -     1     0     N    o    v   -     1     0     D    e    c   -     1     0
406080100120140160SovX Country CDS IndexItraxx Main CDS Index
 My friend and fishing buddy David Kotok of Cumberland Advisors is inLondon at a conference where they are discussing this very issue. He sent a note thatsays:“In meetings today we speculated that the sell-off is not a US-only phenomenon. We speculated that it is more than a reaction to Bernanke’s QE2. If all benchmark 10-year debt is selling off by about the same amount in price change,could it be that this selling is the reallocation of globally indexed funds away fromsovereign debt and into something else?

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