The Treasury bubble is likely to be much less destructive than the Internet and Housing Bubbles.
The bubble in the US dollar, however, if one wishes to consider it as an adjunct or outcome of the bubble in Treasuries, has the potential to be disruptive and devastating
Reuters
Buffett says U.S. Treasury bubble one for the ages
By Jonathan Stempel
Sat Feb 28, 2009 9:31pm GMT
NEW YORK (Reuters) - Warren Buffett, whose Berkshire Hathaway Inc. sits on $25.54 billion (17.8 billion pounds) of cash, said worried investors are making a costly mistake by buying up U.S. Treasuries that yield almost nothing.
In his widely read annual letter to Berkshire shareholders, the man many consider the world's most revered investor said investors are engulfed by a "paralyzing fear" stemming from the credit crisis and falling housing and stock prices. Treasury prices have benefited as investors flocked to the perceived safety of the "triple-A" rated debt.
But Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors.
"The investment world has gone from underpricing risk to overpricing it," Buffett wrote. "Cash is earning close to nothing and will surely find its purchasing power eroded over time."
"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."
DISMAY OVER MORTGAGE PRACTICES
Investors' flight to quality followed years of excessive borrowing, especially in housing, and Buffett used his letter to make plain his dismay with a variety of mortgage lenders.
He said many ignored Lending 101 by not checking customers' ability to pay off home loans, or foisting "teaser" rates that reset to higher unaffordable levels.
In contrast, Buffett said, Berkshire's manufactured housing unit Clayton Homes had a 3.6 percent foreclosure rate at year end on loans it made, up from 2.9 percent in 2006, though more than one in three borrowers had "subprime" credit scores. The unit was profitable in 2008, earning $206 million before taxes, though earnings fell 61 percent, Berkshire said.
"The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability," Buffett wrote. "Home purchases should involve an honest-to-God down payment of at least 10 percent and monthly payments that can be comfortably handled by the borrower's income. That income should be carefully verified."
28 February 2009
The Bubble In US Treasuries and Its Implications
HSBC Expected to Cut Dividend, Raise Capital in $17 Billion Shares Offering
This could make Monday's trade interesting.
The Economic Times (India)
HSBC plans $17 bn share sale to raise funds
28 Feb 2009, 1100 hrs IST
SINGAPORE: HSBC, Europe's biggest bank, plans to raise more than 12 billion pounds ($17 billion) in a share sale aimed at propping up its capital base in order to cope with the economic crisis, a media report said on Saturday.
The report said the share issue would likely be announced alongside its full-year 2008 results due on Monday.
The report quoted unidentified people involved in the discussions as saying the offer price for the sale had not been set and the deal could still be postponed.
The bank is also expected to announce a cut in its dividend, the report said.
It said the share sale was underwritten by Goldman Sachs and JPMorgan Cazenove and the deal could set a new record in Britain for a rights issue funded by private investors after Royal Bank of Scotland's 12 billion pound share offering last April.
HSBC has traditionally been one of the best capitalised banks in the world and has not raised capital while rivals have scrambled for cash as the credit crisis has deepened.
27 February 2009
GE Slashes Dividend For the First Time Since 1938 to Preserve Capital
GE cut their dividend by a whoppoing 68% to preserve capital in 'uncertain markets.' The company also said that there are no plans to raise additional capital and dilute common shareholders, with the same confidence which they had in January when Jeff Immelt said that they would not cut the dividend in 2009.
Here is a February 5, 2009 video interview with Jeff Immelt:
Immelt Says Important for GE Not to Cut Divident in 2009
The Wall Street Journal interviewer provides an example of an interview from the prior March in which Jeff Immelt was optimistic about earnings and then shortly thereafter "BAM! A big miss. Does this mean you and your guys don't know what's going on?"
Well, BAM again.
Reuters
GE cuts quarterly dividend to protect liquidity
Fri Feb 27, 2009 2:50pm EST
BOSTON (Reuters) - General Electric Co plans to cut its quarterly dividend to 10 cents a share starting in the second half of 2009, a move that it said would provide it with more "flexibility" in the face of a recession.
The U.S. conglomerate said it had no plans to raise additional equity, and that reducing its dividend from 31 cents a share would save it about $9 billion a year.
The news had been widely expected on Wall Street even prior to GE's statement earlier this month that its board would re-evaluate the payout....
"We have determined that reducing the dividend ... is a prudent measure to further enhance our balance sheet and provide us with additional flexibility," said Chief Executive Jeff Immelt in a statement.
As recently as January, Immelt had defended the dividend. In November, the Fairfield, Connecticut-based company said it planned to pay the 31-cent quarterly dividend through 2009.
Still, troubles at its GE Capital finance unit had led some investors to wonder whether keeping the dividend was a good idea....
