Friday, October 29, 2010

The Beginning of the End

The End of a Bull Market in Bonds

PIMCO's Bill Gross shook me up the other day with his October commentary. Bond investors do not like it when a bond guru writes that the Fed's announcement of renewed quantitative easing next Wednesday "will likely signify the end of a great 30-year bull market in bonds."

Whoa! I've been raking in easy if modest returns with a portfolio tilted toward high credit quality bonds. That's what you do in a debt deflation, isn't it?

"Safe Spreads"

Always prone to hyperbole, Gross softened the message toward the bottom of his commentary, when he said that PIMCO had no intention of suffering a bear market in bonds, and that they could maneuver around this little problem of no more bond bull. Specifically, he intends to invest in what he calls "safe spread" securities that offer higher yield "without taking a lot of risk" of inflation.

One example is emerging market debt with higher yields and non-dollar denominations, and another is high quality global corporate bonds. Gross added: "Even U.S. Agency mortgages yielding 200 basis points more than those 1% Treasuries, qualify as 'safe spreads'.”

You know, I wouldn't call a bond portfolio exactly safe it includes a lot of securities sensitive to highly correlated risks like currencies and emerging market economies. So, how does this square with the "end of a great 30-year bull market in bonds?" Well, with Gross we know that he likes to engage in a hyperbole and that he doesn't tell the whole story.

Bonds Are Not "Over the Cliff"

Gross appeared on Bloomberg Surveillance Thursday and was more nuanced in his explanations. By an end to the bond bull he means "not over the cliff" for the entire market but a recognition that "certain maturities can't go much lower." Two-year maturity Treasuries, for example, are yielding near the overnight rate. Not much opportunity for return there. He explained that Fed purchases make it mathematically impossible for bonds to do much better.

He also explained that "safe spreads" refer to securities that offer yield without being vulnerable to inflation expectations. This concern with inflation sensitivity seems an important point.

Gross added that he hasn't shortened the maturity of his Total Return portfolio, which is still in the vicinity of four to four and a half years. This is in contrast to Dan Fuss, who said on Bloomberg Surveillance the day before that he had reduced the average maturity of his Loomis Sayles portfolios.

Rather than reducing PIMCO's bond maturity, Gross has gone "to a space not vulnerable to inflationary expectations."  A lot of securities are much less sensitive to inflation than are Treasuries, and he is focusing on the "safe space.".

It is interesting that Gross is concerned with vulnerability to inflation. Inflation is what the Fed is trying to achieve with QE, and with the suggested 2.5% inflation target. If PIMCO takes it seriously, perhaps there is a risk that they will succeed, or at least that investors will be spooked by the expectation.

Higher Rates in Three to Five Years

Another reason that Gross hasn't changed his portfolio's average maturity yet is that "the Fed isn't changing its target rate." So, he isn't expecting inflation soon, but apparently he thinks that it is a possibility sometime in his planning horizon. He believes that the Fed will tighten eventually.

The timing of inflation is influencing the maturities in his portfolio. Gross said that he is avoiding the 10-year Treasury because policy rates may go higher. The "safe maturities are five years and in, not five years and out." So apparently five years is approximately the horizon at which the Fed is expected to tighten. (I have no idea how anyone can predict if and when the Fed will tighten, but there it is.)

Gross reinforced this estimate of a five-year "safe" period when he said that CD investors could go out in maturity to three or four years. Five-year CDs might appeal a risk taker. Just to make it clear that he is willing to make a prediction, he added: "The Fed won't raise for three years, maybe four or five."

Stagflation Coming?

Given that the Fed is unlikely to restart the economy with monetary policy, it is natural to wonder why the Fed might raise rates within three to five years. The answer may be stagflation. If the Fed creates inflation through dollar devaluation or speculative bubbles, it would probably result in stagflation rather than ordinary wage-price inflation, given the likelihood that the economy will remain weak. Stagflation would be very negative for Treasuries. Rates would rise in general, and the Fed would have to follow.

It would take something very serious, like stagflation, to get the Fed to raise rates with the economy still weak. We have to wonder how badly higher rates would affect the economy and the servicing of US debt, which suggests that recovery through inflation is a self-limiting process.

No Inflation at Present

However, inflation risks are for the future and not the present, according to Gross. He sees even the low yields of short Treasuries as "safe" at the present time. "A two-year Treasury and a three-year Treasury only yield 37 to 60 basis points, but that's safe yield because the Fed isn't going anywhere."

Gross also suggested that the Fed may not be able to go much farther with monetary policy, and that fiscal policy will have to take over soon. "We've been willing to accept the lower yield in anticipation of a hand-off to federal officials maybe six months down the road."  Gross didn't say, but this would be after newly elected Congressmen have taken office in what is expected to be a more Republican House. Given the likely stalemate in Congress, it is hard to understand exactly how this "hand-off" is to work.

Does This Mean Anything?

Gross loves to dampen his clients' expectations by expressing caution. A look at his past commentaries shows that he has called for the end of the bond bull before, only to be followed by huge bond rallies. Maybe this is another of those times, but on the other hand, maybe his remarks are justified and even prudent at this time.  No one knows what the Fed is going to announce next week or the market reaction. The stakes of the anticipated QE II are huge, and it would make sense to hedge bond portfolios ahead of the meeting. Gross's comments aren't much at odds with the fears that most bond investors hold these days, and at least we have another plausible scenario for consideration.

We definitely need some scenarios to think about to protect our portfolios.  Another PIMCO guru, Mohammed El Erian, also said this week that Federal Reserve purchases of Treasury securities likely will spur inflation, while leaving unemployment untouched.

Saturday, October 23, 2010

Bond Risks and Opportunities

"This was a great nation until the robo-signers came."

Following a run-up in response to prospects for further Fed asset purchases, the bond market has turned more cautious. Perhaps this caution is in response to prospects of an intensified round of currency devaluations, with its implications for domestic inflation, or maybe the advance was just getting ahead of itself. Let's look at what people are saying about bonds.

Portfolios Shift Out of Short Term Treasuries

On October 8 PIMCO's Bill Gross gave in interview on Bloomberg television, in which he described how the advance in parts of the Treasury curve had caused him to adjust his portfolios. I watched part of the interview of Bloomberg Surveillance, where Gross said the yields of 2-, 3-, and 4-year Treasuries are getting so low that alternatives are now preferable in terms of taking on a little more duration or credit risk in return for more yield. In fact, he found no advantage for 2-4 year Treasuries over the money market. Instead, traders are moving out to the "belly" of the curve, and Gross said they should buy 5-, 6-, or 7-year maturities if they buy Treasuries.

"Look, Timmie, Someone Spent a Dollar!"

This move seems consistent with the prevailing pubic view that the Fed has gone as far as is practical in lowering yields in the shortest maturities, and that we can expect to see the Fed gradually walk its way out the yield curve, lowering rates in longer and longer maturities until the curve is flat.

Seeing the End of the Bond Rally

Then on October 14 Bloomberg summarized an interview with Douglas Hodge, the COO of PIMCO, about recent changes in their portfolios. The basic message was a little stronger than Gross's earlier statements, and Hodge warned that the strong bond gains of recent months are unlikely to continue:

“From where we sit, it’s very hard to suggest there’s going to be that kind of price appreciation that we’ve seen in bonds over the last 12 to 24 months.”

“Even if the QE process is large and rates decline further, in our view we’re approaching the end of the bond market rally.”
Hodge reinforced Gross's earlier message about the portfolio implications, saying that “We have reduced our Treasury holdings, the lowest yielding instruments.” Hodge mentioned that increased positions included emerging markets, such as India, China, and Brazil, with infrastructure debt looking particularly attractive. They are buying high-quality corporate bonds in India and are making investments in China via the non-deliverable forward market.

"This meeting of the Federal Open Market Committee will come to order!"

Seeing Increasing Credit Risks

In an email to Bloomberg, Bill Gross described the strategy underlying these portfolio changes, which involves much more than simply moving out the Treasury yield curve:

“Pimco Total Return currently is employing what we call a ‘safe spread’ strategy, which seeks to identify sovereign countries best able to handle a new normal global economy that envisions slower growth and therefore increasing credit risks in fixed-income markets.”

Perhaps PIMCO is expecting the Fed to keep the world's financial bubble primed through eternal quantitative easing.  As ridiculous as that sounds, maybe we should consider the possibility that the Fed is not going to let the US slip back into recession, no matter the inflationary consequences.

He also remarked that this has definite implications for portfolio allocation:  It looks like they are moving gradually away from the US to where the growth and improving creditworthiness may lie. This would be a good strategy if the emerging markets are not hurt when the economy of the developed world again takes a dive, which seems likely at some time in the next few months or years. Unfortunately, emerging economies like China are still extremely dependent on their more developed customers.

"The printing press is out of control!"
The worrying part of these pronouncements is that Gross's email emphasized the "increasing credit risks in fixed income markets" in a world of low growth. They still have a lot of their portfolio in the low growth US, but the percentage of the money there has been gradually reduced in recent months, particularly in the Treasury component. Many people are worried that high government debt problems will eventually catch up with the US and other advanced economies, and it would appear that PIMCO is starting to adjust its portfolios incrementally in that direction.

Buying Mortgage Backed Securities

If you look at PIMCO's most recent portfolio statistics, the message is a little different from that given by Hodge. Bloomberg published an article an article about this just the past week. You see that they still have large amounts of Treasuries, but the relative mix has been shifting in the past few months in favor mainly of mortgage-backed securities, which are the largest category in their funds (and which Hodge did not mention). Increases in emerging markets were much smaller.  This move is quite consistent with Bill Gross's statement that Treasury yields are so low as to be unrewarding in some parts of the curve, and that it is necessary to look elsewhere.  Apparently their thinking is that, with the US government backing them, agency-issued MBS offer more yield reward with only little more risk than Treasuries.

"These oddballs are ruining the neighborhood."

There is another, more speculative issue with MBS.  The general press is that QE II will focus on purchasing Treasuries somewhere out the curve, extending the flattening of yields that has already occurred at the short duration end. However, the Fed may have reasons for including considerable amounts (a billion or so) of MBS in QE II, especially now that there is a crisis brewing with rotten MBS that the big banks sold to investors at the height of the mortgage boom. With so many investors pressing the banks to make good on their agreements to buy back such rotten MBS, there is some increased level of risk to the survival of some of the big banks, and the profitability of others. The Fed may want to help the banks get rotten stuff off their balance sheets sooner rather than later, so as to avoid another possible financial crisis. Just maybe we might see some mortgage backed securities included in the Fed's asset purchases during QE II.

Timing the End of the Bond Bull

Bloomberg published a worrying article on October 21. It reported that Mark Kiesel, global head of corporate bond portfolios at PIMCO, said in a CNBC television interview that he sees interest rates going higher. He also said that PIMCO is increasing its stakes in investment grade companies. There was no word about whether this was a cyclical or secular rise.

"Is this the food stamp line?"

Other PIMCO pronouncements convey a different slant and suggest that the bond bull still has some chances of continuing in their opinion. Just prior to Kiesel's comments, a senior VP of PIMCO, Tony Crescenzi, said on Bloomberg television that bonds will suffer only when bankers start to lend money and when businesses and individuals ask for loans. Further, a "Keynesian endpoint" will really come only when all major economies "max out" their balance sheets. Given the likelihood that this event is some years in the future (albeit highly uncertain), the time for bond suffering is evidently not just around the corner.

The Risk of a Liquidity Trap

Perhaps a more serious threat to bonds is the threat posed by the Fed itself. Or, more properly, the threat is that the financial crisis has only been patched over, and could arise again to drag the economy and the financial system down in a deflationary liquidity trap.

This past weekend's New York Times carried an article on the dangers that the Fed sees with deflation, which the article referred to euphemistically as "persistently low inflation."  It is widely expected that the Fed will respond to this risk by attempting to lower long term interest rates. It is also expected that the Fed will do this by announcing of another asset purchase program -- QE II -- at its meeting in November.

The problem may be worse than generally appreciated until recently. Charles L. Evans, president of the Chicago Fed, said plainly at a recent conference that the economy is in a "liquidity trap." He announced his support for a strategy known as “price-level targeting,” in which the Fed would permit inflation to run at higher-than-normal rates in the future to make up for inflation being lower than desired today. In other words, Evans was proposing inflation targeting.

"Don't pull on your leash, Timmie."

Evans did not say how the Fed would accomplish this at a time when no one wants to spend money, and it seems unlikely that ordinary monetary policy (or asset purchases) could do this. However, even an official Fed statement saying that it is targeting higher inflation rates would raise considerable fears in the bond market that the Fed might embark on reckless actions.  Unfortunately, such actions would be self-defeating to the Fed's goals of keeping credit easy and cheap.

The Risk of Repressive Monetary Policy

Many commentators have commentated on the likely fruitlessness of further quantitative easing, which raises the question of what happens next. Maybe it is just idle speculation, but some of these commentators raised the possibility that the Fed will eventually be forced to turn to more repressive measures to force people to spend their money. By "repressive" they mean such things as motivating banks to charge their depositors for holding funds at the bank, rather than giving them interest on deposits. (Perhaps the Fed would charge a fee for holding banks' required reserves.) This means that the Fed would force negative short-term interest rates on the public and business.

There's nothing like seeing your money disappear before your eyes to motivate people to convert their money into real things, like cars, houses, or gold bullion. Would this restart the economy? It seems doubtful. But it would get money moving.  Money would flee the country and go to places that have saner central banks.

"We'll get those lazy bums off Social Security and Medicaid!"

Repressive monetary policy seems unlikely from today's perspective. The majority of observers seem to think that the Fed will simply continue with QE until it debases the dollar, and the recent drop in the dollar seemed to be tied to that worry. That would be another way of targeting inflation, which gets us back to the stopping problem of when to sell bonds and dollars ... and presumably buy gold and wheat.

Betting on the Inevitable

Not everyone is convinced that the Treasury bull is over. Gary Shilling, for example, still expects years of a deflationary environment and a continuing Treasury rally at the long end of the curve. David Rosenberg of Gluskin-Sheff has a similar view. Rosenberg believes in deflation, and he remarked in a recent newsletter that, despite all of the Fed's intervention, consumer prices have continued to fall, and core inflation is at four-decade lows. His reasoned:

"Therefore, it would make sense to assume that once we get pass this bump in the form of a weaker U.S. dollar and surging commodity prices, the risks of deflation will intensify again."
"Right now, the long bond yield provides a 150 basis point premium over 10-year Treasury notes at the price of taking on nearly nine extra years of modified duration. Sounds like a handsome trade-off ... a 3% real yield still looks fairly attractive from our lens."

"This wll give us exactly 3% inflation."

The Prospect of Fiscal Prudence Next Year

A problem with the deflationary argument is that many forces point to a different environment next year: That's when questions of fiscal austerity will start to come to the fore, and when we can expect real discussion of how to cut back on the US fiscal deficit. If this results in fiscal prudence, we can look forward to a slowing economy but perhaps also to a relaxing of worries about government debt, which could be good for the dollar and the long bond. On the other hand, if a Republican win in the elections should produce a political stalemate, there arises the prospect of a Congress unable to do much to reduce the fiscal deficit. A continuation of the present trajectory of budget deficits would heighten worries about the US, weaken the dollar and the bond, and raise again the specter of increasing inflation.

What to make of this dichotomy?  One point of view is to go with the inevitable. What is the most inevitable, unstoppable force affecting our society today? Why, it's the faltering economy. And what is ailing the economy? Why, it's debt, of course. It is hard to argue with trillions of dollars in debt (manifested in foreclosures, unemployment, and budget cutbacks) as an inevitable force.  Particularly when the deleveraging of the consumer sector has hardly begun, and when banks are still constrained by bad debts.  Driven by the weight of all this debt on our collective backs (and by its political masters), what else can the Fed do than feed the asset bubble until it bursts ... again?

"They bought it.  Only billionaires can vote, now."

Saturday, October 2, 2010

A Night on Bald Mountain

Bald Mountain in Fantasia

A Mountain of Debt

In his latest monthly commentary, Bill Gross of PIMCO warns that there is no way back to the "good old days" of high returns in investing. Decades of double-digit returns were made possible because easy credit provided more money than could be put to productive uses in the real economy, but the credit bubble has burst. The bursting of the debt bubble means that days of easy credit are over, and it will be many years before debts are paid off or defaulted sufficiently for better days to return. This is the New Normal that PIMCO has adopted as its mantra.

As harsh as the New Normal sounds, I think that PIMCO does not go far enough. I would add that the buoyant economy we experienced ever since the end of World War II has never been normal. It was based on special circumstances and can never be the same. A generation of Credit Excess was preceded by centuries of Good Luck for America and the West. There is no way to get back to the "old normal," and the economy will never be the same.
Satan Contemplates the Mortal World

The Fantasy of Normalcy

Why can the economy never be the same? We had a long run of good luck in the US, and our luck seems to have run out. It's right there in our history. We exterminated entire peoples to conquer an entire continent and exploit its resources, we were in the right place to be beneficiaries of multiple industrial revolutions, our industries were relatively unscathed by global conflicts, and then we prospered even more by refitting the bombed-out industries of a war-broken planet. No wonder we believed in "progress."

The problem now is: Those advantages are gone. Information and capital can flow anywhere instantly. Former colonial subjects and former slaves of Communist ideology are no longer exploited but are now investing their sweat in modernization and increasing competition. They want the good things and they are willing to work for them. There is no more monopoly market for America or the West to exploit.

About three decades ago, when America started to find the going more difficult, we didn't scale back our inflated expectations. Instead, we clung to our outsized expectations and financed current consumption by borrowing from the future. In fact, our government encouraged borrowing by instituting a policy of easy credit. Citizens responded, used their housing ATMs, and piled up debt. It was an unsustainable process and the mortgage-credit-finance bubble was the terminal phase.

Satan Spreads the Seeds of Evil

Our only hope now is to get through the debt mess and -- probably after decades -- get back to a growing, sustainable economy. We are far from creditworthy now, and our competitors continue to grow lot more capable. There are no "good old days" to go back to.

Illusion Has Replaced Reality

No, the debt load does not mean that America is doomed, but it suggests that many or most of us are bound to be disappointed that our outsized expectations are not satisfied.

Debt is too high, and trust is too low to restart the economy. Time is the only real solution to deleveraging, but government and the people have no patience. QE will not work, and it will raise the level of risk to our national credit and currency, but the Fed will proceed anyway. Illusion has replaced reality in the minds of the policy makers.

The Spirits of the Dead Rise on All-Hallows Eve

A Declining Dollar and a Lower Standard of Living

In his latest monthly PIMCO commentary, Bill Gross pointed out that the economy is mired in the deflationary process of debt deleveraging and is likely to stay there for years. Quantitative easing (QE) is the Fed's attempt to jump-start a moribund economy by igniting a process of inflation. (More precisely, they want to bring about price inflation by increasing the velocity of money in an already inflated monetary base.)

After some years, price inflation should reduce the real value of debts to a more manageable level. The problem with inflating our way out of debt is that America will have to pay a very painful price:

"And the most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living."

If the dollar is worth less, we are poorer. We would have to cut back on what we import from the rest of the world, but rises in exports would be of little importance, because we export so little. A country that has invested so little in productive technologies would stand little chance of expanding the scope of its exports. Such lazy countries suffer a declining standard of living.

Gross's point of view isn't the only one with credibility, but the alternatives are also depressing. There are other kinds of "soft default," such as reneging on promised social entitlements. There are also ways that governments can "stick it" to creditors, such as revoking the terms of existing debt securities (perhaps converting inflation indexed securities to fixed rates). None of it would be pleasant.
Mere Toys in Satan's Power -- Satan Increases the Velocity of Money

Terminal Competitive Devaluation

As SoGen's Albert Edwards mentions in a recent report,
"Our economists made a very interesting point in the Economic News, 17 Sept. They believe the BoJ's actions may be the start of a more general period of competitive devaluation; with the US authorities tacitly allowing the US dollar to decline in an environment of QE2 (no wonder gold looks so perky!)."

According to Edwards, there is good precedent for using currency devaluation as a tool to combat presistent deflation, and good indications that the Chairman of the Federal Reserve, Mr. Bernanke, has considered devaluation seriously as a policy tool.  In his 2002 speech Deflation: Making Sure "It" Doesn't Happen Here, he said:
“The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt."
"Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange … there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation."

Not that I necessarily agree, but Zero Hedge interpreted Bernanke's statements very liberally as "the blueprint for the endgame," meaning that a competitive round of international currency devaluation will soon be upon us:

"Hence Bernanke openly stated back in 2002 that the end game, especially when all else fails (fiscal deficit too high and QE shown to be impotent), is to print money to drive down the dollar. This is default in all but name. Investors ignore this at their peril."

I have no idea of whether or not the Fed can actually bring about currency devaluation and inflation, but there are ominous signs. As a likely program of QE II approaches, the dollar has been declining and gold has been rallying. Now, noted investment managers such as Bill Gross are warning of inflation and currency devaluation in our future.

Satan, Like the Fed, Can Extinguish His Creations

On the other hand, bonds are still performing well. They need to, because the Fed is enforcing low rates to keep banks solvent, to let debtors refinance, and to let the Federal government roll over its debt at affordably low rates. The strong dollar has been a big help in doing this. It is also fortunate for the US that no country wants to endanger its exports by letting its currency rise against the dollar. Since the dollar started sliding recently, countries around the world have intervened to weaken their currencies and maintain their export competitiveness.

If the Fed promotes currency devaluation, it will be walking a tightrope between driving down the dollar (to cheapen our debt) and keeping the dollar strong (so that we can afford to roll over our debts). Something will have to give.

Maybe the currency game is not a total standoff. As Edwards put it:

"The good news is that this is not the zero sum gain that most commentators suppose. For if all central banks are printing money to drive their currencies downward, exchange rates may not change, but the money supply does. It is easier for the US to "guide" down the dollar with its burgeoning current account deficit, and to the extent bond yields rise as foreigners back away, the Fed will just keep printing money to hold them down!"

So, maybe the US really can devalue the dollar relative to other currencies, at least those that are not pegged. In that case, there would be all those "printed" dollars waiting to enter the real economy and, if the velocity of money increases, the eventual inflation in prices.  That is what Edwards argues.

Of course, there are problems with this scenario.  To get inflation, individuals and businesses would have to want to borrow and spend, and it would take a lot of devaluation for that to happen (which hardly seems in the cards now that Congress has caught the austerity bug).  Not that I doubt the ability of politicians and bureaucrats to make mistakes, but it is hard to imagine an environment that would encourage much additional spending, short of some kind of currency crash or bond panic. 

Maybe a really repressive Fed policy (like incentivizing banks to charge negative interest on deposits) could do the trick, but that would have risks too.   Another problem is that devaluation would not help against currencies that are pegged to the dollar.  In fact, modest dollar devaluation would make China even more competitive against the rest of the world, as long as the dollar-yuan decline wasn't so great as to price them out of the commodities markets.

What Will Dawn Reveal?

The Fed has already responded to the slowing economy with one round of extraordinarily accommodative monetary policies, and they seem ideologically inclined to try it again. Extraordinary policies can be risky -- and we had better think hard about that risk.

The End Game -- Doomed Souls Return to Satan

What about the risks of accomplishing another round of QE?  Zero Hedge wrote that $1 trillion of Treasury purchases a year (as widely expected) means that the Fed will be purchasing nearly all of the net debt that the Treasury will issue this year. That means the Fed will be financing all of the Treasury's debt issuance, which might raise a few eyebrows, because the Fed would actually be monetizing the debt. Will anyone lose confidence in the US as a result? I don't know, but it sounds strange.

The most popular view in the media is that QE II will cause nearly all asset classes to rise in price, but will have only a very minor and transitory effect on the real economy. This is a very short term point of view. In contrast, Edwards takes a very extreme but more serious view. He believes that citizens of the mature Western economies are being pinched to the point of social unrest, and that the inflation resulting from competitive currency devaluation could be the breaking point: "what do devaluation, high unemployment, inequality and food prices spell? C-H-A-O-S."

I hope that everyone had a good time!

Despite worries about social trends, I certainly do not see social chaos affecting the US anytime soon.  Rather than some kind of social chaos, the risks at present seem more tilted toward policy mistakes.  Politicians do have a way of catering to the base needs of their constituents, no matter the long-term consequences.

Perhaps devaluation and inflation are future risks, but I am not sure if they can affect us greatly in the near term.   For the near-term future, disinflation and economic stagnation seem more likely to continue  as the dominant forces, but the destabilizing risks posed by QE II are worth contemplating very seriously. 

   Happy Halloween!!!