Japan’s 10-year government bonds advanced for a third day after stocks slid and speculation increased that a worsening recession will lead to deflation.

Inflation-linked bonds worldwide are yielding more than conventional debt, signaling that investors expect deflation to deepen.

The extra yield 10-year conventional Japanese bonds offer over similar-maturity inflation-linked debt, known as the breakeven rate, was at minus 161 basis points today, according to data compiled by Bloomberg. The U.S. five-year breakeven rate was minus 80 basis points and the three-year U.K. breakeven spread was minus 85 basis points yesterday. A negative breakeven inflation rate reflects investor expectations for declining consumer prices over the life of the security.     

Global bond bull market in progress.

U.S. options trading slowed this month from a record pace after hedge funds collapsed and the biggest market swings since 1929 made equity derivatives too expensive to be used as insurance against stock losses.

About 12.5 million contracts linked to shares changed hands each day in November on average, according to data compiled by Bloomberg. That’s 23 percent less than in October.

One reason for the decline is that investors have sold assets to protect against losses by moving money into cash, which reduces the need to use options to protect against drops in the underlying assets.

We aren’t the only ones seeing a big dip in trading volumes.

• Barrons: Reversal of Fortunes Between Stocks and Bonds

. . . the dividend yield on the Standard & Poor’s 500 stock index touched 3.57% at 1:13 PM Eastern time, exceeding the 3.54% yield on the benchmark Treasury 10-year note, according to Bloomberg News. That’s something that hadn’t happened since 1958.

“Dividend yield, like price-to-sales, is one of those persistent metrics. We can all quibble about earnings, but dividends, particularly those of the entire S&P 500, are remarkably consistent,”.

“In a world of deleveraging, both for the financial services arena and for the economy at large, growth is less certain,” he says. “And with the economy eroding sharply, so is inflation. If stocks don’t deliver nominal growth in dividends and earnings, then their yield ‘must’ exceed the Treasury yield, in order to give us any sort of risk premium.”

• Wall Street Journal: Memories of the Depression Still Sea

There are 11.5 million Americans who are 80 and older, according to the U.S. Census Bureau. The period from the Crash of 1929 to the start of World War II shaped their lives, affected how they raised their children, and influences their reactions to today’s economic turmoil.

The memories aren’t all negative. For many, President Franklin D. Roosevelt “was like a god,” recalls Mr. Hague, and there was hopefulness amid the desperation. “People had confidence in the American way — which I am not sure they have now.”

Now, living in Vermont, she thinks only someone in Roosevelt’s mold can rescue America from its slump. “I keep thinking, why doesn’t someone do what Roosevelt did — shut down and start from scratch and give everyone jobs,” she says. “He put a lot of people — young people, older people — immediately in jobs. There were artists painting murals inside post offices and young kids out in the woods clearing away the brush.”

I can’t begin to imagine what it was like. And I do hope that we dont see this again.

The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.

. . . investors fear that individuals and corporations alike will have trouble paying back Dubai’s non-bank foreign currency debt estimated at just under $70 billion. Shares in the region have lost around $1 trillion since the beginning of the year as investors fled.

As I’ve said, this is the next big bubble waiting in line to burst:

• Dubai Realty
• Du-bai or Not to buy?
• Readings: Skyscraper indicator, LIBOR signals, Deficits & rupee

PS: Oil now at $50.

Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property. And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles.

• Bloomberg: Junk Bond Yields Reach Record 20% as Economy Declines

Yields on speculative-grade corporate bonds surpassed 20 percent for the second straight day as a declining economy increased the risk of default.

Junk bonds have lost more than $187 billion in market value since August on speculation the U.S. recession will leave a glut of companies unable to meet their debt payments.

About 72 percent of high-yield issuers have bonds trading at so-called distressed levels, or with yields of at least 10 percentage points more than similar-maturity Treasuries, Merrill data show. That ratio implies a default rate of 18 percent in the next 12 months.

• Reuters: Greece braces for shipping storm

In just a few months, dry cargo rates have fallen by more than 90 percent as a five-year boom has turned to bust. For Greece, which owns a fifth of the world’s fleet, that spells trouble.

At 170 million tonnes, its merchant fleet is the largest in the world, ahead of Japan. It is the second biggest contributor to Greece’s 240 billion euro economy after tourism, accounting for 7 percent of output.

Dry cargo vessels that commanded $150,000 a day in May are now earning $7,000 or less. Prices could fall further next year, when a record number of ships are set to flood the market: more than 10,000 new ships are currently on order.

Also, via Business Standard: Emaar MGF cuts home prices

Emaar MGF Land, the Indian unit of the West Asia’s largest real-estate developer, has cut prices of apartments to make them more affordable and tide over a slump in demand for higher-priced homes.

The company is building apartments that cost between Rs 3000,000 and Rs 4000,000 near New Delhi and in Chandigarh ss market “We would have used the land to build more premium homes where margins are higher but we are utilising it to build homes for the mass market,’

The words Sobha used were - “these price cuts should help propel demand”. I say - good luck with that, but I don’t think so. Cut rates by 40%, maybe then you have a hope.

This sucks. Impact costs have risen significantly, whipsaws more common and the trend in trading volumes remains down.

“The Federal Reserve put deflation back on the table as a significant policy concern,” said Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs. “There does not appear to be any barrier to lowering” main rate below the current 1 percent level.

Some policy makers saw a risk last month that the inflation rate will fall below their mandated goal of “price stability.” “Aggressive easing should reduce the odds of a deflationary outcome,” they said, while noting that the low federal funds rate target “would pose important policy challenges” in that case.

So much for diversification. And stat-arb quant funds.

The cost of protecting against default by Warren Buffett’s AAA rated Berkshire Hathaway Inc. has almost tripled in two months.

The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, is more than four times that of rival insurer Travelers Cos. At those levels, the swaps are typical of companies rated Baa3 by Moody’s Investors Service, one level above junk. The price may have risen on concern that the billionaire’s firm could lose a $37 billion bet on world stock market values more than a decade from now.

2019! Heck,  given Buffett’s probabilistic thinking, he has considered the (slim) chances that he’ll still be around in 2019 when (and if) these payments come due.

• Pensions & Investments: Excellent timing: Face to Face with John Paulson (July 2007)

Watch the downside, the upside will take care of itself. That’s been a very important guiding philosophy for me. Our goal is to preserve principal, not to lose money. Our investors will forgive us if our returns don’t beat the S&P in a given year, but we are not forgiven if we have significant drawdowns.

The other saying really drives the same point from a different angle: Risk arbitrage is not about making money, it’s about not losing money. If you can minimize the downside, you get to keep all your earnings and that helps performance.

The performance of these subprime pools will not be decided over one month or two months. They will be decided over the next three years. Our investment (commitment is not based on) looking at what these bonds trade at today or tomorrow, but what the losses in these pools will be two or three years from now. Our estimates are that the losses will be well in excess of 6% or 7% and that as time goes on and these losses are realized, the bonds will be downgraded and they will fall much further.

• Express India: Bought for a fortune, stuck in realty slump

. . . according to information from the International Property Consultants (IPC), clients such as Reliance Mutual Funds and Aditya Birla Group, which have only signed letters of intent, are now demanding renegotiations on the lease rent. The last deal transacted was as long back as April. 

Banga concedes that the rates have come down from Rs 275 per sq ft per month, but only up to Rs 225-250. IPC, however, says that even at Rs 195, there are no takers today. 

Bought over by DLF at Rs 704 crore, the 17-acre plot stands testimony to the country’s costliest land deal till then. Since its moment of glory, the changing market dynamics has forced the Delhi-based realty player to go back to the drawing board more than once. Plans for a business hotel, mall and multiplex were modified to make way for an IT park. For more than a year now, the massive cranes on site have been at rest and work has not proceeded beyond the basement. 

Still in denial.

Meanwhile, here in Mumbai - DNA: ‘Actors have reduced their market prices by 30-40%’

. . . there is a reality check in the industry right now. Earlier everything was obnoxiously priced; none of it was value for money. So you had actors charging us not only for his acting, but also a share of the revenue, then for the rights of the film. But now, market prices for actors have come down by at least 30-40%.

No one’s spared.