Boy oh boy, we have some interesting times coming. Today at least the "inflation" trade is winning the deflation v inflation battle. The whole key for Ben Bernanke is finding the sweet spot, where he can stoke prices but not to a point that it disturbs long term rates. Otherwise that would stop the whole refinance game / house ATM.
Myself, I am hoping for $3.50 gas, $100+ crude while I hear talk of green shoots. And yes secretly I love seeing the market overwhelm the Very Visible Hand. Ok, not so secretly.
Here is what the bulls are going to say today - the jump in commodities is bullish as it forecasts a return to global growth, blah blah blah. I say that works nice in an expansionary economy. Not so nice in a contracting economy. This will lead to my stagflation thesis i.e. 1970s redux.
I was just pinged that mortgage rates are already up from last weeks 4.70%ish to 5.20%ish. Let's watch the refinance reports next week. p.s. this will hurt the title insurers as Doug Kass correctly forecast. And it will hurt the entire home complex trade. I am really surprised Bernanke did not bring out the bazooka earlier this week to keep rates suppressed. Mortgage rates at 5.5%-6.0% ruins this whole "consumer is back" story.
There is no way this is bullish unless you are a believer in the Goldilocks economy - just enough inflation to signal "a return to global growth" but not enough inflation to stagger the increasingly unemployed populace of the world, and US in particular. Enough inflation to "signal" great things coming down the pike, but not enough to cause disconcerting looks from US consumer as he goes to buy food, energy, and the like.
But this is what the spin IS and WILL be. Because it's not Main Street; it's Wall Street. I don't believe in this fairy tale with unemployment still on the rise (in reality in the low teens headed for mid teens) and a struggling consumer who is using tax returns, house ATMs, and the like to spend. But I look forward to hearing the fairy tale of Goldilocks return....
Via WSJ
- The benchmark 10-year Treasury yield climbed to new record highs for 2009 in Friday morning trading, as stocks picked up a little from an early slide. Investors offloaded long-dated government bonds in volumes that could set new trading ranges despite the best efforts of policy makers to keep a lid on benchmark borrowing rates for consumers, homeowners and small business.
- Strategists see the 10-year hitting its next potential ceiling at 3.25%. Investors remain focused on the heavy freight of new government bonds coming next week, when a record $71 billion refunding by the Treasury kicks off.
I did not remember to reload my TLT short post Fed meeting like I had planned to do. Bugger. [Apr 28: Bookkeeping - Covering Most of iShares Barclays 20+ Year Treasury Bond Ahead of Fed]
Make no mistake folks - unless you are of belief the US is about to enter a V shaped recovery this a bearish situation for Main Street even if one thinks the abandonment of safety and return to risk is "bullish" from a Wall Street view.
Speaking of food (reinflation) - [my favorite long term theme is agriculture] see our old friend DBA which just took off like a rocket the past 2 sessions (aka post Fed meeting): this is wheat, soybeans, corn (and to lesser degree sugar). Boo Yah consumer.
Short iShares Barclays 20+ Year Treasury Bond in fund; no personal position
11 comments:
Guess that's why XHB, ICF are down today?
Yes I would assume - past 2 days have been iffy for homebuilders and RYL did not help with lousy earnings.
That said other companies have reported lousy earnings and run, so i think these long term yields are hurting far more.
Going to be an interesting battleground... getting my popcorn out for this one.
Inflationary pressures -as in trends in crude, treasuries, and gold - will stall any equity rally; but that is for another day.
My largest position is in the TBT- ultra inverse Bonds; in other words, if yields are up so is this. I have had this position for months; unfortunately, as many have discovered with the ultra products, this is not a 2:1 correlation with moves in the 10 year. On up or down days, it is more like 1 to 1, so while it is nice be on the winning side, I don't have as much on the table as I would like (typical); once the 200 day MA is out of the way, I think yields can get to 3.375% on the 10 year.
I think most stock pundits and permabulls would suggest that yields are up because of re-allocation from bonds to stocks. Why? Because it is a bull market -of course, everyone knows it. Typically yields rise several months after a recession ends; this situation might be a little different because they are so compressed already. I don't think yields are anticipating the end of the recesssion.
i like that move in DBA, which I think can finally get the ag names going. The sector is just pretty hated.
Have you looked at HYG and LQD? The govie yields are up, but the credit spread is still narrowing, which I think overall, is a positive. While not as good for home owners, its the corporations that are benfitting.
I think we need to see the high yield corp bonds sell off, and that would signal a high. It's been sideways for a couple weeks now.
"I think most stock pundits and permabulls would suggest that yields are up because of re-allocation from bonds to stocks. Why? Because it is a bull market -of course, everyone knows it. Typically yields rise several months after a recession ends; this situation might be a little different because they are so compressed already. I don't think yields are anticipating the end of the recesssion."
Agree 100%
Waiting for the first Kudlow "Goldilocks" call.
"Have you looked at HYG and LQD? "
Haven't looked at ages
I find it bemusing that the riskier is rallying much more than the safer
Under my thesis of defaults, it makes little sense for LQD to be ramping but I was working under the mistake assumption that debt of corporations is under ownership of the companies; instead of US taxpayer.
I am slow to move to this new world order
Under my old world order I assumed a wave of defaults still to come; but now the Trasur pushes banks to let every covenant be re-written, and what can't be written I guess goes to Fed balance sheet. So the move makes sense in the USSA.
Still clutching USA
I'd of expected LQD to be doing better
Munis also flying because of course Fed will backstop it if it ever comes to that.
Isn't it supposed to be that you'd want money supply to shrink with the economy contracting and then grow with the economy expanding?
But not here, when the economy is good they print money, when the economy is contracting they print even more money with reckless abandonment.
Hey Mark,
I'm currently a student majoring in corporate finance(and vigorously studying investing). I love reading your articles and find your point of view very insightful. If you have the time, I would really like to speak with you further. Thanks!
- Jonathan Sandlund
contact@jsandlund.com
Anon,
depends what type of economist you are :)
In theory as a Keynesian you want everything to expand when the economy is weak under the guise that the government makes up for the private sector
Austrians not so much
The problem with our current system is we flood cheap money in, create new govt programs, but we never really take them back when times are good. So we are having series of bubbles and crashes, when the Fed says they are here to be the "moderate" force
Really the Fed has no reason to exist. Everyone says we should have free markets yet they want an arbitrary figure controlling rates like the USSR?
Jonathan my email is in upper right of blog if you want to shoot an email. Fair warning, my answers have a 50% chance of being correct.
Agreed on the Fed
Central economic planning doesn't work.
I tend to side with the austrians. Keynes' theories seem more like pro-government propaganda to me than anything. Keynes kind of admits it:
"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." - John Maynard Keynes
I find that his theory is wrong...it blames inflation (and calls it rising prices) on things like rising wages, but wages are a a price of labor, so he blames price rises on price rises, without saying what initially caused it, which is always the expansion of the money supply, which is inflation (austrians consider that inflation and price rises the result). Just seems like propaganda to fool people so they don't realize they're being robbed with the inflation tax.
Ron Paul put it well....something like "money is 1/2 of all transactions and the Fed has a monopoly on it and its price, we're half way to socialism right there" He actually has a book coming out later in the year called "end the fed"
Bill
Post a Comment