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Bernanke: "Long Live the Carry Trade!"
The jobs report turned the market hard on Friday. A 2 big figure gain
on the Euro and $50 on the gold price tells it all. Based on the
employment data it is very hard to believe that US interest rates can
remain at zero for much longer. But that is exactly what is going to
happen. The carry trade is alive and well and will resurface as a
dominant market factor. It is just going to take a bit for the power of
zero cost debt to start driving the money flows.
My totally non blue chip economic forecast for GDP goes as follows:
4th Q 2009 = 4%
1st Q 2010 = 4.5%!!
2nd Q 2010 = 2.5%
3rd Q 2010 = 1%
4th Q 2010 = 0%
These numbers are not too far from the thinking at Goldman. They see
things chugging along and then slowing. My numbers are more extreme
then theirs for end of 2010. My guess is that we are going to hit a
wall sometime around mid-year. By then most of the monetary and fiscal
stimulus will be gone. Without the oxygen we are are going to stall.
Bernanke has stuck to his guns and set out a timetable for the end of
the Agency purchases as “March”. This certainly means that there will
be no increase in the Funds target until at least then. After that it
gets a bit murky. The Fed Funds Futures closed Friday at levels that I
think are a pretty reasonable assessment of what might happen. My read
on what those numbers say:
-It is a pretty decent bet (70-30) that the Funds rate will be increased 25BP by June.
-It is almost certain that the Funds target will go up 25BP by August of 2009.
Let’s say that that is wrong. Take a scenario with a more
extreme outcome than suggested by the futures market. Assume Ben shows
his muscle and tightens the Funds rate by a whopping 50BP by September
1st. Who cares? That is nothing.
So now it is September 2010, the economy is again clearly decelerating.
Unemployment will be at best 9%. Does anyone think that Bernanke will
increase rates by more than 50BP given the economic backdrop that he
will be looking at? Not a chance.
When people get to understand that this low rate environment is going
to be with us for a long time, the seduction of the carry trade will
again be the dominant theme.
The price action on Friday killed the leveraged players. I talked with
a lady on Friday night. She runs big money in liquid macro trades. She
got beat up. She said,
“ The carry trade is like an orchid. It looks beautiful, but when you get too close it smells like rotting meat”.
The rest of the conversation was about timing and entry points to put the trade back on. Nothing has changed.
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Let’s not forget that the Fed already once before extended the time period for completing its quantitaive easing (that is purchases of mortgage backed securities). Odds are, they will not shock the market by switching from a QE buy rate of $1 trillion a year to $0 per year on April 1.
More likely the Fed will first drag out the reminaing purchases until June, and after that, resort to at least some sleath expansion the old fashinoned way – by open market purchases from time to time.
But then there is the little matter of how to finance a $1 trillion budget defiict, plus various state budget deificts. I see QE making a comeback later in 2010. Good luck betting on the removal of QE.
How in the world do you forecast a 4-4.5% gdp when the rail and shipping traffic data is in the soup?
How can you get spending like that when increases in the consumers capacity to spend have no headwinds to speak of?
Since it takes $8 dollars of additional new lending above the previous levels to get $1 dollar of gdp growth the following year ...and lending this year is down by billions....where do you see the growth coming from?
Bankruptcies are at an all time high. So are defaults. So are overdraft fee collections. So are credit balance re-sets. So are mortgages under water...as are IRS tax receipts....yet we are going to jump off the mat and grow 4.5% precisely in the months with the highest heating bills, the highest medical bills and the months credit card collections are traditionally at their worst?
How?
Oh ye of little faith.
What on earth does this "reality" of which you speak have anything to do with the construction of the FedGod/MSM narrative?
If Obama and Timmay want a GDP increase of 4.5%, you can bet they will get it. Don't forget, every penny Uncle Sugar borrows and spends makes GDP go up. Hell, they're in charge of who comes up with the numbers anyway.
I'm going long shovels, because before this is over, the idea of paying half the country to dig holes and the other half to fill them back up will be discussed by Christina Romer on the Sunday talk-shows as a viable long term plan. I imagine by that time, the T-Bill rates will be -5.0% and the auctions will have bid to covers of more than one hundred.
Why not.
"Don't forget, every penny Uncle Sugar borrows and spends makes GDP go up."
Antal Fekete says there is a limit to that effect. He calls it "The Marginal Productivity of Debt":
http://www.financialsense.com/editorials/fekete/2009/0330.html
Bruce, fwiw, a different perspective here:
http://whiskeyandgunpowder.com/theyre-going-to-kill-the-fed/
thoughts?
Totally agree Bruce. The head fake of the first quarter numbers will have people zigging and it will be time to zag. Child's play. As I posted earlier today, the coming housing second leg down will be all too apparent by the end of the second quarter 2010, and it will be a factor as a drag on everything. Not mention at least 500 banks by mid year, maybe end of summer, will have bit the dust.
Yes, sounds like a likely scenario, but low US rates are not the only factor driving the carry trade. It could also be derailed by a rise/spike in volatility - possibly associated with deflationary fears that you mention. This could be a multi-month event, which would eventually require more fed intervention.
Yes, sounds like a likely scenario, but low US rates are not the only factor driving the carry trade. It could also be derailed by a rise/spike in volatility - possibly associated with deflationary fears that you mention. This could be a multi-month event, which would eventually require more fed intervention.
you are not factoring in the mid-term elections - if there is a wall it will not appear until January 2011
Find a seat before the music stops.
Why do Dollar and Equities go up when gold goes down? Because Goldman can make it appear that way - for now. Why is there a dollar carry trade when banks can charge 27 percent interest during a depression? Because we havent drawn and quartertered the instigators on the steps of their institutions, but then that would deny them due process.
There are Tribunals for War Crimes, so why not for "Financial Crimes". At some point (i'd say gun point metaphorically as in firing squad but for sake of arguement how about end of a noose) the minion class will rat out the PTB whereby respective governments (the real government of the people) can reappropriate the wealth stashed in the numbered accounts.
I know this will probably upset the delicate sensibilities of the ZH team (any minions here?), but really this is probably the quickest road to recovery compared to the social upheavals that are in the cards. People here are obviously trying to figure how to make a buck on the next big move in whatever collapses or gets favorable treatment from FED or government stimulus. It's a dead end street - it would appear to behoove the ZH team and readers of this sight to devote time and energy toward directing a political message to the congressional authorities. The wall thet the Geitners and Paulsons help create for the Bernankes and Greenspans (and ...who knows whom) hide behind needs to fall, will fall, and anyone with sound mind needs to pitch in and give a concerted push.
...there's somethin' goin on but you dont know what it is,
do you,
Mister Jones? (-Dylan)
?????
"When people get to understand that this low rate environment is going to be with us for a long time, the seduction of the carry trade will again be the dominant theme".
Have'nt low rates already been with us for a long time? The carry trade will blow up again just like last time. Watch for reversals in the GOLD, OIL, EUR and YEN, most everybody is on one side of those trades. Stock markets have been grinding sideways to slightly higher for weeks on weaker and weaker internals.... The action last week in the YEN and Gold may turn out be the warning shot. When interest rates go up and currency exhange rates have dramatic reversals it will have nothing to do with what the FED does and everything to do with what they have done. They went "all in".
The carry trade is only a small sideshow to the main event – which is the Fed monetizing Treasury debt and mortgages at a rate of about $1 trillion per year.
If this were a zero sum game, then yes, speculators on one side of a trade would have to balance out the speculators on the other side. But it is insane to think that the dollar will hold its value when you throw a $1 trillion in new ones on the market.
I’ll be glad to take the other side of the puny ‘carry trade’ debate and watch gold hit new highs by the end of the year - as the US government debt limit crisis goes into high gear.