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Don’t Kid Yourself. Interest Rates are Going Up.
Make no mistake. The shot has been fired across the bow, the chink has appeared in the armor, and the crack has opened up in the dike.
The Fed’s move to raise the discount rate on Thursday from 0.5% to 0.75% may have been technical, widely telegraphed by the Fed minutes, and an unwind of an artificial spike down in rates the economy no longer needs. Sure there was only $15 billion in loans outstanding at the Fed window, against $1 trillion in excess bank reserves.
But it was definitely an UP move for rates. The liquidity tide that has been floating all asset boats has reversed and is starting to recede. We’re about to find out who has been swimming without a swimming suit. The train is leaving the station.
Next week the TALF expires, eventually sucking another $1.5 trillion out of the system. The Fed is reverting from its role as the lender of first resort back to its traditional role as the lender of last resort. Inflationary expectations are going to rise.
While overnight rates are going to remain miniscule, probably for the rest of the year, the long end is going to take this less well. That means that one of the steepest yield curves in history is about to become a lot steeper. I’m thinking the face of Half Dome.
Now I know that I have been predicting that a short in 30 year Treasury bonds will be THE great trade of 2010. But don’t pop the champagne bottles just yet. Without more aggressive Fed action, the rise in long rates is unlikely to be a sudden, panicky spike.
So while you can comfortably sit with non leveraged short play like the TBF, you are going to have to nimbly trade the leveraged ones like a demon, such as the TBT, to keep the cost of carry from eating you alive. You are still sailing upwind against a 4.7% yield, and you can multiply that with leverage. Think of it more as a slow ground offensive, than a lightning fast aerial assault.
But it will grind us inevitably closer towards a major triggering event that will bring real fireworks, my favorite being a failed Treasury auction. If your spouse has a divorce lawyer pounding on your door unless you buy a house tomorrow, make sure you do so with a 30 year fixed rate mortgage. It will be the last time you see sub 5% mortgage rates in your lifetime. Better yet, dump the spouse.
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .
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Thank you for your time putting these in writing.
I always respect the position of those who end their missives with spouse-bashing.
Yeahhhh, interest rates might be going up, but you would be an idiot to buy a house nowww..
Rates are going to go up, and prices are going to crash--Would much rather buy a cheaper house at a higher rate than a wildly-overvalued house at a cheaper rate.
There ARE ZERO fundamentals that justify current housing prices.
So, by your "logic," the Fed is going to suck billions and trillions of dollars out of the economy -- and there's going to be inflation because of it??
Milka-whaaa???
Better luck next time, madhedgie....
He's gone mad!
MadHedge, but when? Next month, next year?
What's the point.
Buy and Hold, it's the only way!
Not.
My number for the next four years is $120b of new supply each month. That is just an average number. It will actually come in bunches. Big bunches.
Lets put it this way. that has never been done before. Don't count last year's big issuance. Ben bought 1.75T of coupons. So we are entering into a whole new ballgame.
I would watch this trade. The negative carry is a big weight. You can suck wind with this for a month and then a hot number comes out and bails you out. But it has been impossible to stay ahead with a buy nd hold short on bonds. Maybe tomorrow is different. For me this is a timing trade. If you can't make money in it in 3-5 days move on.
Japan Hoarding Treasuries Counters Retreat by China
Bloomberg today. My money's on those inscrutable Asiatics...
Got duration?
Who knows this cycle better, Wall St or the Japanese?
http://www.bloomberg.com/apps/news?pid=20601009&sid=aUaFf71VVrR4
Japan Hoarding Treasuries Counters Retreat by China - BBG 2/22/2010
In a Bloomberg News survey at the end of 2009, Barclays Capital Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of the 18 primary dealers that trade directly with the Federal Reserve forecast the 10-year yield would rise to 4.14 percent in 2010, from 3.84 percent on Dec. 31.
“Employment is very fragile,” said Hiromasa Nakamura, a senior investor who helps oversee the equivalent of $21.1 billion in Tokyo at Mizuho, part of Japan’s second-largest bank by assets. “U.S. households will increase their savings. That’s negative for the economy and positive for bonds.”
Nakamura said the yield on the benchmark U.S. 10-year note will decline to 3 percent by June 30 from 3.80 percent today. Investors would earn 8 percent if Nakamura’s forecast is accurate, according to data compiled by Bloomberg.
Once upon a time ...those of us that have saved ....got some interest on our money....
Now we get the 100% tax of no interest imposed by the govt. to reward those who lost their money by making bad bets....
Question is....
Why do I have to pay them ?????
Why am I taxed 100% ?????
Mad. I tend to agree on the trend to higher rates, but what about flight to safety issues if European banks debt exposure to emerging markets is exposed plus more sovereign debt crises? What's your view on this?
What happened to all those guys who were screaming to short JGBs when the Japs bailed out their failed brokers in 1998, and then after they started QE in 2001? I hope I don't have to post charts. The JGB bears have been eaten alive.
Stag party just for a few more months. Inflation is at 10% and rising and small rate hikes are going to matter? no.
Must be your own inflation statistics.
Listening to a variety of sources helps to ease any burdan of a single opinion. From what I can tell, Mr. John Williams does some good work, so I look to him and others....
http://www.shadowstats.com/article/consumer_price_index
I used to hear bullshit like this in the boardroom when I was a rookie stockbroker 20 years ago. We did a lot of damage with our great ideas, supplemented by the great research we heard on the Morning Call, not to mention the excellent business building ideas offered by the free lunch purveyors. Good thing with a hedge fund they are all qualified investors with throw away money.
The "short the 30 year t-bond trade" is looking stale and overcrowded, particularly with the global recovery now in
serious doubt and the record decline in bank loans.
Debt and tax service are DEFLATIONARY. So look for further economic contraction, defaults, etc.
Energy may rise due to production declines and that will have an impact on food prices. So "volatile" food an energy will rise. But everything else will fall.
If the Treasury continues to raise taxes and forces tens of millions of families and small businesses into bankruptcy, the banks will be able to swoop in and scoop up their liquidated assets at pennies on the dollar.
Deflation is good for the "TBTF" banks and for the US Dollar too -
the banks will be able to swoop in and scoop up their liquidated assets at pennies on the dollar.
And Then what? There will still be the not-so-subtle problem of no one being able to re-purchase: "consumers" are totally strapped.
Although open for (perhaps too much) debate, what we could be seeing is the destruction of assets that will NOT be serving us in the future, a big paradigm shift (energy influenced). SUVs, granite-counter-top mansions etc.. I think that the big boys know this, and that's why the banks aren't really wanting to make big grabs; they're looking to government to set the path, legislation that hard-wires the flow of subsidies... but, it's clear that no one has a clue; when the tide goes out we will see that it wasn't a sea of oil, oil, THE cheap slave that has enabled the big bubble that is industrial society.
Silly me! The government will re-purchase! Duh! (until the music stops)
Except when the asset side of their balance sheets are composed of unicorns and derivatives on property in Fantasy Land.
long the 30yr will indeed be a nice trade this year. ~3.50% at end-of-year will be close to 25% return.
wait - you didn't say 'short', did you? what planet are you on?
Bank holiday coming:
Paul Joseph Watson
Prison Planet.com
Monday, February 22, 2010
A new advisory being sent by America’s third largest bank to its account holders has stoked fears that major financial institutions could be preparing for old fashioned bank runs if the economy takes a turn for the worse.
Originally reported by John Carney over at the Business Insider website, Citigroup is sending the following information to customers along with their bank statements.
“Effective April 1, 2010, we reserve the right to require (7) days advance notice before permitting a withdrawal from all checking accounts. While we do not currently exercise this right and have not exercised it in the past, we are required by law to notify you of this change.”
If you think this is news, check your bank's account agreements. Odds are pretty good you are already subject to this potential restriction and don't even know it.
A few minutes and Google will get you:
Bank of America Deposit Agreement, Section XX.Q.
JPMorganChaseWAMU Account Rules, Page 11.
SO we will be the only G3 nation raising rates, ramping the USD with the goal to kill the inflation bogey man and crush any sort of housing recovery, mutlinational competitiveness at the same time....think not Mad HFT but really like your articles. Look for the Reston 6 hedge funds continue to grow assets at above mkt rate...
Rates don't go up in Depressions. I guess this time is
different?
Tell that to the Argentinians. Or the Greeks.
Wait and see time. Mortgage rates are moving north now but time will tell if this is a long term trend (without increased intervention)
BUY. PHYSICAL GOLD. NOW.
"Next week the TALF expires, eventually sucking another $1.5 trillion out of the system."
Huh? TALF funded 1.5T?
Are you talking about the MBS program (which was not TALF)? When is that money going to be sucked out of the system? Over ten years when the mortgages pay down?
Pay down???? You meant defaulted didn't you?
Deflation will be the dominant winner through about 2015. It will take that long for the slow bleed (deleveraging) to free up some credit capacity. You can't get inflation if the consumer is not spending and they aren't and won't be anytime soon. We may see isolated inflation in the energy, metals and food industries, but they will only inflate until they become to much a burden on the zombie US consumer which will then spin or ecomomy downward into many "mini" recessions for a long time to come.
Things could get better quicker if they would get on with the ever so needed liquidation of all this rancid, misallocated debt as well as the cutting back spending in the local, state and national governments that is clogging our system.
Cliche, that is...(pronounced klee-shay) is a saying, expression, idea, or element of an artistic work which has been overused to the point of losing its original meaning or effect rendering it a stereotype, especially when at some earlier time it was considered meaningful or novel. Sorry, MHFT.
But at least we will see who is swimming naked when a shot is fired across the bow of the train leaving the station.
Congratulations!
That was the best head-spinning mixed metaphor I've read in a long time.
Thanks for the chuckle!
I am seeing a chiche' spike in the MHFT Index.
Once Lord Blankfein and his Tribe are positioned correctly, trading ahead, way ahead of the 'news' the rest of the world gets, for their further enrichment, he and his "coincidences of interestees" will tell the FED what to do next.
It matters not whether it is keeping rates the same, raising them or lowering them. All that matters is the positions that Lord Blankfein is building.
All the rest is just conversation.
It all comes down to whether a hard $USD oil peg exists. If so, and Ben has to once again allow the market to set interest rates, as opposed to printing with abandon, then this bitch is going down.
With longish term rates heading north of 6-7%, it's good night Irene. Our little $1.7 trillion deficit isn't gonna get financed. When that happens, the states are on their own. (No more, cough, 'stimulus' to mask direct state subsidies.)
See my post above for happens next in the great state of California.
Ah yes, the hard USD oil peg. Yet another guy that thinks oil is infinite.
You're going to starve and die. Oil is not infinite. It doesn't have to run out to starve you. It only needs to be insufficient, and that's what it's going to be.
Gold won't help you. You can't eat it. Guns won't help you; they just inform the mobs of where you are with food.
Oil runs the tractors that plant the hundreds of thousands of acres. That is going to stop.
And then most starve. You want to prepare? Prepare for that.
So, I take it that you don't have a series of solar panels that can drive an air compressor, a bunch of air tanks as batteries, a tractor that runs on compressed air, and some farmland.
YOU HAVE BEEN WARNED
So what's the result of failed bond auctions then? Since spending can't/won't be cut and if you think they won't print which will break first? I mean it would be a hoot to see the USA default on it's debt and not print it away, is that what you see happening? Most of the states are screwed as is the whole system, so whats left if there is no printing other then debt repudiation? I mean I suppose they could just start seizing and taxing to a massive level but that might make a few people decide that they will fight to keep what they have.
Of couse we're going to print our way out of this. Don't expect them to call it that though. They'll think of some other interesting name for it.
"Targeted Quantification" or something like that.
This exchange took place over on the state finances thread, but it seems appropriate to re-post here:
by B9K9on Mon, 02/22/2010 - 08:29
#240159
California has a projected budget deficit of $20 billion dollars for 2010-2011. However, this does not include a negative balance of $6 billion in UI funds owed to the fed.gov. Since the UI deficit is increasing each month to the tune of $500m+, we're looking at $12 billion at the end of the year.
The total proposed California budget for 2010-2011 is around $100B, so the 20+16 puts us in the territory of running a 35% deficit. Since (state) debt has increased 80% over the last 3 years to $50b ($100b if one adds in local), any reconciliation is going to come out of expenditures.
So how does one cut 20% (assuming the UI debt is forgiven by Uncle Sam)? Well, considering that total state employment costs are around $25B, you could fire everyone and still almost run a deficit. So what's gonna happen is that it's going to come out of schools (previously untouchable) and social spending.
I forgot to add that pensions are significantly underfunded, so if we add in wandering students, out of work teachers/gov't employees, the unemployed who are no longer receiving support and retired cops without pensions, if 2010 doesn't do the trick, 2011 is when this thing is gonna blow.
And some people think we're looking at hyper-inflation. Snort.
by lookmaon Mon, 02/22/2010 - 08:42
#240169
How can you make such a great case for hyperinflation and then throw it all away with such a goofy line at the end?
Hyperinflation is simply monetary panic in the face of crushing deflation. The crushing deflation is a cause of and prerequisite for hyperinflation. You have made the case for hyperinflation pretty well, bravo.
by B9K9on Mon, 02/22/2010 - 08:48
#240176
Asset prices drop, forcing the relative value of debt to increase, so the absolute value of currency ... declines?
I fall in the camp that believes there is a hard $USD oil peg - the days of unbridled QE are done.
I failed to mention that the state of California is hoping the fed.gov contributes $10b to state coffers so that they only have to cut $10b. (10+10=20 total deficit.)
The fed.gov money is not forthcoming. This is telling those who spend their time combing through 1,000 page budgets what is really goin' down.
Interest rates going up? Inflation around the corner?
Got gold?
-------------------------
NATIONAL STRIKE
APRIL 15 to APRIL 18TH
TELL EVERYONE YOU KNOW
POST THIS ON EVERY DISCUSSION BOARD
www.taxfree15.com
Good luck. If you are a lucky enough to be chosen as an IRS lottery winner (they decide to make an "example" of you), you will be jailed.
Or you can fly your plane into the closest IRS office that is over one story.
Wake up folks, we live in a dictatorial police state. Get used to it or get jailed.
hang separately
Ripped Chunk ...
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace. We ask not your counsels or arms. Crouch down and lick the hands which feed you. May your chains set lightly upon you, and may posterity forget that ye were our countrymen."
-- Samuel Adams, speech at the Philadelphia State House, August 1, 1776.
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And with that said i expect to hear you also went on strike because you and millions of others feel it is the right thing to do. If not strike, please leave us in peace and we all wish you well in your possible slavery to the State.
And you're proposing what, exactly as the alternative? It'll do you well to remember that one of the first things the Founding Fathers did once independence was declared was create the federal government. Then, they discovered that making a pissant weak government was almost worse than no government, so they made a stronger one. So, again I ask you: what's the alternative?
mumble to ourselves and keep taking it up the ass?