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Jim Caron Does It Again, Downgrades Bond Yield, Economic Outlook For 2011
As many recall, Morgan Stanley's always cheerful, and unfortunately always wrong on the first try, Jim Caron had a target of 4.5% on the 10 Year for 2010 only to see the bond trade at half the yield at year end (a call for which he later apologized). Today, following another comparable bullish call on yields (and thus inflation, and the economy) Caron has done it all over again. "We see the key risk to the market as a downgrade in growth expectations for the quarters ahead. This could happen as early as this month if the data does not materially improve after a big miss in 1Q growth and keep us on track for reaching 3.4% consensus 4Q/4Q growth in 2011. And despite today’s stronger headline release of NFP, the Household Survey, which we saw as a leading indicator of jobs, fell 190K and the unemployment rate rose 0.2% to 9%. This keeps us wary of growth prospects in the months ahead. As a result, we recently turned neutral from bearish bonds. We also see risk for curves to flatten as yield forecasts may also get downgraded along with growth." Gee, and it was only on April 7, that this strategist wrote: "Overall there is little doubt that policy in the US continues to be very easy, which presents a risk that markets may tighten those conditions well ahead of the Fed, especially if Q2 growth is back on track. This is why we think that the risks are skewed toward higher rates." What a difference month makes. But that's ok, just like when Caron turned bearish on bonds in 2010, promptly followed by Goldman going all out in its QE2 demands, so this time the very same action, now that 2011 is a carbon copy of 2010, we fully expect Wall Street demands for QE3 to hit a fever pitch within 3 months tops.
From the most recent capitulation:
The market expects the Fed to go for growth. In their latest forecasts, the Federal Reserve downgraded growth expectations and upgraded inflation prospects. Thus, this is the key debate in the market: Will the Fed support growth or fight inflation? The market’s interpretation is that the Fed will strive to support growth and will ignore inflation (at least for the time being) and that this is a bullish sign for risky assets. We agree. Based on Bernanke's comments from his press conference last week, we believe short-term interest rates will remain lower for longer despite the upgrade in the Fed's forecast for inflation.
Lesson learned from Japan. At this point in the economic cycle, if you have a choice between supporting growth or fighting inflation, one would tend to choose growth – because in theory, it’s harder for the Fed to spur growth from low levels than it is to keep inflation in check. This, after all, was one of the reasons the Fed adopted QE2. At the time US growth was teetering dangerously close to a stall speed of 2%. By our estimation, if US growth fell below 2%, it would accelerate deterioration in the economy.
We thought it would push the unemployment rate above 10% rather quickly, the personal saving rate would spike, consumption would decline rapidly and many of the delevering issues of the past crisis would return. Simply, the Fed wanted to avoid falling into a low/slow growth spiral that has unquantifiable impacts to consumer psychology that would be hard to reverse, as has been the case in Japan.
Divergence developing. Expectations for Fed rate increases and movement in the S&P have been relatively in sync (see Exhibit 1) — as economic expectations grew, risky assets went along with these expectations (and vice versa). But now we are seeing significant divergence. The market is pricing a backdrop of lower fed funds for longer, and the risky asset markets are taking this as a very bullish signal. The market is arguing that growth will be supported over controlling inflation, and that is the opposite of what many economists expect.
Inflation expectations playing a diminished role. Our fair-value model for the level of 10-year rates shows inflation expectations are currently playing a very small role in defining the level of rates. So while inflation expectations may rise or may be somewhat volatile, they don’t matter all that much with regard to the level of interest rates at this point (see Exhibit 2). Even though the Fed has increased its view on inflation, the market appears to have judged that any bump up in inflation will be more transitory. The market apparently believes that yields will remain relatively low and that the best determinant of longer-term interest rates is where short-term rates are going. And the outlook is for short-term rates to remain low for an extended period.
Conclusion: The Greens, or the 2y1y rate, are most likely to richen if growth expectations are downgraded. In Exhibit 3, we highlight the term structure of 1y rates. We illustrate that the Reds-Whites curve, or the 1y-1y1y curve, has flattened considerably but the 1y1y-2y1y curve, or Reds-Greens curve, has remained relatively steep. We argue that the front-end forward curves will flatten point by point if growth expectations are downgraded. And since 1y1y rates have significantly richened, 2y1y rates may be next. We would like to express this trade conditionally because it is predicated upon a possible downgrade in growth in the future. If growth is not downgraded, or if it's upgraded, then the 2y1y point will cheapen. Our goal is to limit exposure to that scenario.
This merely confirms our long-standing thesis that "Economist" is merely another word for "momo trader" with just that extra bit of negative connotations.
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In case you have not heard, Rush Limbaugh referred to ZeroHedge and Tyler, commenting on the false job creation post earlier. I kid you not, ZeroHedge quoted on Rush Limbaugh.
Tyler, this must be why Barry said you're a dittohead
Where was Rush during the Bush government and war expansion?
Rush had his lips surgically attached to W's behind for 8 years.
Rush knew with his legal problems, he might need .gov on his side.
oh shit, ZH just jumped the shark
Was that on todays radio show? I'll try to locate it if I can get a date.
It was on today. I was driving in the car and happened across his station just as he was saying it. This is a financial website he "likes to go to". He gave an accurate account of Tyler's analysis. My first thought was "There goes the neighborhood!" The guy has a huge following and with the way he presented it ZH can expect a huge increase in hits. As soon as they get processed through you can expect a lot of new members with a neo-con mind set. I think Texas Gunslinger just got help in his crusade to rid this site of its 'evil'. I'll be interested to see if things change around here.
If you want a free-bee. Click on CNBC , and scroll markets. Click on bonds.
Ah yes, infinite growth on a finite world. Hedge accordingly.
All the bullshit economic indicators that the MSM and these TBTF's/TPTB are focused on are nothing more than Keynesian illusions of grandeur. If these indicators in their useless models actually said anything about the real economy, then we would have a better yardstick and less 'funny' business. Unfortunately, this is not the case and everything they use is geared towards how to goose the fractional reserve banking ponzi.
Yet another tool to fool, numb, and divide the peasantry into meaningless debate all the while being exposed to the biggest economic genocide humanity has seen.
Another day of ZIRP....
All of these less than 1% freaking percent!!
COUPON MATURITYDATE CURRENT
PRICE/YIELD PRICE/YIELD
CHANGE TIME 3-Month 0.000 08/04/2011 0
/
.01 -0.005 / -.005 15:06 6-Month 0.000 11/03/2011 0.06
/
.06 0.005 / .005 15:03 12-Month 0.000 05/03/2012 0.13
/
.16 -0.01 / -.010 15:03 2-Year 0.625 04/30/2013 100-04+
/
.55 0-01½ / -.024 15:08 3-Year 1.250 04/15/2014 100-29¾
/
.93 0-01¾ / -.020 15:08
Morgan Stanley out with a rational report? Actually mentions they look at household as leading indicator? Have they been reading too much ZH?
Their bond-yield call is spot on -- for three months ago. This probably means yields have bottomed out.
Yes, but when will Bianco remove Bernankes dick from his balloon knot.
Yo Mistah Durden...great article. Caron is now an official "Economissed".
But who can blame him? He just sits in his office of grandeur in MS and writes to protect his $1MM comp package by writing what his traders were told 3 hours ago.
All these economisseds are like day traders with their opinions these days. But with the Fed and Treasury trying to controll the price of assets, what's a Canali suit supposed to do?
i have improved a bit oil price prediction after the previos Feb 6th version correctly timed/priced current dip:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&p=32261#p32261
Current oil price dip will end in May.
ivars...there are 25 days left in May....what day should I buy oil? What price? C'mon if you are going to prognosticate at least put 1 finger on the chopping block.
may i suggest: jim "carom" caron?
You must be printing it Slewie.
May Grey will go away. Sit tight.
Can we add Yardeni to this list of misfit econ-punk, douchtards?
Now Now! Don't be too tempestious.
Jim Caron had a target of 4.5% on the 10 Year for 2010
And this guy still has a job? On Wall Street? Not as a stand-up comedian?
So yesterday was the continuation of the great de-leveraging and today all is well thanks to 7,000 new jobs. Idiocracy really was a documentary after all.
LOL, LOL, and LOL