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Odds and Ends
The five-year TIPS closed at +.14% on Friday. I got a laugh out of that
price. The low yield a few months ago was -52 basis points, meaning
people paid big time just to own it. To those that did buy the negative
yield I say, “Suckers!” The yield on the TIPS has backed up by
66 bp in just a few months. In bond land that is a very big deal. It
will wipe out a few years of income.
What’s driving the back up in the bond market? Inflation? Inflationary
expectations? If that were the case Bernanke would be pleased.
Increasing inflationary expectations is a primary goal of QE. How is he
doing on that score? Lousy. The chart on TIPs since QE2 was announced.
Note that that the yield on the 10 year TIPS increased pretty much point
for point with the 10 year coupon bond. I read this as the market
saying, “inflation expectations are not the problem”. That flies in the face of logic, but never ignore the market and what it's telling you.
If inflationary expectations are not the cause of the very sharp run up in rates, what is? Answer:
The market sees the deflationary forces mixed with the
inflationary signs and trades it to a draw. The market is shooting bonds
because it is afraid and confused about the distortions that QE is
causing.
Thanks a lot for that one Ben.
****************************************
A quick look at a two-day chart of the bond futures. Just before the
tens and thirty year auction the market (aka the primary dealers) took
bond prices down by a chunk. My scribbles on this chart show the timing
of the actual results of the auctions. In both cases you see a spike up
in bonds post the announcement. Yields returned to the level before the
market smack down an hour or so after the auctions were finished.
Does this matter? No, not really. This is how it works. The primary
dealers are, in theory, taking a risk when they underwrite the Treasury
issuance. So the ¼ to ½ point they rip off the Treasury every month is
just a cost of financing. However, the Fed is on the buy side of the
bonds next week with more POMO, so how much risk do the PDs really have?
After all, a ½ point on $33 billion of new issue bonds comes to $150
million. That’s a pretty good payday for the street.
********************************************
The CBO produced a report on Friday that is worth a read. The title is: Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance. (PDF Link)
The conclusions from the report are not all that surprising. Our economy
and society will be screwed if we delay in getting our house in order.
What else is new? There was one chart from the report that struck me
hard. The CBO did an analysis of which age groups would be most affected
by kicking the can down the road policies. So who is going to be hurt
the most? Children that will be born after 2015. The kids who are not even close to being a twinkle in one’s eyes are going to pay for what we are doing today.
We should be ashamed of ourselves.
****************************************
There was no explosion in Ireland this past week. For the time being it
looks like the folks running the EU have a lid on things. I don’t see a
run on Spain in the near future. For sure the problems will reappear at
some point in the next few months. They have to. They are too big to get
buried for long.
If we are to have a period of relative calm in the EU it does not bode
so well for the dollar. Speculators have to attack something. If the fun
is out of shorting EU bonds then it is likely they will move onto
something else. Given that the US bond market has been in the absolute
crapper for five weeks there is a good chance those bored specs may just
lean on it a bit further. There is no better signpost for the US than
the bond market. If it looks like there is a fear factor on the 30-year
then it will surely translate into some fear of the buck.
****************************************
Lots of concern about Chinese inflation. Up a whopping 5.1% in the most
recent read. This might be the big story of the week. China is not going
to let food prices run up 10 or 20 percent in a month. There are too
many mouths to feed.
New reserve requirements, higher interest rates and most likely price
supports are likely to come. There is going to be an economic "J" curve
when this happens. When Chinese people see that the government is
reacting and some allocations are in the future it will result in
hoarding. When you have a billion people hoard a few pounds of rice it
makes for shortages. And that is when the problems really start. Just a
question for all you stock pros; if the Hang Seng drops 15% as a result
of this, what does the S&P do?
Note: I am the shopper in my house. Fresh vegetable prices are up
a good 20% in the past month or so. I have also noticed that there is
not the diversity of produce I am used to. Some of the stuff on the
shelves is well past it’s prime.
We live in a global village. If China is going to see significant food price inflation, so will we.
»
- advertisements -
buy rice
crash the yuan...
great discussion on US vs China markets. Appreciate everyone's comments and hats off to Orly.
Bruce, great stuff as always.
+1, Bruce. This is a superb collection of information. Thank you.
I have to respond to this question, though:
"if the Hang Seng drops 15% as a result of this, what does the S&P do?"
That's an absolutely silly question. The answer is that the S&P goes up, of course. Pick any action, and the direction always seems to be up, up, up. That's somewhat tongue-in-cheek, but unfortunately it seems to be all too true of late.
The flock is circling overhead; hard to make out if the makeup is black swans or vultures; will it really matter?
The end game has commenced; the can has been kicked too much. The first Qtr, 2011 is going to be an absolute bitch, especially if the CFTC lets 1/19 pass by without position limits, and BAC is not dissolved. We need a positive signal that we can continue to play in a game wherein the outcome has been predetermined. We won't get one; business as usual. Be careful.
I really like your writings, Bruce. They are very good and yet comfortable. You engender trust in the reader.
Have a good one
Ever since the Ben appearence on 60 minutes, I have been finalizing USD exit time lines. The tone of the propaganda just sounded different to me. He did not really justify his QE2 actions, and did not provide a viable exit strategy. Plus he made obvious bold faced lies, and forced 60 minutes to follow a preplanned script. He was not honest, but in a way that signalling to me that he has lost control.
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The CBO report is as harsh as it can be without being shot as the messenger. Which is to say it is wimp. But they get to keep their jobs, for now.
To me it says prepare for fiscal crisis.
But what does this really mean?
Better stated as, what does this really mean to a Congressman?
The CBO is reluctant to mesh fiscal and monetary risk. As if the FED is not their concern. The proposals explored ignore the connections between fiscal and monetary policy.
It is interesting that the warnings made point to hyperinflation. With the focus on fiscal policy. But, what happens if the bond market creates stress on issuance, or the tigger is monetary based? How do we mold fiscal and monetary policy in a coordinated and effective approach without first obolishing the FED?
Perhaps the real message from the CBO report is there is no comprehensive solution to the underlying problems without first centralizing fiscal and monetary policy. Without effective centralized fiscal and monetary leadership, action will only come in response to crisis.
Mark Beck
+1
Word to the wise, never buy fish on sale.
BK, you must be doing your shopping at PathMark
A&P. They ar filing chapt. 11......
Nice read Bruce. Thanks for the education and best as always. You have been a great read all year.
If you don’t like getting SCREWED by the Federal Government, then WATCH the YouTube video “OBAMA DOUBLESPEAK, More Lies, Tax Breaks for the Mega-Rich J” at (http://www.youtube.com/watch?v=_CLiyb7LnCw).
God Bless Wall Street Crooks and the Political Inept!! It’s like “Corky” Runs the Country from the TV show Life Goes On!
Bruce, thanks for the amalgamated post. These are all very good questions you ask. I have some thoughts, if you don't mind...
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"The CBO did an analysis of which age groups would be most affected by kicking the can down the road policies. So who is going to be hurt the most? Children that will be born after 2015. "
Notice that it was directly after this news from the CBO and the bi-partisan back-slapping that went on after an agreement was made to extend tax cuts that the yield on the ten-year note began to rise. There has been upward pressure for a while, as you say, but the drop in the price of the ten-year has really picked up over the last several trading days.
Part of me wants to believe that the Fed is doing this on purpose, like a PPT-action, believing that a ramp in ten-year yields would make the dollar more attractive and US stocks relatively more expensive so they can ramp down the euphoria in SPX just a bit.
It can't be denied that the next day, the Democrats were screaming that they didn't agree to this thing, so yields came off. By the end of the week, they were all back on the same page and yields continued their march higher. Part of the game-plan or is there legitimate concern in the Fed about ten-year yields? Are they really losing control? Something tells me no.
In fact, Santelli said the same thing on Friday (paraphrasing...) "Is this a ramp in yields? Yes. Is this the ramp in yields? Myself and traders down here on the floor don't think so."
_______
"Given that the US bond market has been in the absolute crapper for five weeks there is a good chance those bored specs may just lean on it a bit further. There is no better signpost for the US than the bond market. If it looks like there is a fear factor on the 30-year then it will surely translate into some fear of the buck."
There is just too much "risk-on" remaining in the market to even propose such a question just yet. It is an interesting thought exercise, I suppose, but it is just not going to happen any time soon. In fact, as yields rise, the dollar rises. It still remains the fact, whether we like it or not, that there really is but one safe-haven currency on the planet, the same as there is only one superpower.
What will likely happen is that the yield in the ten-year will rise back to the level it was in June, taking the USDJPY up and the EURUSD and the GBPUSD down with it. In fact, not that I am one to make startling predictions (!) but by the end of the next trading week or into the middle of next, you are going to see some major, major moves in all three of those pairs. Resitance and support will be shattered as traders get a lot more "risk-off" with the deteriorating data coming out of Europe and Britain. I think the real breakdown in the markets will be marked by massive churning at the top of equity markets. Of course, how long that can last is a question only the PPT can answer.
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"Just a question for all you stock pros; if the Hang Seng drops 15% as a result of this, what does the S&P do?"
I am hardly a stock pro but I would like to offer a thought...
The Hang Seng is built primarily on real estate and banking shares and shouldn't be correlated to the SPX. Same as the Shanghai Index is called the "Chinese market," when, in fact, it is little more than a pink-sheet speculative playground for Chinese barbers and sanitation workers.
If food and wage inflation do pick up in China, one would expect the real estate market to come off as well but the driver for the Hong Kong moves are going to be predicated on what everything else in the market is predicated on and that is the price of the US dollar. Dollar up, Hang Seng down, along with the DAX, FTSE, ASX, Sensex, NASDAQ and IBEX.
More risk-off coming up!
:D
Orly, assuming you are right about the EURUSD, do you think buying gold would be a good way to hedge the euro? The last time the Euro tanked, going from $1.40 to $1.19, gold was a good hedge. Is there any reason to think the same strategy wouldn't work in the scenario you envisage in the next 10 days?
Yes, there are reasons to think that the strategy would not work now:
For a very simple graphic demonstration of what I will say, just overlay last week's charts of gold and the price of the ten-year US Treasury note and you can see that there is a direct correlation to the movements. (Also, to overlay a chart of the yields on the 10-year would show you the inverse correlation...)
Now overlay a chart of the EuroDollar and notice the exact same correlation.
"The last time the Euro tanked, going from $1.40 to $1.19, gold was a good hedge."
Yeah, but this time, it's different. Last time:
Now, the trend for yields in the US ten-year is definitely up by any measure and how quickly it ramps depends on a lot of things that I am not privy to. The main driver right now in the markets are the skittish US interest rates, so anything Bernanke whispers on TV will have a great impact, so gold will be extremely volatile over the next few weeks.
Remember, too, gold doesn't pay interest but US Treasury notes do.
Basically, as US yields rise, the dollar rises and investors will seek yield by moving, perhaps quite quickly (see gold ca. 1983 for an illustration...), out of PMs and more risky trades altogether.
Back to King Dollar.
:D
Thanks, Orly, for your generous response. I always look for your comments, particularly in Bruce's columns.
Completely agree. I look forward to your thoughts Orly.
bk
Thanks. I hope I am not too boring. Far from being an expert in anything, I am trying to learn as much as I can. Your columns, Bruce, help me to think in different ways and I appreciate that.
:D
You're most welcome.
:D
""Same as the Shanghai Index is called the "Chinese market," when, in fact, it is little more than a pink-sheet speculative playground for Chinese barbers and sanitation workers.""
good reminder, for in China, the RICH can/do afford Real Estate (very large down payments),
whereas the Prols' can only afford to play the stock market....
Hum? does that mean its all 'dumb money" sanitation workers and barbers and maybe (small time) pig farmers?
maybe Metastock, the obsolete application regards USA stock markets...MAYBE it might just WORK against pure dumb money??? ha ahh, no?
So if you suggest using neither the $HSI nor the $SSEC, what are you supposed to use to gauge relative strength to US markets? The FXI is narrow but at least it is a composite of the big guns.
And call the $SSEC what you will, but I'm sure a few barbers and sanitation workers did pretty well from 2005-2007. But a lot of the later part of the rally was built on the retail investor, many of whom got burned in the consequent drop back down to current levels. And short selling is banned in China, so no squeezes to initiate a strong trend higher.
And as China continues to underperform, the other index to watch is the Sensex - and it is showing signs of churning at its previous highs.
Banning short-selling is like dumping honey into your primordial soup of fraud, the market has no way of checking fraud's growth without short-sellers. WTF?
Exactly - Which might explain why Hong Kong and Tokyo permit it. And can you really think of anything in China that might NOT HAVE fraud?
I'd read back in late 2007 where in Shanghai during the height of the market bubble, young workers spent more time in the stock market than any other activity outside of their jobs. Speculating in any companies with PEs in the thousands, and the cheaper the better - they rationalized that such companies would eventually get bought out. But after the bubble burst a lot of those very same investors got reamed pretty bad, and have since been leery. And that is supposedly one reason why the market in the country that is supposed to be the next great world economy has struggled to get moving - they know the ponzi scheme.
That is the nature of bubbles - I recently saw a news report about young Indonesians now getting into their stock market, which has been very strong this year but now appears to be at a top. So when the retail investors start piling in, the smart money starts getting out.
About short sellers working toward exposing fraud, I can't agree more, but financial markets will always work in favor of the longs. Case in point, just look at the bank ETF (KBE) the last two weeks - it's been the biggest dud the last year but now there's an effort to get that sector going. I would think, it's been a dud because traders are skeptical, but suddenly an upgrade by GS and then a massive short squeeze - but have the banks' fundamentals changed suddenly in the last month? Do you see the condition of the banks improving over the next 6 months that justifies upgrading the group?
My point was that they will all pretty much mirror the moves in the USD. Relative strength is just that: relative to two chosen trades. As I said, I am not a stock trader but I would have a hunch that Shanghai is still rich while Hong Kong is about right, relative to the SPX.
If my reading of the charts in EURUSD and GBPUSD are correct, there could be a pretty quick correction, in nearly all equity markets coming within the next ten trading days. The Euro has ramped down in a tightening channel almost to the Fibonacci level where it air-braked two weeks ago. Kiss me once, watch out. Kiss me twice and it is over with.
These next two weeks are going to be wild!
recall Bernanke actually jacked rates (pre-2008?) to take some of the spec out of the commodities trade, but he never went back for seconds. Problem is they know he's bluffing and they buy the dips even harder. And in this all in one market you might start something you can't stop. In the first China syndrome crash, the myth of decoupling was pretty much exposed. There is no stopping the Wall Street mind from smoking the same mattress stuffing and telling everyone they are getting high.
Is this the ramp in yields? Which yields? Suppose mortgage rates ramp and the UST does not? (the banished risk premium returns to the lending market, speaking of decoupling) In China inflation runs ahead of interest rates, has and will probably for a long time, but the two should correlate even if they are offset the wrong way. I expect the US to follow, with maybe 5% inflation and 2 1/2% on the note, for a whopping 50% premium, but the public really only sees the nominal numbers, and they won't be too outraged. If you went to 10% and 5% the impeachment proceedings would be under way, even if it is the same thing really. Which is why I pounded the table on TIPS a couple years ago, not the bond fund, but direct ownership. TIPs would hit the sweet spot in such a rate overhang environment, and my be why they are catching a bid now. At the time they were often selling at a discount to par, but the Fed front runs now? If they would pay you buy inflation protection, well sure, I'll have some.
"Is this the ramp in yields? Which yields? Suppose mortgage rates ramp and the UST does not?"
It is my understanding that mortgage rates are fairly set by Fannie and Fredie and they use the ten-year US note as the lending basis.
Mortgage rates hit a six-month high on last Friday. Which is why I am so confounded about this move and whether it could be orchestrated or not; why would the Fed endanger an already anemic US residential real estate market? There must be some other ways to get equity speculation under control than to punish middle-class homeowners.
when you say "fairly" priced, you lose me. One thing which happened I believe was an extension of the upper limits the GSE's would go. I think its 750K, which in this deflated housing market is even more generous than it seems. It could be the high end of the market can bear those rates, and the borrowers at the low end are going to pay to play, for years Maxine Waters complained that the system was rigged against the low end first time buyer, and amounted to usury. Probably not much has changed. If higher mortgage rates did turn out to inflationary, that would help the middle class homeowner, whose wages would rise along with it. Inflation is a thief, but selling debt forward in a rising rate environment is one way to beat it, and the Feds game is always to extend debt, or money into the future. Why they call them inflationists.
" Maxine Waters complained that the system was rigged against the low end first time buyer, and amounted to usury"
True.. Lets not forget that there are near 3 years of ARMS and interest only mortgages about to roll over and IF the parties are able to pay a higher rate...great. If not and the defaults continue ( and they are anyway) the FED will buy the junk just like always. This game is not over by long shot.
Everyone take your minds to a point a mile high and look at all around you, past, present, and see the future. The big picture has not changed, the destruction of the lower and middle classes.
The FED will not let the banks fail. If the banks become the largest land owner in the country, great...they will rent to all the homeless and enjoy their 'no loss' position guaranteeded by the FED.
The PD banks have every interest in seeing the interest rates rise. The 'free money" commissions on QE2 will not last that much longer and the banks need easy money no matter how they get it. And they don't care how they get it.
Inflation, come on folks open your eyes. A box of crackers that was 3.50 for 16 ounces is now 3.50 for 11 ounces. Like everything that is wrong, people do not want to look at what they know is happening. Every commodity is sitting at a record, people are still having more people, people are living longer, and people in 3rd worlds are competing for the same goods as you now. Deflation is a pipe dream. Inflation is here, and the march to higher rates is on.
With the Bonds for America program likely out of the picture, muni's rates offered must go up and in turn corporate, and unless the FED is the only buyer for T bonds, T bonds must go up too.
@grateful
" If higher mortgage rates did turn out to inflationary, that would help the middle class homeowner, whose wages would rise along with it. "
I don't see any cause and effect linkage. Rising mortgage rates will result in lower bids on houses -- deflation. Why would wages increase? Is China going to suddenly take pity on Amercan borrowers and become less competitive so everyone over here can get a pay raise?
Sorry. My vernacular...
Fairly, meaning, "pretty much..."
"If higher mortgage rates did turn out to inflationary, that would help the middle class homeowner, whose wages would rise along with it."
Not necessarily. With such a tremendous slack in the US economic capacity, wage increases would not be met with nearly the speed at which inflation can ramp. A stagflationary environment would ensue.
you're probably right about wage pressures, there is somebody who has a website, dedicated to promoting the accumulation of debt as a means of retirement savings. a simplified form is the 30yr fixed rate mortgage at historically low rates. the downside, deflating wages and personal income, deflating housing asset prices, but of course history suggests that the inflationists always win out, your debt gets scrubbed.
Bruce,
I think the one glaring hole in your analysis is not addressing the fact that yields are being influenced so heavily by Bernanke & Company, themselves.
I know you do write "[b]onds are weak because of QE," but that really doesn't do the analysis full justice, IMO.
Isn't it the case that all yields on bonds and bond-like assets are far lower than they would be in a free (or free-er) market because the treasury note of the U.S. is such a benchmark competitor, and as The Federal Reserve is basically buying so much of issued U.S. Treasuries, this effectively keeps yields on treasuries artificially low, thus decreasing yield pressures on competiting instruments in the overall marketplace?
Isn't it possible that yields aren't rising that much despite inflationary expectations?
yep - another rigged "market"...this one the Big Daddy. isn't it why the "vigilantes" jump in from time to time, try to nudge it forward another inch towards reality?
Robot could we please see more boobies?
yes, a lovely pair of brains...
I have been hoping for rice riots. If the.Chinese don't start playing nice and repeg a little then we have no choice but to turn up the heat. With 40 percent of Chinese income devoted to food we can take the heat a lot longer than the Chinese. Rice riots are the ace of spades and.hopefully we dont have to play that card with Qe4. But we will if they don't repeg because they are causing great instability with mercantile policies. Hint for Chinese...mercantile policies in someone else's fiat will bite you in the ass.
jr dick suck you drunk again after hitting the pipe? stay off the meth bro and sucking dick for rent won't be such a problem.
i see the last TIP auction (11/15) went at a staggering 8 point premium to par, which is more important that the yield, because it indicates how much the buyers are willing to pay up. If the Fed monetizes these TIPs is that at par? Hard to figure that angle.
China Inflation= US deflation, that according the Prechter
I do the shopping too, and share your lament at the produce, high prices low quality. we have a thing called Trader Joes, which is a British? owned private retail chain, which shops the globe for healthy, affordable products. There is almost no commercial brands, they have their house brands and locally procurred healthy meats, produce. They use inventory flexibility, in that if something isn't available at the price they like, they simply drop the item and find something that fits their standards.
for price and selection on produce there is a latino run chain which has the most and best and cheapest produce, (you have to knock the dirt off some of it) and a meat market. that part rocks, where you have to take a number. they also have a van which picks you and takes you home. Many latinos don't have cars, or only one car. not sure how organic their produce is but at my age, probably doesn't matter. for SoCal laid back these guys have a real going operation. they likely have a low cost connections from south of the border to bring some of this in to serve the latino demographics, which is growing.
I don't see that the pressure's off Spanish bonds at all. The 10-year closed at 5.41, down from the multiyear high of 5.5, and back up half a percent since the EU kicked the can:
http://www.bloomberg.com/apps/quote?ticker=GSPG10YR:IND&n=y
Portugal is back up at 6.26%, down from 7% since the EU did its thing, but up 40bps from there.
http://www.bloomberg.com/apps/quote?ticker=GSPT10YR:IND&n=y
RobotTrader, do you have a website? I am going to take a few grand after X-mas a try some trading. never traded would like to give it a whirl. I saw your post yesterday, no need to sit around waiting for the world to end, I'm as ready as I'll ever be. I don't know where to start. I'm cool with risk,
I am a newby too and I am ready to give it a go myself next year. Maybe we can build a support group. Benelli M4 here.
http://www.zerohedge.com/forum/fiat-paper-bubble-run-your-lives
Nothing gets done in the last two weeks of the year so yes, it's all quiet on the western front. Congress and Obama just signed us up for a $2T increase in the debt next year. Do you honestly think the bond markets won't notice? It all works (buy the f-ing dip) fine until the day it doesn't.
The FXI is definitely something to watch.
It has been lagging, and it needs to turn up ASAP.
However, if you recall, in the 2003 - 2007 bull run, the FXI really didn't get moving until 2005.
I remember watching the Shanghai Composite getting crushed week after week while the rest of the world markets were skying. in 2003 - 2004.
I'm a little worried robot. The zero hedge crowd may be turning bullish.
you don't know the first thing about the zh crowd. worry about your halitosis, feltching cum breath.
why so worried? you don't need to 'worry' about the zh crowd ok dick face?
That's right. If there is a covariance, it is a negative one. When one is down, the other is moving up.
Look at the three year chart of FXI vs SPY and you'll see a very strong correlation (close to 1). They move together. This alone should debunk any silly de-coupling theories regarding emerging nations or China. Moreover, as Soros once observed, the world economic system is like the body circulating system; when a freeze hits, the capital (blood) flows back to the central core, the West (heart) quickly. Thus, FXI crashed harder than SPY in the fall of 2008 (-60% vs -40-50%). And we've recovered better too. Asian investors are even more easily frightened than Western ones!
But if you want to know where you want to be when the next big one hits look at a coplot of GLD vs SPY. GLD up 75% while SPY and FXI down -15% and -30% respectively. So, there's a nice pairs trade. Long GLD short SPY, a great buy and hold fiat debasement trade.