10 Year Treasury
Think back over the last 10 years - how different was your life in April 2006? While you may think your daily existence is largely the same (maybe the kids are older or you’re married now, but that about it…), consider what was actually different about your life in the spring of 2006:No iPhone;No Facebook (unless you were in college at the time); No Twitter; No Instagram; No Kim Kardashian; No Uber; No iPad.
Should US monetary policy not be on the path to normalization, a fundamental change in the benefit of gold ownership is taking place, and this increased investment demand should lead to higher gold prices. Gold investment appears to be moving towards stronger fundamentals than we have seen over the past few years.
It is always hard to buck the crowd, to be a bear when the market is up this much, this fast. Stocks are rallying and being underweight gets harder to maintain every day. The bulls are out there yapping about how this was just another correction, another dip to buy and that we better get back in, yada, yada, yada. What makes being bearish so hard is the noise of the perpetually bullish street, the lure of easy money in a market you know is overvalued but keeps going higher. Like JM Keynes "I change my mind when the facts change." Despite the rally, the facts – at least for now – still favor the bears.
"Central banks around the world, reacting to the same recessionary fears, are likely to cause long rates to sink materially lower than where we are today. I see the 10-year Treasury note falling to 1 percent, perhaps even lower, before year-end. According to technical analysis, the current target bottom for the 10-year Treasury note is 28 basis points!"
Spoiler Alert: It's NOT a rate hike!
On Dec 16, Federal Chair Janet Yellen announced the Fed was raising the federal funds rate by 25 basis points. She will have to take it back.
The Fed seems to have been operating on the theory that their own views on the economy determine its path. But recently the Fed has taken the principle to an extreme never seen. Yellen may well have just hiked rates expecting, hoping, that the mere act of showing confidence in the economy would produce an economy worthy of confidence. The Fed has dominated the narrative for years now, investors and traders hanging on every word. Last week that started to change, the market repudiating the Fed’s outlook over a 48 hour period that must have produced some second guessing at the Fed.
The Fed has worked overtime since the 2008 crisis to produce a stability, a sense of normalcy in the economy and markets. It is a stable equilibrium now but almost any minor shock could change that dynamic for the worse and quickly. Widening credit spreads, Treasuries and gold outperforming stocks indicate that some parts of the market are already preparing for the storm. Stocks are about the only asset yet to batten down the hatches. If this is the calm before the storm, stock investors are about to get swept overboard.
Goodbye to "fat fingers" being blamed for flash crashes, and welcome to the Heisenberg uncertainty market: you can have your 1 cent bid/ask spreads... but you can't have any real market depth at the same time.
The 30 stocks of the Dow Jones Industrial Average currently trade for an average of 14.8x next year’s consensus earnings. But... Everyone knows Wall Street analysts are always too optimistic, so what if we just look at the lowest estimate for each company? The driver of market pessimism sits at the top of the income statement – the Street’s worst case revenue estimates call for a decline of 1.7% in 2016. Now, Q3 earnings season is unlikely to provide much comfort here; why should corporate managements go out on a guidance limb when their stocks are down on the year? All this points to further volatility in October, and with a bias to the downside.
The short squeeze into 10Y auctions never fails.
Every Federal Reserve Chair since 1979 has faced a notable challenge in the first 12-20 months of their tenure – something akin to capital markets “Bullies” hazing the new kid at school. Paul Volcker had the 1979-1980 Iranian oil shock/recession, Alan Greenspan the 1987 Stock Market Crash, and Ben Bernanke the 2007 Financial Crisis. Their responses shaped market perceptions about Federal Reserve priorities and set the stage for the remainder of their tenures, from Inflation-Fighting Volcker to Save-the-World Bernanke. Now, it is Chair Yellen’s turn...
The dance of the zombies goes on... During the 10 years between 2005 and 2014, these four retailers spent $34 billion on stock buybacks and dividends. But, alas, their cumulative net income during the period was only $13 billion. So they pumped 2.6X more into the casino than they earned! Last week’s tepid retail reports were not only a reminder that QE and ZIRP have by-passed main street entirely. The faltering department store sector is also a reminder that the monumental amount of Fed confected cash pooling-up in the canyons of Wall Street is breeding debt-laden zombies throughout the length and breadth of the land.