This page has been archived and commenting is disabled.
Guest Post: Why Bonds Aren't Dead & The Dollar Will Get Weaker
Submitted by Lance Roberts of Street Talk Live,
There have been quite a few bold predictions, since the beginning of the year, that the dollar was set to soar and that the great "bond bull market" was dead. The primary thesis behind these views was that the economy was set to strengthen and inflation would begin to seep its way back into the system. Furthermore, the "Great Rotation" of bonds into stocks, on the back of said economic strength, would push interest rates substantially higher.
While I have no doubt that at some point down the road that inflation will become an issue, interest rates will rise and the dollar will strengthen - it just won't be anytime soon. A wave of "disinflation" is currently engulfing the globe as the Eurozone economy slips back into recession, China is slowing down and the U.S. is grinding into much slower rates of growth. Even Japan, despite their best efforts through a massive QE program, cannot seem to break the back of the deflationary pressures on their economy. This is a problem that has yet to be recognized by the financial markets.
The recent inflation reports (both the Producer and Consumer Price Indexes) show deflationary forces at work. Wages continue to wane, economic production is stalling and price pressures are falling. More importantly, there are downward pressures on the most economically sensitive commodities such as oil, copper and lumber all indicating weaker levels of economic output. The battle against deflationary economic pressures has been what the Federal Reserve has been forced to fight since the financial crisis. The problem has been that, much like "Humpty-Dumpty", the broken financial transmission system, as represented by the velocity of money, can't be put back together again.
The weak level of economic growth, global deflationary pressures, demographic trends and excess indebtedness which derails productive investment are keeping inflationary pressures suppressed. The chart below shows the Composite Inflation Index (CII), an average of the consumer and producer price indexes, versus interest rates. With inflationary pressures turning lower it is highly unlikely that we will see interest rates rising anytime soon
Our long term view on the 10-year Treasury remains at 1%. Despite the Federal Reserve's ongoing efforts to inflate asset prices; such inflation is not translating to "Main Street" in the form of higher wages, increased consumption or higher standards of living. The Federal Reserve has often discussed that there are limits to monetary policy and they may have found those limits in its most recent endeavors.
The same goes with the U.S. dollar. With Japan engaged, on a relative basis, in a Quantitative Easing program twice as large as the U.S. on an economy just one-third the size, the suppression of the Yen has boosted the Dollar higher in recent months. However, the deflationary pressures globally are likely to create a feedback loop on Japan's effort to create inflation leading to a economic decoupling that creates a potential disaster in Japan. This is the bet that Kyle Bass has made and anticipates happening in the next 24 months.
The chart above shows the U.S. Dollar versus the CII. Historically, downturns in the composite inflation gauge lead to, not surprisingly, declines in the dollar. Currently, the economic data is confirming that we are likely to see dollar weakness sooner rather than later.
The bottom line is that the "bond bull market" likely still has a bit of life left in it. The deflationary pressures that weigh on the consumer and the economy are likely going to keep downward pressure on rates for some time to come as the Fed comes to realize that they have been caught in the same "liquidity trap" that has plagued Japan for a generation. Those same pressures will also temper any "dollar bull market" for the foreseeable future as well.
The real concern for investors, and individuals, is the actual economy. We are likely experiencing more than just a "soft patch" currently despite the mainstream analysts rhetoric to the contrary. There is clearly something amiss within the economic landscape and the recent decline in rates, the dollar and inflation are telling us that.
»
- 15696 reads
- Printer-friendly version
- Send to friend
- advertisements -
The dollar has been proxied by the Fed. for dumpimping inflation on Asia.
I think a massive short squeeze is in the works for the euro. Everybody seems bearish on it now, and while it may touch the fib level of 1.2660, I think the EU has more 'moves' to make, whereas the U.S. pretty much only has its inflated, bubblicious stock market as its only 'calling card.' Friday the euro held tough at the 1.28 level. The eurozone will continue to disintegrate but I think the U.S. situation is far graver relatively, with owing so much money abroad and still huge trade deficits.
I think you're on to something.
everybody loves that H&S pattern on the euro right now with the right shoulder looking completed, but if you look at the left shoulder, it isn't that far-fetched to foresee another run to 1.32+ area. Doubt the Fed Keynesian clowns will stop printing after seeing more lousy data last week like 10% above expectations in initial jobless claims and lousy manufacturing and durable goods orders. PMIs are awful. 'CONfidence' is actually quite fitting, that it was at 83.7 on 78-9 expectation.
I don't trade the ponzi euro. I'm watching eur/gbp for direction. Lots of GBP news next week.
Yeah, I'm thinking about going to the GBP if I do any more currency futures trading. I mainly trade crude, but even that has random bursts that can be killer. It's nervewracking sometimes to just even place a limit order a few ticks above, because the thing can blitz through in an instant (happens more so with the metals, though). I can trade the euro along with the ES, but euro is just ridiculous and frustrates the heck out of me sometimes. I thought it was going to break above 1.284 yesterday and squeeze all the shorts, as intra day there was a nice inverse H&S but no dice. Bought near the 1.2839 mark hoping to go for the ride to filling the gap up to 1.29 maybe, but never happened. Fortunately got out quick after seeing it would hold resistance. Next week probably will get back towards 1.3 though.
I trade SPOT, and contracts. I wouldn't want to be long $ next week.
Weak USD and weak equity markets doesn't happen often, but this is the way it is supposed to be, isn't it? I agree with your thinking and am looking to buy NUGT, but maybe will wait as Monday could be a bit of continuation after this big Friday, as they might want to make it look like it wasn't a fluke and thus have ES go up a few points. Gold looks good, though, and actually right after that Mich CONfidence # came out, gold plunged, but interestingly made a parabolic move to 1380 before coming back down. Somebody got excited to buy. I think we'll be testing that again at least, near term.
Im looking at Dollar index which has given a long term breakout above 84 and seems to be ready to head to 100 levels. i wouldnt go long eurusd or short usd/jpy till DXY goes back below 83.5. Eur/jpy though looks like it could turn down soon from 133 levels. That would lead equities lower.
Just my trade ideas.
Hard to say. It seems everyone is a bear on the euro but it held 1.28 quite strongly on Friday, and it would seem that they would wait for more of a catalyst to totally have it taken down into the mid 1.2's.
Forex is nuts right now. The way many people seem to see it, the USD can't lose lately. It gets the safety bid, and also gets bid when there are 'beats' on economic data. There is a gap to fill on the euro from the plunge Friday, and it never got back above 1.2837ish, but I think that will happen, even if it's just as USD takes a breather.
It depends on your time horizon, too. If you want to put on a position and sit back and not micromanage, then yeah, a little euro pop isn't a big deal if you have a far away stop. I'm looking to capture more short term and intermediate term plays.
Fair idea. I agree everyones bearish on Eur this week. However my suggestion is to be very nimble.
Eur had a weekly close below 1.2850, Gbp closed at low of the week, Jpy at high of the week, aud, nzd have been beaten black and blue closed at low of week. chf got bruised against usd.
BRL has taken immense support at 2.00 and closed at high of week, usd/sgd has shown strong upmove, USD/INR has broken out of 1 year triangle at 55.10 and looks set for 58.
All in all looks like a convincing USD breakout, but disclaimer is im also talking my book.
Best of luck..
they could take eur down to 1.2775 key area to trap more bears who would think 'surely it's going way down now' and then get that double bottom shoot up towards 1.3ish. I have more conviction that crude is going to approach 100. That market has a symm. triangle and the range is narrowing meaning breakout coming soon. Looks like it's going up. Euro would figure to do well as crude goes up. Crude held its own even with USD surging.
Lance has no doubt that when interest rates finally rise the dollar will strengthen? Does he also have no doubt that is because we will have paid down the debt and are running surpluses? Or is he just clueless?
Queen Palms. fONZ I'M OLD. [IMG]http://imageshack.us/a/img153/387/img20130518144634.jpg[/IMG]
No doubt he has a boat load of high yield bonds he would like for you to take off his hands..... For a premium of course.
Interpretation: No matter how much money and power is transferred from the people to the illuminati the economy doesn't improve.
Improving the economy is not the goal. Squeezing every last nickel out of us peasants and buying time so that the insiders can position themselves, and they can get the police state in order is what they are trying to do. Make no mistake they don't give a shit about the economy, and they will offer us plenty of distractions to keep us busy.
Doc without getting to crazy into it, do you own any individual corporate stuff for your clients? I have some stuff well below investment grade that i picked up a long time ago and has done great and thrown off a nice yield. After watching this market Friday I am convinced we are getting to a point where something is going to come flying off this machine and I wonder if it wil be high yield. I don't think it's possible as long as there is POMO everyday but I think if that were to slowdown or halt even temporarily we chould get a freeze in credit. What do you think?
I do have a bunch of corporates, both investment grade and high yield. It's nothing short of stunning seeing the premiums being paid for this debt. My clients are like yours, we bought most of the bonds at a discount so they are getting a pretty good yield and are therefore reluctant to let them go. Recently I've had debt called, so we have cash that needs to find a home which is impossible in this climate. I'm like you I think things are ready to fly off the handle. If the Yen blows up I don't think any amount of Pomo is going to right the ship.
It's amazing to be stuck in such a rut and yet the only path out seems to lead straight through hell.
+ 1666
all right smart guys - we've hit the debt ceiling...does this stop or curtail treasury issuance? less for Fed to purchase? flow slowing? Any impact to QE or no impact? If Treasury is not issuing further til August or September and Fed keeps buying T's...do rates start to fall through the floor?
you said smart guys so I am certain you did not direct that at me.
They will do like the last two times they hit the debt ceiling. They will pillage from the pensions , which allows treasury to continue to issue debt, and that will buy them some time. Around September we will see congress and treasury pretend fight, but in the end they will raise it again. They will probably raise it enough to make it a topic in the 2014 elections.
Yeah - yeah - but still, if T isn't issuing new debt but QE continues to buy $40 to $50 bil a month in T's for 4 to 6 months...aren't we looking at a significant push lower in yields???
Yes if treasury stopped printing and the fed kept buying the same amount yields would go lower, but treasury will still be issuing new debt. Technically we will go above the debt ceiling. You have two types of debt, the debt subject to limit and agency debt. By pillaging the agency debt ( pensions) that allows them to go over the limit. It's all a matter of book keeping. As far as yields go I do believe the ten year will eventually push towards 1% , but it will be market turmoil that causes it.
Pastor Engali ?
You have debt ceiling weekend same as Jackson hole and no bernanke. Roll that up in a ball and you get weird shit.
My UBS Money Manager tells me that we will very soon be entering a cyclical Bear Market and expects bonds to be perilous after the Fall. I think keeping a good percentage of cash and tax free muni's may be the right coarse until the end of September.
Lance & Mata Ha are on the case...
~~~
http://www.youtube.com/watch?v=0d5dKBMK5mo
This is why my economic landscape includes a vegetable garden.
The daollar is nothing......DO YOU GET IT
THis author's view is totally on end, tell it to the Japanese whose 10y rates have doubled over the last week. Get this rookie off the airwaves
If the FED stop QEasing in June or Sept the yeild curve will rocket and the $$$ will continue its ramp, having just broken the technically important 84 level on the DXY.
3yr and in rates will hardly move....
SPX BTFD
QED
Want some excitement? Look at 2year German and Swiss yields. When you are finished. Ponder Australian T-10s<
Very interesting situation with the Aussie situation for sure.. Thansk for the tip
In spite of QE the US Dollar will be heading higher - in support of the falling Euro, GBP, Yen and CDN.
Below is a USD daily.
http://bullandbearmash.com/chart/spot-dollar-daily-continues-rising-shar...
For the USD to fall, the other four currencies mentioned above would have to climb - possible, but not probable.
Larry Summers (I know, I know, but let me finish pls) said "the only way out of this recession is a very weak dollar." I'm guessing we wil see that happen after this little spurt of Potemkin Strength.
massive writedowns of private credit and debt is creating a whole new class of "indebtors" (otherwise known as borrowers and lenders) and thus generating the capacity for new loan growth which is the only way create the possibility of an economic recovery in the first place. (sound about right Hank Paulson? by all means if there was a different idea i'm ready to the long version...for the historical record of course.) public debt is/was to be monetized to contain the interest rate monster (ala Europe as we all now know was all too real.) the only question that remained was/is "the war" vis a vis public policy. the best i can offer...and i would call it quite good actually...is "choice theory" as it relates to PUBLIC POLICY not markets. Since clearly the war vis a vis the Middle East is a war of choice and there were no WMD's (thus making the entire effort illegal...along with all the principals who both crafted and then continued the policy) then clearly we have a war over the philosophy of just what public policy is in the first place. i can recommend a few books if the policy makers...and takers...are interested. http://en.wikipedia.org/wiki/Public_choice here's a multitude of University complexes dedicated to the whole approach actually.
Wait until Bernanke, Evans, Dudley and Yellen see the currency crisis they setup unfold.
They will get all the inflation they want and much, much more.
I disagree with his analysis for the short term. They concerted cutting of rates around the globe ( even Turkey) last week will keep a bid to the dollar. All dollar based US Equities will continue to ramp higher as the US will be the best house on the block and wouldn't be surprised for SPY to top out at 1775. Interest rates will go no where which will keep a bid under US equities. Dollar Yen is going to 1.10-1.20 and Euro 1.23-1.25. When the US becomes a manufacturing state again in the next decade dollars will be worth nothing.
We'll see who will buy all that made in USA stuff and with what.
Earnings are dropping and there's little reason to invest in new capacity.
zh likes the term the cleanest dirty shirt & things have gone bad in the us i know & u losers know but us is the only shirt no matter what ben & fatso do 1 day $ way up
Ever heard of the 6th rule?!
http://www.diggingforfire.net/FightClub/
The burger flippers economy with workers earning $10.00 per hour will barely skip along, - as after all, the "flippers" still have to eat and sleep somewhere.
The real economy however of strong wage earners will barely limp along. Who is going to form new household units, buy $300,000 houses, pay off education debt, open new businesses and compete strongly in the new work world of open borders immigration. What kind of cool aid are we all drinking?
Glad I'm in the USD and not Euro, yen or anything else. Flight to safety to the USD and deflationary pressures gives us time. USD will be the last to crash. Still time to make more money and then position it in tangibles (I hope).
"While we have no doubt that at some point down the road that inflation will become an issue, interest rates will rise and the dollar will strengthen - it just won't be anytime soon."
No, interest rates won't rise, Fed won't let 'em, it's printing press here on out, which means inflation and currency collapse eventually.
And yes inflation is happening right now, gas just topped $4/gal 'round here.
Who the hell are these idiots saying there's no inflation? USD has lost about 50% of it's 2007 value now. That's about 10% inflation / yr.
And yes demand is falling in many areas because the economy is getting worse. In some areas falling demand is offsetting inflation, keeping prices steady. But not gas, and not food, and not anything else in high demand, those prices are going right on up, showing the real inflation rate. But sadly your paycheck isn't in that group, because market demand for your skills is falling along with the general economy, lots of people with your skills would do your job at lower pay.
I am with fuckitall on this point. Almost everything is soaring in price YoY here in my area - everything that matters for "the people". Food price inflation is the most significant along with productive farmland. Gas is up. There might be a threat of deflation remaining in "financialized" paper assets, but not in real things/commodities. Not yet anyway.
Here is a trade idea though (seeing signs of over-production in corn in the U.S.) The god-awful ethanol mandate has kept the price of corn high. The drought from last Summer also kept prices high. Farmers in Wisconsin (and many other areas I hear) are cutting down trees everywhere, even slashing and burning (no lie, I have seen it around here anyway) to produce corn on every marginal scrap of land (or former forest) in order to cash in on the high corn price. As a semi-conservationist - I HATE the ethanol mandate!!! Anyway, due to the high price of seed, gas, and oil, the profit margin on corn is slim. A local farmer said it was less than 50 cents a bushel. If there is more rain this year, the price of corn could easily fall 50 cents a bushel, maybe multiples of that. There could be some plays in the food/commodity futures or derivatives of such.
I forget who it was that was saying it, but he was alluding to the possibility that with all of this Fed induced liquidity is going into mergers and buybacks which may be causing a shortage of equities available. When have I heard that before? Mortgages, maybe? I dunno.
Australia has lowered interest rates to debase their currency (in order to help the US prop up the US dollar), and it's starting to work: oil prices, and other commodities, are surging in terms of the Australian dollar.
The yen is really starting to break down. Look for rising prices. The Japanese jigger their cpi like US does. They throw out the stuff that goes up and then claim they have deflation so they can claim they need inflation.
The driver in this economy? None. Not enought to ignite the rates of growth the Fed needs to feed the debt (and interest) regime it works so hard to foster. Sometimes, you have to settle for no to zero to 2 percent growth.