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Bonds Are Back: "There Is Too Much Complacency"
Via Scotiabank's Guy Haselmann,
FOMC
For many, there is typically a large divide between what they believe the FOMC should do, and what it will actually do. There are those who believe the Fed should not hike until next year or later: they include Charles Evans, Narayana Kocherlakota, Jeffrey Gundlach and the IMF. Others believe the FOMC should have hiked already and should begin ASAP (even at the July meeting next week): those in this camp include, Esther George, Loretta Mester, Jeffrey Lacker and me.
- Neither outcome will likely happen, despite reasonable and easily understandable arguments for either delaying or advancing lift-off.
- Somehow the FOMC has veered back to its ‘hated’ calendar guidance, signifying the September meeting as most probable for lift-off.
It seems to me that the delay camp has too much faith in models. Inflation and economic slack and few other aspects that constitute the basis of their position, may not be as fully understood as they claim. Globalization, technological advances, and the drift in the US economy from a goods-producing to a services economy, has weakened economic forecasting accuracy and understanding.
Nonetheless, this camp wants to wait for certainty (that the Fed’s full-employment and inflation mandates are achieved) before hiking. They have little concern that official rates have been at the ‘emergency level’ of zero for six years; well past emergency conditions. They believe that overshooting is preferable to undershooting targets, because of asymmetry, i.e., it has the ability to hike rates, but does not have the ability to ease from zero (further QE is likely a political non-starter).
The delay camp also does not believe (rightly or wrongly) that there are any current (meaningful) risks to financial stability. Rather, this camp seems excessively more worried about having to reverse course after hiking.
I have outlined numerous reasons for over a year why the Fed should hike rates ASAP (including moral hazard, record levels of corporate issuance, impact on pensions and insurance companies, investor herd-trading, inequality, renewed sub-prime lending, and low-quality securitization) so I will not get into detail here.
Yellen said that the choice is hiking ‘sooner and slower’ or hiking ‘later and more aggressively’. Hiking sooner is more consistent with her preference and message of a gradual path toward ‘normalization’. She also said that a hike would indicate confidence in economic momentum; so wouldn’t an early hike rid markets of the uncertainty around the timing of the first hike as well as allow for a longer (i.e., more gradual) period before the second hike?
Bottom line.
The FOMC should stop dangling a rate hike over markets with its informationally-challenged term ‘data dependency’. Currently, financial conditions are ideal and economic conditions are plodding along with progress. Market interest rates are low. Spreads are tight. Equities are at, or near, all-time highs. The dollar index (DXY), while higher than last year, is 4% lower than where it was during the March meeting. China and Greece (and other geo-political flash points) are far from solved, but at the moment, there is relative calm.
Financial Markets
During the last week of April, I recommended being cautious on Treasuries (German Bunds were a catalyst). However, in May, after a steep selloff, I recommended re-establishing tactical longs in the backend (10’s and longer) in front of 2.40% yield on the 10-year. While chopping around ever since, the support levels of 2.40% 10’s and 3.25% 30’s, appears to have held well. I now recommend adding to those backend positions.
Investors are too myopically focused on expectations of a steep rise in bond yields and on using central bank stimulus to pile back into riskier assets. There is too much complacency. I believe the upside potential for Treasuries prices for the balance of the year is once again being greatly underestimated.
The long end should continue to perform well under various scenarios. If the Fed hikes in September or earlier, the back end should perform well. If the Fed breaks its implicit promise to hike rates in September, its credibility would be damaged: unless of course, it was due to a significant deterioration in the economic or political landscape. Either outcome would likely benefit long Treasury security prices.
I expect USD strength and commodity weakness to continue as well. Weakness in the commodity complex is probably a sign of deep and on-going trouble in China. I expect: EUR to test parity, $/yen 130, $/Cad 1.35, AUD .6500, WTI oil $42. I also expect the US 10yr and US 30yr yields to dip again this year below 2.00% and 2.75%, respectively. Periphery EU spreads should continue to be sold versus Bunds and UST.
“Easy money is not costless” - Anonymous
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Honestly, anyone who's views are this myopic and driven by mainstream narrative should not feature on ZH.
I think he makes some good points. Particularly his take on the commodity markets, oil, copper (the commodity with a Ph D in economics,) gold, silver, etc. They're signaling weakness and that's bond bullish.
Actually, Haselmann is one of the brightest bulbs here. Far too much pure scare tactic Bullshit is printed here and I wish there was a Plonk feature cause certain authors simply run out the same blather every week or 10 days. A few 8th grade graphs and 12 th grade verbiage, not to mention the 9th grade grammar and spelling.
Haselmann always has insight - not dreams or pure garbage.
HAND
The Federal Reserve is a private for profit bank that utilizes it's relationship with the United States Treasury to fund the major corporations. Rates have been kept at 0% so to keep the balance sheets of said corporations afloat. This continues the power grab for the corporations to loot what remains of the middle class. The Federal Reserve won't stop until the middle class has lost all their wealth and power.
It is more likely that we will see more QE before a rate rise.
Keep stacking that fireplace higher Yellen.
In order to do this another danger to the markets must occur. Interestingly because the Greek crisis hasn't gotten out of control, the Federal Reserve missed its chance to institute a fresh quantitative easing policy. That meant they couldn't lower rates.
But they can keep rates at zero as long as stocks stay flat. The problem with that is their ponzi scheme needs an increasing balance sheet. Without increasing growth on their balance sheet wealth creation ceases. The whole ponzi sheme has been to increase the wealth gap.
Also what must be asked is what is the cost of increasing the balance sheet? The purchasing power of the dollar diminishes with each dollar printed. Even if the Fed wants to take the dollar hyperinflationary they will need a backup currency. Is this the plan? To switch from the dollar to an international currency?
Only a monumental disaster will create this crisis. The stock market is the greatest lie ever told and to crash it would be to end the lie. The Federal Reserve wants to keep the lie going, but at what cost. The more they hyperinflate the less pwoer they will have over a one world currency. It is likely that the dollar will have favor in the SDR and basket of currencies, but how much? The yuan has the backing of an increasing gold reserve while the dollar has a stagnant one. If the Chinese leak a report each month showing an increase in gold reserves they could catch the US very quickly.
China increased its gold holdings by half last month. Last month! As in ONE MONTH. At this rate the PBoC will rival the largest central banks.
What is the time fram? How long until China reports 8,000 tonnes and the dollar fights another major crisis? Anyone's guess is fair, but we all know it won't be long in the scheme of things.
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China is either keeping (a whole lot) of gold-colored powder dry, or they want to walk their $holdings down nice & easy, not scare the market, and simply keep 'quiet' - right before they deliver a kick to the head...
First off I think Yellen should resign.
Just the mere implication that she has been feeding inside info to her "trading buddies" on Wall Street already has made her a target for a CRIMINAL INDICTMENT.
Nuff said there.
Second In spite of being (happily) long Treasuries for two years now I have presented a "sales pitch" for why the Fed should finally normalize and BARELY raise rates to some nominal amount...namely...the economy is doing fine.
The other alternative of "clear out another trillion" doesn't seem all bad I guess...certainly good for Banking profits which are now coming on strong here.
Frankly I think we should just get rid of Banks for the next few years though and "see how that works for a while."
I can't take fundamental analysis of Treasuries any more seriously than I can take the Treasury "market" itself. It is nothing but a money laudering scam to feed USD into the US Government.
I suggest you all learn Russian and prepare for the "aftermath". The US becomes it's enemies. We are going to be best buddies with them when this is all over. And if making money is not enough reason, check out these fine Russian babes singing a popular Russian song on their TV: https://www.youtube.com/watch?v=kF0ZxXMeorA
Via Scotiabank's Guy Haselmann. Stopped reading right there. Another bankster-fuck talking his book and telling us how accurate his prognostications are, no doubt.
"If the Fed breaks its implicit promise to hike rates in September, its credibility would be damaged:"
Was there not an 'implicit promise' to hike rates in June...?