There's a growing view that America's energy boom will result in a higher U.S. dollar in coming years. There are some key holes in the argument though.
What perhaps Minsky couldn’t conceive of was the point at which debt, deficits and interest rates would go to such extremes that the creation of credit itself, which was and remains the heart of capitalism, would be threatened. No longer might the seventh inning stretch lead to a Coke, some “Cracker Jacks” and the resumption of the old ballgame. Instead, zero-bound interest rates and debt/GDP ratios in a majority of capitalistic economies would begin to threaten, not heal, the nature of finance and investment in the real economy. Investors, leery of not only overleveraged investment banks such as Lehman Brothers, but overextended countries such as Greece, Cyprus and a host of Euroland lookalikes would derisk as opposed to rerisk as per the Minsky model. As well, with interest rates close to the zero bound, investors in intermediate and long term bonds would become dependent on Big Bank to do their bidding. When that QE buying power became jeopardized via tapering and the eventual ninth inning conclusion of asset purchases, then the process of maturity extension and the terming out of historically modeled corporate lending was prematurely threatened.
Gross: 3 to 4 percent credit growth can’t produce much more than 3-4 percent increases in asset prices. No more QE's? No more bull markets.
— PIMCO (@PIMCO) August 21, 2013
The current belief is that rising interest rates are a sign that the economy is improving as activity is pushing borrowing rates higher. In turn, as investors, this bodes well for corporate profitability which supports the current valuations of stocks in the market. While this seems completely logical the question is whether, or not, this is really the case? Increases in interest rates slow economic activity, with a lag effect, which negatively impacts earnings, margins and forward guidance. Ultimately, and it may take several quarters to manifest itself fully, the fundamental deterioration leads to a reversion in stock market prices which, ironically, will then lead to the next decline in rates.
Gross: Today I feel less "GUARDED" than yesterday. Is the free press still free?
— PIMCO (@PIMCO) August 20, 2013
Deutsche: "Either The Central Banks Lose Credibility Soon Or The Markets Have Overstretched Themselves"Submitted by Tyler Durden on 08/19/2013 09:46 -0400
Some unpleasant observations from Deutsche Bank below for fans of either central planning and/or risk assets, as having one's cake and eating it too is no longer an option, and one or the other is finally set to snap. To wit: "Yield curves are very steep suggesting a challenge to central bank guidance credibility is at a tipping point. Either the data really are strong and the central banks lose credibility soon or the markets have overstretched themselves, allowing for a partial recovery in lower rates." A "tweeted out" Bill Gross is praying to the Newport gods it's the latter.
It's all about rates this largely newsless morning, which have continued their march wider all night, and moments ago rose to 2.873% - a fresh 2 year wide and meaning that neither Gross, nor the bond market, is nowhere near tweeted out. As DB confirms, US treasuries are front and center of mind at the moment.... the 10yr UST yield is up another 4bp at a fresh two year high of 2.87% in Tokyo trading, adding to last week’s 20bp selloff. As it currently stands, 10yr yields are up by more than 120bp from the YTD lows in early May and more than 80bp higher since Bernanke’s now infamous JEC testimony. We should also note that the recent US rates selloff has been accompanied by a rapid steepening in the rate curve. Indeed, the 2s/10s curve is at a 2 year high of 250bp and the 2s/30s and 2s/5s are also at close to their highest level in two years.
If the following just released forecast of where the 10 Year is going, from Bank of America's chief technical strategist MacNeill Curry is accurate, not only is the bond bottom nowhere near but we sense a Tweetstorm is coming from Bill Gross.
Just in case there is still some confusion about what passes for a "catalyst" in this market, moments ago just as the 10 Year was threatening to run away on its unmerry way to 3.00% and higher in the aftermath of the fatalistic tweet by Bill Gross, there promptly emerged, since it is 3pm on a Friday after all, a rumor that Hilsenrath was about to hit public on the latest NYFed plant handed to him in order to stabilize the market. Not in itself surprising: we have seen it a million times in the past, the only difference is that this time the target of the WSJ "intervention" would be the bond market, not stocks. Which is the saddest thing: while idiot stocks traditionally move on the dumbest of triggers, at least bonds had been immune from such stupidity. To see even the bond market succumb to the lowest of rumormonerging, is indeed a slap in the face.
Bonds are being sold off as concerns about the Fed's taper (aka the Zero Hedge-penned in May "Taper Tantrum") propagate through the bond market, and as Bill Gross reminds everyone of what a non-centrally planned, and Fed-backstopped, market may one day look like (nothing good). But today's action is nothing compared to what a real tapir tantrum looks like as one unluckly child and its mother were forced to find out.
Bill Gross Tweets: "Without Central Bank Check Writing, We Only Have Ourselves To Sell To" Sends Yields SoaringSubmitted by Tyler Durden on 08/16/2013 12:54 -0400
Gross: Pogo said, We have met the enemy & he is us. I say, All asset mkts peaking; W/o central bank ck writing we only have ourselves 2sell2
— PIMCO (@PIMCO) August 16, 2013
As JPM's Michael Feroli notes, the September FOMC Taper announcement (which certainly isn't assured, although if the Fed does not taper, it will end up monetizing 0.4%-0.5% of the total private TSY stock per week before year end) may just be a sideshow to a previously undiscussed main event: the Fed's first forecast of 2016 interest rates.
Succinctly summarizing the positive and negative news, data, and market events of the week...
Gross: Strategists/writers I follow? Dalio, Durden, Bianco, Arnott, Aitken, Santelli, Grant, Grantham, Inker, Marks, Quaintenance & Brodsky
— PIMCO (@PIMCO) August 9, 2013
From Bill Gross: "Capitalism depends on the successful offering and capture of carry in its multiple forms. If capitalism is faltering (recession) in developed/developing economies and yields are close to the zero bound, then portfolios should have less carry than before. If prospects are mediocre, portfolios should be overweight carry. If prospects are very bright, they should again be underweight bond carry. If we can be mindful of this, and accurately forecast it, we will be successful. This may be the most important conceptual change I have ever written about in an Investment Outlook. Readers who have stuck with this Outlook at least to this point have a scoop, if not a magic feather."