This is something I whipped up for a meeting.
RW comment:
There is no other way to put this. The market continues to seek extreme safety, while completely ignoring the numerous triggers that could result in extreme price inflation. It is impossible to tell in advance when this downswing in rates will end, but it will. It was obvious for some time before it occurred that the real estate market was going to crash--exact timing was, however, impossible.
it's the same with interest rates, between the inflation threat and the huge debt overhang, this market is likely to break dramatically. This is no time to own long term bonds. If you are going to borrow, lock in rates now, but make sure you lock them in long term/
Bonds surged on QE 1.0 announcement on Mar 18 09, then reversed and declined into June 09, when they went mostly sideways until the flash crash in May 10. I suspect the bond euphoria has similarly run its course now that QE 2/Lite is a reality. Daily/weekly charts look like we have an interim top in 10 Yr Note futures that will last a few weeks--to be confirmed by a close below 125'15; however, I suspect it will be a longer term top. The signal that the markets took yesterday was: Bennie's helicopter is back. If S&P 500 cash trends down beginning next week (allowing for an opex fake out this week), I'd say $18 B/mo. was not enough. Otherwise, we should have an equities love fest once again until the ECB can't beat back the headlines any longer. I'm told Hungary and Belgium are the new bellwethers.
ReplyDeleteRobert & Bob - you guys are playing the same broken record & missing the picture. You can't create run-away inflation with this much dollar-denominated credit and credit derivatives in the system. Credit is the opposite of money and there is no way to print your way out of the mess once the dominos start tumbling down. All we have inflated is supply by artificially stimulating demand for decades.
ReplyDeleteBut - you're right in one sense. Real interest rates will go up. But it doesn't take a high nominal rate for interest rates to be high - it can also be a rapidly strengthening dollar. We are one good market "event" away from rising real interest rates and outright deflation.
To readers, be cautious in regard to gold. Gold is no longer linked to fiat, and therefore you need to look at the price of other dollar denominated hard assets (such as real estate, food, gas, etc) to draw conclusions about what may happen to the price of gold. Gold may infer safety, but can be taken down in a deflation as the price of everything else drops in dollar terms.
Dear Summers a/k/a Anonymous...
ReplyDeleteNot sure how you can interpret my sage trading tips as a warning about runaway inflation. However, to indulge your statement that, "You can't create run-away inflation with this much dollar-denominated credit and credit derivatives in the system," let's conduct a thought experiment. What if, tomorrow, the Fed arbitrarily added one hundred zeros to every PD's reserve account? Would the PD's keep that money there and calmly collect 0.25% interest, or would they panic and bid up every hard asset on earth, creating near instant hyperinflation? My educated guess is the latter, so it is possible to create run-away inflation. What if the number of zeroes were 50? 10? Well, now we're close to the actual number of zeros added to the average PD's reserve account since the birth of QE. Clearly, there is a line beyond which there is no return; however, it will remain unknown until it is crossed. That is the warning here...by me at least.
For the record, I expect the mother of all short covering rallies in the USD when Europe implodes for real in 2011-12. A friend of mine expects a fall in the USDJPY sometime to 80 that knocks out all the barrier options from the mid-1990's. In short, we will have currency and bond market dislocations galore. To assume policy makers will not or cannot overreact on the printing side is a serious misunderestimation.