If you’ve been reading this blog for the past week, you know I was on top of the muni collapse in California. As a matter of fact, similar pinless hand grenade action can be found in NY, Maryland, Illinois etc. Of course this is all following the lead of U.S. Treasuries, best represented by the share price of TLT.
However, let’s call a spade a spade here: rates were artificially low to begin with. What if the rising yields are simply a reaction to an improving economy? I mean, it’s fucking possible, right? Or are we stuck in some sort of endless murderhole, where the economy gets pillaged over and over again, until we all die. WTF.
Granted, rapidly rising rates at a time when the Fed is actively pursuing an artificial environment to reduce yields is counter-intuitive. But then again, market forces are supposed to trump all of this government bullshit anyway, right? Is it possible that the Fed is spinning their wheels with QE2 and Wall Street is simply forecasting a better than expected economy 6 months out, via rising yields? As a consequence , commodity prices have been crashing too; but they had a terrific run.
After thinking about this situation all weekend, I just wanted to throw a few ideas out there, especially since every motherfucker with a keyboard seems to be hellbent on declaring the end of the world is near, yet again.
If recent history has taught us anything it is to watch out for the other hand, for the one in front of you is merely a diversion.
Going into tomorrow’s tape, I am 5% short, 50% cash and 45% long.
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Rising rates are simply a product of money rotating out of bonds and into equities. The run started in September with a solid bottom being formed, got goosed big-time when The Bearded One put a PUT under the market with QE2, but then something unexpected happened. Every leading indicator known to man, save housing, started turning up. No one expected that. Maybe not even The Bearded One himself.
Who in their right mind would hold bonds at these ridiculously low yields when the economy is heating up, emerging markets are on absolute fucking fire, and Bernanke is threatening, nee promising, inflation at all costs.
Buy the dips…all the way down to the S&P 200 if necessary….
The government stats on employment are a bunch of BS. They revised the seasonal factor last month which made the numbers skew about 100,000 to the plus side of the ledger…..or is that legerdemain.
But equities have been falling in sync with rates rising.
Hmmm…that is an excellent point.
But, i still hold to my thesis as being valid, although it may not account for rising bond yields.
It feels like there is a little bit of “risk off” going on across the board, and that somehow bonds are now lumped in with risk assets.
I think the bond vigilantes come out when they want to make equities selloff, so they too can buy the dip. Every dip in the last year has been in some way related to that scenario.
Awesome earnings conclude –> bond yields start rising -> CDS spreads blowout –> market corrects –> major banks profit like hell when they buy the dip.
BUT, if my last statement were to prove true, then we’ve got significantly more downside ahead…
I tend to agree with you analysis. This sell off is nothing to fret over. It will be important to see if rising yields panic investors at a time when Ireland is in crisis. Crunch time.
Honestly, if i were holding bonds, i would be nervous as hell with everything thats been going on. They are supposed to be a “safer” investment, but its obvious to everyone its not a safe place to be right now. So I would guess its just that alternatives (e.g. equities and commodities) are simply looking more desirable over the last few weeks.
The sovereign shit is just more reason for the same…
By the way, apparently Japan is on fire now too….who’d of thunk that?
Equities have only fallen slightly for a week while rates have risen.
Huggie may be right in that the carry trade from the U.S. treasury is unwinding slightly to seek higher growth prospects.
With no real structural changes taking place why would you risk profits in a market that has reached pre LEH levels ?
It would be wiser to take some off the table and try to place hot money in pac rim countries.
If equities continue to sell off then expect yields to about face.
On another note here is some real change: http://www.publicintegrity.org/blog/entry/2675/
Also i think TLT started selling off before equities stopped rising, no?
It started to fall in earnest after QE2 was introduced. I guess it was the ultimate SOLD TO YOU, sell on news situation.
It will probably be a good buy soon, once all the hot money has been vanquished.
With all due respect gentlemen, I don’t think all this analysis is warranted until next Sunday. Save yourselves the headache. GM IPO this week = market HAS to go UP. Period. The end. Period. It doesn’t hurt that its OPEX either.
over the long term, rising rates are not good for equities (raises the rate at which you discount the present value of future earnings, which is roughly the fair value of a stock). however, that relationship can be out of sync for extended periods. If rising rates are bad, falling rates should be good, no? But look how the stock market performed as rates fell sharply from 07 to early 09.
maybe the short term moves of stocks and interest rates just aren’t tightly correlated. maybe the recent (1 week) stock selloff was a reaction to an overbot condition, and would have happened even if rates had declined.
If rates are going up, bond prices are going down. not opinion, just old fashioned bond math. but stocks can still go up for some time.
completely different topic: any opinion on the recent ETF controversy?
I vote endless murderholes in between coke fueled rallies. Unless new stimulus trickles down to Joe sixpack’s wallet, it’s all bullshit hope – which as we know, can be very good for the markets. The formula for economic troughs has been to drop rates and flood the system with liquidity, fueling growth. WTF has been fueled with the Trillions spent over the last two years? As far as I see it, that was hole plugging money. People are still broke, have no credit, can’t use their house as an ATM, and almost 20% of the country is fucked for work. I think the most obvious solution is that we continue falling into murderholes until so many people are unemployed that we end up with “New Deal II.” We’ll probaby get a war out of it too.
Why not give the QE2 money to Ireland? It would fix their shit and end all that associated uncertainty.
80% short 20% cash as of thurs afternoon… Fuck you fly.. You are wrong this time
Deck.
Perhaps this is one of the Feds intentions- massive buying along the 2-10 and letting the long bond rise.
This way the yield curve will steepen (inverted curve can be a precursor to a double dip and a flat curve means uncertainty) ) which is good for financial institutions.
The balance sheets of the banks still need help and the Fed is doing this via it’s operations.
Or maybe I am thinking too much.
QE2 is not targeting the long end of the curve aka TLT, Front running is happening on durations < 10 years (IEF, .. ) . The fed and the banks want the long end of the curve to rise because they will make money on the spread. Again this QE2 like the previous one is ALL about the banks – everything else out of the clam is lies. If he were really concerned about consumers he would also be targeting the long bonds…
An alternate view could be that the usual relationship between yield and equity is being trumped by currency risk across the board, a factor that is gaining momentum. Since SPX topped out last week, we’ve seen the dollar index up 3%, SPX (top tick to bottom tick) down 3%, and TLT down 3.9%. The extra move in TLT is natural given the uncertainty of long dated bonds.
Also, given that the Beard has mandated higher stock prices and assumedly, increased retail participation, there needs to be an entry point, given the ultra-overbought status in equities. So, the logic would be, sell off the bonds on the news, and hoard the Pomo cash until we have an “orderly,” tempting pullback.
As far as the rising yields indicating an economic recovery? I dunno man, we’ll let the xmas numbers tell us that. As far as inidicating higher equity? It’s definitely possible, with maybe just a well-timed lag, accounting for the anomaly.
One of the great things the interwebs have done is made large amounts of information accessible to the masses at almost zero cost. One of the worst things the interwebs have done is to provide large amount of inept analysis of said data to the masses, who then run around like fucking chickens squawking that the fucking sky is falling. I mean really, we blew up our banking system and damaged our economy by a bunch of bad/under regulation. We bottomed at SP-500 666. We’ve been up since then, we corrected, and now we’re moving up.
Bonds will move lower. Rates will go up. The economy will gradually improve. People will be taxed more. There will be emerging economies that grow a lot faster than ours. Some people will be under-employed or unemployed for a long time. Life goes on. Get over it.
We’re not done. We’re just getting started. Let China try to catch up. We’ve been coasting.
Anyone who is short 80% during a bull market is gambling on a top or some bullshit. That’s not trading or investing. Good luck to you sir.
Fly, Thanks for your insight. You truly are one of the guys with the white hats (and a space alien magician time machine).
good comment yogi…or was that boo boo’s input?
Thanks. Boo Boo’s only 5. He’s asleep already.
lucky for you…i have barely survived another weekend with my two little boo-boo’s. they are literally going to kill me.
Talleb on QE. Almost as good as the QE cartoon. if you can stand talleb.
http://www.bloomberg.com/video/64477298/
Indie:
Taleb is a fucking self promoting doofus. If he was so good at predicting black swans the question to ask is why he closed his fund at a loss several years ago.
Fly:
The california stuff is important only in so far as the market is basically pricing those fuckers out of any more issuance. Even if they defaulted it wouldn’t be a terrible thing as they would be closed out of the market for at least a decade before they could raise more money and waste it. Although he’ll try, governor Moonbeam will attempt to avoid the laws of economics but in the end he’ll have to cut spending.
I’m optimistic for next year and I think stocks will do fine.
Have you read his black swan book? It was very good.
It seems to me that the onset of QE2 would be the perfect opportunity for “smart” money to exit their US treasury positions with a guaranteed bid under the market provided by the Fed. Nothing says that can’t be coincident with an improvement in the economy as well. I tend to think that the move down in bonds will be secular while the current moves in the dollar, commodities and stocks are counter-trend. If that is the case then there is a wall of money in bonds that is going to start flowing into other assets.
We are in a bull market, the train is leaving the station.
A 5% – 6% correction off the recent high is probably all we’ll get, given that the economy is inching along, and corporate earnings have been good, gvien QE2 and “beggar thy neighbor” policies in effect.
The yield curve cannot be relied upon as any kind of indicator if it’s under heavy manipulation by the fed.
BAC to the toilet
http://www.alternet.org/economy/148817/bank_of_america_is_in_deep_trouble,_and_there_may_be_financial_disaster_on_the_horizon/
I think USD increases to $81 here. The Fed will control inflation: by breaking those who bet against them. Watch the parabolic charts of: gold, bonds, commodities take the hit now. These are crowded trades and the “wealth” from those bubbles has already been made. Suckers remain; get bum-… screwed.
I’m rooting for that;
but betting against it.
I ask Cebu Not-So-Sunny and the other doubters… Are Prices Higher than a Year Ago?
The Ben Bernank Knows, do you?
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Wouldn’t the fear of rising rates cause people on the fence to go buy that home they have been thinking about? The fear of missing the cheap rates may spur housing growth and help home prices.
In a word, no.
Why would someone rush to buy at today’s price when they can buy it for less next month.
Owners should however rush to refi
QE2 is the beginning of an economic war between the US and China. China is refusing to allow the yuan to appreciate so the US is forcing their hand by devaluing the dollar. A good dose of inflation will help the US compete on the world markets which is really pissing off the rest of the world, but they are just collateral damage in this battle of the titans.
Inflation will also force up yields and push a lot of money out of bonds into hard assets. And it will reduce the real income of all the wage earners.
But the government needs to seriously get its spending under control. Not necessarily austerity but Jesus something needs to be done. Close half the jails. Mothball half the fleet and half the planes. (they just get you into trouble anyways).
Now might be a good time to buy farmland in Australia. Get out of the dollar and buy something that will always be worth something.
Or, enlist all convicts in the Navy?
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Sounds good to me.
Yea, but real estate. It’s real. It can’t go down like some dot com paper company.
Many coutries in the world are trying to lower the value of their currencies to increase imports.
That’s like cutting a pizza into 16 pieces instead of 8 because you are hungry.
get spending under control = austerity
Fly
There are always diversions until the fundementals always take over. The Wall St machine is a powerful bunch.
I am not predicting the end of the world here but you are playing with fire being that long. Rising rates will destroy the economy due to our massive treasury issuances as you well know. The market should tank when rates rise.
The bond boys to date are selling QE but they might just be trading the volatility. If rates keep rising I would be getting very nervous on any long positions.
My .02
Yeah, i am playing with pure fire being 40% long after hedges.
You know what is darn interesting, Stamp Tax….I had never heard of it being used by China to speed up or slow down their markets. Been reading about it tonight…discussed it in my newest PG article. China top 4 state own banks announced that they won’t lend money to property developers anymore this year…maybe they lend to Califlornia..lol..ouch.
Welcome to merger Monday.
IMO QE2
This is what it inflates about 6% why the hell would you create that much inflation.
Housing it’s that simple.
Why
For the past 2 yrs I have Been picking up properries to rent out. For the past 6-7 months very very little inventory has Been put back on the market if you dump these defaults back on the market you need to prevent deflation. Last QE homes to buy jumped then it dried up QE2 should create another wave.
So there are that many homes still to get moved I expect a QE3
Whovever it was on the last post: Thanks for the Jesse Ventura conspiracy video. It is awesome! That dramatic intensity makes it fun and hilarious. I recognize that a lot of it is actual totally justified indignation.
“Is it possible that the Fed is spinning their wheels with QE2 and Wall Street is simply forecasting a better than expected economy 6 months out, via rising yields? As a consequence , commodity prices have been crashing too; but they had a terrific run.”
If the economy is expectedmto get better, why should commodity prices plummet alongside bonds?