Posts filed under “Think Tank”
The reopening of the 30 year bond auction was mixed as the yield was about 1 bps higher than where the when issued was trading just prior at 4.303% (40 bps below the June auction) and the bid to cover at 2.36% was below the June reopening. But, going back to 2006 when the Treasury started the 30 year auctions again, it’s above the average of 2.22. The level of indirect bidders totaled 50.2% and is a touch above the June auction. Bottom line, the results are not enough to move the needle after yesterday’s solid 10 year note auction but it does cap a successful week in government fund raising and the Treasury gets to live another day in this regard with yields still well below the highs.
Nice chart on Consumer borrowing via Asha Bangalore of Northern Trust’s Global Economic Research: > Asha notes: Consumers Continue to Borrow Less but Pace of Decline is Notable Consumer credit declined at an annual rate of 1.5% in May, after a 7.8% plunge in April and a 7.3% drop in March. The consumer deleveraging trend…Read More
Here’s a check up on stock market sentiment in light of the recent pullback that has taken the S&P’s back to levels last seen on May 1st. The AAII (American Assoc of Individual Investors) weekly measure of individual investor sentiment towards the stock market over the next 6 months showed a spread between bulls and…Read More
Retail Metrics said June comps fell 4.3% which is a touch better than the range of estimates of a decline of 4.5-5%. The month was impacted by the cold and rainy weather, tough comparisons with July ’08 rebate checks (which is the last month of this comparison) and of course sluggish consumer spending.
May Wholesale Inventories, which makes up about 25% of Business Inventories, fell .8%, .2% less than expected and April was revised up .1%. It’s the 9th straight month in a row of declines. The biggest contributor to the drop was in the durable good sector led by auto’s and computers. With overall sales falling .2%,…Read More
Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.
This month we discuss why we think longer term Treasury yields should be much higher than they are; why we are not investing in anticipation that they will rise; and how synthetically-low benchmark interest rates are sending false economic and investment signals. We also discuss, point by point, the justification behind our assertion that US monetary policy has been, and continues to be, terribly misguided and dangerous to the broad US economy.
American Fun House
We believe macroeconomic fundamentals imply longer-term US Treasury yields should be priced above 10%. We have been reluctant to express this view in the markets, however, because there are powerful structural forces blocking any fundamental reconciliation of value. These forces include bond markets comprised mostly of domestic and foreign investors with incentives that place them at odds with rational credit pricing, as well as central banks with unlimited spending capacity threatening (and being encouraged by all) to intervene when necessary to provide a ceiling on yields. As a result, we think the price of money and credit in the US and globally (because dollars are the world’s reserve currency) has been sending false macroeconomic signals.
Investors are being forced to judge asset values in a hall of mirrors. As Treasuries provide benchmark default-free nominal rates against which all investments are ultimately judged, we think the relative values of tertiary asset markets are also being compromised. Such illusionary forces are powerful and we do not expect them to change unless there is great economic and market upheaval. So, we have not been willing to express our fundamental view of benchmark US interest rates directly (by shorting Treasuries). Nevertheless, we believe there is great value in acknowledging this gross mispricing because it provides a critical cornerstone upon which to build more accurate valuation metrics that we think will generate positive real rates of returns from other assets.
Most bond investors may genuinely believe default-free interest rates are priced fairly or should be generally lower, not higher as we do. The argument against our view is that the rate of CPI growth has been minimal, even negative year over year, and that the prospects for substantial demand growth (dismissing, of course, considerations of supply growth) that would lead to higher prices seem remote. Therefore, it would follow to these investors that Treasury yields are positive in real terms today and likely to stay that way into the foreseeable future. We vehemently disagree.
As we’ve discussed at length (and won’t dwell on here), money growth is inflation and generally rising prices are frequently derivative of that money growth. When it comes to the changing prices of goods, services and assets, it is very easy to prove conceptually and empirically that, in macroeconomic terms, the changing stock of money overwhelms any potentially offsetting discrete changes in the supply/demand equilibriums of widgets, widget repairmen and Widget Inc. shares. The nominal prices for any or all of them will increase, all things equal, even if the supply of them were to rise by, say, 10%, the demand for them were to drop by 25%, yet the general money stock with which they might be bought triples. This logic should make sense to all, yet it is overlooked by the majority of contemporary investors and economists who seem to be modeling the money stock as a constant.
Sources: The Federal Reserve Bank of St. Louis; St. Louis Adjusted Monetary Base; QBAMCO
The Fed just doubled the monetary base over the past nine months (above) and has stated plans to continue this expansion (via Quantitative Easing) through at least the end of 2009. So, in monetary terms, we’ve already witnessed a massive dose of inflation. The growth in the US monetary base is the permanent addition of money to the system. It is money created from thin air by the Fed that is not self-extinguishing. Where did this new, permanent money go?
Category: Think Tank
Initial Jobless Claims totaled 565k, much better than the consensus of 603k and it’s the first reading below 600k since Jan 23rd. The key factor in the lower than expected # has to do with the auto sector. Historically in July automakers normally shut down plants but because Chrysler and GM had plant shut downs…Read More
Better than expected earnings from Alcoa (partially citing China) and Chinese car sales rising 48% y/o/y in June are helping to lift commodities and in turn global stock markets. On the AA call, the CEO made an interesting comment about China according to Bloomberg, “One of the things that the Chinese government very smartly does…Read More
For the holiday shortened week, spot gold closed at $929.80 per ounce, down $9.80 or 1.04 percent. Gold equities, as measured by the XAU Gold & Silver Index (12) fell by 2.64 percent for the week. The U.S. Trade-Weighted Dollar Index (13) gained 0.52 percent. Key Research Points: • Turkey, the world’s third-largest manufacturer of…Read More
Ahead of the reopening of the 10 yr bond auction and with the S&P’s back to where they were on May 1st, we can compare where interest rates, inflation expectations, the US$ and the CRB index were on May 1st with today’s level in the S&P’s in order to gauge the impact of treasury supply…Read More