Posts filed under “Think Tank”

A Dubious Foundation

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.

True Inflation

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?

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Category: Think Tank

jobless claims

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

Category: MacroNotes

China remains the swing factor

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

Category: MacroNotes

Gold Market Weekly Report

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

Category: Commodities, Think Tank

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

Category: MacroNotes

Consumer Credit

May Consumer Credit fell $3.2b to $2.519 trillion (SA) but $5.6b less than anticipated. Consumer credit outstanding is now at the lowest level since Dec ’07 and May is the 8th month in the past 9 that has seen a decline. Most of the decline was in revolving credit which fell $2.9b while non revolving…Read More

Category: MacroNotes

King Report: Who Cares About Moving Averages?

> There is mucho pontificating by research types and pundits that ‘all is still well because the S&P 500 held its 200-day moving average. These people are wrong and misguided. Long-time readers know that we regularly assert that the slope of the moving average is of paramount importance and breaches that are contra to the…Read More

Category: Think Tank, Trading

10 year note auction

The reopening of the 10 year note auction was solid as the yield was 4 bps lower than where the when issued was trading and the bid to cover of 3.28 was well above the one year average of 2.31 and at the highest level since at least 1994. This also comes in the context…Read More

Category: MacroNotes

Rate hike odds

Coincident with the pullback in most markets over the past few weeks on doubts with the robustness of the 2nd half global economic recovery, the fed funds futures have been pricing in lowered odds of a fed rate hike by year end. Odds of a 25 bps hike to .50% by December is near 20%…Read More

Category: MacroNotes

8,893 “Bill Millers”

> I am especially pleased to present today’s Think Tank piece by James Bianco. Jim has run Bianco Research out of Chicago since November 1990. He has been producing fixed income commentaries with a circulation of hundreds of portfolio managers and traders. Jim’s commentaries have a special emphasis on: money flow characteristics of primary dealers,…Read More

Category: Index/ETFs, Investing, Think Tank