http://www.morganstanley.com/GEFdata/digests/20050118-tue.html An update from Roach. Incidentally, 30yr bond closed at new high, so the market doesn't seem to care. The curve-flattening trade has keep going on for months now, but has been much more intense during the last 20 days.
Interesting quote from a NYC grocer in the article. He basically says that his land has become so expensive running grocery stores no longer makes sense - he's better off just selling the land. Food Prices in New York in Biggest Leap in 14 Years http://www.nytimes.com/2005/01/20/ nyregion/20consume.html
Wrt inflation: Inflation is actually too much money and credit. During the last 3 years, worldwide money supply has increased by 37.1%. Many people seem to mistake "inflation" as being the same thing as CPI. In addition to that, the US government will create a statistically manipulated basket of goods and declare to its citizens that the "core CPI" is just over 2% While it is true that *some* products which can be outsourced from low-wage countries like China haven't increased in cost (and to us in Euroland have decreased substancially -30% in cost, due to dollar collapse and yuan-usd peg), most products and services which can't be readily outsourced have increased substancially: housing, food, energy, healthcare, education "RUNNING AMOK." Case in point: One restaurateur in Pennsylvania e-mailed BusinessWeek Online in response to a recent story citing tepid inflation statistics: "Being one who considers himself 'in the trenches,' what the heck is everyone (government, business publications) talking about inflation being kept in check? Talk to the folks down here to get the real deal. Inflation has been running amok for a year and a half." http://www.wpbfnews.com/money/3802963/detail.html "In the past three years, the total value of residential property in developed economies has increased by an estimated $20 trillion, to over $60 trillion. Granted, that increase is partly explained by the decline in the dollar; still, it is double the $10 trillion by which global share values climbed in the three years to 1999. Is this the biggest financial bubble in history?" -- ECONOMIST The 2002-03 average teacher salary was $45,771, up 3.3 percent from the previous year, according to the report. The 2002-03 average beginning teacher salary was $29,564, up 3.2 percent from the year before. The AFT estimates that the average beginning salary for the most recent school year, 2003-04, was $30,496. But while teacher salaries rose an average 3.3 percent, health insurance benefits spiked an average 13 percent, according to the Bureau of Labor Statistics. http://www.aft.org/presscenter/releases/2004/071504.htm Since all the excess dollars printed have (for the moment) returned back to the vault of US Treasury in form of bonds, the excess money hasn't flooded the markets to cause an even higher spike in pricing. So, one wonders, why haven't the long bonds moved and are even lower than they were one year ago? Despite FedFunds increase from 1% to 2.25% since June-2004? My explanation is that long-bond is no longer a valid instrument for the market's measure of future inflation, since the US gov has stopped it in 2001. Nowadays long bond is just a game for "carry" traders, trying to squeeze a bit more yield. Just the bond dealers have leveraged positions of over 1 TRILLION playing the carry trade. The various hedge funds might have a similar figure on top of that. The recent FOMC minutes mentioned the Feds "concern" about excessive risk-taking. Yet the carry players simply ignored it and continued the game more aggressively, making new highs yesterday. What might be in the cards wrt fed? Here's some stuff from PIMCO: http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF_Jan_05.htm At some point in time the masses will start to sense they are being fleeced and will look for ways to preserve the value of their hard earned cash. My opinion is that the commodity funds are going to have a very bright future in the years to come.
The weekly view on the 30yr bond yield. A month ago the technical picture looked conducive for a medium term short, with target in the 5.7% - 5.8% area (top of uptrend channel). Right now, the technical picture is marginal at best. Today at 4.65% it's back to second lowest reading of all time in yield, in the entire history of the long bond since 1977.
T-Note 18-year seasonal chart: http://www.spectrumcommodities.com/education/commodity/charts/ty.html Looks like we can get more aggressive short in about 2 weeks.
Krugman on the Greenspan succession next year: http://www.nytimes.com/2005/01/25/opinion/25krugman.html?hp He makes an important point that I hadn't considered, namely that Bush always appoints yes-men, and will be appointing the next Fed Chairman. This could really prove to be a catalyst for something not so good and spark a leg higher in interest rates.
Hmm, you're looking for a "catalyst" to lead to higher interest rates. There have been MANY "catalysts" sofar, but somehow they've been ignored by "the market". Perhaps "the market" seems to think that Greenspan is a magician and blindly trusts him (despite all the evidence to the contrary) to somehow make things work afterall? So the only change / catalyst is if the market doesn't have blind faith in his successor. Today's Fed (headed by Greenspan) has implemented an extremely loose policy on money and credit. I read it was the most "stimulative" policy since WWII. The "fudged" official CPI is +3.5% for 2004, the real CPI is estimated to be over 6%. So bond holders all over the yield curve are losing purchasing power. Worldwide money supply increased by 37.1% in just 3yr. A tsunami of paper money flooded everything from stocks to bonds to commodities. Risk premiums have diminished to the lowest levels. Bankrupt companies from the dotcom bust are issuing corporate bonds and the market is happy to lend them money with 7% interest!!! There's also a collapsing dollar, which still has failed to produce the desired effects of narrowing the trade deficit gap, which showed a record increase to 60bn/mo last months report. So, the equilibrium may be a lot lower I *assume* that the Fed is unhappy with the current situation of abnormally low long rates, because it just gives fuel to the asset bubbles, built on piles upon piles of debt. It seems that housing is priced out of reach of lower class and rapidly being priced out of reach of US middle class in East/West coast. But maybe they're just pretending it's a concern for them? Remember the Fed threatened to actually BUY longer-term debt if market didn't let longterm rates drop a couple of years ago (during the reflation). Many people have wondered (i read it in various US magazines for years in 2003, 2004) that it may be Fed who's actually buying longer-term debt, in order to keep long term rates down for as long as possible. Back in 4Q2004, there was a "buyers' strike" by Asian investors and FCBs, most of the US debt buying was by Carribean funds. Some speculate it was the Fed.