I happen to agree with this Felix the Cat fellow, but others have been making a similar case for years, and in some ways more eloquently, e.g.: Lacy Hunt (Hoisington Asset Management); Jeff Gundlach (DoubleLine); Bob Janjuah (Nomura); Guy Haselmann (Scotiabank); Steen Jakobsen (Saxo Bank); Albert Edwards (SocGen); and Gary Shilling.
As a trader, isn't it your job to anticipate all this "manipulation" and figure out how to profit by it?
The CRB Commodity Index is now down over 30% since its June 25th peak, and over 40% lower than its 2011 peak. Jim Grant hauntingly recalls the drop in commodity prices prior to the 1921 mini-depression in his recent book, The Forgotten Depression:
“No stock-market crash announced bad times. The depression rather made its presence felt with the serial crashes of dozens of commodity markets. To the affected producers and consumers, the declines were immediate and newsworthy, but they failed to seize the national attention. Certainly, they made no deep impression at the Federal Reserve…”
Based on December’s Y/Y CPI print, the current inflation rate is 0.76%, so I’m not sure where you’re getting the 1.7% number. When the CPI print for all of 2015 comes in at near zero, you are going to think back and realize that today’s 2.4% rate on the 30Y was actually a decent value (but by that time the rate on the 30Y will have fallen to 2% or lower).
Spanish 10Y currently yielding 1.35%; US 10Y yielding 1.82%. Just to refresh your memories, Spain’s unemployment rate is around 24%, and its government debt to GDP ratio is around 98% (and will likely surpass 100% this year). Speculators are apparently going to drive Spanish yields down to Japanese levels as they continue to front-run the ECB.
This is what happens when long-term Treasury yields drop to Depression-era lows, and still have further to drop (look at rates in Europe and Japan). And when the 30Y Treasury bottoms around the 2% level, there won't be a V-shaped recovery in rates, more like an L-shaped malaise for years. Bond equivalents like ED should continue to do well.
It can be a volatile number from week to week (especially this time of year), which is why most analysts use a 4-week moving average to smooth the data. For the last few weeks, though, the 4-week moving average has been trending upwards.
Lost in all the European QE madness was today’s initial jobless claims number of 307,000, making it the third week in a row above 300,000 (for the first time since July). This is one of the most reliable of all the leading indicators. For those keeping score at home, the 4-week moving average is now at 306,500. But...I thought President Obama told us everything was fixed?
I would have guessed that Spanish and Italian bonds would have sold off in "sell the news" fashion today, but the opposite has happened. Yields on both have dropped double digits: Italian 10Y yielding 1.58%. Spanish 10Y yielding 1.43%!
I’ve been a fan of Lacy Hunt for years. A former chief economist for the Dallas Fed, he has a rare combination of qualities for a bond strategist: he’s both a superb economist and a historian of the bond market. He is assuredly not some sort of fringe doomsday prepper. Yet his 4Q14 quarterly report for Hoisington Management, released earlier today (and available for free at their website), is devoted to the global economy’s current parallels to the Great Depression. It’s the kind of thing that makes you go, hmmm…
First off, the only market I really study is the US treasury market, so anything I might say about Euro bonds is just a guess. Second, if one were to try to short that market, I would think you'd want a fund loaded with debt from the peripheral countries (Spain, Italy, Greece, Portugal) and not just some general Euro bond fund that also included bonds from strong countries like Germany, Austria and the Netherlands. Guy Haselmann (Scotiabank) issued a note a couple of days ago about his favorite pairs trade: long US treasurys, short Euro peripheral bonds. The title of the note was 'ECB QE – Design Matters More Than Size'. It was posted on the ZeroHedge website a couple of days ago, or you might try a google search.
And here was the punchline to the report:
“In the aftermath of the debt induced panic years of 1873 and 1929 in the U.S. and 1989 in Japan, the long term (30Y) government bond yield dropped to 2% between 13 and 14 years after the panic. The U.S. Treasury bond yield is tracking those previous experiences. Thus, the historical record also suggests that the secular low in long term rates is in the future.”
I just re-read Lacy Hunt’s 2Q 2013 report for Hoisington Management (the reports can be downloaded for free at the Hoisington website). I’m going to repeat some choice quotes, but keep in mind that these words were written 18 months ago!
“The secular low in bond yields has yet to be recorded. This assessment for a continuing pattern of lower yields in the quarters ahead is clearly a minority view, as the recent selling of all types of bond products attest…”
“The Fed has maintained the Fed Funds rate at near-zero levels, and it has tried to lower longer term rates through a series of quantitative easings. The effect of each of the quantitative easings was the opposite of the Fed’s intentions. During every period of balance sheet expansion long rates rose, yet when securities purchases were discontinued yields fell. The Fed cannot control long rates because long rates are affected by inflation expectations, not by supply and demand in the market place. This is extremely counter-intuitive. With more buying, one would assume that prices would rise and thus yields would fall, but the opposite occurred. Why? When the Fed buys, it appears that the existing owners of Treasuries (now amounting to $9.5 trillion) decide that the Fed’s actions are inflationary and sell their holdings, raising interest rates. When the Fed stops this program, inflation expectations fall, creating a demand for Treasuries, bringing rates back down. The Fed’s quantitative policies have been counter-productive to growth as interest rates have risen during each period of quantitative easing. During QE1 and QE2, commodity prices rose, the dollar fell and inflation rose temporarily. Wages, however, did not respond. Thus, the higher interest rates during all QEs and the fall in the real wage income during QE 1 & 2 served to worsen the income and wealth divide. This means many more households were hurt, rather than helped, by the Fed’s efforts…”
Steen Jakobsen, the brilliant chief economist for Saxo Bank, answers your question in a note published just yesterday:
“Look at the Federal Reserve forward-looking guidance: They are constantly over-optimistic on growth and inflation. Constantly. The joke doing the rounds is that to get the proper GDP and inflation forecast you merely take the Fed's own forecasts and deduct 100-150 bps from both growth and inflation targets and voila! You have best track record over time.”
Do you not realize that we are in 2015? Did someone drop a brick on your head? The YoY CPI print for last month (December of 2014) was 0.76%.