Follow The Bottom Violation
-
Jan
24
Treasuries Struggle with Stocks
Last week, 30-year Treasuries posted their biggest weekly loss since 1987. Normally, one might expect the capital leaving bonds to move into equities, and yet stocks fell. I’m not patting myself on the back, but if you’ve been reading my articles over the last three weeks, you know this is exactly what I have been predicting. Of course, I think the move is going to be much more pronounced over the next year or two.
But then, if you’ve been reading my articles, you also know that I exited my short position in Treasuries (through the double short ETF, TBT) after a big part of the move. So you’re undoubtedly asking yourself why, if I am so bearish on Treasuries, did I offset my position?
Believe me when I tell you that, with every move lower in Treasuries last week, my stomach tightened a little more. Yes, I believe the reversal is going to be colossal — just like the collapse in oil. And no, I do not want to miss it. But unlike the oil bubble, there is a huge variable in the Treasury equation that makes timing of the move much more difficult: the Fed.
In December, when the Fed lowered its funds target to between 0% and 25%, it also stated it would use any tools at its disposal to fight the ailing economy — citing specifically the possibility of buying the long-end of the yield curve to keep rates as low as possible. As most of you know, I think such a policy would be extremely stupid — bad for both Treasuries and the dollar; the move would undoubtedly necessitate more printing of money by the Fed, only adding to inflationary pressures, and it would undermine the credit-worthiness of the United States, calling into question successful future Treasury auctions.
Listen, I’m no market-timer. In fact, I hate looking for entry- or exit-points. Usually, I’m a buy-and-hold guy, but these are crazy times, and they require extreme diligence, patience, and perseverance. It’s true, I believe Treasuries and the dollar are doomed, and if the currency I’m being forced to use is going to fall apart then I’m going to try to get on the opposite side of that catastrophe — as anyone would. At the same time, I’m not going to lock myself in a cage and provoke a fistfight with a gorilla as big as the Fed.
For almost all of 2008, I waited. I wanted to short Treasuries all the way down, but somehow I knew, even with the specter of rising prices looming early in the year, things were about to get bad. I knew if credit continued to dry up, people would start selling whatever they could to raise cash, and that would mean an economy-wide collapse in asset prices. I knew about Japan in the 1990s and early 2000s. I knew about Bernanke’s dream to be a helicopter pilot. Yes, yields were low, but shorting Treasuries was still too much of a risk if the Fed took us to zero. And that’s exactly what it did on December 16.
Only then did I sell, and I did well — thanking my lucky stars that I hadn’t shorted earlier in the year, thinking about all the poor souls who did. Timing really is everything in a game like this.
The only reason the Fed would threaten to attack the long-end of the yield curve is that it can’t lower its funds rate any further. It needs to be able to continue fighting a weakening economy; indeed, unless I’m missing something, the only reason it wouldn’t buy long-term Treasuries would be if it saw a strengthening economy and a return to risky investment. But that’s not what the Fed is seeing: unemployment is moving dramatically higher. Consumer confidence continues to stagnate. Equity markets are hovering at multi-year lows. Housing starts and existing home sales are imploding.
Nothing is getting better; if anything, things are getting worse.
I’m going to make my next prediction with a lot of hesitation, because I actually think the prediction may be wrong. If it is, I’m probably going to miss the move in Treasuries I’ve been salivating over for the last year. But here it is anyway:
Because the Fed is not seeing the sort of signs that might signal an impending recovery, it probably will start targeting the long-end of the curve. And when it does, I believe there’s a distinct possibility it will do so with strength and decisiveness. Remember, one of the Fed’s biggest criticism of Japan’s failed zero-interest-rate-policy — and subsequent quantitative easing — is that the Japanese central bank failed to act with decisiveness and strength — that is, they neither acted quickly enough, nor with enough firepower to get any real results.
On another note — and adding to my trepidation about the Fed’s intervention — is the fact that the Japanese yen continues to strengthen against every other major currency in the world. Remember, Japan’s well-being depends heavily on its ability to export, and a strong currency is horrible for exports. Japan can’t allow its currency to continue to strengthen much longer — especially against the dollar — and one of the best ways to weaken the yen is to buy Treasuries. The Chinese are in the same boat.
So to round out my prediction: I think it’s highly possible that some, or even all these factors might come into play over the next weeks or months — especially if we continue to see weakness in equity markets. In that regard, I want to reiterate that the consumer is tapped out, and as such, I believe corporate earnings are going to continue to fall across the board — probably drastically. As many of you know, I believe credit card companies are extremely vulnerable to defaults on a vast amount of unsecured debt, and on top of all the other pressure the economy is facing, I believe commercial foreclosures are going to accelerate, along with unemployment. Any of these alone would be bad for stocks, but taken together they could cause more catastrophic losses.
What could all this mean for the Treasury market? Well, despite the fact that I believe there is neither “quality” nor “safety” in Treasuries, the consensus has traditionally been against me. This could lead to a lot of pressure driving Treasury prices higher — perhaps even retesting some of the levels we’ve seen in recent months. Of course, because of the cracks we’ve seen in the last week, I think we’re starting to see signs that Treasuries will not necessarily be perceived as the safest place to park money indefinitely, and if we do see another downward run in yields, I’m going to jump right back in with even more zeal than before.
Until then, I’ll sit and watch. Hopefully my stomach won’t contract too much.
Having trouble with RSS? Click here.
Disclosures: Paco is long TBT, UCO, and gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.
You can buy his novel Discipline wherever books are sold.
2 Comments so far
Partners
You Bail Them Out, We Opt Out.
Dear [May Be Too Much to my Taste, OK!, It will rather be:] Expensive Chairman Ben S. Bernanke,
All of Our Economic Problems Find They Root in the Existence of Credit.
Out of the $5,000,000,000,000 bail out money for the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE, The People, got?
If my bank doesn’t pay back its credits, how come I still must pay mines?
If my bank gets 0% Loans, how come I don’t?
At the same time, everyday, some of us are losing our home or even our jobs.
Credit discriminates against people of lower economic classes, as such it is unconstitutional, isn’t it? It is an supra national stealth weapon of class struggle.
Credit is a predatory practice. When the predator finishes up the preys he starves to death. What did you expect?
Where are you exactly in that food chain?
Credit gets in the way of All the Principles of Equal Opportunity and Free Market.
Credit is a Stealth Weapon of Mass Destruction.
Credit is Mathematically Inept, Morally Unacceptable.
You Bail Them Out, We Opt Out
Opting Out Is Both Free and Strictly Anonymous.
My Solution: The Credit Free, Free Market Economy.
Is Both Dynamic on the Short Run & Stable on the Long Run, The Only Available Short Run Solution.
I Am, Hence, Leading The Exit Out of Credit:
Let me Outline for You my Proposed Strategy:
✔ My Prescription to Preserve Our Belongings.
✔ Our Property Title: Our Free, Strictly Anonymous Right to Opt Out of Credit.
✔ Our Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: - .
✔ Asset Transfer – Our Right Grant Operation – Our Wealth Multiplier.
✔ A Specific Application of Employment, Interest and Money.
[A Tract Intended For my Fellows Economists].
If Risk Free Interest Rates Are at 0.00% Doesn’t That Mean That Credit is Worthless Already?
Since credit based currencies are managed by setting short-term interest rates, on which you have lost all control, can we still say that they are managed?
We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.
In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.
The only other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.
It will be either awfully deadly or dramatically long.
A price none of us can afford to pay.
“The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”
- Henry A. Kissinger
What Else?
Until We Succeed the Economy Will Sink Into a Deeper and Deeper Depression
You Bail Them Out, Let’s Opt Out!
Check Out How Many of Us Are Already on Their Way to Opt Out of Credit.
Let me provide you with a link to my press release for my open letter to you:
Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can’t Work!
I am, Mr Chairman, Yours Sincerely [Like do I have really the choice?],
Shalom P. Hamou AKA ‘MC-Shalom’
Chief Economist – Master Conductor
1 7 7 6 – Annuit Cœptis
Tel: +972 54 441-7640
Fax: +972 3 741-0824
http://edsk.org/
I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
Sarah
http://laptopseries.net