Editor’s Note:
In this series of articles, we include important or interesting
videoclips with our comments. This is an article that expresses our
personal opinions about comments made on Television and in Print. It is
NOT intended to provide any investment advice of any type whatsoever.
No one should base any investing decisions or conclusions based on
anything written in or inferred from this article. Investing is a
serious matter and all investment decisions should only be taken after a
detailed discussion with your investment advisor and should be subject
to your objectives, suitability requirements and risk tolerances.
1. The Perfect “Rumotory”
A “Rumotory”, by our definiton, is a rumor-cum-story that has begins as a rumor with embedded elements of truth yet facilitates convenient denial. A perfect rumotory is one that eventually turns out to be more true than false but at a later convenient date. Last September’s rumotory about a Benghazi coverup is a good example.
But the perfect example is the rumor of a “Fed tapering its stimulus” article to be published in the Wall Street Journal by Jon Hilsenrath, the man Steve Roach called the real Chairman of the Fed. This is the rumor that caused Treasuries and stocks to sell off on Thursday afternoon. The rumor was sort of denied by laughing at it when no article appeared after Thursday’s close.
In the perfect Rumotory pattern, the rumored but denied Hilsenrath article was published in the Wall Street Journal at 07:19 pm on Friday conveniently after the markets had closed for the week. Assuming, of course, that the article is an accurate reflection of Bernanke’s thinking, or at least the thinking Bernanke wants us to believe at this point.
This makes Thursday afternoon’s action and Thursday night’s action in Japan perfectly sensible. If Bernanke is slowing down QE in America, then Kuroda becomes the only central banker committed to QE. So U.S. Dollar should bounce and Japanese Yen should get hit hard, very hard.
We shall see what happens on Monday in America but what happens in Japan Sunday night may now hold the key.
2. Going Nuts in Japan.
We don’t mean the 415 point up move in the Nikkei on Japan’s Friday. We mean the overnight action in the Yen & JGBs. The Yen go down hard but that was expected. What was unexpected, at least to us, was the waterfall decline in JGBs.
The 10-year JGB yield rose by 10 bps from Thursday’s close at 59bps. The 10-year Treasury yield rose by 9 bps on Friday from 1.81%. So on a relative basis, the rise in the 10-yr JGB was 3X the rise in the 10-yr UST. Big, we say. Clearly, we should expect sovereign bond yields should trade in tandem at least during the initial stages of the move. Look, the 10-yr Bund yield also rose by 11bps on Friday.
The bloodbath in the JGB market on Thursday night was the single most important event of this week, we think. That indicates that Abe-Kuroda pair is being given a greater chance to create inflation in Japan. But shouldn’t a tapering of QE be negative for the U.S. economy, at least at the margin? So US treasuries should begin acting better, as they did at the end of QE1 & QE2. Or are the markets very sure of the upward trajectory of the US Economy? More on the economy in Section 4 below.
Neither BTV nor CNBC discussed the overnight JBG action on Friday morning. Why didn’t they just call Kyle Bass? And why didn’t they call Peter Hayes or BlackRock or Bill Gross of Pimco, both of whom had said on April 4 that Kuroda-san’s actions were a big positive for Treasuries. We quote from our April 6 article:
- Hayes – the Japanese move last night was a very, very big deal for the fixed income market….”
- Gross – “the BoJ has gone
all in the amounts of they are going to be buying… to a certain extent
Sara, that money is expected to move out of Japan and into Treasuries
and other fixed income in other high quality markets with higher
yields..the 10-yr treasury is only 1.75% but it is certainly much better
than what they can get in Japan and if the Yen is weakening – sort of a
double play for Mrs. Watanabe…”
Bill Gross didn’t wait to be asked or invited. He stunned everyone with the tweet below:
- Gross: The secular 30-yr bull market in bonds likely ended 4/29/2013. PIMCO can help you navigate a likely lower return 2 – 3% future.
Why didn’t Sara Eisen, FinTV’s passionate anti-Treasuries champion, call Bill Gross on her shows in Friday? Instead, she reacted with a contemptuous “why?” on Friday morning when her colleague Erik Schatzker told her that Jeffrey Kronthal was bullish on Treasuries. Interestingly that contempt marked the bottom in TLT for Friday which began its 3/4 point rally at the same moment. Correlation or Casuality?
To be fair, Ms. Eisen is not the only hater of Treasuries in the FinTv world but she seems the most passionate, a bit above Scott Wapner of CNBC Fast Money who seems more into conviction rather than contempt. These two have a lot of company according to the tweet below on Friday afternoon:
- @RonnieSpence – “I honestly believe there is much more hatred for Treasuries than any other asset class.”
But not everyone is bearish on Treasuries. Who isn’t? See section 5 below.
3. U.S. Stock market – “Wire-to-wire” with a “Hall Pass for months”?
The US Stock market began rallying around noon, a bit after Bernanke finished his Q&A at this speech. Was that because the market was relieved he didn’t hint at the tapering of QE rumotory. The indices did ramp in the afternoon to close at new all time highs.
Oil & Gold were shot in the morning. But USO reversed around 11, about 15 minutes or so before FXY, the Yen ETF, made its bottom for the day. USO actually closed unchanged which does seem impressive. How do these markets handle the confirmation of tapering QE announced by Jon Hilsenrath on Friday after the close?
Last week, we gave a shout out to CNBC Fast Money trader Steve Grasso for his call on last Thursday (5/2) afternoon for SPX 1625-1630. This Friday, he sounded a different tone:
- “it’s getting a little too telegraphed for me. We had a conference call this morning and I felt negative. I sold my Apple, sold my Google. I felt it was too telegraphed at this point. I think there’s room to the upside. I don’t feel like I have the brains to pick a top here.”
In contrast, Michael Novogratz of Fortress (see clip 1 below) & Morgan Stanley’s Adam Parker see no reason to worry:
- Novogratz – “I
don’t see why we can’t go wire to wire this year …there is nothing in
the horizon that gets me too scared.. could be one of those years, who
knows.. we could finish the year up 25%, 30%“. - Parker – “We think you have a hall pass, we are calling it for the next couple of months… from the market’s perspective nothing I can hear will make me worried“.
In contrast, Leon Cooperman of Omega, one of the most consistent bulls for the past 2-3 years, described the stock market as ahead of itself & fundamentals (see clip 2 below):
- I think the stock market’s probably a little ahead of itself…Profits this year
are going to be up about 4%. The market’s already up 15%. Last year,
profits were up 6% And the market was up I think 14% to 15%. So, you
know, I think that the market is somewhat ahead of the fundamentals. But
by and large, the notion of a big decline, I just don’t think makes
sense.
What does Lawrence McMillan, our most consistent option guru say?
- “Despite these overbought conditions, we do not envision much of a
pullback in the market unless support at 1600 is taken out. That would
change things bearishly, but otherwise we remain intermediate- term
bullish.”
Letting the market speak has been the safest course this year.
4. U.S. Economy & Inflation
When asked about the stock market, Michael Krasch, a colleague of George Soros and Stanley Druckenmiller, said (see clip 4 below):
- “we’re at these
record highs. I feel very good about where the market stands, assuming
that the soft patch of the last few months ends.”
The Payroll report on May 3 and this Thursday’s jobless claims dispelled much of the gloom that had been caused by April’s soft patch in the economy. The stock market now believes that the 2nd half will see an acceleration. Two successful predictors disagree:
- David Rosenberg (see clip 3 below) – “I still think that in an environment where you’ve got more disinflationary pressures than inflationary pressures….I think Europe is
still basically in recession. Asian economies are slowing down. If Asian
economies weren’t slowing down, then why would the Bank of Korea have
cut interest rates today? I think we’re still in a very fragile global
economic market…. it was a few months ago
people thought we’d have 4% first quarter growth in the u.s. before you
know it is 2.5%. forecasters have taken their numbers down towards 1% for the
second quarter. It is a discretionary economy but it is still very soft.“ - Jeffrey Kronthal (see clip 6 below) – “I am a little bearish on US economy… we have been able to get ourselves to 2% growth,.. I believe the Fed has done a wonderful job of getting us there….we think there are a lot of things that are going to pull & push us so we will continue to muddle along to 2-2.5% GDP kind of growth...“
Mr. Kronthal’s “fed has done a wonderful job of getting us there” might end up being the key if the tapering of QE ends up prolonging the soft patch .
5. U.S. Treasuries
The sell off in Treasuries has been brutal with yields up 20 bps from last Thursday’s close. The action was really ugly on Friday. It does demonstrate how overbought Treasuries on Thursday, May 2, the day before jobs Friday. The long end looks oversold but long duration Treasuries tend to get more oversold after you get convinced they are oversold. The real question is how investors react to the tapering of QE and to the data next week.
Jeff Gundlach was on CNBC Fast Money this Thursday and said TLT is an Ok investment. Frankly, CNBC’s Scott Wapner was much more interested in Gundlach’s views on Apple & Chipotle. For a better discussion of Gundlach’s views, we refer readers to the summary of “Why own Bonds At All” presentation at Ira Sohn Conference featured on ZeroHedge.
Gary Kaminsky, Vice Chairman at Morgan Stanley, asked Jeffrey Kronthal whether we will see 1.25% on the 10-year Treasury yield first or 2.75% first. Kronthal told him “1.25% first“. Mr. Kronthal told CNBC’s David Faber that he see the 10-year yield trading between 1.5% and 2.00% for some time. But that was on Thursday morning, hours before the QE tapering rumotory of Thursday afternoon.
Jeffrey Kronthal gave BTV’s Erik Schatzker 2 trades in Treasuries (see clip 6 below):
- “long strips are very mispriced to the belly of the Treasury curve. We can make a lot of money through a bull flattener or if the economy takes off, we will see a flattening curve in a bear environment.”
- “deflation is more likely than inflation. World is paying up for TIPS believing there is a lot of risk of inflation… We are actually Short TIPS... we actually think Japan could export deflation to us. So TIPS have a (-1.30%) yield in 5-year TIPS that is very rich.”
By the way, almost every one else on BTV & CNBC predicted large rise in Treasury yields and told viewers to sell their bonds and buy stocks.
6. Was it the Dollar or the Yen on Thursday-Friday?
This pair broke 100 and triggered many stops in heavy volume. What does it do on Monday now that tapering of QE is Fed-sanctioned story? The action in the Yen and the action in the JGB market are probably the most significant factors next week.
7. Cooperman-Gundlach-III
Leon Cooperman is a stupendously successful hedge fund manager. His forte is equities and especially picking value stocks that deliver great upside. But he does not seem content to talk about stocks. He goes out of his way to trash Treasuries in his TV comments especially when he is paired with a bullish-on- Treasuries Jeff Gundlach.
The first was on June 30, 2011 and the second on March 6, 2013. The third was this Thursday, May 9. On each occasion, Mr. Cooperman made the same arguments, came to the same conclusion that 10-year Treasuries should yield 5%-6% and used the same analogy about buying Treasuries is like “picking up pennies in front of a steam roller.” On the first two occasions, Cooperman proved to be completely wrong and Gundlach was proven correct. Will this 3rd time be a charm for Lee Cooperman? And will CNBC’s Becky Quick, a gentle despiser of Treasuries, stop taking Cooperman’s side in these debates? We shall find out soon.
Featured Videoclips:
- Michael Novogratz on BTV Market Makers on Monday, May 6
- Leon Cooperman on CNBC Fast Money Half Time on Thursday, May 9
- David Rosenberg on CNBC SOTS on Thursday, May 9
- Michael Karsch on CNBC FM & 1/2 on Thursday, May 9
- John Burbank on CNBC SOTS on Thursday, May 9
- Jeffrey Kronthal on BTV Market Makers & CNBC SOTS on Thursday, May 9
1. wire-to-wire up 25%-30% – Michael Novogratz on BTV Market Makers – May 6
This was before Thursday’s rumotory about tapering of QE. Michael Novogratz is one of the three people who run $55 billion sized Fortress.
- Mindset out there –
central banks with their foot on the gas pedal, don’t fight the Fed,
don’t fight the BoJ, don’t fight the ECB mindset out there; - Staying in Trends – two best performers have been Japan & US…Get alpha just be
market selection… staying in trends is one of the hardest things to do
in trading..pain of the gain…it is really hard to not sell your
position….Nikkei
& S&P – Keep it Simple Stupid – Japan has QE times 4…Nikkei still the cheapest equity market
out there.. US still has a pretty good story.. Rest of the world’s
stories aren’t as good… - How much longer? – I
don’t see why we can’t go wire to wire this year …there is nothing in
the horizon that gets me too scared.. could be one of those years, who
knows.. we could finish the year up 25%, 30%.. and if you look
statistically even in deflation times, go back and look at Japan after
1990, after they had the huge crash, they had many years of 30-40% up
years .. and down years over 10 year period the market went nowhere…
Buying Tail Risk protection – we have a tail risk business,
it is very difficult to raise capital.. Right when people should be
putting money into tail risk, they are not.. It is now. Of course you
should be lightening up on risk… If I spend a little money on
protection when it is really cheap, I am a pretty smart guy….what
happens is people don’t spend money on protection until it gets
expensive…that’s the mistake most people make…. You should be putting
tail risk hedges on… lots of asset classes that are getting very very
rich… I can see in the next 18 months selling very bit of credit
exposure .- Yen – I don’t like the Yen…Dollar-yen is in a trend,
it is headed to 120 by end of year…we are stalling up here around 100;
markets pick levels after big runs to consolidate until the story
continues to play out…between 99 & 101, there is a lot of
technical congestion, lot of offers there, lot of exotic trades have
been put on where people are protecting that 100 level, but its just a
matter of time when that will be taken out…then we will see the next
leg up… - Japan – QE is likely to work in Japan better than anywhere
else…no people like Japanese to take pain for greater good.. Abe can
generate just enough inflation and keep inflation so that in 2-3 years
it eats away at the debt…Japan is the one place you might not hear
anyone complain. - ECB – they will do QE…it is coming… don’t know if it is 3
months, 6 months… but ECB will run out of weapons they are using right
now... they have acknowledged that QE is legal in their framework and
they could do it…they would buy equal weighted govt bonds of each
country and it wouldn’t shock me to see them do it… not a ton that
excites me in Europe right now… sovereign spreads have narrowed in a
lot… don’ see a lot of value there…. we are using less capital in
Europe right now than we have in the past….just think the
opportunities in US & Japan are better… - Emerging Markets – Don’t like Emerging
Markets in general… 1) as growth slows down in countries that had fast
growth, you see a lot more of the corruption that happens….and people
get sick of it…you have got corruption from head to toe in China,
Brazil, India & Russia, you think about it, the BRICS are a wonderful
story and now you are like wait a minute… the legal systems, the
corruption, they have got wage pressures, Brazil is in stagflation right
now… the only country in the world that really has stagflation…They are uncompetitive… this surge of euphoria that went on, now you
are paying the piper there…
2. Stock market a little ahead of itself – Leon Cooperman on CNBC Fast Money Half Time – Thursday, May 9
- I think the stock market’s probably a little ahead of itself. By and large I think the bull market has more time to run. I think the economy’s limping along, you know, a couple percent growth rate and given the absence of alternatives, I don’t really see the reason for the market to decline a lot. I really think bernanke has succeeded in getting the market into his own fair valuation.
- I think to get the market down a lot, you’re going to need basically a recession and doesn’t look like it’s playing that way. I think that given the underinvestment that exists, okay, because of the risk, I think one or two things will have to happen to get the market to go down a lot.
- one would basically be a fear of recession which doesn’t seem to be in the cards,
- second, the stock market starts to get very frothy, the Fed moves away from QE-3 and you have a correction when the Fed changes course. All these economists I’ve been meeting out here at salt assured me QE-3 will be with us till the middle of 2014. if that’s right, you have got to stay involved.
- I ask myself every day, what’s unusual about the current cycle. I think what’s unusual about the current cycle is you ought not have an $800 billion deficit in the fourth year of an economic expansion and interest rates ought not be zero. approximating zero. I’m trying to normalize and what’s normal? To me, the market ought to sell somewhere between 15 to 16 times earnings, normal. and then earnings normalize at probably 100, maybe better.
- I think all of us have to take a message from 1.7% 10-year governments and zero short rates. Profits this year are going to be up about 4%. The market’s already up 15%. Last year, profits were up 6%. And the market was up I think 14% to 15%. So, you know, I think that the market is somewhat ahead of the fundamentals. But by and large, the notion of a big decline, I just don’t think makes sense.
3. More disinflation that inflation – David Rosenberg on CNBC SOTS – Thursday, May 9
- I still think that in an environment where you’ve got more disinflationary pressures than inflationary pressures for the time period, a period where interest rates are at ultra low levels, the focus on capital preservation and the preservation of cash flows across the capital structure are still going to win the day over time and they can’t guarantee, by the way, that it is going to work every two or three weeks. But I think if you have a longer time horizon, the dividend theme is still going to be the theme that’s going to work well over the longer run.
- I think Europe is still basically in recession, Asian economies are slowing down. If Asian economies weren’t slowing down, then why would the Bank of Korea have cut interest rates today? I think we’re still in a very fragile global economic market. I think we need to focus on preservation of cash flow. That’s going to win the day. But the bottom line is that we haven’t really spun the needle in terms of where the economy is going. It was mentioned earlier what wholesale trade did. It was a few months ago people thought we’d have 4% first quarter growth in the U.S. before you know it is 2.5%. forecasters have taken down their numbers down towards 1% for the second quarter. it is a discretionary economy but it is still very soft.
- I’m starting to get more concerned in the future over cost push inflation. That certainly would be a factor causing interest rates to rise. When that starts to happen it is not so much interest rates rising, it is fact it is causing rates to rise. I think at that point you’ll start to find a lot more inflationary hedges are going to start to outperform. Everybody’s maybe been selling gold, selling real return bonds. The parts of the market that you would screen for for inflation are probably going to be the places to be at that point when interest rates start to rise. That’s probably down the road but it is probably something you want to be looking at. It is not too early to be talking about in any event.
4. Assuming soft path ends – Michael Karsch on CNBC FM & 1/2, Thursday, May 9
Michael Karsch is the founder of Karsch Capital Management and a protege of George Soros & Stanley Druckenmiller.
- we’re at these record highs. I feel very good about where the market stands, assuming that the soft patch of the last few months ends. and I do believe when you look at the way the consumer stands in terms of job — not great job creation but some job creation. this is where the stock market is and housing prices increasing. I feel like the consumer should be fine. overall, the next issue then is valuation.
- I am focused on consumer discretionary and I’m focused on industrials and we’re finding some good event situations….. so specifically within consumer discretionary some names in our portfolio include Carmax, Ultra cosmetics and Macy’s and industrial hybrid tech, as well as Tyco.
- I agree that the least risky part of the market seems overvalued. the bubble of 2000, it was the real expensive namings. now it’s the bond proxies. If the soft patch does end, that’s the most vulnerable area.
- A theme we’ve exposed in our portfolio is intermodal. Intermodal is just using different modes of transportation. namely rail and truck to get from the producer to the retailer. we feel like the gap between straight trucking and intermodal has significantly widened, creating a significant opportunity for companies like north folk southern, as well as to a lesser extend JB Hunt.
5. Buying yield, buying thin
gs with scarcity value – John Burbank on CNBC SOTS – Thursday, May 9
John Burbank is the founder of Passport Capital, a large hedge fund.
- Ihe big trend is to get yield however you can do it. Equities offer a better yield with growth than bonds. People shouldn’t confuse the equity market with a proxy for global growth or successful economies or whatever. It’s just that equities are now a better risk reward than they were before. And that’s after investors took credit basically beyond par. And so now we’re looking at where to put the money into equities because not all equities will do well.
- So people wan to fight this trend. They want to fight most new trends, the trends towards defensive stocks, towards yield safety is not normal. It’s lasted for two years here in the equity universe. I think it’s going to last for three years more. I think this is the big trend.
- Because I don’t think the world is going to grow that much. The liquidity that’s being issued is going into yield products, into bonds. It’s not going into big investments, you know, in infrastructure. It’s not causing a lot of new growth, the opposite is happening. China is moving the opposite direction. western governments are moving the opposite direction in terms of austerity in fiscal prudence, not spending lots of money. they’re printing lots of money.
- What you want to own world leaders, more likely to have some growth, liquidity, dividends. They’re not beneficiaries of global growth. They don’t need the whole world to grow the way equities do or even emerging market equities do. There’s been a big distinction between the S&P and the emerging stocks the last two and a half years. People want to play catch-up with the commodities and risk your securities. They’re fighting the trend that has been established the last two years. So I think the world is not going to grow very much. I don’t think the western governments are going to come up with great policies that lead to big massive long-term bets. In fact, I think it’s the opposite.
- the irony is is with the S&P and these companies in the U.S. is if you — if there is wage inflation, then problem margin shrink and the equities are going to fall. so that’s a big question. Profit margins are far higher than people expected them to be and they’ve been maintained. and I would say the growth is increasingly harvesting richer consumers for around the world, leading U.S. companies. So I like the general prospects of world class companies. I don’t like the prospect of average companies.
- If you compare what’s in the S&P Top 20 and what’s in the emerging Top 20, the difference of quality is enormous. There’s a lot of commodity markets, a lot of government controlled companies, a lot of Chinese banks in those indices. I think this is a distinction between quality and lack of quality. And inflation is measured in labor and commodities, there isn’t the inflation people expect. People do know there is a basement, essentially the basement of their currency. So I think the money is going to risk high quality assets around the world. It’s the same as emerging markets putting money to buy expensive markets or houses in safe places. It’s the same as buying collectibles or art. It’s buying things with scarcity value as opposed to most things that the world supplies.
6. Long Strips – Short Belly of Curve, Short TIPS – Michael Kronthal on BTV Market Makers & on CNBC SOTS – Thursday, May 9
First the BTV clip with Erik Schatzker, because it is much more value added.
- I am a little bearish on the economy.. we have been able to get ourselves to 2% growth,.. I believe the Fed has done a wonderful job of getting us there….we think there are a lot of things that are going to pull & push us so we will continue to muddle along to 2-2.5% GDP kind of growth…
- our belief is that opportunities in the Treasury market are much more in the line of yield curve trades, where things like long strips very mispriced to the belly of the curve.. that is a negative carry trade and a long volatility trade in a market where no one wants to be long volatility… We think that trade actually can make a lot of money
- either through a bull flattener if the economy actually struggled which we think it might
- or even if the economy actually surprises us and takes off we actually think we will see a flattening in a bear environment..
- We are a believer that we have a more risk of deflation than inflation which I think the world is paying up for TIPS believing that there is a lot of risk of hyperinflation or inflation based on what the Fed is doing. We are actually Short TIPS. And if you actually look at the TIPS market at 5 years, the implied inflation is over 2% and NSA CPI is running 1.5%.. We actually think what is going on in Japan, they actually could export a little deflation to us. So if anything, we think in the short run, inflation may actually come down, not go up and people are paying up. So you have a (-1.30%) yield on that TIP. Boy, that sounds very rich.
- Our belief is yes, at some point rates are going to rise… we really do think that the need for low rates is going to be here much longer than that… certainly we can see rates going to 2% on the 10-year, that’s not material. But we don’t see a material rise in rates for awhile. There are just too many sensitive parts of the economy, sensitive to interest rates like housing, auto sales & other things, that if you turned them off right now, would really hurt us. Because that’s really some of the engines that are driving growth.
- we are pretty bearish on some of the structural issues in Europe, the competitiveness of Northern Europe vs Southern Europe even France is significantly deteriorating… France is output or GDP per person vs Germany is declining rapidly.. and when we look at it, France actually isn’t actually going through structural reforms… Germany has forced austerity into the southern periphery trying to create structural reform and make the periphery more competitive really unfairly. If you go back to German unification, the 1990s, if you look at some of the things that occurred, Germany itself was very uncompetitive. It actually took a decade to work its way up to where it is now kind of the behemoth of Europe and yet they are trying to force others into a process, By the way, they went to the European Union and said our Debt-GDP is going to go up the limit but please give us time because we are dealing w
ith structural reform - problem is you don’t want to fight the ECB; so you don’t want to be short Spain or Italy or the markets where the ECB has said we are going to support it.. Our view has been France-Bund spread of 50-60 bps does not price in the risk of France. Our view is again, if you look at Europe, we could be wrong in that it heals itself. Then all rates are going up including France. And if some of the issues that go on, a) political election in September in Germany – its is not clear to us that Merkel is going to win that easily as the market seems to think.., we still think there are some issues around the Italian elections, Spain has some very strong structural problems, housing..
CNBC SOTS clip with David Faber
- There’s been a great rotation of cash in the risk assets. You look in high yield bond funds, the lows have been marginal.…We’ve been a big believer that high yield has been cheap throughout most of the year. Coming to a view that it will get to be pretty fair value at this time. Spreads have moved enough that when you start looking at what expected default rates are, kind of the expected risk premium, looking at losses, you’re getting towards fair value. We continue to think the default rate is going to remain very, very low.
- when you look at everything that’s Fed is doing and certainly reserves have picked up. You really haven’t seen the monetary bases not growing. It actually shrunk in the first quarter. So, you know, a lot of this money is going towards consumption. That’s why deficits are going up, transfer payments, and the savings rate of consumers is coming down. It’s gone from mid 4s back down to 3. so some of the wealth effect is showing up with consumer spending. I’m not a believer we’re going to get a lot of inflation. Some of our favorite trades are things like short TIPS. We think the market is overpaying for inflation. The world thinks inflation is coming and people are paying over fair value.
- we think Japan is going to go further. They’ve gone beyond. You’re going to make the U.S. Dollar stronger. You’re going to have cheaper imported goods relative to U.S. goods. It will keep a cap on inflation in our view.
- We think we’re in a range for a while. Some of the this things going on are very interest rate sensitive like housing. and some things that have propelled earnings is refinancing into lower rates. We think the economy is interest rate sensitive. We think we have a trading range probably between 1.50% and 2% for quite a while. .
Key question & answer:.
- Gary Kaminsky of Morgan Stanley – Which one will we see first? 10-year UST yield of 1.25% or 2.75%
- Jeffrey Kronthal – 1.25% first. .
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