More Fun With Interest Rates

While we’re on the topic, let’s review the spread we have on from 6/9, (S) US 10 yr, 2.99% / (L) Ger 10 yr, 3.03%, thus -4. That is, we expected US rates to head higher vs Ger. We also have an outright view but the qlt flt triggered by Greece illustrates that spreads can sometimes be a more conservative approach. Last on that spread +13 with the US leg at 3.10% and the Ger leg at 2.97%, thus US prices much lower, Ger prices higher from 6/9, a satisfactory result.

Two key factors inspired the trade: 1) our view for a US recovery and end to Fed meddling and 2) the reality that the ECB would soon brake given Germany’s real sector vigor.
　

Robert Craven

Just Ahead

We are reminded of early Q4, ‘10. Consensus was for a further slowing. We said no, and here is why. The economy blew through estimates into Q1, ‘11.

Now is a mirror situation. Again the market crowd are all looking in the wrong direction.

Instead, we will move nicely into year end.

Finally, we have isolated the turning point in interest rates, set June/9 at 2.99% on the ten year. Quality flt took us a tad lower, certainly, but that was temporary. Last, 3.11%. Year end - 3.50%.
　
Robert Craven

Handy Tool

We’re not EU insiders but any of us can get a clue re the Greek outcome, simply by glancing at Treasuries.

Recall that when world institutions think all hells about to break loose, they seek sanctuary, parking their loot in the safest location of earth - US obligations. Thus demand tied to fears of EU contagion drove Treasury prices higher and yields lower. Today we see that has reversed, institutions un-parking their cash, selling Treasuries, yields higher. Thus, the 10 yr printed a 2.88 June/24 (week of panic re Greece) from a 3.10% on June/14. Nothing has changed here, yet the 10 yr last is a 3.08 from a 3.04% yesterday, telling us world institutions are optimistic.

Robert Craven

Fun With Interest Rates

On June/9 we stated that this major cycle in lower rates had ended. The ten yr Treasury then a 2.99%, down from 3.34, Jan/4/11. In the old days, 35 bps was nothing; it’s a movement nowadays!

Since June/9, the 10 yr moved to a 3.10% (thank you) but then lower to a 2.93%. We did not anticipated the furor linked to Greece, which drove US rates lower (2.93%) based on quality flight. But knowing the business of the future is to be dangerous, we recommended a spread on June/9 as opposed to outright: sell the US 10yr (2.99%) / buy the 10yr Ger bund (3.03%), thus at a -4. That spread is last a +11 today (3.04% / 2.93%), a very satisfactory result, the10 yr Treasury lower in price, bund higher in price.


Robert Craven

Mark Twain the Strategist

"Whatever ... thing a consensus coppers, bet your money on that very card and do not be afraid," Twain wrote ("coppers" being colloquial for bets against). The good ‘ol consensus sure does get beat up regularly, and fittingly so. It’s fetched up a horrible track record.

At the moment, market view, world consensus is for a US slowdown, H2, and into year end.

We noted earlier that absent another major violent event in the Middle East, and absent another major intrusion by the Administration and/or by the Fed, that we will move nicely into year end.


Robert Craven

Week Ahead

Kids in the media (whose living depends on US economic releases) point out this pm that there is a lot on the burner this week. That is true but very little of it is important. The good ‘ol Jobless Claims release on Thursday and a Manufacturing survey on Friday pack some horsepower; the rest will come from offshore.

Germany has a couple of key releases, as does Japan; then there’s Greece. We have little direct exposure but some indirect exposure by the way of swaps. An outright default would impact us somewhat. But here is the key folks - this situation is fully on the radar screen. Q4 ‘08 was not. Thus this will not be a repeat by the way of breadth of destruction.


Robert Craven

Week In Review

It was pretty much all offshore - Greece and fears of contagion.

US signals were mixed.

Fed policy has stalled things here a tad, helped by our Arab buddies (gasoline).

More and more have joined us in the demand that the administration and Fed cease their efforts as planners. Then we’ll be just fine.
　
Robert Craven

Interest Rates

US rates remain low, partly on the (mistaken) view for a slowdown into year end. But a good part too is demand for sanctuary given considerable uncertainty of spill over linked to Greece. The EU decided to throw a life raft as long as the Greek’s stick to an austerity plan. Lower US rates tell us no one believes they will.

So world flight to quality drives prices of our treasuries higher, thus yields lower. When we see our rates turn around and head back up, it’s a sign the Greeks have abandoned their Cal Trans work ethic.


Robert Craven

The Anointed

Today’s Investor’s Business Daily, picking up on our theme: "A free economy doesn't need an elite of government high priests named Bernanke or Greenspan or Rubin or Summers to reach and maintain the greatness that has marked most of U.S. economic history. It needs protection from such arrogant figures."


Thank you.


Robert Craven

Crowd Behavior

Claims for unemployment insurance for the week ended 6/18 printed 429M today vs 415M expected, and the markets tanked! The world has been looking for the stamp of authenticity to a double dip and figures this is it. Off they go.

Crowds, whether of the French Revolution variety or a lynch mob - they're all the same. Crowds without failure react in the extreme.

In fact, after averaging 459M in 2010, new claims have averaged 415M in 2011. The pace of layoffs has slowed.


Robert Craven

Authority Figures

Folks in WTC tower I were told by authority figures to return to their offices. That didn't work out.

Likewise, question the Fed, always.

QE II meant the buying of 70% of new issue Treasuries. But the sellers parked the cash. Any fool knew they would because the policy of this administration makes it stupid to lend money.

Bernanke today implied no more. Slow learner.


Robert Craven

Art History 1-A

Admit it! You took this course cause you needed an "A" didn’t you? Come on. We know you did. Thought you got enough of Greece then? Seems not.

Why the ruckus? Greece is 3% of EU output. Fresno Cty produces more. Greece’s problems - its own look out? No longer.

"From each according to his abilities, to each according to his needs." Thanks Karl.

Now that this is no longer an abstract some folks are pissed.
　
Robert Craven
　

Back To Business

Greece only affects us in the extreme: a liquidity freeze, European banks, due to poison assets. Then we’re involved but odds are slim for such an event.

Thus, back to business. The US boat wants to right itself, and will if left well enough alone.

Gasoline - the main culprit in this slowdown, a dynamic we predicted. Potential Iranian / Saudi violence remains the wild card. Absent that, we will move nicely into year end.

Consult xxxx for an expansion on these topics.


Robert Craven

Circus

Headline: "Stocks Advance on Improved Economic Reports" What’s that? The reporting has improved? Or the economy has improved?

Although we know the economy will rebound, today’s reports on balance were not "improved," either by the way of reporting skill or economic reality. Housing starts showed a blip but they’re still in the sewer. Claims - tad lower but still high. The key Philly Fed manuf survey tanked.

This is why stocks are higher? Nonsense.


Robert Craven

Contagion?

Greece in the headlines. Problem - potential rescuers cannot agree on a package, none wanting to be hung out to dry.

There is fear then that French and other European banks, those with significant exposure, will be downgraded, then have funding problems - something similar to our crisis of Q4 ‘08.

Thus, we see significant "flight to quality" meaning flight to US Treasuries. This largely explains the movement in the 10 yr yesterday from 3.10% to 2.97%.

Robert Craven

Rock and Hard Place

We don’t want to fall into the UK trap - inflation about double target, yet a sideways economy, today’s higher jobless claims and lower earnings testifying to that.

Today’s US May CPI print was not alarming perhaps - consumer prices are now 3.6% above their year ago level - but the trend will continue to rise, our view. Thus, we want to see real sector vigor before Bernanke feels obliged to apply a brake.


Robert Craven

Nutshell

We suppose the equity market could have another fit or two before it gets lined into year end. Recall that much of the demand for this stuff was phony, driven by the Fed’s Ponzi scheme.

Certainly the course of least resistance for interest rates is now higher; we set that anchor at 2.99% on the 10yr, June 9. Last - 3.10%. Many others were right; key is to right at the right time.

Absent further scare tactics by the Administration and the end of Fed activism, the US economy will do just fine.
　
Robert Craven

Anchor

Today’s US May Retail Sales about as expected.. PPI was higher for May but that is not a market worry as commodity prices are now lower.

Anchor: Remember that what we have recently seen is not trend, but pause. Review recent posts for background.


Robert Craven

China - The Engine That Could

We noted yesterday that China (along with the US) would spark world growth - the Engine That Could. Today’s a good start - higher than expected Ind Prod. We also noted that the risk was for the Bk of China to brake. They did that today as they announced higher reserve requirements (forcing the banks to set aside more cash in reserves) after a 5.5% annual inflation print. But no risk the Bk of China will kill the goose, simply contain it.


Robert Craven

US Interest Rates

Earlier we advised readers to look for higher US rates and used the spread (S) US 10 yr to (L) German Bund as an example. We sold that spread at -4, that is, 2.99% on the US Note, 3.03% on the Bund. Last is +4, or 3.01 on the 10 yr and 2.97 on the Bund. Thus, the price is lower on the note (we were short), higher on the Bund (we were long).

Of course this is what institutions do all day long; they would be very pleased with this result.

Our purpose however is that of illustration for non-traders, folks who have something better to do
during the day yet have more than a passing interest in the direction of interest rates. You don’t have to sell the US vs Germany of course but it is worthwhile to know that US rates have just about bottomed.


Robert Craven

Back Stage

This week offers key releases, here and abroad. From these, the kids on Wall Street will try to divine if the recent global slowing is trend or pause.

Tuesday will start us off with the Bk of Japan policy decision, China’s CPI, UK CPI, and US Retail Sales.

We know the Bk of Japan will remain generous; we know that a spike in CPI will move the Bk of China closer to another brake; same for the UK despite a sideways economy there.  Finally, we know that a very weak US Sales print Tuesday will telegraph a "paws up."
　
This is all these guys do. They're paid a zillion to tell you something you already know.

Robert Craven

The Engines That Could

Observers will try to figure this week if the recent slowdown is trend or pause.

It is pause. The Chinese consumer (no longer so persecuted by official policy) and the US, given the absence of discretionary activity by the Fed and Administration, along with its natural powers of resuscitation, are the engines that could.


Robert Craven

Where From Here?

The combination of the Arab Spring (higher crude), reckless Fed policy and administration interference has triggered a slowing. Bright spots like Germany are not enough to help us.

Let’s remain optimistic. The Fed and perhaps the Administration have learned their lessons (we paid the tuition). Central planning never works.

Equity prices to return to fair value; bonds to loose their phony buyer; price discovery will return to normal.

All will be well into year end.


Robert Craven

"Somebody Do Something!"

Heard that before? We all have. But there’s no one in ear shot. And thinking that there might be is the key to the problem.

The administration wasted our money. Stimulus did nothing (aside from union payback). Most of us who can read knew it wouldn’t.

Fed emergency measures, Q4 ‘08, were proper. Spoiled, Bernanke has continued with discretionary monetary policy making. The Fed is rarely any good at that. That failed as it sparked commodity price escalation, which in turn sparked central bank braking offshore. Combine that with tragedy in Japan and we have a modest world slowdown.

No what? We will look to the US and China for extraction. First, China’s domestic appetite will play a large part in resuscitation of the global economy.

China’s trade surplus print for May was far less than expected (more Imports). It fits with the "new" China we have highlighted earlier, one which finally is looking to its consumer, allowing the Yuan to strengthen at least some vs the $, thus not importing all the inflation Bernanke has created and killing their consumer.

Next, if the Fed leaves things well enough alone and if the administration refrains from scaring employers, we can look for a reasonable pace of expansion into year end.

Equity prices, the earlier beneficiary of the Fed’s Ponzi scheme, are returning to fair value. This means that they will continue to fall off over the near term, then, once grounded, will move well into year end.

Bond prices will erode, yields higher as normal pressures apply.

These are both good things, indicating a repair of the wounds left by planners on an economy which will do
just fine if left alone.



Robert Craven
　
　

Interest rates.

Rates are famously low. Some observers, including our UCLA classmate Bill Gross, who runs the world’s largest bond fund, has claimed for several months (erroneously as it turned out) that rates on US debt will spike. If you own bonds, that means your prices goes south. If you are about to refinance, that means you better be quick.

What is reality ahead? US rates will now begin to come under pressure. If one were of a trading mentality, one would short the US 10 yr (2.99%) and buy the 10 yr Ger Bund (3.03%) Spreads are safer than outright.

(We grew up in this industry counting on price discovery being left to the free market, devoid of planners. That is why predicting the direction of interest rates was so much easier in the old days.)
　
Robert Craven

Locomotive?

There has been a slowing offshore - witness German Ind Prod and Exports coming in weaker than expected - and the view is that only the US can pull the train. Today’s strong US Exports for April indicate someone’s alive out there. It won’t take much from the US to provide a spark but both Obama’s and the Fed’s tinkering must stop. Potential employers know there’s one huge phony buyer of Treasuries, what several observers have called a Ponzi scheme. It’s to bail out failed stimulus. That changes, so will they.


Robert Craven

Key Economic Problem - The Anointed

The Administration’s economic experts are just so "exhuasted" according to aides that they have hit the skids: Krueger, Summers, Romer and now Goolsbee, all gone. Back to academia where standards are fuzzy and accountability is a phantom. They are so bright but somehow they forgot to read Friedman and ignored Hayek.

We are in a mess as a result. Reagan, JFK, "Scoop" Jackson knew - let the government interfere in the workings of the economy and you are done for.

Further "stimulus" will do nothing. A QE III will do nothing. Answer? All of our readers know. Stand aside, both of you; Bernanke, Obama, stand aside.. You cannot understand, let alone direct a free market. Let it be.

And let in the sunshine.


Robert Craven

Gasoline and Evening Prayers

Gasoline. Most of us use this stuff. We predicted the March/April price spike for our readers. Our friends had a chance to brace. Key then was upcoming turmoil in the Middle East.

We hear today that OPEC talks tanked; crude is higher. These and other supply considerations will come and go. They’re not very important.

Before hitting the sack tonight and every night, kneel down, think Saudi / Iranian conflict and pray for one more day without it. If God can’t help with that, I bet He’d advise you to buy a bicycle.


Robert Craven

Narodowy Bank Polski Clears Leather

Who? Which? That would be the Polish central bank, and they lifted their official rate today.

Polish cowboys not on your agenda this am? Think again. Today’s lift is the fourth this year, all of these tagged to rising food and energy prices. Now the Bank’s Monetary Policy Council are just too polite to blame Bernanke, but under their breath, they curse the guy.

Of course it’s part the Arab Spring, potential and real violence that goes with that (higher crude). Yet US exported inflation is just plain irritating for Poland and her fellow travelers. Naturally none of this is good for global growth. And, it didn’t have to be.


Robert Craven

Central Planning At The Fed

Headline this pm: "Japan Stock Futures Drop as Bernanke Gives no Hint of New Stimulus." Indeed, the Fed flooding has inflated equities. It has accomplished little else, certainly not its objective.

Central planning never works. North Korea comes to mind. So does the USSR. But we all know that, don’t we? QE II has been a non ruled-based, discretionary activity; it represents a hunch of a few individuals with the muscle - but not mandate - to interfere with a free market. It has contributed to our problem. Obama’s stimulus is a fellow traveler. As we predicted early on, both were failures.


Robert Craven

China’s Change of Heart?

China policy past years - pure mercantilism - exports at all cost and to heck with their consumer. Yet today we hear from Reuters that an adviser to the Bk of China called for reforms in exchange policy, "to reduce the central bank's massive foreign currency buying, which has pumped excessive cash into the economy and exacerbated inflation risk." "The central bank's dollar buying on the domestic market to keep the yuan exchange rate stable has been costly as such intervention fuels price rises," said Zhou Qiren, who is also a professor at Peking University.

This echos our view exactly.

Such a change means China will finally favor more imports, becoming a stronger market for US goods.


Robert Craven

It’s His Party

Retail Sales in the EU and German Factory Orders were both better than expected. Well, the ECB will take one look at that and be even more prone to apply the brake.

They’re just no fun these central banker types - except of course Bernanke, whose been on a binge for months. He can’t throw enough liquidity around even though it does no good at home and plenty of harm abroad.


Robert Craven

A Wayward Fed and You

Care about your savings or business? Peer offshore. Pushed into a corner by an activist Fed, all sorts of sovereigns have raised rates this year. Thursday is a big day as we will find if the European Central Bank is about to do the same. Any hint of growth and the Bk of England will also clear leather. Planners at the Fed pour money onto a flat rock and may compound that error with QE III. This would be a tragedy; it would do nothing to impact US growth but would further irritate price pressures offshore, resulting in even more tightening by the likes of Russia, China, India, Brazil, Sweden to name a few. Slower world growth - a less-than-pleasant circumstance.


Robert Craven

Vote "No"

Some are considering a QE III. This is a disaster if you own a business dependent on average American’s discretionary spending. Open, then vote "no" in the space below.

http://www.cnbc.com/id/43263683


Robert Craven

The Week Ahead - Focus Offshore

US markets will be driven by offshore events this week. The slowing offshore is tied to reckless Fed policy and central bank braking. The following releases then are key: EU PPI (6/6) and EU Retail Sales (6/7), German Factory Orders (6/7) and Ind Production (6/8), Germany CPI (6/10) and China’s Trade Balance (6/10).

Higher price figures may get a pass due to the recent slip in commodity prices, in turn giving central banks license to hold fire.


Robert Craven

Bernanke Owns That Horse

Things have settled down a tad. The general view out there this weekend is that factors which depressed US vigor in May are temporary, perhaps one-off events. Observes point to the floods, to supply disruption tagged to the tsunami, to EU problems, and of course, to gasoline.

The floods had little to do with it; supply considerations tagged to the tsunami hit Detroit; EU problems have little impact here; gasoline, yes, a problem.

But there is one factor impacting business activity here and abroad - higher commodity prices. This is the crazed horse from a Faulkner Yoknapatawpha County short story - a spotted pony gone wild, right through Mrs. Littlejohn’s house, out the window, over the bridge and who knows were. But folks at the general store, on the front porch, chewing tobacco and spittin’ at the bugs, know it's Bernanke who owns that horse.

Bernanke has exported inflation all over the world. These higher input costs are exactly why manufacturing measures world wide tanked in May. Here is how it works:

Emerging economies from China to India keep their currencies undervalued to spark exports. That’s no good but that’s the nature of the beast. Suddenly, thanks to Bernanke, dollars appear out of everywhere (recall the flat rock) and are thus suddenly worth much less. But these countries want the dollar worth more vs their own currency so foreigners will buy more of their goods. They can’t stand the sudden shock of a free float or they’d all be socked into a depression. So what do they do? They sell - cheapen - their own currency and buy dollars. That is, they import Bernanke’s inflation.

So now with the Fed’s reckless policy come to roost, these economies pay 30 to 40% more for oil, copper, cotton, etc since they’re all priced in dollars. And these much higher input costs just tanked their manufacturing sectors.

And with higher domestic inflation (imported from Bernanke) these central banks apply the brake, stubbing world demand in the process.

That folks is what we have just witnessed.


Robert Craven

What Happened? (Picture a Cow Peeing on a Flat Rock)

Commodity prices happened, with oil in the lead. Weak manufacturing numbers out of the US, China, UK and the euro area all point to oil as the culprit in the global slowdown.

Violence in the Middle East is part of it, the Federal Reserve is the rest. Higher crude goes with the Arab Spring. But it was more than that.

It was QE II, which was a disaster, providing a flood of liquidity when none at all was needed. In the US this deluge sparked an over-valuation in stocks. The rest washed offshore (picture a cow peeing on a flat rock). As most world commodities are priced in dollars, you have the picture.

The administration could not leave well enough alone. The tragedy of stimulus, health and all the rest was the result.

Bernanke’s effort to bail out this failed policy sparked the current world slow down.
　

Robert Craven

Employment

We had expected a friendly print. Instead, even private sector jobs rose only 83M, the smallest gain since July/10. The Labor Dept claims we can’t blame the headline result (+54M) on poor weather. Unemployment rose to 9.1% because household employment rose more slowly than did the labor force, thus an increase in the number of unemployed.

We have a slowing in the rate of growth in employment, spending and manufacturing, all three major engines in late Q4, Q1. Pause or trend? We will determine that in the near term.


Robert Craven

Suddenly Sober

When we first learned Bernanke was considering a "QE II," and then at its enactment, and regularly following that event we have advised clients that since we were not in need of liquidity, that lack of liquidity was not the problem, this non rule-based activity would have two, and only two results: 1) inflate equity prices and 2) inflate commodity prices.

Dec/5/10 we stated that it was a gross error; that QE II would have little to no impact on the pace of recovery and two, that it was corrosive to Fed independence, a necessary item, the heart of monetary control because it was nothing other than an attempted bailout of Obama’s failed fiscal policy.

Now that the horse is long gone observers are growing suddenly sober. Look for the headlines to reflect this reality just ahead.
　

Robert Craven

Garbage. Financial Media. But I repeat myself.

Much of what we do at this center is to distill input, discarding 90% as noise.

Case at point: This pm, CNBC - "Horror for US Economy as Data Falls Off Cliff"

Pure tabloid!

Yet the masses are exposed to this stuff, and many take it as gospel.

Don’t. It’s for the sake of headlines, not for the sake of anything substantive.
　
Robert Craven

Paladin No More

This am it was clear that manufacturing around the world had slumped, in unison. From Poland to Hungary to Russia, from the UK to the EU, from South Africa to China, back to Spain, a quick stop at the US; all of the manufacturing surveys, and all at once, and all the same - a major shedding of momentum. Most, still positive, but a considerably slower rate of expansion.

Fascinating! We have monitored this sector for 20 years and we have never before witnessed such uniformity of result. Why? Because never have we witnessed such uniformity in cost of input (and thus, the squeezing of margins). This is tied to the Q1 Middle East upheaval triggering crude, and, the Federal Reserve’s reckless policy triggering higher commodity costs world wide. These have hit the consumer and manufacturer simultaneously.

Robert Craven