US - Near Term Anchor

We noted in our Sunday sketch that the clear risk is for key releases to disappoint, to fall south of expectations, and that traders were to prepare for that reality. Given we have in hand that flaw common to most models we have a major leg up on the market crowd.

Since Sunday of course this anchor has held. It will continue to hold, most releases, until economists catch on. That will take a bit.

Friday we have the Q1 GDP advance. This is the one release which may not fit; that is, consumption may push the headline just a tad north of consensus, but if so - odds, 40% - only a tad. Because Q1 is ancient history and because our anchor will likely hold for the near term, counter-trade such a result.
This is true even if the Consumption component of the advance is through expectations.


Robert Craven

UK - Stay With It George

We have in the UK an enlightened administration. Not perfect, just enlightened relative to what went before. 

Now those in the cheap seats can’t restrain themselves, beating Osborne about the head and shoulders at every opportunity (and looking like morons in the process) for his “severe” cuts to public spending and just at the worst time. They are not severe and any time is a good time.

In 1939, ten years after the crash on Wall Street, FDR’s Secretary of the Treasury, Henry Morgenthau, Jr., told the House Ways and Means Committee:

“We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong…somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…I say after eight years of this administration we have just as much unemployment as when we started…And an enormous debt to boot!”

Any fool knows this stuff does not work. You don’t have to be a Wall St type (many recently bailed out for poor decision making) to understand this reality. If it’s fluff, and it is, do away with it.

We asked an average citizen – a Fresno, California cattleman - what he thought about the issue. “Well, sort of like taking water out of the deep end of the pool, and pouring it back in the shallow, ain’t it?” Exactly so.

Is there some sort of slush fund reserved for public emergencies? No. The money comes from 1) taxes, or 2) borrowing or 3) a complicit central bank (inflation). All three rob from the private sector, which is infinitely more productive than the public.

Public spending – at best a wash.  Get rid of it.


Robert Craven

Throw Out the Toolbox

It is important to understand economic reality just ahead. A re-tooling is a necessary if we want to get it right.

Early Q1 we predicted a slowing for H1, the reasons why and finally, the impact on the US term structure.  Our Mar/7 sketch entitled Lament presented first a distillate of our reasoning, but then the possibility that in fact we might be mistaken.  In this case it simply took a tad longer for dynamics to impact than we had expected.

Discard conventional tools. We have. Street economists/observers avoid politics like the plague, at least in print. But this time, understanding risk takers’ response to 4-more-years is key. 

Next, economic theory and price relationships of past years are no longer reliable guides. Traditional clearing mechanisms are not in play. Instead, planners are in control.

Part of the puzzle for many has been the general euphoria tagged to the equity market, as if this might be a reliable leader, some sort of indicator of the whole.  It can be, but not this time. Companies are more efficient, can get along with less - including fewer employees - but this dynamic was not birthed by some sort of renaissance or corporate awakening, but fear of a regulatory nightmare ahead. Given that the Fed – a partner in crime with the administration - has targeted equities, the false signal has been amplified. Even seniors with limited means are tempted, as the Fed has eviscerated traditional vehicles.

Although we had the current slowing in hand we should have done a better job at conversion. For example, we advised selling the curve in early Jan, and again in early Feb, something like 112 on the 5-10, 290, 2-30, average. Yet the market crowd had yet come to agree and the position moved slightly against us by mid-Feb. We suggested risk control might dictate an exit.  Hopefully, most discarded that advice!  Last - 100, 264.

Now there is a growing temptation to reverse, especially considering rumors of a spurt in Q1 GDP (4/26 release). That may be, but it’s ancient history, and, likely priced in.

Instead, look for more of the same; that is, look for “surprising” weakness, key releases, balance of Q2.


Robert Craven

US - Perspective

Typical headline today – “US market worried on signs of slowing global economy.”  That may be, but our concern, our purpose is to fetch or discover the US fixed income landscape just ahead. The rest of the world doesn’t count much in that exercise.

Clients and readers have come to understand that the US economic ship is freighted with such a cargo of retardants that what would otherwise have been a sparkling performance has been nothing more than a reefing down, a standing by.

The US does well when she is unhindered. Planners at the Fed and the administration stand in the way. Their retardants are invented, completely discretionary.

As we highlighted in our last sketch there is an awful unpredictability about it all - the lack of an economic rule of law. There is only chaos and madness. Fiscal programs are temporary; no one knows what fate the river may offer up at the next bend, a journey which could easily resemble that of Marlow’s descent into Hell. Reckless gov’t spending calls for out sized future taxes, thus the disincentive, the danger to engage.

More, the economy is phony – a false hope, a house of cards. And that is not limited to rotten institutions judged “too big to fail,” a nonsense birthed from the incestuous joining of the Fed and its flock, and then the ability of Washington to manifest this lie to an unsuspecting and gullible public. There is indeed more – normal, market-driven clearing mechanisms have been replaced by the Fed. Money is either staying idle (reserves at 0.25%) or is directed to targeted activity; that is, the activity the planners have deemed worthy. Thus, individuals are making our choices for us, not normal market forces.  None of this can end well; and, it most certainly won’t.

The course-of-least resistance for the US term structure – further contraction.

Robert Craven

The Horror, the Horror

We noted end of 2012 that there was a “governor” attached to the US engine which would prohibit that otherwise resilient and vibrant economic machine from doing much past 55 mph, H1.  We expected the impact to be more immediate; nevertheless, it is upon us now.

An immediate payroll tax increase on the middle class and an outright tax increase of higher income types is part of the story naturally. And Obamacare’s taxes hit consumers and businesses 2014 with a wallop. Employers adjust – less hiring.  Consumers adjust, or will – less spending.

It is the ant-business agenda of the current administration which plays a large part to be sure and is represented through the impact of the “governor.”  But there is more; there is the awful unpredictability; actually, there is the madness of it all, this radical and failed experiment. We recall the words of Conrad’s Mr. Kurtz, the ivory trader in Heart of Darkness – “The horror! The horror!” referring to the damning madness about him. In economic terms this is the lack of an economic rule of law, both at the Fed and in Washington and is as much a horror as that delivered by the Congo interior, where there was no order and no control, only the omnipresent threat of death. Thus, many simply refuse to take to the field, refusing to be a part of a radical experiment less they become its victims.

In anticipation of this reality we had advised that clients sell (S-L) the term structure Jan/10 (5-10, 110, 2-30, 285) and again Feb/6 (113, 294) looking for that spread to contract substantially; but then the market crowd did not come to agree right away, and we recommended an exit Feb/13 (111, 295) not knowing just when the herd would turn. Now of course it has, in stampede-fashion, last 103, 267.

Finally, wild cards are always a threat; we all know that. Yet we may have one of a home-brewed variety just around the corner - the threat of bubble creation tied to planners at the Fed.  Readers may recall our Q1 survey where we reported that some staffers registered a concern, especially regarding real estate and stocks. Such a burst might just eclipse anything Iran, or N Korea or the E-Z can deliver.


Robert Craven

UK Interest Rate Environment – Near Term

Let’s take a quick look at where we’ve been, our track record. For purposes of this blog we limit strategy to an item or two. Thus, readers were advised to own (L-S) the UK term structure or something similar on Jan/10, 5-10 then 109; 2-30 then 288, and, the reasons why.  Readers were advised Feb/13 to realize half the gains - 5-10 then 121, 2-30 then 310 – and stay with the balance.

Last, 106, 285; that is, just about where the curve was when we originally bought it.

Now what?

The E-Z remains a wild card; we’ve never pretended to know what these folk may do next. Flight to sanctuary may continue to retard progress; UK fundamentals will not. 

We have price pressures which accelerated at the fastest pace in 9 months and a central bank which has just been given the ok by Osborne to ignore the same. We have a situation where most observers continue to under-estimate the consumer and the services industry, and export potential. We have short lines at the unemployment office. A dead-cat bounce is already priced in for manufacturing. 

What is there not to like about this spread? Well, maybe US contagion. Readers may recall that we had expected more of a negative reaction from the US consumer and corporate planner to events in Washington than did indeed materialize, at least so far. We expected more weakness in consumption and capital spending plans and employment. We still do.  But not being journalists, we need to abide by some standard of delivery, and so our plan was to sell the US term structure early Jan.  This was taken in for a very modest loss, early Feb. The idea was to have the UK and US positions on at the same time, then snub the looser and remain with the winner.


Robert Craven