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
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
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