THE FED: “STAND BY YOUR (MARKET)”

9/5/14

Wall Street’s perennial favorite parlor game has been trying to get into the head of whoever is Fed chairman and deciding when s/he will be adjusting monetary policy one way or the other.   See, for example, TAPER TALK, THE FEDAND THE FINANCIAL MEDIA:   WHAT WOULD JESUS SAY?, 12/19/13.  The last few years, and even the last few months, have seen this game in full swing.  Yours truly may as well join the fun since he is as likely as anybody else to be right…or wrong.

It’s general consensus that the Fed won’t be raising short rates until sometime next year, probably around the middle of next year, after winding down its quantitative easing (“QE”) on the long end of the curve by the end of this year as scheduled.   Yours truly suspects, though, that the consensus might be early on the increase in short rates.  Yes, today’s jobs number indicate that the economy remains shaky and still needs the methadone of the Fed’s easy money policy.  But further contributing to my belief that we might be waiting until 2016 to see the end of what I referred as Ben Bernanke’s (and now Janet Yellen’s) War on the Elderly is the dollar’s amazing strength.  As the financial media are nearly constantly pointing out, the dollar is now trading at its year to date high against the euro.  But the greenback is also at or very near year to date highs against the British pound and the yen as well.   This economy can’t take sustained currency strength against our trading partners/financial rivals, or so the popular wisdom, which this Fed rarely defies, would have it.  Hence rates will stay low a long, long time, especially since the European Central Bank (“ECB”) seems to have jumped on the “toss the paper out of helicopters…go on, it’s good for you!” bandwagon yesterday.  

This enthusiasm for competitive debasement of currencies doesn’t look like it will end well, but old codgers like yours truly have been saying that for years now and, so far, we haven’t been right.  For now, the party continues; the hangovers are tomorrow’s problems.

BUYING THE 10 YEAR AT 1.66%: THE NEVER ENDING SEARCH FOR THE GREATER FOOL

4/29/13

Holly Liss, ABN AMRO Clearing’s director of Global Futures was on Bloomberg Radio just a few minutes ago talking about the upside potential of the 10 year treasury.   Ms. Liss is one of the brighter traders out there, or at least one of the brighter traders who appears on the financial media, so I generally try to listen when she speaks.

Ms. Liss likes the 10 year treasury, which currently yields 1.66%.   While she says that she can’t see the 10 year trading to a 1.00% (Gulp!) yield, as some bond bulls are arguing, she said she could easily make the case for a 10 year yield in the 1.30% to 1.40% range.   Her argument is straightforward:   the economy remains slow, Fed quantitative easing (“QE”) action will continue and will be skewed heavily toward the long end of the curve, a skew that will be exacerbated by the continuation of Operation Twist.   As regular readers know, I don’t feel equipped to make short term calls on any market (See my two 4/15/13 posts, GOLD:  YES, I’M SCARED…BUT I’M STAYING and SO WHY HAS THE STOCK MARKET DONE SO WELL OF LATE?) and suspect that most people have a similar shortcoming, including, perhaps especially, those who claim the degree of acumen necessary to make such trading calls.  Nonetheless, it’s hard to argue with Ms. Liss’s logic, especially when she was careful to argue that she is not advising anyone to buy a 1.66% ten year and hold it to maturity; she is advising only a trade at 1.66%.   If she is right and the 10 year does trade to the 1.30% to 1.40% range, this trade will, of course, prove to have been very lucrative.

But think about this for a moment….

Again, Ms. Liss is not advising buying the 10 year at 1.66% and holding it to maturity.  Very few people with even a reasonably firm hold on their senses would advise such a strategy; if earning 1.66% for 10 years turns out to be a good, or even a not all that disastrous, exercise in positioning, we have a lot more to worry about than the conditions of our treasury portfolios.  

But by buying even for a trade, one is making the implicit assumption either that one is buying value for the long run or that a greater fool will come around quickly enough to relieve one of what appears to be a very malodorous long run investment.   In other words, if we buy the ten year (or any instrument, for that matter) despite not liking it for the long run, we are betting that someone, the greater fool, must believe that the 10 year is a good buy at a yield presumably even lower than 1.66%...or that the fool in turn can find an even greater fool to take him out of his position at an even more absurdly low yield.

This is a dangerous game of musical chairs.   I will let others who are confident of their ability to move quickly when the music stops play this game.   As a long term investor, I want no part of either aspiring to a miserably low yield for 10 years or betting that I can find someone with even more misplaced trading hubris to take me out of what I know, and presumably everybody knows, is a rotten long term position.   I’ll leave that to the clever people.