30 year Treasury @ 3.90%

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Submitted by moneymaker on June 20, 2013 - 9:18am

Could this be it? The beginning of the inflation that everyone has been expecting! Okay maybe not everyone, but a vast number of people.

Submitted by livinincali on June 20, 2013 - 9:23am.

I'm going to go with the popping of the bond bubble that most people say doesn't exist. The result should be a deflationary depression because credit spends the same as money.

Submitted by SK in CV on June 20, 2013 - 9:29am.

No. This is the petulant market reacting to the Fed saying almost exactly the same thing they've been saying month after month for what seems like years. The free flow of candy MIGHT begin to be reduced sometime before the end of the year, if, and only if, inflation, GDP growth and unemployment hit projections. Inflation remains very low. Unemployment remains very high. GDP growth remains positive but sluggish. This is classic over-reaction to nothing changing.

Submitted by no_such_reality on June 20, 2013 - 9:35am.

SK in CV wrote:
No. This is the petulant market reacting to the Fed saying almost exactly the same thing they've been saying month after month for what seems like years. The free flow of candy MIGHT begin to be reduced sometime before the end of the year, if, and only if, inflation, GDP growth and unemployment hit projections. Inflation remains very low. Unemployment remains very high. GDP growth remains positive but sluggish. This is classic over-reaction to nothing changing.

No SK, this is a junkie spasming over the hint that the juice is going to stop in the future.

Submitted by SK in CV on June 20, 2013 - 9:51am.

no_such_reality wrote:

No SK, this is a junkie spasming over the hint that the juice is going to stop in the future.

I'm pretty sure that's the same thing I said, with only slightly different words. The only thing that makes it a petulant reaction is that that the hint wasn't significantly different than it has been in the past.

Submitted by no_such_reality on June 20, 2013 - 10:08am.

SK in CV wrote:

I'm pretty sure that's the same thing I said, with only slightly different words. The only thing that makes it a petulant reaction is that that the hint wasn't significantly different than it has been in the past.

Slightly different. Yours implies they are acting like a child getting denied something they want but won't really affect them.

Mine implies they're addicted and going to have real problems when the juice stops.

I think the later is true and not the former.

Submitted by SK in CV on June 20, 2013 - 10:25am.

no_such_reality wrote:

Slightly different. Yours implies they are acting like a child getting denied something they want but won't really affect them.

Mine implies they're addicted and going to have real problems when the juice stops.

I think the later is true and not the former.

I'm not sure I made any such implication, you may have inferred it nonetheless. It will have some effect. But what Bernanke said was that he won't pull back on the juice until there is other juice to take it's place. (higher employment, higher GDP growth, higher inflation) Bernanke's predictions of future growth of these measurements are consistent with recent Fed history. I suspect overly optimistic. Anyone having watched the Fed reduce projections time and time again over the last 3 years should recognize that. The only slightly bullish thing that he actually said is that the economy faces diminished risk of deflation. In another context, that's like a doctor telling a patient his likelihood of survival has improved from 10% to 20%. Better than it was, but hardly pretty.

It's a good day for bond shorts to close out, reverse, and be prepared to do another 180 over the next 90 days. I think its gonna get back up to 138 or 139.

Submitted by The-Shoveler on June 20, 2013 - 10:25am.

Personally I don't see an exit that does not involve 7-10% inflation for several years.

Any attempt at an exit without the inflation would be a drastic event IMO.

(IMO I don't see an exit anytime soon)

Submitted by moneymaker on June 20, 2013 - 11:43am.

I agree that the Fed "wants" to continue the stimulus, however we are not in a vacuum here in the US. When safety and yields start increasing elsewhere will there be a choice. I think I heard US treasuries are being sold by some holding them, when that happens on a large scale, seems to me that it will be harder for the US to sell without raising yields. The government seems to be in a credit bubble.

Submitted by XBoxBoy on June 20, 2013 - 11:48am.

The-Shoveler wrote:
Personally I don't see an exit that does not involve 7-10% inflation for several years.

I don't follow this logic and wondering if you can explain. I would think that reducing money printing would decrease the chances of inflation. Given that inflation is currently running at about 1% why is it going to jump to 7-10% when the fed reduces stimulus and ultimately tightens interest rates?

Submitted by SK in CV on June 20, 2013 - 11:58am.

moneymaker wrote:
I agree that the Fed "wants" to continue the stimulus, however we are not in a vacuum here in the US. When safety and yields start increasing elsewhere will there be a choice. I think I heard US treasuries are being sold by some holding them, when that happens on a large scale, seems to me that it will be harder for the US to sell without raising yields. The government seems to be in a credit bubble.

I don't know about the credit bubble part. But the rest of it is exactly what is happening today. Treasuries are being sold, yield is going up. It's not a safety thing, its a yield thing. The Fed has been the primary buyer in the bond market for a long time. There have been days when they were the only buyer.

But so long as we continue to have a large trade deficit, foreign central banks will have few options but to buy our paper. Today, they're buying dollars.

And nobody wants gold today. At 32 month low.

Submitted by The-Shoveler on June 20, 2013 - 12:01pm.

OK I will take a stab at it knowing full well I am about to be flamed.

If they raise interest rates without wage inflation then the housing market will crash followed by state and city bankruptcies one after the other because their main source of revenue is property tax.

This will cause a lot of other economic issue etc...

A lot of people I think fail to put two and two together and think housing crash existed in some sort of vacuum.

Submitted by SK in CV on June 20, 2013 - 12:16pm.

The-Shoveler wrote:
OK I will take a stab at it knowing full well I am about to be flamed.

If they raise interest rates without wage inflation then the housing market will crash followed by state and city bankruptcies one after the other because their main source of revenue is property tax.

This will cause a lot of other economic issue etc...

A lot of people I think fail to put two and two together and think housing crash existed in some sort of vacuum.

If mortgage rates went to 10% overnight, that might happen. But they won't. Since the Volker days, the Fed is pretty quick to the trigger when there's real heat in the economy. But we won't see those 50 and 75 basis point moves without that heat.

I agree that wage inflation is more important that any price index. If we actually hit the Fed target of 6.5% unemployment, there will be some wage inflation to go with it. Though I don't expect to see it by a year from now.

I'm not sure if you're only referring to CA with regards to the municipal bankruptcies, other states have much better flexibility. If I remember correctly, we had a housing crash, and we didn't have a rash of municipal bankruptcies. I think there were 3 in California, one having nothing to do with the housing crash. And maybe 5 across the rest of the country.

Submitted by livinincali on June 20, 2013 - 12:31pm.

The-Shoveler wrote:
OK I will take a stab at it knowing full well I am about to be flamed.

If they raise interest rates without wage inflation then the housing market will crash followed by state and city bankruptcies one after the other because their main source of revenue is property tax.

This will cause a lot of other economic issue etc...

A lot of people I think fail to put two and two together and think housing crash existed in some sort of vacuum.

The fed isn't going to raise interest rates. It's going to be those that hold bonds, coming to the realization that they aren't going to get paid, that's going to raise the interest rates.

I think city bankruptcies are inevitable and declines housing are likely too, but I don't know that it will be a crash. There's too much debt in the system and I think it will be defaulted on rather then inflated away. I could be wrong but there's so many people playing the lever up and bet on inflation game that I think they are going to end up being the losers.

The thesis has always been that the fed can create the right level of inflation and fix the debt problem. My bet is that they can't and those people expecting them to be able to do so are wrong. Congress fiscal policy might be able to trigger hyper inflation but the fed cannot.

Submitted by The-Shoveler on June 20, 2013 - 12:35pm.

There were a lot of hidden close calls (take Texas for instance),

Los Angeles barely escaped last year, I don't think they have long.

There was a lot of stress out there, (well maybe not in north dakota, but really they don't count much).

If the housing crash played out again, I think you will see it.

Do a web search on "pension crises".

Submitted by SK in CV on June 20, 2013 - 12:58pm.

The-Shoveler wrote:

Los Angeles barely escaped last year, I don't think they have long.

"Some people said" they were on the verge of bankruptcy. It didn't happen. LA isn't closer to BK now, they're much further away. And with rising RE prices, revenues will increase, and they'll get further away.

Are they still at risk? Sure. I just don't see a scenario that will cause another RE crash. "If" interest rates rise dramatically? How's that going to happen? The Fed continues to control. As they have for decades.

Submitted by The-Shoveler on June 20, 2013 - 1:05pm.

Tell that to Garcetti ...

Anyway this is going nowhere so I give up.

Submitted by SD Realtor on June 20, 2013 - 1:24pm.

I agree with SK.

I think the misconception is that people throw around the term "fed raising interest rates" in a haphazard manner. This is a typical knee jerk reaction however the 10 year yield has been slowly on the rise for the past several weeks.

Look at what Bill Gross said... pretty much the identical text that SK wrote above which I do agree with. The market movement was not only about the fed speech, it also had something to do with the slowdown in China.

All things being equal though, I would not have wanted to be a homebuyer floating a mortgage rate as you would have been slaughtered in the past 2 days. Bottom line is I don't see the yield spiking...we are nowhere near that point and I don't see the bond market bubble popping yet. It still has a few years left before it ruptures and when it does it will be ugly.

As for inflation, most of us have been suffering through higher prices for many commodities including food and water for the past several years. Don't forget fuel and energy costs.

The only thing we have not had is wage inflation. I also believe the underemployment numbers and those that have simply dropped out of the workforce are fairly staggering. Similarly we have record numbers of citizens on welfare, food stamps, and disability.

Submitted by The-Shoveler on June 20, 2013 - 1:58pm.

Why I said, I don't think we will see the fed exit any time soon.

If they do they will be forced to reverse course very quickly IMO.

Submitted by skerzz on June 20, 2013 - 1:58pm.

The move in the 10 year over the past several weeks has actually been pretty dramatic. The yield has increased roughly 80 BPs (or approximately 49%) since early May.

Submitted by SK in CV on June 20, 2013 - 2:35pm.

The-Shoveler wrote:
Why I said, I don't think we will see the fed exit any time soon.

If they do they will be forced to reverse course very quickly IMO.

That's the thing that I really don't understand about what's happened in the market. They didn't change course. Bernanke said the same thing he's been saying for a year at least. Basically he'll keep feeding the junkie until the methadone kicks in. It's not the first time it's happened, but I think this might be the biggest move after an FOMC meeting. As far as maintaining market stability, he's really between a rock and a hard place. He farts and the market panics. He doesn't fart, the market panics.

Submitted by livinincali on June 20, 2013 - 2:51pm.

SK in CV wrote:

That's the thing that I really don't understand about what's happened in the market. They didn't change course. Bernanke said the same thing he's been saying for a year at least. Basically he'll keep feeding the junkie until the methadone kicks in. It's not the first time it's happened, but I think this might be the biggest move after an FOMC meeting. As far as maintaining market stability, he's really between a rock and a hard place. He farts and the market panics. He doesn't fart, the market panics.

I think the market is starting to figure out that the fed really isn't in control as much as they've thought. For awhile people have been thinking that the fed is an insurance policy for being long. I think people are starting to open their eyes and see that economic conditions across the globe are deteriorating and that faith in the fed might not be able to save them.

I kind of expect faith in the fed to be similar to subprime is contained during the last bubble pop.

Submitted by flyer on June 20, 2013 - 3:22pm.

Since I believe we are in uncharted territory, I don't think anyone really knows exactly where this train in going. Along with real estate and some other investments, we've been hoarding cash for years, so it will be interesting to see how all of this plays out for better or for worse.

Submitted by SD Realtor on June 20, 2013 - 3:27pm.

I agree that the move since May had substance although I don't think it was a surprise. The market usually leads in pretty much most economic trends. Gross from Pimco had spoke about bonds a few months back. You look at gold for instance at 1300. However many funds were selling gold back in February. While there was no landmark statement by Ben, everyone knew one of a few things would happen in a few years, either QE will scale back and the fed will slow or stop purchasing at auctions because the economy will improve, or the much worse alternative. Either way, the fed cannot keep monetizing the debt for another several years, it has to start scaling back. The market has been looking forward IMO but today was a knee jerk to China, not so much Ben. Also if you look at the past it looked like the market was definitely wobbling. It just needed an excuse to dump. Sell in May and go away was just a month late.

Submitted by SK in CV on June 20, 2013 - 3:45pm.

China makes a lot more sense, except for the precise timing. It started while Bernanke was speaking.

July earnings could be interesting. If they surprise to the downside across the board, the Fed is really in trouble. Though I've seen no trend in warnings that would make that likely. Employment doesn't reflect that either. It just looks like slow as a snail sluggish growth. If earnings get confirmed, I'd be surprised if this 5% adjustment doesn't disappear over the course of the summer.

Submitted by SD Realtor on June 20, 2013 - 4:12pm.

It could happen. I follow Gross at Pimco alot... back earlier in the spring said he seemed to signal a pullback in bonds... then as recently as last week he was saying they were buying again. As I said earlier he was saying what you were echoing as well which makes sense. Other bond guys are saying that while the bond bull run is not over, it is closer to the end rather then the beginning... but that is still measured in years not months. The data does seem to be on your side with respect to all of the numbers. I bought TBX not long ago but may take my money and run as I agree I think the tnx will pull back and settle out. Not sure if it is gonna run all the way back down to where it was at though. I guess we'll see.

Submitted by SK in CV on June 20, 2013 - 4:36pm.

Pretty nice call on the tbx. Similarly, my girlfriend got into tnx the middle of April. She's traveling today, I suspect she'll dump it tomorrow morning.

I like the guys at Pimco. Gross is good. But I particularly like El-Erian. He doesn't pull any punches. He had a column about a week ago basically saying the Fed has done everything it can with monetary policy, and laid the responsibility of the potential for high unemployment becoming structural at the feet of congress and their lack of fiscal policy action. Maybe I like him because I often agree with him.

Submitted by XBoxBoy on June 20, 2013 - 6:40pm.

livinincali wrote:
I think the market is starting to figure out that the fed really isn't in control as much as they've thought. For awhile people have been thinking that the fed is an insurance policy for being long. I think people are starting to open their eyes and see that economic conditions across the globe are deteriorating and that faith in the fed might not be able to save them.

Allow me to propose a different narrative. The market doesn't have a clue. At the margins it's traders who only worry about will the market go up in the next few minutes or will it go down. Lots of nervous traders who felt that this fed meeting was gonna be a big deal. No one seemed to know which way it would be a big deal, but it was gonna be a big deal. Once the momentum started swinging one direction it just kept right on going. This last two days of market moves have nothing to do at all with what the fed actually said. It has nothing to do with where the economy will go x years in the future. It has everything to do with traders who will bail or buy in an instant depending on how they feel momentum is going. Not on fundamentals or economic realities.

Submitted by moneymaker on June 20, 2013 - 7:43pm.

I hope you're right XBoxBoy. I bought some Apple today thinking the market might bounce/or they would finally release something/or they would actually buy back some stock like they said they would/ or the Chinese school kids would consider Apple stuff a status thing and their parents would indulge them, I could keep going but let's just say I bought on a hunch.

Submitted by paramount on June 20, 2013 - 11:51pm.

Isn't Detroit now essentially bankrupt?

Submitted by FormerSanDiegan on June 21, 2013 - 9:08am.

The-Shoveler wrote:
OK I will take a stab at it knowing full well I am about to be flamed.

If they raise interest rates without wage inflation then the housing market will crash followed by state and city bankruptcies one after the other because their main source of revenue is property tax.

This will cause a lot of other economic issue etc...

A lot of people I think fail to put two and two together and think housing crash existed in some sort of vacuum.

I don;t follow. How would this scenario lead to 7-10% inflation. Sounds deflationary to me

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