Whoa Nelly!
I was watching cartoons with my kids the other day…OK…they were actually watching them with ME but the point is still the same. There is an old Loony Tunes episode where Yosemite Sam is riding a camel through the desert chasing Bugs Bunny. The camel is running at full speed when Yosemite Sam pulls back on the reigns and yells “Whoa!” The camel completely ignores the command and continues charging across the sands. Again our lovable loser yanks on the reigns and shouts even louder “I said WHOA!” Still he runs. Ultimately, he takes out a rifle and clobbers the camel hard over the head, knocking him unconscious and dropping him to the ground as he screams “when I saaaay Whoa…I meeeeean WHOA!!!” This episode reminds me of how the Fed must be feeling today.
They’ve taken a lot of steps to keep rates low, yet the market is charging to the upside. I envision a scenario in the not too distant future where Bernanke breaks out some serious QE2 funds, clobbers the market on the head, and screams screams “when I saaay low…I meeeean LOW!”
Frustrating at best
I can only imagine the frustration at the Bernanke household. He has been working diligently to solve some very serious problems and he’s spending hundreds of billions of dollars and taking criticism from every corner of the world in the process. Ben probably comes home at night, doesn’t say a word to anyone through dinner, sulks on the couch watching sports center until everyone else falls asleep, then he gets online and starts making angry posts in economic forums in support of QE2. It’s got to be a tough existence right about now.
What’s up with the selloff?
Most of the ideas being offered for this week’s pullback revolve around the general theme of increased expectations for future economic growth.
I don’t agree that it’s the sole (or even predominant) explanation for this week’s activity. If you were selling Treasuries to position yourself for an economic expansion you’d be moving into things that would directly benefit from the expansion…stocks and commodities. To date that hasn’t happened. The Dow is basically unchanged from the 11/4/10 announcement of QE2 and from the recent announcement of the new tax initiatives. Additionally, commodities as measured by the Bloomberg Commodities Composite curve are also unchanged over the same time periods.
Dow Jones on:
11/4/10 - 11,434
12/6/10 – 11,362
12/10/10 – 11,349
This doesn’t have the look of a market being fueled by investors betting on an economic recovery.
Bloomberg Commodities Index:
11/4/10 – 1,534
12/6/10 – 1,530
12/9/10 - 1,537
Commodities also unchanged over this period.
So where is the money going? It would seem that it’s being parked in cash for the time being…and cash isn’t where you go if you want to bet on a comeback.
Potential sources for this week’s volatility include but are not limited to:
- Speculation that tax initiatives will boost the economy
- European worries continue to reverberate through Treasury market
- Bond Vigilantes punishing Fed and Congress for poor policy decisions
- Portfolio Duration rebalancing
- Unwinding of the deflation trade by various parties
- Year end liquidity concerns
- People taking gains before they disappear
There is no shortage of potential sources of explanation…whether this pullback lasts is another story.
Who would have thought you could make money by shorting the Treasury right after the Unemployment Rate jumped from 9.60% to 9.80%?
Despite the pullback in prices and the higher yields they’ve brought us…the underlying economic data are still fairly poor. The Fed is still looking at 9.80% unemployment and inflation running at a lower level than they’d like. The Fed is just starting to spend their QE2 money, they’ve got a lot left to spend, and they are already talking openly about increasing the size of the program if necessary.
It would seem that we have some potential for a street brawl between the bond vigilantes and the Fed. Every time I think this market is getting boring it comes up with something new.
Unemployment Benefits…or the benefits of being unemployed
One of the benefits of my job is that I get to speak with a lot of people who are “on the front lines” so to speak. Bankers are in the heart of every community in this country and they have a very good idea of how the local economy is doing.
This morning I was having a conversation with an old banker friend of mine and he gave me some remarkable insight on the unemployment situation. I’ll preface this story by saying that when I look at the size of the average unemployment check…$302 per week…I see an incentive to not be unemployed. In my mind I can’t picture a person who would want to live on the government dime rather than make their own way. I figure most people will try to get off of the unemployment rolls as quickly as possible, get back to work, and take command of their own destiny. That’s my perspective because that’s how I think…it’s how I view the world…it’s how everyone reading this e-mail views the world.
My friend on the other hand has some very direct experience with this unemployment program that we have in place. He told me several stories but the best might be of his friend that runs a manufacturing plant. This guy needs to expand his production schedule because he just got some new contracts. Keep in mind he resides in a county that carries the highest rate of unemployment in his state…there are literally people sitting around everywhere with nothing to do. So he needs to add a bunch of jobs that pay nearly $20/hr. He warns everyone to get to the plant early because these jobs are going to go quickly. Several weeks later he still doesn’t have the positions filled. In the words of Jerry Seinfeld…WHAT is the DEAL with THAT?
Apparently the people that came and looked at the jobs didn’t like the hours. They’d rather get paid by the government to not work 24 hours a day than to get $20/hr to work when they are needed.
You can imagine how frustrated this guy is every night when he goes home…he’s surrounded by unemployed people and he can’t fill the jobs he needs to grow his business. So he goes home one night and his neighbor yells over to him to come have a beer. Great…he could use one. He walks over to the neighbor’s house and the neighbor tells him to check out his new lawn tractor. Our man’s jaw hits the floor. The neighbor has been on unemployment for 80 weeks. This guy can’t fill jobs at the factory…and the unemployed guy is buying new lawn tractors. He feels sick…he no longer wants a beer…he goes home.
While I certainly understand the good that unemployment insurance can do…some of the examples you see in practice point out that there is a lot of room for improvement in this program. It would seem that with adequate oversight we might be able to make this a much more productive…and less expensive program.
If you have any questions or if there is anything I can be doing for you just let me know.
Regards,
Steve Scaramastro, SVP
800-311-0707
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