Saturday, April 3, 2010


After several posts here and debates on the SKF board with Mizesaw over whether the U.S. can land in a JapanII scenario or in a more severe catastrophe. These are real economist debating an issue that is the essence of our current Fed efforts...take special notice of the personal take in this article about the unspoken demographic issue I keep bringing up. Its an albatross around the developed worlds "recovery neck".

Agree or disagree, the fact that two of the smartest economists in the world can present very persuasive cases for either side indicates precisely the conundrum we are in, and is precisely why the Fed will pretend it is operating in the shadow of a so-called Goldilocks economy, even as it prints record trillions of new debt until one or the other is proven wrong. If, as many expect, Grant ends up being correct, than Bernanke will have gambled and lost the future of the United States.

Some of the more persuasive arguments by both include a refutation by Grant that the US economy now is in any way comparable to that of Japan, for a variety of reasons, namely the underlying domestic "dynamism." Rosenberg disagrees and presents the trend pricing for JGBs which, even with record ongoing debt/GDP and deficits, has seen a contraction in JGB yields by 70 bps, even after a round of downgrades.

For traders, the recent move wider in bonds, as well as the first time ever observation of negative swap spreads is likely a warning signal that the 10 Y may finally be breaking out of the 3.20% - 3.80% range where it has been stuck for the past year. If yesterday's post NFP move is any indication, we will likely see a 4.00%+ print in the next week, after which the next resistance level is in the mid 4's.

Our personal take is that the key factor that is least discussed by pundits, is the demographic shift in both Japan and the US, with both populations aging, and a record number of Americans entering retirement age over the next 5 years (and discovering that Social Security is bankrupt). To believe that this cohort will invest in equities is about as stupid as saying that IT is the current GARP sector of choice. What is the alternative? Corporate bonds may be reaching an adverse inflection point as both foreigners and Primary Dealers begin to pull out - is the slowest money, mutual funds, about to follow? Will the next big move be a derisking exemplified by a shift into Treasury funds and an increase of the Household purchases? Unlikely - we have seen that the savings rate has just dropped to its lowest level since 2008 of 3.1%. Consumers are once again running out of investable cash, and instead are loading up on one-day fad trinkets like Kindles. On the other hand Primary Dealers, which usually are a harbinger of things to come, have increased their capital allocations to bonds dramatically over the past several months. Or will the shift be a derisking one? Also unlikely, due to the primary demographic observation highlighted above, and also with the majority of the population having sat out the bear market rally (intuitively aware that it is based on one-time, non-recurring fiscal and monetary stimuli), which is logical: just the richest decile of the population tends to benefit from blistering bear market rallies. To be sure, Uncle Sam is waiting on the other side with the IRS taxman to take his share. Also, domestic equity mutual funds have seen a substantial $3.5 billion outflow in 2010: why should that suddenly change?

1 comment:

  1. I guess Mizesaw doesn't draw posts. That's typical, the days of importance if it ever existed of the neanderthals living on the SKF board is gone. Now it is controlled by rednecks like Bronze and hangers-on. And they collectively have the IQ of an eggplant.