Saturday, May 30, 2009

The Bond Vigilantes Are Back

Who woulda thunk? The bond vigilantes are back. Of course, "bond vigilantes" - negative connotations and all - are just investors with a healthy dislike for being screwed over, even if the Fed promises it will pull out in time. One must wonder if Timmy and the Lords of the Underworld really believe bond investors are about as gullible as girls on prom night. Quote: "The surge in the 10-year note is especially notable because its rate helps to determine mortgage lending rates. The Fed is desperate to keep mortgage rates low to reflate the housing market, and last week it promised to inject hundreds of billions of dollars more in this effort. This week the bond vigilantes are showing what they think of that offer, bidding up yields even higher."

The yield on T-Notes hit 3.7%, while current Wall Street lore says that Timmy and Ben want to keep it near 3% to prop the housing market. Makes perfect sense - who would want a market-clearing price, markets are so passé. We would not want a market to self-correct quickly, much better to keep it deflating for years and avoid those scary pops.

History is also passé. Last time the Fed Funds Rate was kept under 2% for 3 years from Dec 11, 2001 till Nov 10, 2004 (and under 1.5% for 1.5 years from Nov 6, 2002 till Aug 10, 2004) we got... that's right, a huge asset bubble. But, as Sir John Templeton would say, "The four most dangerous words in investing are 'This time it's different." This time, the Fed Funds Rate has been at 0-0.25% since Dec 16, 2008 - the idiots did not even have the cojones to call it 0%, and had to bullshit about targeting a range now, eliciting smirks from professionals who had been watching the bond markets for decades. That's not cheap money - that's free money. Is the expectation that all those who got burned in the CDO implosion are going to think "You know, we were wrong, those things are good, after all, let's pile back into them?" Says Ed Yardeni:"Ten trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever." Bonds normally do well in times of recession with low inflation. For Q1, US GDP tanked at a 5.7% annual rate, and mild deflation was reported, yet bonds are selling off - anyone dare take a guess as to what kind of inflation expectations are baked into this turd cake?

We are being set up for a massive flight from the US dollar and dollar-denominated assets. When that happens (remember the commodity bubble), you get bubbles everywhere, becasue of the sheer size of the outflows. Watch oil, which has just about doubled from the bottom. Watch the commodity currencies - the Canadian and the Australian dollar. I profess lack of trust in and understanding of gold, but watch that too.

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