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Don’t give up on the party yet!

June 10, 2013

I have two very quick items today. Last night, I watched the Japanese stock market soar and imagined a conversation between two completely disconnected and dislocated financial markets. Let’s call one Mr. Nikkei and the other Mr. Dow.

Mr. Dow: Mr. Nikkei, do you realize you are being a real downer — why all the doom and gloom?

Mr. Nikkei: I think I am suffering from a liquidity hangover. I’m sorry I threw up all over your shoes, but this is too much liquid to hold down!

Mr. Dow: Pull yourself together man! You are beginning to make this party look questionable. Now pull up to the bar and have another drink. You need to let the world see that this party isn’t over yet!

Mr. Nikkei: Do you think I could get your pal Goldie (aka Goldman Sachs) to give us a thumbs up (a buy signal)?

Mr. Dow: That’d be no problem. I will have my friend Bernie (Bernanke) give them a call. Now drink up!

Mr. Nikkei: I’m feeling much better, Dow. How does a 636 points-up day sound?

Mr. Dow: Like a party! Come on, I’m buying! Drink up!

One other note: The 10-year treasury is moving above 2.2 percent this morning. This is going to create quite a squeeze on Bernanke. That space between a rock and a hard place is getting a little tighter! Imagine what would happen if rates ever normalized.

CBOEInterestRate10-year

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One Comment
  1. Wayne permalink
    June 10, 2013 5:41 pm

    Hi Jon,

    If the 10 year treasury hits 2.5%, Mr. Bernanke is going to have to make some O.E. decisions? Will be interesting, since current asset fundamentals support a DOW significantly lower than current DOW levels (including the S&P, real estate, bonds etc.). I suspect that asset values will drop below fundamental support, rather than fundamental support rising to support asset values. In other words, maybe Mr. Bernanke loses control of rates and we see a corresponding drop in the markets.

    I have read that the only real benefit to Q.E. is it makes us feel good and when people feel good they borrow and spend more. I guess the opposite is also true, when we stop feeling good they reduce borrowing and spending. Since Q.E. has been in place for 5 years with little or no appreciable change in the economy it won’t take much to change the mood of the public and when that happens step back a watch. It is hard to estimate the impact because we are in uncharted waters, but it will most likely not end well.

    In reality, Q.E. is actually counter-productive to creating jobs and forces many people too far out on the risk curve just to get a acceptable return on capital. Historically, fixed rates insured a decent return on investments with little or no risk. This was beneficial to insurance companies, retirement funds, senior pensioners and companies. With Q.E. all the no/low risk investments have vanished which negatively impacts predictable returns. Consequently, companies reduce permanent staff and replace them with temporary workers or technology. Resulting in fewer workers being hired.

    Additionally, too many baby boomers are taking risks they can never recover from if we get an economic down turn. When the down turn comes it is going to hurt a lot of people who cannot afford to take the hit. I hope people are watching their investments close because when the last straw (basis point) breaks the ten year bond camels (economic) back, the markets will drop fast and ain’t going to be pretty.

    Talk to you soon,

    Wayne

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