When the note contract breaks down, it's gonna get ugly.
Here's a longer view of the same contract that shows the support level more clearly.
If you've never seen a rout, pay close attention, cause we're about to get one in the bond market.
Posted on 02/19/2006 7:49:34 PM PST by FairOpinion
Call it the Bush-Bernanke rally.
After two days of congressional hearings, new Federal Reserve Chairman Ben Bernanke delivered a "not-too-hot" and "not-too-cold" testimony that reassured financial markets -- driving up share prices by roughly 1 percent across-the-board, while gold, bonds and the dollar held flat.
On the Bush side of the rally, the Senate voted 53-47 this week in favor of extending the president's investor tax cuts on dividends and capital gains. Joining in this breakthrough vote was John McCain, the senator who voted against these tax cuts when they were introduced in 2003. This is an important shift for the GOP presidential frontrunner -- and another big win for pro-growth fiscal policy.
Even better, it seems that Bush and Bernanke are on the same pro-growth side. During his hearings, Bernanke gave the Bush tax cuts credit for the economic recovery. He also pledged to keep basic inflation around 2 percent or less as he narrated a positive view of the economy.
Bernanke's biggest concern on the inflation front seemed to be a spillover effect from higher energy prices. But that hypothetical thought is being overtaken by events in the energy trading pits, where gasoline prices are plummeting and crude oil has dropped below the $60 dollar a barrel threshold. With energy inventories high, lower prices will pull down inflation rates in the next couple of months.
Indeed, lower gas prices at the pump are increasing the purchasing power of consumer incomes, which have risen with steadily impressive job gains. This is what the housing pessimists are missing. Any cooling of the home real-estate market and the "cash out" income from that market is being more than offset by the job creation of healthy American businesses, low unemployment and rising incomes. In fact, while the economic pessimists can only cite the effects of warm weather in January, the reality is that the Bush tax-cut incentives continue to propel economic growth.
Just look at the outsized gains in retail sales, new home construction and manufacturing production. Then look at the flood of new tax collections from the strong economy that has thrown off unexpected federal budget surpluses over the last two months.
Of course, when it comes to inflation, it's critical that the Fed watch the right indicators, lest it does more policy damage than good.
Bernanke impressed during his testimony when he referenced an important bond-market model of inflation expectations calculated from the difference between inflation-indexed bonds and cash bonds. These forward-looking bond-market indicators tell Bernanke that inflation worries are "well anchored" and that the Fed's interest rate target should stop at 4.75 percent or 5 percent, at most.
However, Bernanke was much less impressive when he made lingering references to resource utilization and "excess" economic growth above potential. Remember, in the second half of the 1990s, unemployment dropped to 3.9 percent, while real economic growth averaged above 4 percent -- both of which occurred without upward inflation pressures. But the Fed worried about "irrational exuberance" and made the wrong policy call -- it began aggressive over-tightening that led to a generalized deflation of commodity, equity and business investment. This was Alan Greenspan's biggest mistake, predicated on a short-run Phillips curve trade-off that gave the central bank a very bad policy signal.
Hopefully, Bernanke will stick with the bond indicators, bolstered by commodity- and currency-market signs, and will push the Phillips curve into the background where it belongs. Otherwise, this old Soviet Gosplan approach to central planning will doom the recovery cycle.
Fortunately, Bernanke will be ably assisted by two new Fed board appointees -- Kevin Warsh and Randall Kroszner -- both of whom were unanimously approved this week by the Senate Banking Committee. Full Senate confirmation will occur in due course. As I've noted before, George W. Bush has moved the Fed's center of gravity toward free-market supply-side economics.
Notably, Bernanke not only credited tax cuts for economic recovery, he also endorsed school choice and vouchers for better education performance. And he also contended that private market companies, not government, should underwrite terrorism risk insurance.
It's safe to say that the "old guard" Fed bureaucracy -- led by Donald Kohn -- doesn't like this free-market assault one bit. They were the ones leaking potshots at young Warsh -- the Harvard trained lawyer, former investment banker and senior policy advisor who will be the only person in the Fed building with any real-world financial market experience and contacts.
Contrary to the advice of Keynesian government planners, low tax rates and a rising economy are the best means to domestic price stability and prosperity. Let's hope Bernanke stays on the right side of this debate.
====
Larry Kudlow hosts CNBC's "Kudlow & Company," and is a contributing editor for National Review magazine and a columnist and economics editor for National Review Online.
I disagree. McCainiac, like most of us, can see the handwriting on the wall. Got to give him credit for not being Stuck On Stupid.
Not a single mention of the yield curve. Maybe under Bernanke we'll have kinder, gentler, more compassionate recessions.
"Bernanke impressed during his testimony when he referenced an important bond-market model of inflation expectations calculated from the difference between inflation-indexed bonds and cash bonds. These forward-looking bond-market indicators tell Bernanke that inflation worries are "well anchored" and that the Fed's interest rate target should stop at 4.75 percent or 5 percent, at most."
===
Actually during the testimony, he was asked about the yield curve and he said an inverted yield curve doesn't necessarily mean a recession.
I have hopes for Bernanke, that he will indeed focus on yields, instead of thinking that regulating the stock market and house prices is in his charter, as Greenspan thought.
Kudlow was one of the few who pointed out Greenspan's fata mistake, which plunged us into recesssion.
"Remember, in the second half of the 1990s, unemployment dropped to 3.9 percent, while real economic growth averaged above 4 percent -- both of which occurred without upward inflation pressures. But the Fed worried about "irrational exuberance" and made the wrong policy call -- it began aggressive over-tightening that led to a generalized deflation of commodity, equity and business investment. This was Alan Greenspan's biggest mistake, predicated on a short-run Phillips curve trade-off that gave the central bank a very bad policy signal. "
I think Bernanke, this being his first testimony in front of Congress, was threading lightly, but I think he will hopefully focus on monetary policy and leave the rest to the market economy.
I am cautiously optimistic that our new "Big Ben" may interpret the reality of the "new economy"...high productivity allowing lower unemployment and interest rates without inflation pressure. Might I also hope for a temporary pause in increases at 4.5%?
An economy based on higher productivity and technological progress is nothing new in this country. We've had it for over 200 years now. It seems new because it's taking a few centuries for the federal government and the Federal Reserve to realize it. They are still not quite there.
Some good comments above. Well done.
But, Kudlow talks politics more than economics. The nonsense about "spillover effects" is the babbling of a man who's forgotten that money causes inflation.
All the rest is hot air.
The bond market test is about the be proven. When the 10-year US note futures contract falls below 107.26, and the bond market malaise turns into panicked selling, the gasbags at the Fed will have to do some serious tightening, and I don't think they're ready for that.
This is gonna be fun, as long as you're not long the bond market.
What I like about Bernanke, is that I think and hope that he isn't going to meddle in the economy -- such as Greenspan, who singlehandedly crashed the stock market by his unnecessary and large interest rate increases, because he decided that the stock market was too high and it was his job to crash it.
I think Bernanke will focus on the money, and not be driven by the behavior of the economy in general, the stock market, real estate market or other things. The more he stays out of things, the better it will be.
As I heard, Bernanke spoke up about Greenspan's continuing interest rates and said there was a threat of recession more than a threat of inflation. I find that encouraging.
Since this was his first testimony, he couldn't very well criticize Greenspan, without upsetting Congress and the markets, but I could harly wait for Greenspan to be out and I think Bernanke will be much more reasonable.
Interesting, thanks.
Not looking too good.
Well said.
But, remember, he's an academic, not a markets guy.
He's doomed to screw it up.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.