Market Timers or Market Cheaters?

SafeHaven ^ | September 6, 2003 | John Mauldin

[Starwind]

Fyi...

[Starwind]

Further elaboration on Greenspan's ambiguous policy as we were discussing on Monetary Policy under Uncertainty, if you're interested.

[Starwind]

FWIW, some qualitative commentary as opposed to numbers.

Let's look at some uncomfortable long-term facts facing the Fed.

First, they must clearly mistrust that the current economic growth spurt that is forecasted has "legs." In my opinion, I believe if they thought that for one minute the economy was going to grow on its own at 5% real growth for the next 18 months, I cannot imagine they would not begin to raise rates, if for no other reason than to have some room to lower them the next recession.

Why mistrust this growth? Because much of the growth is from stimulus that is not lasting. This growth is caused by (1) Bush's tax rebates, which are clearly kicking in (Wal-Mart's sales are up 5-6% year over year), (2) a huge government deficit spending (more than half the GDP growth last quarter was government [mostly defense] related) and, (3) massive mortgage refinancing which was done in the second quarter which produced a huge amount of spendable cash, which is now being spent.

[Free Vulcan]

slef-ping

[kitkat]

BUMP

[arete]

He has long argued for maximum flexibility for the Fed, with minimum quantification of the Fed's goals. In a nutshell, Mr. Greenspan's management style is best described as 'trust me' - sometimes known as 'constructive ambiguity.'... Greenspan disagrees [with specified policies], when it comes to carrying out his job mission. His definitions of the Fed goals are what his gut says they are, but what he cannot bring his lips to say, subject to change when he has an undisclosed stomach ache.

I have been saying for months that the FED has been actively following an unstated policy of releasing misinformation, conflicting opinions, and intentionally vague statements designed specifically to keep the markets and traders confused and guessing. I can only assume that with the economy so weak and dependent on the flim flam of borrow and spend new era structured finance, the debt bubble must be expontially inflated and having bond traders get a clear understanding and sense of the coming inflationary train would raise rates and limit the ability of the central planners to further stimulate the artificially induced recovery. It always comes down to "inflate or die".

Richard W.

[Always Right]

A conspiracy and a bubble all in the same post....I am impressed....

[arete]

Just in case you didn't read the article --

"And thus, to establish a "reasonable" set of policies such as McCulley asks for would mean the Fed may to all too soon feel forced to abandon them in order to deal with the potential crisis resulting from today's imbalances. Such a reversal has the potential for creating far more havoc than the current environment of "guess what Greenspan is feeling today." Since the exact nature of the potential crisis is unknown, how can you set a proper course? Better, says Greenspan, to allow them ultimate flexibility than adopting polices. Trust me."

Richard W.

[raybbr]

I have been saying that the stock market has been a scam for years. It is a closed business that relies on guesses and misinformation from companies. There is no way to verify company forecasts so the manipulation of the stock market goes on and on.

[Starwind]

A conspiracy and a bubble all in the same post....I am impressed....

Greenspan has made statements calculated to hopefully induce traders to respond as they have previously, to suit Greenspan's unspoken and vague policy. Greenspan's own words (Monetary Policy under Uncertainty):

For such judgment, we policymakers, rather than relying solely on the specific linkages expressed in our formal models, have tended to draw from broader, though less mathematically precise, hypotheses of how the world works. For example, inference of how market participants might respond to a monetary policy initiative may need to reference past behavior during a period only roughly comparable to the current situation.

Greenspan's intent was to encourage the stock market to go up because a recovery was in place, yet encourage bond yields (interest rates) to remain low, ignoring the inflation that normally comes with recovery.

He knew that typically bond traders would drop prices (yields rise) if they believed what Greenspan told the stock traders that the economy was recovering, and he knew that stock traders would not bid stock prices up if they believed what Greenspan told the bond traders, that deflation was a real danger to a recovery.

So he was deliberately vague to both groups, trying to get both bonds and stock prices to go up together - which they typically don't.

I presume you don't need any proof of the debt bubble?

[imawit]

My take. You're both right but there is an interesting lull that I see.

No one referenced in the article or Mauldin himself has an inkling nor guess as to what will really happen. So I looked at this as the lull before the next move/storm to hit. In doing so, there are two possibilities, advance or decline. Now I'm not a doom and gloomer and certainly least wish for the doom to occur. I see a downtrend coming as the best guess and the best scenario would be the uptrend Mauldin mentions that could last for 6-9 months. There are tooo many tight rope acts that must remain in place.

And maybe there won't be a crisis and we do grow ourselves out of the problems, at least for awhile. The current economic growth is very for real, at least for the next 6-9 months.

This scenario could happen, nothing negates it entirely. Certainly the majority either blindly or with hope (knowing the truth) do wish to see this happen. Right now it looks like it will but every thirty days will be a whew and catch a breath, things are going OK.

There are those problems lurking in the shadows; they are not being addressed nor are they being handled; if anything they seem to get bigger and nastier; they are also being fueled by both fiscal & monetary policies as are the good times.

[Starwind]

Nor did Mauldin mention the amouint of new debt coming to market. I've mentioned this before and IIRC you agreed only moderately.

I don't track the bond markets typically, just recently. But it seems to me record supplies of Treasury, GSE, and corporate paper are coming to market and the recent demand (lower bid-to-cover) indicates satiation unless prices fall (yields rise), irrespective of what the economy or stock market may do.

Have your views on the supply/demand of bonds crystallized any, and if so, do you see yields rising or falling - based soley on supply/demand?

[imawit]

What, now you want me to come out of Polyanaland, Camelot ?

I found it very interesting to see how the King Arthurs in earlier years (and certainly now also (the aluding to of Sir G's "unbridled arrogance") and the "Full Employment and Balanced Growth Act of 1978") reflect the demigodery and out and out foolish emporer syndromes of our wonderful leaders then and now. Ok. So let's get to the facts.

First, crystalization is not the proper adjective. I'm a fundamentals guy (reason for my allusion to Polyanaland). Second, the need for financing, if you will, bonds is actually an unnatural market force. I say this meaning that the US Treasuries bond market is manmade/governmentmade. There are no economic forces that drive this up or down, just extant policy at any given moment. Therefore this area and force can either be a great hindrance or accomodation to true market forces at any given economic moment. In the long run it is always a hindrance, the government never makes a profit by which it can pay down debt.

With this in mind I feel one has to look at the corporate and government bonds separately; see what each is doing and being driven by separately; and then combine both forces as a function of how the market will treat bonds. Currently there still is no market for corporate bonds other than speculation with playing the trends (a technical study in market forces). Utilization of corporate facilities/factories is still down and concurrent with that so is expansion (nonexistent), job creation (nonexistent) and the need for corporate bond expansion/creation (actually also nonexistent). What we are actually seeing in corporate land is restructuring of debt. As interest rates rise this will come to an end if it hasn’t already. This does not mean that the technical side will change any though but I don’t look to analyze that arena, I don’t speculate in bonds. I don’t believe you do either or that the majority of the readers/posters here do either. That’s another world altogether. However, I do feel and as you rightly open the question to me that, one must keep an eye on what’s happening here because this market arena has great effect and great information as to how the economy is doing, envisioned as doing and is being affected or going to be affected by what happens here.

Well I've given you what’s happening with corporate bonds, it’s very simple if you’re not an investor/speculator with such. Government bonds is another question altogether. There are so many effects and players that it is a real challenge to get a bridle on it and control it and much harder to get a feel as to what’s happening and what will happen. Corporate bonds rates have risen (and only brought down because of market pressure from government bonds) and so has corporate financing rates (funding is practically nonexistent so who cares about rates but under these conditions you'd have to put actual rates at sky high levels). Only because the spread was too out of whack have the yields/rates come down and brought forth the grand opportunity to restructure (a la GM’s new bond issue). This tells you that the upward pressure in corporate bonds is still there and really never subsided. Look at what corporate financing has done over this period, nothing, it’s still nonexistent.

I know this is probably getting quite long but the answer to government bonds, fundamentally is very quick and simple as in corporate bonds but no one is stating it. The more that are created and put to market (and don’t forget, it’s against a specific and quantifiable collateral (if you will) the taxpayer and his ability to service and payoff the debt (which never happens and never will) the more the risk involved. Or the less confidence and therefore the higher the risk and the higher the rate. Now add to this the inflation it causes and that’s another factor for higher risk and higher rates. And then add to this the fact that the issuance of new debt and government bonds is in the offing and with no end in sight. This is a 3rd factor that pushes up rates/yields. Fourthly and now I ask you, how certain and confident are you that the economy is expanding and if you think it truly is then is it expanding by a high enough rate (which it isn’t at this time) to assuage, mitigate and nullify the risk and bolster confidence in bonds and what they represent. Then fifthly, and this is the hidden 800lb gorilla (they own 40% or more of bonds now and must be counted on the buy that portion or more for a successful issue) how are these foreign governments/central banks going to see all of this with respect to their motives and intentions. My (obviously educated and fundamentals rooted) guess is rates will go up. But then there is Japan who has been using its trade payments money to buy dollars and bonds no matter what just so their Yen stays low against the dollar.

Just hope Japan, the #2 economy doesn't wake up and realize they can be #1 with a stronger yen and owning 10% or better of the #2 economy, the US. Should their Imperial tendencies become reawakened, nothing could stop them. They are the biggest economic force in Asia still and are in fact the largest exporter and investor to China at the moment and to all of Asia. (something that no one is telling you either)

[Tauzero]

Good piece.

bttt

[imawit]

ps: the only reason rates fell in the first place was the FED controlled rate going down (which is now stopped and for the foreseeable future; only an increase seems logical), FED jawboning (which has now been found to be baloney) and the Japanese buying dollars and bonds to keep their Yen weak and exports up (very succesful action). The first two factors are now missing and the 3rd ... well Japan now has a new problem; lots of trade payments cash and further drowning of their Yen will degrade the value of that cash and also hurt their improving economy.

Let's see if the price of Japanese cars start to rise. They have conquered the US car market at this point. And I do mean conquered. If Ford, GM and ChryslerDaimler go for a counter attack, all 3 will go bankrupt because they'll have to give no interest, no payments for 12 months and cash away with each car (don't forget pension plans funding in this money giveaway). Take a look at car sales shares per manufacturer.

[arete]

Maybe a little less "crystalization" next time please. Didn't understand what you were talking about (over my head) so I am glad that you can to a conclusion -- higher yields (?) in which case I agree with you. Way too much supply plus the risk premium.

Richard W.

[imawit]

Maybe a little less "crystalization" next time please

Wellllll, I dunno bout that. Maybe a few more words and some more examples would have made it more clear.

[lelio]

You fax two mutual fund orders (both buy and sell) to the trading firm, they get stamped as coming in before 4 pm or the close of the trading day. At 5 pm, you decide which one you want to keep and throw the other in the paper shredder. (This is in all likelihood what broker Red Bones did for Hillary Clinton with her cattle futures trading.

We should start a trend and label this "The Hillary Maneuver." Has a mountaining ring to it as well (and we all know Hillary was named of Edmund, right?)

[lelio]

Just hope Japan, the #2 economy doesn't wake up and realize they can be #1 with a stronger yen and owning 10% or better of the #2 economy, the US.

Interesting point. And coinkydinkyly I just picked up a Zen Buddhism book. Can't remember if that's Chinese or Japanese. Anyway its all a bunch of riddles. Perhaps Greenspan's been taking cues from it.