Some Thoughts on the Current Market Situation

Here are my thoughts on the markets, in no particular order:

1) Momentum draws investors.  Long treasuries have run hard, and people like them now.  My view is, if you want to short them, wait until they rise 0.1% more in yield, then short.  There are a lot of weak longs to shake out.

2) That said, long rates are generally falling in the developed world.  Gives a real feel of global debt deflation.

3) Not that the yen sees any problem here for now.  This makes me more bullish on the yen; few nations are willing to allow their currency to appreciate.

4) Arguments over residential mortgages. Geithner sees room for a federal role. Gross want the Feds to make mortgages full-faith-and credit obligations of the US Government.  A shameful statement from a man who built his wealth through free markets, and now looks to protect it through Socialism. John Carney is far better, though he flounders over what to do.  To me it is obvious — take Fannie and Freddie through Chapter 11 after their debt guarantees are gone, and let the market buy up the pieces.  Fannie and Freddie have lost money for the US over their existence; they have served no useful function, any more than some misbegotten tax incentive might have done.  And, as Kid Dynamite has put it, “The problem is that home prices are too high.  We need more deflation, and more debt reduction.

5) Physics is the wrong analogy for economics.  Ecology is the right analogy.  Like ecologies, economies resist prediction and control.  People adapt, inanimate objects don’t.  So you might enjoy these articles from FT Alphaville and Bookstaber.

6) As I commented today on Twitter: “Get ready for the bookstore massacre http://bit.ly/cywtPT $BKS fiddles with its capital structure, while it gets outcompeted by $AMZN.”  I mean it.  The problems of Barnes & Noble are organic problems of competing against Amazon and losing.  Who controls B&N is less important than what strategy they take from here.  It is a lousy time for B&N to be consumed with a noneconomic issue, when they are getting killed.  And forget BGP… they are dead too.

7) Matthew Lynn hits the nail on the head.  Additional debt does not promote recovery.  If true in Europe, then true here as well.

8 ) The Dallas Fed questions whether we can stimulate our way to prosperity.  My answer: the more we place the decision in the hands of individuals the better the decisions will be.  We know what we need better than the government does.

9) Did we misunderstand the Fed’s recent FOMC non-action?  I don’t think we did , but Federal Reserve Bank of Minneapolis President Narayana Kocherlakota thinks that we did.  I think he has to understand the markets better — we work off of changes in expectations.  We expected the Fed to do nothing again.  Now that you are buying in more Treasuries, we know that the economy is weak, and we buy long fixed income as protection.  At least we are front-running you.

10) Hey, another blogger summit at the Treasury, and this one has three of the originals there (but not me).  Comments from Marginal Revolution as well.  One participant told me it wasn’t worth it to be there and the Treasury was not prepared to answer questions, but who can tell?  I have an idea: let the Treasury webcast the meeting.  I know from the first meeting that neither the Treasury nor the bloggers would have been dominant.  At least it would be transparent; isn’t transparency what the Obama Administration is about?

11) Cramer has ten reasons that the market won’t blow up.  Good.  I am 80% invested.  All I will say is that the rules are different when debts are being deflated.  Things don’t behave the same way as when debts are growing.

12) TIPS are in an awkward spot here.  Negative yields on the short end imply that buyers are looking for more inflation.  I might think that in the long run, but would be reluctant to bet on that over the next five years.

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