Monday, November 15, 2010
Please Mr Market, Just Gimme Three Steps To The Door
So, in a helpful spirit, here's the crib:
This isn't QUITE what they were looking for, is it? But it is what they bought - Caveat Emptor.
First thing your young drinking southern banker learns is that rates have three components - cost to service, cost of funds, and risk premium. I think the Fed does not realize that it, too, is a bank.
The Fed thought Mr. Market was going to have what it was having
But instead - instead the reaction is best described by one of the best jokes EVER:
After staying late at her sick grandmother's cottage, the young and devout peasant woman bravely leaves to walk home through the forest past the cursed castle.
Clutching her cloak around her just below her neck, she walks along the dark path ignoring the forest sounds. The rustles, the animal snorts, a shuffle of leaves as a deer moves stealthily past. She keeps her eyes on the path ahead and looks neither right nor left.
But now the sounds have changed - what is that? Footsteps? Almost running, but too light to be a man's ... she whirls, she stares, she starts. A pale spectre with glowing eyes and two small fangs is almost upon her.
She drops her cloak and pulls her crucifix away from her neck, pushing it toward the apparition. And the last sounds she ever hears are "Tough luck, shiksa."
I don't think central bankers will understand your joke.
1. We assume that the crucifix always works.
2. We know that the "sounds have changed".
3. We know that the girl lost her hearing ("the last sounds she ever hears").
4. We must therefore conclude that the sounds became too loud.
What could be better?
Well, maybe the Chinese Army choir might be even better....
I think you mean T-Bonds (long duration US debt). Mr. Market still likes T-Bills (short duration US debt).
Mr. Stagflationary Market (me, lol) has his IRA sitting entirely in cash right now (very similar to 3-month T-Bills).
For a while there it looked like a very bad plan to be selling TIP at $107.90 back in August and lock in some profits, but things are starting to turn around. Maybe.
At the time I said "I expect it to be a losing trade." on my blog.
However, on a risk vs. reward basis I felt the downside risks were higher than the upside rewards.
There were a variety of ways real interest rates can/could rise (both for bullish and bearish economic reasons). Perhaps we're seeing one of those reasons play out now. Who knows?
I think Mr. Market is saying that Helicopter Ben is out of aces.
C.S. Lewis once wrote something like "There's no good in trying to be more spiritual than God. God likes matter. He invented it." in "The Case for Christianity". I probably have a few words wrong, but that's the gist. I seem to recall that Lewis also points out that God invented sex.
My verification word is "earroc", so maybe Blogger is on your side.
LOL! Could be. However...
My take on it is that the Fed isn't the buyer of last resort. They are the buyer of first resort.
I have a TIPS ladder and fully intend to reinvest the proceeds into more TIPS as they mature.
The Fed is sneaking ahead of me in line though and buying what I'd be buying before I'd be buying it.
It is an attempt to get me to take on more risk. I'm not going to do that though.
If the Fed really wants people to take on more risk, then perhaps the Fed should put its money where its mouth is and lead by example.
Of course, they tried that too.
The Fed has tried psychology. If they buy mortgage backed securities then maybe I would.
The Fed is now trying reverse psychology. If they buy treasuries then maybe I'll stop and buy something riskier.
I'm the string. They're the pushers.
About all they've succeeded in doing is get me to move to cash every now and then, hoard toilet paper, and reduce spending. None of which helps our economy in the slightest.
I've been busy and missed that on Friday. But if the Fed can't export asset inflation so readily, that could seriously cut down on the gold buying. It also would have a salutary effect on China's ability to control both their exchange rate and their inflation at the same time.
There's likely to be negative effects on trade as well, and I don't know how to predict the outcome of that. But it would certainly cause some nasty problems for "growth" companies that do all their manufacturing in China, and should help old-line "value" companies that still make consumer staples on-shore.
Links to this post: