Monthly Archives: July 2016

Today’s Moment of Yen-I Mean Zen

Back when The Daily Show was funny and relevant, John Stewart used to end with "A moment of Zen" to capture the day's absurdity. Today's moment comes courtesy of Section C page 3 of the WSJ. Top headline: Yen Traders Fret Over Japan's Stimulus... Below: Tokyo takes long View:50 Year Debt..and to the side: Longer Bonds Hold Risks for Investors.

The Cliff's Notes version - Everyone has borrowed yen to buy long term bonds that don't yield very much but everyone wants them for capital gains in strange ETFs, so 50 year bonds sound great except the market is getting clobbered this month, wiping out years of returns and causing said massive positions to be unwound. But governments buy most of them anyway, which may or may not be inflationary depending on whether you are talking to Rick Santelli or the CEO of Whole Foods. Got It? And I wondered why neither of our would-be Presidents have commented on monetary policy.

My disinterest in government FI over the last 3 years has been well chronicled in this Blog. "Anything, and everything else" has been my advice. Hoarding low coupon debt for price increases is the Yang to the early 80's "certificates of confiscation" Ying . Yesterday, the Fed meeting results were released to the usual micro-parsing and insignificance. The Fed, I am now told by the parade of "watchers", "strategists" and "traders" is now Data Dependent. Zen moment redux.

The term structure of interest rates (Some guy, I heard he was awesome, used to speak of it on TV) is fercocked. The Journey back to Ixtlan (#GIK) will be a wild and transformative process far beyond the grasp of our soon to be Commander in Chief. It is ALWAYS about the positions. Those positions are starting to change.

On Money

Today, as @Conorsen tweeted out, the "benchmark" LIBOR hit a new cycle high with the 12 month rate (#GIK) offered at 1.37%. (Long time delusional readers know this means we put the equilibrium FF rate at .77, thus CB policy has been quite accommodative of late) The 10 year government bond is yielding 1.57 but was at 1.37% as recently as July 5 ! Any casual observer of Dodd-Frank and its morphings understands the regulatory aspect of wider interbank sets. Many of us began to estimate where the "Financial System 2.0" spreads should be as long as 7 years ago.

The WSJ has several articles highlighting the interest "savings" of low (Negative - hello Spanish 2 year auction) rates on borrowing governments. At the height of the "Debt Crisis" debate and populist fear mongering, we argued that just changing the trend and letting the economy grow was more than adequate policy. Even marginal growth rates have delivered adjustments large enough to bring  more pundits to our "Issue more for longer" camp.

The critical distinction is the difference between money and debt, even as quantitative policies seek to blur and merge (blurge?) the two. The dollar's waxing and waning becomes a Dramamine ingesting barometer for clues to what lies down the road. Currencies, especially global fiat currencies, are poor compasses to steer policy by, however. Which takes us back to interbank benchmarks. In a world of Central Banks exotically bolstering government borrowings with Flying Buttress purchases, the risk-free rate becomes irrelevant. "Things" other than risk-free are better reflections of financial system vitals. Here's the message, their yields are going UP.

Corn Sweat

Corn has lost a dollar in value recently and the entire grain complex completed down patterns in the model again Friday. Farmers are hoping the high temps over the next week produce some kind of price pop. No one we have spoke to since arriving in the mid-west feels loftier pricing can be sustained for long, however.

So much product has been planted in the age of abundance that a new weather condition has developed in the Plains called Corn Sweat. High heat and fence post to fence post "Frankencorn"  combine to sweat so much moisture into the air as to send humidity readings and the heat index soaring. Watch for this phenomenon this week.

We have felt that income bumps and basic service price increases would combine to nudge inflation readings up enough to expose the folly of low (negative) FI renting for capital gains. Public transportation, road tolls, rents and Starbucks are all costing more. The incoming weather pattern should provide some flopping around in grains but the crop as a whole remains enormous.