Closing Notes – August 19

19 Aug

The unexpected jump in weekly unemployment claims this morning came as a bit of a surprise to me, I didn’t expect a +13k jump. For those who have been following me as I’ve opined on Stone Street, i’ve been bearish throughout most of the year.

Economic Commentary

Throughout the “Recovery Summer” I was ridiculed for my bearishness. Some may continue the ridicule, however today’s employment picture should tell you something about the state of the economy; It’s not getting better and the problem is simple: it’s all about the jobs. Without the jobs problem being addressed in a coherent and collaborative manner, we are running a higher risk of a double dip recession. You can refer back to my earlier article from the spring of this year where I laid out my double dip thesis here. While I am less inclined to believe that we are in for sovereign debt downgrades than I previously was in the spring, I will reiterate the points that I do think will matter:

  1. Persistently high unemployment in the population under 50 will result in substantial declines to government tax receipts
  2. Increased risk of a double dip recession as the transfer payments enacted under EUC 08 begin to trail off (i.e. people begin to exhaust unemployment transfer payments at an accelerating rate) resulting in less spending to stimulate the economy
  3. Inflation will begin to skyrocket, further weakening the buying power of those remaining in the population who are the key to pulling us out of a recession

The point about inflation may not be on the front burner right now, given that everyone is talking about deflation, but I believe that there will be a mismatch which is akin to inflation. Wages will drop while prices may stay static or slightly increase, which creates an illusion of inflation, even though it won’t be picked up in S&P and Moody’s econometric models until.. well, I’ll leave that one alone. Points 1 & 2 are still very much valid and alive. And with the increasing drum beat of people clamoring to stomp the living hell on the throats of the unemployed currently in the EUC-08 program, you will have less spending. There’s only so many iPads that people can buy, and that spending that is being done on those consumer devices is not even being reinvested back in our nation. Foxconn, the Chinese manufacturer will hire 400k more Chinese workers to build the products that Apple puts in front of our faces, while American companies gleefully lay off 400k US workers.

While I agree that we can’t float 16M people (and growing) ad-infinitum, we need to provide some support to them while coming up with solutions. Our elected officials in DC have so far failed to come up with solutions that put Americans back to work – instead they have chosen to bail out a select few (who just happen to be located on the Isle Of Manhattan) and leave the rest of the populace with the bill. Better yet, they have filled the lifeboats with themselves and their friends, and left the rest of the nation on a sinking ship. To make matters worse, those now on the lifeboats are calling the rest of us on the ship “stupid” and enjoying the spoils of their handiwork. While millions suffer, the lifeboats float away, sweeping the “eyesore” that is the American people who were not fortunate, connected, well-heeled enough out of their field of vision. It’s sad. Joe Weisenthal over at Clusterstock noted:

In the past, Obama’s strategy has been to take credit for the good economy. Even after monthly jobs reports that have been mediocre, the President has defended the numbers and claimed success.

That’s changed. Now the strategy is to acknowledge that the economy is weak, and to blame opponents — it’s a subtle, but important shift.

Read more:

Joe is right. the President is woefully out of touch with what needs to be done in the economy, instead he chooses to blame his predecessor, Bush, or – those wacky “Tea Partiers”. Let me ask you, my dear reader: If you had an employee that was newly hired in a position that was left in absolute disarray by someone who was no longer there, and after the first 6 months the employee continued to blame mis-steps and poor performance on the long-departed predecessor, wouldn’t you fire that individual? The logical answer would be “absolutely”. I am not intending for this to be a political debate, but it is important that people begin to take note of the subtle shift that Joe mentioned.

Not to be a Debbie Downer today – Connecticut, our hedge fund capital darling may be nearly broke, living paycheck to paycheck by this fall:

US Indicative Close

Today’s bond market saw some pretty impressive things happen, 30Y cash prices were up 2 full handles, sending yields down over 11bps at one point during the day. The 2Y is on track to close at a record low yields of 48.4bps. Swap spreads were relatively quiet given the large swings we’ve seen in both USDJPY and the corresponding Treasury legs. Also, the Fed purchased 6-10Y bonds today, more on that later. In the last half hour of trade, yield spreads managed to widen off of the flatter levels of the day, most notably was the 2s30 which widened to 317bps, although it is still significantly flatter on the day, the worst levels were around 311-314bps. Muni bonds for 10 and 30 year (top rated) fell 2 and 3bps to 230 and 378bps respectively, which is a new record low.

US Yields

2Y 48.8 -0.8, 5Y 139.1 -4.5, 7Y 199.7 -5.1, 10Y 257.7 -6.1, 30Y 365.9 -7.8

2s5 90.72 -3.28, 3s5 64.71 -1.79, 2s10 209.32 -4.88, 2s30 317.41 -6.69, 5s10 118.77 -1.43, 5s30 226.94 -3.16, 7s30 166.12 -2.78, 10s30 108.27 -1.63

2s3s5s 38.51 -0.49, 2s3s7 99.33 -0.87, 2s5s10 28.10 +1.90, 2s5s30 136.46 0.36, 2s10s30 -101.36 +2.94

Swap Spreads

2Y 18.63 +0.875, 3Y 24 +1.25, 5Y 22.75 +1, 7Y 12.75 -0.25, 10Y 1.75 unch, 30Y -36.50 -1

Fed Treasury Purchases

The Fed purchased 6-10Y bonds today, which didn’t disrupt that particular market too much – the yields of 8-9Y bonds were down between 4-6 bps on Tradeweb. It appears that the Fed purchases were skewed more towards the upper 6Y maturities and closer to 9Y but it’s worth nothing that all of the bonds within that strip saw decent price action, up between 11 3/4 – 19 tics, with between 3-8bps decline in yield.

No economic releases for Friday 8/20. Enjoy!


One Response to “Closing Notes – August 19”

  1. eradke August 19, 2010 at 3:12 pm #

    Nice post King.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: