Trillion-Dollar Fool?
Another news-less day, another equity melt-up (+1.1%). The curious thing was that today the equity melt-up was joined by a bond melt-up. The Dec 10y Note contract rallied 16.5/32nds and kept going after the close. At 3:00 ET, the 10y yield was back down to 2.74%.
I try not to get too caught up in the wiggles, and I suspect that this is just a reaction to what some people saw as an oversold market. 30bps over a week and a half wouldn’t ordinarily qualify as “oversold” in my mind, but in the context of the normally-strong September seasonal pattern, it makes some sense.
But rallies in both markets are a little curious. I wonder – the dollar weakened today by the most since July 1 (as measured by the dollar index) and closed at the weakest level in a month of sideways trading. It isn’t a large move; nor was the continued widening in the inflation markets a particularly large move. One thing that could align all of these directional trades is investor anticipation that the Fed’s QE2 is growing increasingly likely. Ordinarily, one would think that quantitative easing would be associated with higher interest rates, and a rise in inflationary pressures would sock equity multiples. But if QE is conducted through direct purchases of bonds, then interest rates won’t rise for a while; and although it is wrong and contrary to copious evidence, conventional wisdom continues to be that inflation is good for equities.
Regardless of whether inflation is good for equities, additional liquidity would certainly tempt a squirt higher in prices. Nominal bonds are only a decent investment at these levels if you’re pretty sure there is a trillion-dollar fool waiting to bail you out at higher prices. But both might make sense if that trillion-dollar fool is stepping up. Of course, injecting more money into the system would tend to quicken inflation (that is, after all, the point) and thereby weaken the dollar unless other monetary authorities are doing the same. So far, that doesn’t seem to be the case.
Like I said, I don’t want to read too much into one day’s wiggles, but part of investing is “aiming high in steering” and trying to figure out where the next curve ball may be coming from. Although I don’t like equity valuations, I would be nervous to be short right now.
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So much for new banking rules for Basel…I still can’t think of why you would want to own banks in this environment given what is happening to their market and their regulation, but at least there isn’t the threat of a “Big Bang” from the Basel Committee on Banking Supervision. The new rules announced this weekend will phase in over 8 years…that’s right, at least one full economic cycle. According to the Wall Street Journal, “Bank of America Corp and PNC Financial Services Group Inc. could be forced to sell their ownership stake in giant asset-management firm Blackrock Inc.,” which would be a very big deal, but the firms have several years to do with it and I’ll bet they can structure around the new rules. The paper also noted, regarding time frame, “Some changes will go into effect as soon as 2013, but others won’t be in place until the beginning of 2019. Technical changes to the definitions of capital won’t be fully in place until 2023.” Here’s betting that over the next 13 years there may well be innovations that require further changes to the definitions of capital. What century do these regulators think they are operating in, anyway?
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Tomorrow, we will have some more concrete data to invest with. Retail Sales (Consensus: +0.3%, +0.3% ex-autos) for August may squeeze out another marginally positive print, but nothing to write home about. Retail Sales is usually volatile and, consequently, is usually not worth reacting to but as it is the first piece of marginally interesting data in a week, we could get a reaction to a miss.
