Those of you who missed Easy Al's link yesterday to Dr. Hunt's contrarian view of the bond market should possibly read it. ( Lacy Hunt: Bond Bull
) At the core of his arguments are what some of you view as meaningless funnymentals when pitched against a backdrop of TA. Somewhere under this smoldering pile of TA driven paper is the real world which will do it's own thing in it's own time regardless of how many fibbin nachos, cup handles, flags or shooting stars appear in the charts.
Have I pissed you all off yet? No? Then let me continue. TA serves the traders in the short term but IMO fails miserably for longer term or macro issues. Funnymentals on the other hand are terrible for short term prognostications, but do an excellent job at predicting longer term trends and macro issues. In the real world, operating a real business attempting to apply any sort of TA would result in unmitigated disaster. I know I speak from experience. 20+ years ago I was introduced to a mangement system that attempted to do just that. Keep your head buried in the numbers and make your projections based on that. After almost three years of invariably having the wrong inventory in the wrong amounts at the wrong time and then trying to readjust based on more TA I threw the whole thing in the trash can and have never looked back. The problem is you can't effectively make real time TA based adjustments in the real world. If you can't take the funnymentals and make decent projections on the macro situation down the road six months plus from now you're going to constantly find yourself pissing into a strong headwind.
Many of you think that all of the markets are rigged. In a snap shot view or even perhaps in the short term, they may be. I'm of the opinion though that beyond short term manipulations, the markets will follow the funnymentals. Note I said follow, not lead.No I cannot sit quietly on this one, nor as I’ve mentioned, have other notables in the past few years. The CPI as calculated may not be a conspiracy but it’s definitely a con job foisted on an unwitting public by government officials who choose to look the other way or who convince themselves that they are fostering some logical adjustment in a New Age Economy dependent on the markets and not the marketplace for its survival. If the CPI is so low and therefore real wages in the black, tell me why U.S. consumers are resorting to hundreds of billions in home equity takeouts to keep consumption above the line. If real GDP growth is so high, tell me why this economy hasn’t created any jobs over the past four years. High productivity? Nonsense, in part – statistical, hedonically created nonsense. My sense is that the CPI is really 1% higher than official figures and that real GDP is 1% less. You are witnessing a “haute con job” and one day those gorgeous statistics just like those gorgeous models, will lose their makeup, add a few pounds and wind up resembling a middle-aged Mom in a cotton skirt with better things to do than to chase the latest fad or ephemeral fashion. If those Moms are holders of government bonds based upon a benign outlook for inflation, they had better cash some of them in, especially at today’s 4.0% yield for 10-year Treasuries.Haute Con Job
Look carefully at that paragraph. Gross on one hand is bemoaning the weak economy and on the other hand complainig about the phony CPI and ultimately ends up warning us that bond prices are set to fall. Perhaps Gross thinks his mega fund can control the markets. Personally I think Gross answered his own question of the future direction of the bond market. It's the economy stupid.
I also think he's a little confused on the hedonics issue. Take a computer for example. If you start with a 333 P-I computer that cost in real terms $1500 as a base line and then move forward to a 1.8 P-IV computer that costs $750 in real terms, what the government hedonics does is say that the newer more powerful model is worth 5 times as much as the older model based on power. So your $750 computer becomes a $7500 computer - all in simplistic terms for illustration.
This does wonders for GDP but instead of hiding inflation it actually is hiding deflation. Hedonics adjusts the "value", not the actual price. Cars today are cheaper than they were 10 years ago. I can today go buy the equivalent truck I purchased 10 years ago for the same or less nominal dollars that I paid then, and of course we all recognize that some inflation has occurred over ten years meaning those are smaller dollars I spend today. But enough on Gross. It's impossible to say whether he is earnestly writing about what he sees or whether he is talking his own book. Perhaps he's short the 10 year in a big way.
And then there's this little snippet for consideration: Want to know where global interest rates are heading? Watch the Bank of England.
Since its Monetary Policy Committee took over the task of setting rates from the chancellor in 1997, it has become the pacesetter for global interest rates.
Right now, a consensus has emerged that U.K. rate increases will end soon. The benchmark rate won't go much higher than the current 4.75 percent.
``We now believe that there will be just one more interest rate rise, probably in November, causing rates to peak at 5 percent,'' the London-based consulting firm Capital Economics Ltd. said in a note to investors this week.
Others suspect even that increase won't materialize. ``U.K. GDP is already losing momentum,'' said Stephen Lewis, chief economist at Monument Securities Ltd., a London-based brokerage, in an e-mailed response to questions. ``We expect lower growth to continue into 2005 and beyond. The Monetary Policy Committee may well see no further opportunity to raise rates in this cycle.'' Bank of England Sets Pace on World Interest Rates: Matthew Lynn
Needless to say I have a much different view of where the bond markets and the dollar will be a year from now than the vast majority of you hold. But then I'm a born contrarian. It has served me well over these last 4 and half difficult years so don't expect me to ever join the consensus. IMO the consensus view tells you what has already happened not what will happen.
I could go into commodities, but in deference to peace and tranquility I won't other than to say, somwthing wicked this way comes.