Friday, September 11, 2009

Why Is the 2-Year Treasury Yield Closer to Its Low for This Cycle than Its High?

Please see MarketWatch charts of the 2 year Treasury note, over the past year and 5 years. If the depr(rec)ession is over with, what on earth is the 2-year doing collapsing 30 basis points in one month?

Note the pattern of a lower high in rates in August vs. June.
Also note that the 50-day moving average (solid green line) has turned downward. My research on this over the past 20 years suggests that this has been a bullish indicator for lower 2-year (and 10-year) Treasury rates and a bearish stock market indicator.
Ed Harrison at Credit Writedowns documents more signs of a firming governmental policy toward money: click HERE for his most recent post with links to related recent posts on this topic.
Zero Hedge has a nice post with quotes from the ineffable Albert Edwards of Societe Generale. Herewith are some of his thoughts:

The problem is that after the boom there will be a bust. The issue now is one of deleveraging and the deflation that is starting to unfold. The problem is that Bernanke is a slave to Milton Friedman?s view of the Great Depression (at Friedman?s 90th birthday Bernanke promised that the Fed would never allow another Great Depression to occur). The Australian economist Steve Keen?s observation that "Bernanke?s dilemma is that he is living in a Minskian world while perceiving it though Friedmanite eyes?" explains his actions to date. It also explains why he will fail. . .
But it is collapsing core inflation that poses the greatest risk to the global economy going forward. We highlighted last week that core CPI inflation descends rapidly, with a lag, after the recession ends. If core US CPI inflation falls by around the 3% shown in the chart below over the next year, that will take the yoy rate to minus 1.5%! Hence the growth in nominal quantities (e.g. corporate revenues) is set to see disappointing ?lower highs? in this upturn after lower lows. And that, in our view, is just a prelude to a 2010 collapse into outright deflation.
Clicking to the post will also show a fascinating projection of core inflation using ECRI's data, probably its Future Inflation Gauge (which collapsed to 1958 levels this year before rebounding somewhat).
Technically and fundamentally, the argument for price deflation remains intact. However, if that occurs, it could occur in ways that cause the most pain to the most people; your house could deflate in price while the haircuts, gasoline and food you buy could rise. Or there could be "good" deflation wherein petroleum prices collapse and your dollar in the bank even at 1% interest rate gains buying power.
(Of course, the TIPS markets are pricing in inflation; that's the default solution; this post is to encourage looking at both sides of the issue.)
These are the most difficult markets to either invest in, save money in, or trade I have ever seen. Anything could happen. All the things that might happen but do not occur will simply remain perpetual possibilities that did not come into existence except in alternative universes.
If one wants the tres interessant views of another of the truly ursine economists around, one of the handful who "got it right" pre-2007, I would also recommend Steve Keen's website. (This site is a bit wonkish and is probably not for everyone. Dr. Keen is an Aussie, so a portion of his data is Australia-specific.)
Copyright (C) Long Lake LLC 2009

1 comment:

  1. Zero Hedge? How about quoting someone credible and not some blogger. You are like the rest of the followers who quote people because everyone does.