Thursday, May 07, 2009
no pickup in consumer spending
We have evidence that the consumer, after a first-quarter up-tick that was frontloaded into January, is relapsing in the current quarter despite the tax relief (didn’t we see this movie last year?). Not until improvement in the second derivative morphs into improvement in the first derivative with respect to the important economic data will it really be safe to declare what we are seeing as something more than a bear market rally, as impressive as it has been. ...
This was not a manufacturing inventory cycle, which makes the data flow less relevant than in the past. Real estate values are still deflating and the unemployment rate is still climbing; these are critical variables in determining the willingness of lenders to extend credit. And as we just saw in the Fed’s Senior Loan Officer Survey, while there may be a ‘thaw’ in the financial markets, banks are still maintaining tight guidelines. In fact, the weekly Fed data are now flagging the most intense declines in bank lending to households and businesses ever recorded.
hmm. tyler durden follows up by highlighting the fed's g.19 filing, but this is not the data which rosenberg cited -- which instead i think must be this weekly update of the h.8. rosenberg on treasuries.
There has never been a time in the post-WWII era where the 12-month trends in wages, producer costs and consumer prices were all in negative territory at the same time. This is the new reality. As the markets focus on the noise from green shoots, we are focusing our attention on the fundamental trends and the end-game. We are more than happy to buy these sell-offs in Treasuries and add scarce safe income to the portfolio.
Take profits in equities and scale into Treasuries
This move to 3.20% on the 10-year note resembles that inexplicable move to 5.35% back in the summer of 2007, in our view. Yes, yields are much lower today, but the inflation rate is 300 basis points lower too and the unemployment rate is 400 basis points higher. If we recall back in that summer of 2007, the equity market was hitting new highs just as bond yields were. The trade then was to take profits in the former and scale into the latter. After a near-40% surge in the S&P 500 and a near-60% surge in bond yields off their recent lows, it would seem logical to us to embark on a similar shift this time around.
Bond yields do not bottom until well into the next cycle
Even if the recession is to end soon, and that is still very debatable, bond yields do not typically bottom until we are well into the next cycle, as inflation continues to decline even after the downturn ends. So just like further upside potential in equity prices seems extremely unlikely over the near and intermediate term, further downside risk Treasury note and bond prices is also less of a risk today, in our view.