Jobs Report Is an Upside Surprise

[I spent the winter writing songs about getting better]

http://www.businessweek.com/bwdaily/dnflash/content/jun2009/db2009065_870586.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis

How long till the Down hits 3000 and a military coup deposes Obama?

[Lief 🗽]

Clearly Obama is destroying the economy.

[© tweed]

Clearly Obama is destroying the economy.

the unemployment numbers won't have anything to do with Obama until July or so

[Sam Spade]

Oh, I feel more confident about my call every day.  But then again, I'm not particularly addicted to headlines (especially not government-manipulated ones).

As I have repeated all year, watch the bond market.  Both the long-end (10yrs) and the short-end (2yrs) have been in an effective crash over the past few weeks, with the spread flattening (especially Friday, which was very ugly).

This can't go on for much longer and it will affect all things - the guess is trying to figure out whether the next credit contraction begins in one month, 3-4 months or 6 months, in my mind.  We may have already seen it start (thinking of Latvia actually).  But sometimes you have to wait for the material effects (markets can stay irrational longer than you can stay solvent).

[Swing low, sweet chariot. Comin' for to carry me home.]

Oh, I feel more confident about my call every day.  But then again, I'm not particularly addicted to headlines (especially not government-manipulated ones).

As I have repeated all year, watch the bond market.  Both the long-end (10yrs) and the short-end (2yrs) have been in an effective crash over the past few weeks, with the spread flattening (especially Friday, which was very ugly).

This can't go on for much longer and it will affect all things - the guess is trying to figure out whether the next credit contraction begins in one month, 3-4 months or 6 months, in my mind.  We may have already seen it start (thinking of Latvia actually).  But sometimes you have to wait for the material effects (markets can stay irrational longer than you can stay solvent).

but doesn't the dollar's big gain Friday and continued strength today, coupled with rising bond yields across the yield curve, simply point to a typical market response of a strengthening U.S. economy? 

[Beet]

I don't understand this either. 'Watch the bond market', okay... but if you're talking about the 2 years with the spread flattening, that's because of speculation of an interest rate hike on the short end which is controlled by the Fed-- ditto for the dollar. The Fed could kill that by saying "no hike this year." Also, according to Bloomberg, risk premiums on US junk bonds have fallen to their lowest since Sept. 26. The euro junk bond market has also rallied, and there are signs of life in private equity. Isn't that evidence that money is simply moving into higher yields? Other than the search for yield, why would would money move out of government long bonds and possibly never move back in (if/when renewed bad news comes out)? If it was fear of default, our sovereign CDS spreads would be widening, but they remain well below their February/March peaks. So what's your argument Sam?

[CARLHAYDEN]

I don't understand this either. 'Watch the bond market', okay... but if you're talking about the 2 years with the spread flattening, that's because of speculation of an interest rate hike on the short end which is controlled by the Fed-- ditto for the dollar. The Fed could kill that by saying "no hike this year." Also, according to Bloomberg, risk premiums on US junk bonds have fallen to their lowest since Sept. 26. The euro junk bond market has also rallied, and there are signs of life in private equity. Isn't that evidence that money is simply moving into higher yields? Other than the search for yield, why would would money move out of government long bonds and possibly never move back in (if/when renewed bad news comes out)? If it was fear of default, our sovereign CDS spreads would be widening, but they remain well below their February/March peaks. So what's your argument Sam?

Expectation of inflation.

[Beet]

I don't understand this either. 'Watch the bond market', okay... but if you're talking about the 2 years with the spread flattening, that's because of speculation of an interest rate hike on the short end which is controlled by the Fed-- ditto for the dollar. The Fed could kill that by saying "no hike this year." Also, according to Bloomberg, risk premiums on US junk bonds have fallen to their lowest since Sept. 26. The euro junk bond market has also rallied, and there are signs of life in private equity. Isn't that evidence that money is simply moving into higher yields? Other than the search for yield, why would would money move out of government long bonds and possibly never move back in (if/when renewed bad news comes out)? If it was fear of default, our sovereign CDS spreads would be widening, but they remain well below their February/March peaks. So what's your argument Sam?

Expectation of inflation.

That's not quite it. Actually, a visit to Karl Denninger's website explained a lot.

If Denninger is right, we should see the bond market fall enough to choke off the recovery, and we continue with debt deflation, one way or the other. As far as I understand, Denninger's view is that there isn't really enough capital in the world to do what BB wants to do via Treasuries (kick the can down the road vis-a-vis recognition of housing losses and re-stimulate growth). Therefore, BB's moves are simply moving asset depreciation from the private sector into Treasuries.

Upon reflection, this may very well be true and is not a view to be dismissed. The traditional response to  banking crises, after all, is early recognition of losses. Last fall, the Fed and government decided that this would be unacceptable, because it would have precipitated a systemic crisis. I still believe this. However, that still leaves the problem. The market's rally in the past three months has obscured the facts that trillions of dollars of write-downs have not taken place, and the bond market's decline may therefore be the market's attempt to force these write-downs through indirect means. If faced with this scenario, there is a high chance the Fed would try more QE, though.

[Swing low, sweet chariot. Comin' for to carry me home.]

risk premiums on US junk bonds have fallen to their lowest since Sept. 26. The euro junk bond market has also rallied, and there are signs of life in private equity. Isn't that evidence that money is simply moving into higher yields?

yes, from my understand, this means investors are showing a growing appetite for risk...which means they see the economy improving and are moving their monies out of low yielding bonds and into investments with higher returns.

[CARLHAYDEN]

I don't understand this either. 'Watch the bond market', okay... but if you're talking about the 2 years with the spread flattening, that's because of speculation of an interest rate hike on the short end which is controlled by the Fed-- ditto for the dollar. The Fed could kill that by saying "no hike this year." Also, according to Bloomberg, risk premiums on US junk bonds have fallen to their lowest since Sept. 26. The euro junk bond market has also rallied, and there are signs of life in private equity. Isn't that evidence that money is simply moving into higher yields? Other than the search for yield, why would would money move out of government long bonds and possibly never move back in (if/when renewed bad news comes out)? If it was fear of default, our sovereign CDS spreads would be widening, but they remain well below their February/March peaks. So what's your argument Sam?

Expectation of inflation.

That's not quite it. Actually, a visit to Karl Denninger's website explained a lot.

If Denninger is right, we should see the bond market fall enough to choke off the recovery, and we continue with debt deflation, one way or the other. As far as I understand, Denninger's view is that there isn't really enough capital in the world to do what BB wants to do via Treasuries (kick the can down the road vis-a-vis recognition of housing losses and re-stimulate growth). Therefore, BB's moves are simply moving asset depreciation from the private sector into Treasuries.

Upon reflection, this may very well be true and is not a view to be dismissed. The traditional response to  banking crises, after all, is early recognition of losses. Last fall, the Fed and government decided that this would be unacceptable, because it would have precipitated a systemic crisis. I still believe this. However, that still leaves the problem. The market's rally in the past three months has obscured the facts that trillions of dollars of write-downs have not taken place, and the bond market's decline may therefore be the market's attempt to force these write-downs through indirect means. If faced with this scenario, there is a high chance the Fed would try more QE, though.

From The Financial Times:

US long-term interest rates hit high
By Michael Mackenzie and Alan Rappeport in New York and David Oakley in London

Published: June 10 2009 20:23 | Last updated: June 10 2009 21:45

US long-term interest rates rose to the highest level of the year on Wednesday, threatening the “green shoots” of recovery, after the latest sale of 10-year government debt met with a tepid response from inflation-wary investors