10-Year Treasury Yield Is the Giveaway

We have had the longest winning streak on the S&P in three years, and gold hits new records every day — and the 10-year yield has fallen in the course of the week. That’s not a dog that didn’t bark, but a dog that did an Elvis impression.

The simple explanation is: dollar devaluation. All US assets are cheapening to foreign investors, including Treasury securities. With unemployment at umptysteenth percent (17.5% of the workforce by the comprehensive measure) American prices simply won’t move at the rate at which the dollar is devalued. Labor will remain cheap. That’s why Treasury securities look cheap to foreigners. The Fed has effectively placed a giant wealth tax on America by devaluating the dollar.

All that has happened is that dollar devaluation has revalued the price of international tradeables — gold, commodities, Intel (INTC), luxury condos in Manhattan — while the grass roots of the US economy continue to dry up. The stock market looks bubbly. How long will the bubble last? As one of my mentors in the business, Credit Suisse chief US economist Neal Soss, like to put it: Bubbles last until they feel like fundamentals.

Comments

[bennyb24:]

Well lets make it easier....... if UST were at the levels implied by PMI's , other macro data and indeed risk pricing we would be at around 4.50% 10Y yields. BUT with risk assets at this level, in "this climate" you would instantly unwind your portfolio and dump straight into UST's at that level of return - This is why UST's trade current levels. Sweet spots and liquidity arguments are also totally correct - but I feel most mainstream commentators just like to over complicate !

Nov 12 04:25 AM

[Mad Hedge F...:]

ljb If I’ve told you once, I’ve told you a thousand times, stay out of those crummy neighborhoods, where the street corners are crowded with high priced stocks of dubious moral character wearing stiletto heels, fishnet stockings, miniskirts, and shoulder handbags. Sure, I know you young traders have needs, think with your hormones, and believe you can live forever. But if you absolutely have to go slumming, at least use some cheap protection. I noticed today that the January 1030 S&P 500 puts were selling at a bargain $19 today. That means for a mere $950 you can buy some decent downside protection for a $55,000 portfolio that takes you all the way out to January 15, 2010. That is bang on the support level that held in the last sell off. If you double top here on the charts and go down for a retest, you double you money. If yearend profit taking causes us to sell off going into the holidays, and we break that support, you make more. If the market melts down the day after we flip the calendar page to 2010, a distinct possibility, then you hit a home run. If the lemmings keep driving this market up every day for two more months, then you lose $900, or 1.72% of your portfolio, pennies, really, against the huge returns you have booked so far this year. It’s a win, win, win, lose pennies trader. I know that the pros that have done for a long time put these trades on without even thinking about it. It’s all about risk control. Since I am a cheapskate, I only like strapping on trades that have a risk/reward ratio overwhelmingly in my favor, and with the volatility index today a bargain 23%, this fits the bill nicely. Buy your storm insurance when the sun is shining.

Nov 12 08:08 AM

[eddybaby:]

"Bubbles last until they feel like fundamentals"
Shakespeare himself couldn't have put it better.

Nov 12 09:19 AM

[mbkelly75:]

I love the quote and have been in agreement with you about the price of Gold for a LONG time.

Nov 13 12:32 AM

[mbkelly75:]

One more thing to think about Gold, the U.S. Dollar and inflation. One Dollar in 1933 = $16.33 just from the effects of inflation. (3.74% annually on average)
One Dollar in 1970 = $5.45 just from the effects of inflation. (4.44% annually on average)
What do you think the average annual inflation will be in 30 more years? Gold and/or Silver is a good place to have some of your money but dividend-paying stocks with a record of RISING dividends has been shown to be a good place also. Check it out and give it some thought.

Nov 13 01:18 AM