Seeking Alpha

It's the dreaded "impossible trinity." Commodities, stocks, and bonds are all giving conflicting...

It's the dreaded "impossible trinity." Commodities, stocks, and bonds are all giving conflicting signals on the global economy, says BAML's David Woo, and their resolution could be a source of a "major realignment" of prices. Commodities (DBC) signal slow down, stocks (VTI) price in strong consumer spending, and bonds have completely lost it - government paper (TLT) says run for the hills, while credit spreads (LQD, HYG, JNK) say things are rosy.
Comments (11)
  • I promise to find you a bull market for now.
    19 Apr 2013, 11:02 AM Reply Like
  • Thanks Ben for screwing up the free market with free money for rich people so they can play musical chairs with the human race's future financial welfare and leave us all sloshing around in the pool of liquidity wondering if we are going to be dunked or surf along on a wave of excitement.


    Since we can't trust government paper pricing mechanisms from the market interventions, our best signals come from credit default swaps since the risk management departments are the best reflection we have of what big traders are thinking of their portfolios. Unfortunately I don't have a source for charts on those prices.


    Given the typical business cycle, equity markets should be slowing soon, which should come from corporate perceptions of consumer demands. If money supply signals the spending comfort levels of consumers (see marginal utility of money and the human propensity of parting with one's cash), and I think it does, the M1 and M2 indices in the U.S. are suggesting corporate earnings will be squeezed soon as next quarter earnings reflect the reality of today's real spending.


    I was intrigued last night when IBM, GOOG, and MSFT reports suggested profits are not being driven by top-line numbers. This is consistent with M1 and M2 of the last 3 months.
    19 Apr 2013, 11:41 AM Reply Like
  • One lesson i've learned so far, and which underlies all my investments is, "don't fight the fed." Does Ben know what he is doing? I don't know, but i"m playing it his way. It's only semi-sure thing out there. Notice I said "investments" the Ben Graham way. With stops. Not trading. I'm not going down with the ship, if it heads that way.
    19 Apr 2013, 12:26 PM Reply Like
  • To address the "impossible trinity" comments. First government bonds (GSEs) are currently not a reflection of real market sentiment since the FED is distorting those markets directly with purchases.


    Second, Commodities are more interesting since real demand/supply issues are drivers. However, the Chinese play a major role in demand and it would be no surprise overblown fears over a severe slowing in their economy may be somewhat by design (does anyone real believe Chinese official data?) to enable opportune purchases at lower prices. On the supply side, producers are cutting production due to lower prices and slower demand (read Europe as a primary driver of slowing demand). However, these actions will stabilize prices and eventually allow for future rises since money is being printed globally faster than any commodity production can or will be ramped up when increased demand returns.


    Third, Stocks (Junk bonds as well since they tend to trade more with stock market sentiment) have and likely will continue to benefit from all the liquidity being produced by central banks. Profitability has been good due to lower financing costs and cost controls (read layoffs for most industries) which has allowed the market to trade higher on valuation which has been inline with historical averages. The key will be top line growth going forward since most of the cost side gains have been realized. If topline growth disappoints, the slide can continue, but likely will be limited since when you run to cash and realize it still yields next to nothing it is hard to justify staying there too long, especially if you are being paid to manage money (institutions will likely be buyers on further downdrafts).


    Finally, the real test will come when QEs stop globally, although they likely won't stop until Europe is able to pull their weight. My guess is when QEs are wound down the inflation begins since the money that has been put into the banking system will really start to be released and then it makes sense to be long some commodities, stocks and short bonds.
    19 Apr 2013, 04:49 PM Reply Like
  • so here's what's happening


    growth in the US is slow and there is a considerable output gap
    the Fed has been valiantly trying to push nominal growth and it has worked but not enough
    the result is that productive capacity in the US is being destroyed
    the result of that is that the long run speed limit for US growth has come down


    you can see this if you study the labor market - not NFP - although the participation rate is a stat worth looking at - but not for the reasons most people rant on about - the way more interesting series is JOLTS - and weekly jobless claims - which gives a truer picture


    what you get from this is that the US is now in an interesting spot - the economy is ready to grow and would if there was more available labor. The US is now supercompetitive - don't believe me? When a Chilean copper mine worker earns more than one doing the same job in the US - there is something out of alignment.


    trouble is that without the labor and for that matter - for small business - access to financing - it is tough to grow.


    so corporate and junk bonds tell you everything is great - it is.
    equities signal that the world is better - it is
    commodities say more about the world aoutside the US than the US
    the long bond is interesting - for now it says that growth is throttled - it is (as discussed above) but pretty soon we will start to see wage inflation in the US and when that kicks in it will rise - that is what the Fed is working against - they know they have a limited amount of time to protect against this destruction and push up the US economy's speed limit


    so what's the answer? - well US energy production has been an enormous help not only to keep inflation in check but also to boost competitiveness.


    the other thing that is needed is immigration - lots of it - of every stripe and type of person. let them all come and give amnesty to the ones who are here. Indeed it is completely idiotic that the US graduates so many foreigners and let's them go - why not staple a green card to every graduate and advanced degree? what a boon for the economy? if people want to come let them.all of them. this can only boost growth - and paradoxically reduce unemployment.


    21 Apr 2013, 02:28 PM Reply Like
  • P, normally I agree pretty much with your thoughts, expect for his post. Outsourcing companies would love you. I worked for several over the years and there are a ton of qualified americans that being ignored because of cost.


    Another thing you don't realize is many that come here, only want to work here for a limited number of years and then return home to their extended families to whom they sent money home to support and build businesses.


    There is a lot behind the scenes regarding foreign workers that people don't see or know about. Unless you work in the industry, it's not apparent.
    21 Apr 2013, 03:02 PM Reply Like
  • Pet:


    Concur with almost everything you say. However, it's worth commenting upon the labor situation and the difference between a copper miner (and lower) and a graduate student with a technical degree.


    The latter are in short supply, as we hear constantly from employers, who lament the shortage of qualified applicants. But, at the other end of the scale, we're generating an artificial shortage, as the Government keeps providing increasing incentives for workers not to work, but to collect myriad assistance payments, legally and otherwise. These payments have now become so lucrative that prospective workers are loathe to give them up, so they either delay/refuse to work or try to work in temporary or cash-paying jobs that will allow them to have their cake and eat it, too. This is one reason why the official participation rate keeps falling. That these folks are often quietly working under the radar is beneficial to the economy, but that they're being ever-more subsidized is not good policy.


    Immigration, to be of any real benefit, must distinguish, as it used to do in times gone by, between those that can fill a genuine need and those that would merely join the ranks of transfer-payment recipients and work in the underground economy. Even worse, the immigrant class, mostly illegal, that would fit this latter category often wind up expropriating earnings back to their home countries.


    Additionally, it might be added that the Government is providing ever-more disincentives for employers (e.g., mandates, taxes, regulations, etc.) to employ people, so both sides, labor and employers, are being given reasons not to become mutually engaged.
    21 Apr 2013, 03:02 PM Reply Like
  • Tack, I don't know what incentives you're talking about. Unemployment certainly isn't a profit center for the person looking for work. I collected 597 every two weeks before taxes while on unemployment. No way to live. Thankfully my wife had started a company after retiring from TGT after 25 years that was very successful.


    Now I think Social Security benefits are being abused, particularly in the disability area. Disability should be looked t closely for reduction.
    21 Apr 2013, 03:12 PM Reply Like
  • ray:


    Yes, disability is a huge offender in the fraud department..


    Regarding UI benefits, they keep getting extended and made larger. Sure, they may not seem like much to a motivated individual with skills, but they're increasingly free money to many others and easily abused, as well. Now, that they can be applied for and received via computer without the slightest attempt at genuine due diligence, they are simply unregulated in many cases.
    21 Apr 2013, 03:19 PM Reply Like
  • Tack, UI benefits are closely monitored and even more so with money from the Fed, especially in Minnesota. Genuine pain in the butt. I will never be on UI benefits again.


    I can't speak for other states of course.
    21 Apr 2013, 03:24 PM Reply Like
  • ray:


    FWIW, I am aware of a self-employed multimillionaire in another state (which shall remain nameless to protect the guilty), who closed his business, signed up online and received the maximum payments without ever receiving a single phone call or other inquiry.
    21 Apr 2013, 03:28 PM Reply Like
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