June 4. Negative feedback loop

–After Friday’s dismal economic data with NFP at only 69k, less than half of what was expected, and soft ISM at 53.5, I can pretty much just write the same thing as I wrote after Thursday’s session: yields plunged, curve flattened to new lows. But the absolute levels still leave me slack-jawed. Ten year yield dropped another 11 bps to 1.47%. 2/10 treasury spread sank 10 bps to 122. The last time 10’s were this low was in April 1946 with a yield of 1.54%, after the conclusion of wrenching global conflict leading to a new world order, rather than what appears to be the cusp of global shifts currently.
–Eurodollar spreads imploded, with red/green pack spread at merely 16 bps and red/gold only 107. Fed funds contracts are essentially the same price for the next year out to May 2013, 9984 to 9983, and out to June 2014 the spread is only 8 bps more, to 9975. Outside of the US, our yields appear juicy as many countries now have negative rates. March’13 euroswiss is 100.22. German 2-yr yield hit zero. Rates in Denmark are negative out to 4 years.
–This is sort of simplistic, but I’m throwing it in anyway…in May 2011 140.028 million were employed. For May 2012 that number is 142.727 million, a change of 2.699. The deficit is running at about $1.3 trillion/yr. If one thought that an “ordinary” deficit were $300 billion, then the extra trillion dollars might be thought of as an amount to “buy” jobs. It would work out to about $370,000 per job.
–This topic isn’t simplistic, but it is simple to describe and somewhat astonishing. (The pricing example below is mine, but all the ideas are from Grant Williams “Things that make you go hmmm…”, and he cites others as well). On 8-Sept 2011, the HUI gold stocks index hit a high of 635. On 15-May 2012, its nadir was 376, a nine month drop of 41%. Over the same exact time frame GLD went from 182 to 150, a fall of only 17.5%. So last year it would have cost 3.5 shares of GLD to buy 1 HUI, and a couple of weeks ago only 2.5 shares of GLD were needed. The point is that mining shares are at historic lows when priced in gold itself. Gold surged $60 on Friday.
–Policy makers in the developed world are facing a nightmarish self-reinforcing negative feedback loop. Asset prices fall and beget falls in other prices. Rates are so low that the demographic bulge of older people can’t hope to survive on asset income. It makes me think of those ING retirement ads, where one guy is confidently strolling around with his big orange number that represents what he is going to need for comfortable old age. And those numbers are usually a bit over $1 million (but of course they are calculated to the dollar). Well what is that million going to throw off in terms of income with 1.5% ten year rates? $15k…not even enough to pay property taxes. What does that thought do for consumption? (which by the way, has never really adjusted down as a % of GDP; it’s still 71.2% vs 71.1 in 2011).
–Sorry a bit long…that’s all for today. We’ll leave Dodd-Frank backstopping financial derivative exchanges for another time…

Posted on June 3, 2012 at 12:52 pm by alexmanzara · Permalink
In: Eurodollar Options

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