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Monday, November 16, 2009

Market Thought... contradiction

There is a contradiction today. The market is up nicely, but the 10yr is up nicely too. To me, that makes no sense at this economic juncture.

The push into treasuries suggests a weak economy, but the rise in everything else suggests a stronger economy. Which is it?

Real economic growth sparks higher rates. That is a constant, unless there is a deflationary aspect that can cap the rates. However, at the moment, I do not see a deflationary aspect of the economy. Housing has stabilized, commodities are up and so are credit pricing. The only deflationary aspect to this economy is the lack of credit expansion, but I would not assume it to be a real deflationary threat given the commodity prices are up so much. (It is putting a pause on our economy growth, but not causing deflation.)

I am uncomfortable with this contradiction. It does not make sense to me. I will evaluate potential reasons, in order to re-adjust my thesis, but the reasons have to be pretty solid. (Right now I think the 10yr is still being bought by the Fed, which could be causing the imbalance.)

Looking at the recent rise in the Baltic Dry Index, I want to say the bond market is off. More on this later, w/charts. Assuming conditions remain.

2 comments:

  1. Isn't the weak dollar playing into higher commodity prices(perhaps significantly)?

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  2. so long as the commodity is dollar based, absolutely. but my care is how that commodity price plays into inflation. That rise in commodity price is inflationary. And that should lead to higher rates.

    ReplyDelete