Friday, January 4, 2013

No Exit Strategy

Long-term Treasury yields, pinned to the mat by deflation:


I was just watching CNBS for today's much-ado-about nothing jobs number. Steve Liesman said he is looking forward to the unemployment rate (now at 7.8%) going up, because that would signal more people coming back into the jobs market. This asinine position reinforces my view that it's ludicrous for the Fed to target a 6.5% unemployment rate as a target for ending quantitative easing, because that would require a lot more people giving up looking for work i.e. the overwhelming driver behind the lower unemployment rate...

The other asinine statement I just heard was that there has been a 30 year bull market in Treasury bonds which of course should end any minute now. The truth is that there has been a 30 year bull market in deflation as the U.S. economy has been bleeding jobs to the export mercantilists (aka. Japan, Korea, China, Taiwan) i.e. countries that like to export to the U.S. but do everything possible to limit imports from the U.S. In essence, the U.S. has been importing labour deflation and lower Treasury interest rates are only a derivative side effect. There are a lot of otherwise "smart" people who want to ignore this key fact, no doubt because they played some part or at least bought in to this terminally fatal middle class liquidation "strategy".

So anyone betting that deflation is going to suddenly end, leading to higher interest rates, is betting that this 30 year trend in job exporting is suddenly going to reverse itself even though it has been the most profitable arbitrage in U.S. corporate history, having levitated profit margins to their highest level since the days of the robber barons, 70 years ago.

For my part, I assume that this trend towards labour "rationalization" has no way of reversing and instead will go into hyper overdrive.  The nascent deflationary output gap between what is consumed and what is produced will continue to diverge as the increasingly crushing debt load puts relentless downward pressure on demand.

And just yesterday we were keenly reminded how fragile this shit show is, when the FOMC meeting minutes sent the markets into a mini conniption over the fact that some members now oppose the QE monetization programs. Markets are well aware that there is nothing else levitating them beyond QE drip feeds to HFT bots. The reality is that if monetary conditions contract and interest rates were allowed to rise, then borrowers across the entire economy would be obliterated in a cascading series of defaults that would crash global markets. So again, those betting on higher interest rates will be right only as long it takes to tank world asset markets. The bottom line is that global Central Banks have no exit strategy whatsoever. Their only desperate hope is that the status quo is sustainable indefinitely.

Place your bets accordingly.