“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”
Commentary & Analysis
“The new abnormal” and another surprise…bond prices could go higher from here
US durable goods orders were dismal for the month of December, as reported this morning. I would suspect “the new normal” debate is alive and well at PIMCO, whether or not Mohammad El-Erian is participating or not. I was never fond of the phrase “new normal;” that’s because we are well beyond anything in the economic world that should be considered normal. So from now on let’s call this journey through the economic twilight zone—“the new abnormal.”
I can just hear Rod Serling saying something such as: “…you are moving into a land of both central bank cluelessness and Federal government recklessness, you’ve just crossed over into “the new abnormal.”
You think this is a “normal” recovery? You think the Fed’s bond buying has worked? You think the banks are confidently lending and the interbank credit system is back to “normal”? I would suggest the chart below [from Hoisington Economic Research] should make you think again if you answered yes to any of the questions above:
1. Monetary velocity is still falling off the cliff. We’ve talked about this many times in Currency Currents, I won’t belabor the point. I will say it is an indication the demand for cash continues to rise—confidence in the future is low. In short, the animial spirits aren’t out “partying,” to phrase it in the venacular.
2. The money multiplier is now at a 100-year low. Though we confidently are told again and again: “Oh yes, the banking system is completely healed. Our credit system is functioning normally again thanks to the efforts of Ben “Blitzkrieg” Bernanke. Recovery is here and accelerating.” Hmm…if any of that were true, the money multiplier, which is a measure of how banks convert reserves into deposits, would not be at a 100-year low and trending lower.
These two indicators continue to provide support for the major global market structure framework we developed a couple of years ago.
Is it really the time to expect bond prices to fall (long yields to rise)? We are long bonds for a trade in our Global Investor service and just took off a half-position profit of 9% — a position we entered using an ETF back in mid-November 2013. We now have a free-trade position (break even stop-loss on the remaining half and looking for more gains).
10-year US Treasury Note Futures Daily
Consensus conversion flow to the view we haven’t emerged from “the new abnormal” would be another powerful prop for bonds. There is a high probability, in my mind, bond prices will be much higher by year-end 2014; I will share more reasons why during my webinar on Thursday. I hope you can join me.