A DISCONCERTING SURVEY

All markets were relatively quiet yesterday. Equites led by the mega caps traded higher while Treasuries declined nominally in price, perhaps the result of a deluge of offerings.
The narrative is rising about the single sidedness of the market. According to Bloomberg, there have only been six occasions in 20 years on which a single sector has outperformed the S & P by itself over a five-day period. Three of them were Thursday, Friday and yesterday and it was info tech.
When will this myopicy hit a crescendo?
Bloomberg also wrote yesterday the correlation between stock prices and bond yields “continues to invert and is the most negative since 1997,” suggesting a major shift in the inflation regime might be occurring. Writing the incredibly obvious, equity prices and bond yields are extremely sensitive to inflation trends.
The Newswire further wrote “the correlation between the two asset classes was positive for the better part of 20 years, suggesting disinflation was the dominant regime…the positive correlation historically implied that equities trended in the direction of yields as inflation coincided with growth.”
This shift in the correlation to negative might be signaling a significant longer-term change in inflation. Stocks had a negative correlation to yields throughout most of the 1980s and 1990s when inflation hurt equities Bloomberg stated.
Some believe equites have considerable ammunition to move higher as there is a record of over $6 trillion in money market funds that is poised to be reallocated into equities as interest rates are lowered.
Is this a realistic view given that a 25 or 50 bps decrease may do little to change attitudes.
Today is radically different the yesterday. Perhaps most significant is the potential of a sovereign debt crisis looming in the not so different future.
According to the OECD over 40% of the industrialized world’s sovereign debt must be rolled over by 2026 and 75% must be refunded in the next five years. These refundings will take place in a considerably higher interest rate environment, in an atmosphere devoid of fiscal mindfulness. Moreover, the largest buyer of this debt (central banks of the industrialized country) are no longer there.
Eighty eight percent of economists surveyed by Bloomberg indicated that US fiscal borrowing is on an unsustainable path and a crisis could occur.
Will the deficit become a campaign issue? Neither candidate has addressed the issue. Perhaps if the bond market starts to rebel it may become an issue.
About thirty years President Clinton’s top advisor, James Carville, famously cussed out the bond market when yields rose thwarting the Administration’s aggressive spending plans.
Carville stated “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
Last night the foreign markets were up. London was up 0.35%, Paris up 0.44% and Frankfurt up 0.30%. China was up 0.48%, Japan up 1.0% and Hang Seng down 0.11%.
Retail sales and industrial production/capacity utilization is released today. Will the data impact the market?
Futures are flat ahead of the retail sales data and a plethora of Fed speakers. The 10-year is off 2/32 to yield 4.29%.