Overnight markets were quiet and modestly higher. Equities in the early going here were perky, led by the Nasdaq, which gained 0.75% as speculation begets more speculation, in the same way rising prices beget a continuation of rising prices. We are in the midst of a speculative frenzy for equities, just as we were circa 1999 and 2007. Just how far it goes and how long it lasts is anyone's guess, but the aftermath will be worse than either of those two periods. Nonetheless, that obviously is not today's business.
Over the course of the day the early gain for the Dow/S&P 500 fizzled and those indices were flat, while the Nasdaq was still 0.4% higher with an hour to go (when I had to leave).
A Dollar Down Under
Away from stocks, green paper was stronger for the most part, but the big story was that the Australian dollar was hit pretty hard thanks to remarks by Glenn Stevens, governor of the Reserve Bank of Australia, who made it clear that he wasn't at all upset by the recent decline in the Aussie dollar and actually thought it would go lower. In other words, he wants a lower currency, as do the Japanese, and many other central bankers around the planet.
The problem they all have is, in a world where money printing is perceived to be the solution to all problems, it is difficult for one currency to really decline against another, it can only decline against real goods and services, which has been happening for some time to various degrees, depending on the asset class or particular commodity, service, or benefit you might be considering. There is no doubt we have a higher level of inflation than what the Fed claims to want. However, with the Western World so enthralled and drunk on easy money, none of the problems are taken seriously (for now), and they won't be, until they are.
Blood and Treasuries
As for the ultimate canary in the coal mine, that being the bond market, it will be informative to see where it is by the time we finish this week (after the FOMC meeting and nonfarm payroll report), and by extension where all markets are after that. The reason I point out the bond market is because 10-year rates are not too far from the highs that they saw in the wake of the start of "tapering talk."
Having said that, regular readers know that my view is that these rates have backed up not simply because of tapering talk, but because of the fact that the bond market is potentially in the early stages of taking away the printing press from the Fed. Five-year rates have risen from about 62 basis points to a high of 1.60%, and today they are around 1.37%. So even though the Fed has made a serious attempt to tell folks that, though they might taper, they sure won't actually tighten for years, the bond market has been unable to rally very far. If Ben makes it clear that he is not going to taper (or is unable to) in September, and bonds don't recapture a huge chunk of this rally (by trading down to, say, 80 basis points), I think a case can be made that the Fed has lost the bond market. If by some chance rates start to spike even higher, then we will really know that is the case.
It's Sure to Be a Bonding Experience
When the bond market takes the printing press away from the Fed, life in America, and everywhere else where money printing is the main economic policy, is going to be very, very difficult. Bond and stock prices will be lower, which will hurt the asset side of everyone's balance sheet, and of course rising rates will put a damper on certain aspects of the economy, most notably housing, while increasing the interest expense on government debt (thereby increasing the deficit). When it is understood that the Fed can't solve the problems, there will be much more angst in general and hopefully, eventually, we will have to deal with the long-running contingent liabilities and deficit problem we have in this country, though that is getting rather far ahead of myself. In any case, I believe the Fed has already started to lose the bond market, and we might get more information on that topic this week.
Turning to the metals, they were fractionally lower. Thus far, the tightness in the gold market has not led to any severe fireworks to the upside, but post the FOMC and payroll numbers we might finally see gold reprice itself higher.
