Back In Black

I am back from my trip. I had the pleasure of visiting lovely Green Bay, Wisconsin. In the time I was away we had a few economic reports. Most recently we had Personal Income, Personal Spending, Consumer Confidence and Case Shiller Housing.


The Case Shiller data came in better than expected, but the data indicates that the pace of the housing recovery is slowing. A large overhang of homes on the market and a winding down of government stimulus (some of which is leading to rising mortgage rates) continues to weigh heavy on the housing market.

Personal Income came in essentially flat, but Personal Spending was up slightly. This has some pundits lauding the return of the consumer, but at least one guest on Bloomberg Radio pointed out that increased spending without increased income leads to more borrowing, which is what got us into this mess. That may not be the case yet as consumer spending dropped below the replacement spending, but at some point spending will level off, unless wages increase or lending standards become a joke once again.

The famous Bill Gross uses D.H. Lawrence's "The Rocking Horse Winner" to describe the situation confronting nations which acted irresponsibly and over-borrowed. He refers mainly to Greece, but alludes to the problems facing the U.K. and the U.S.

I will go one further and apply the story to consumers. Although the original story involves a rocking horse which when ridden will give the winners of upcoming horse races. In Mr. Gross's version, the rocking horse answers that to get more money, one needs more and more leverage (credit). At the end the rider falls off the horse from riding too hard and dies. In other words, once the credit was gone there was no other way to obtain disposable cash. That is where we are today.

It is for this reason I believe that the Fed will keep short-term rates low for (as Chairman Bernanke says) an extended period of time. That, combined with the Fed ending its treasury purchases should cause the yield of the 10-year treasury to breach 4.00% and may even run up to 4.50% during the forthcoming economic cycle, but unless there is a big boom in spending (not likely) or a severe weakening of the dollar (not likely given problems in Europe and an asset bubble brewing in China). Basically, avoid investing on the extreme ends of the yield curve. 2-years to 10-years should be the short and long ends for most ladders or bar bell strategies. The very short end should only be used for cash management purposes and the long end should probably be avoided or seldomly considered.

On Thursday I will be attending a special event for financial professionals at the New York Auto Show. The event includes a grand tour and seminar. In my past life I wrote extensively about the auto sector. I even had a few articles published on the renown automotive website "The Truth About Cars" Hopefully I will have some good info to discuss when I get back.