29 May 2014

How to Be a Weatherman

All those amateur algorithmic stock touts on R-bloggers must be experiencing sphinters tight enough to hold a fishing line with a breaching marlin at the other end. Why? Well, as your local TV weatherman puts it, every now and again, predicting the weather sometimes means just going out the door and looking at the sky.

Let me explain.

As these endeavors have argued, somewhat more frequently of late, Mr. Market isn't an example of Brownian motion or any other physical process. Mr. Market does what he's told by those who can manipulate his rules of behavior. Yes, if you're a Daddy Warbucks with access to money flow data before anybody else, you can use that information to front-run the lemming crowd. Stock returns, aka The Real Rate of Interest, are determined by the productivity of physical capital. We got The Great Recession because that Giant Pool of Money (which has grown only larger in the aftermath) couldn't find any real investment offering as much as its owners wanted. Or, to quote Dire Straits, "money for nothin' and chicks for free". Everybody wants a free lunch, but TANSTAAFL. The banksters conjured up "instruments" which offered up glorious returns, weighted by risk (as asserted by the banksters, of course), which didn't require getting one's hands dirty with physical investment. The world was wonderful, until it wasn't.

So, the rate of return on real productive investment sets the floor (or ceiling, depending on how one views the problem) for the interest rate. Without sufficient productive transformations of fiduciary capital into physical capital, the real return on said capital approaches zero. It matters not a smidgen how much the holders of moolah want to be paid for the use of their moolah. Borrowers will only borrow if they can turn around and make/buy hard assets which return more than what the moolah holders demand. Stamping their wittle fooot makes no mind.

I bring this up, because today's news brings shock and awe to the professionals. And Mrs. Peel was the talented amateur.
The yield on the 10-year Treasury note fell to its lowest point in 11 months as investors continued to put money into the bond market, extending a rally that has taken many investors and analysts by surprise. Most market participants had expected yields to climb this year, and bond prices to fall, as the Federal Reserve reduces its multibillion-dollar monthly purchases of Treasury and mortgage-backed securities, and the economy improved.

Look at the windows, fools. Corporations continue to hoard moolah unable, or unwilling, to transform it to physical investment. Now, that's relative, of course. Yes, producers' durables are being bought, and some companies are building/expanding plant. But no where enough to absorb the burgeoning Giant Pool of Money.
"In terms of safety and yield, the U.S. still is the prettiest girl at the dance," said JJ Kinahan, chief strategist at TD Ameritrade.

Ah, yes. The advantage to being the global New Gold, aka international reserve currency. The Almighty Buck is the only port in a storm. Or even a mild breeze.

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