It may finally be time to go against the crowd and play the dollar for a swift slide.» Read More
Despite the sharp drop in bond prices on Tuesday, fixed-income investors shouldn't sweat the dire warnings that bonds are severely overvalued, says Nomura's head of U.S. rates strategy, George Goncalves.
And while Goncalves does expect Treasury yields to rise over the course of 2015 (pushing bond prices down, given that yield and price move inversely) he says the path is likely to be a slow one, with many obstacles standing in the way of a sudden yield surge.
When it comes to the 10-year yield, Goncalves expects "a gentle grind higher in rates toward around 2.4 [percent] on the year, as long as the economy can handle it," he said Tuesday on CNBC's "Futures Now."
Even with the huge rise in yields on Tuesday, that is still more than an additional quarter of a percent in yield above current levels around 2.14 percent. Yet Goncalves doesn't think yields can maintain their incredible pace of late.
"I think it's going to be really tough getting through the 2.25 level," he said. "It looks like we're trying to do a beeline toward it in the next day or so, [but] that would be a great buying opportunity because it's not going to be a straight shot higher."
There's a major debate brewing in the financial markets, and it concerns the most important potential event of the year for stocks and bonds alike: the timing of a Federal Reserve rate hike.
In one corner are the economists. Many of those looking primarily at the state of the recovery say that the Fed will likely raise its key federal funds rate in June.
On the other side are traders, who say that current market dynamics—and prior experience with the central bank—tell them that a rate hike isn't coming in 2015.
What the Fed actually chooses to do, of course, will have a profound impact on financial market, and perhaps on the economy as well. The federal funds rate, a critical short-term rate at which banks can lend to one other, has been kept ultra-low by the Fed since the financial crisis days of December 2008.
Now, many economists expect that the Fed is finally set to shift from ultra-low levels, given the strong state of the labor market.
With the unemployment rate declining and payrolls data showing some 250,000 payroll gains a month, "the U.S. labor market is screaming for policy normalization," as Societe Generale economist Aneta Markowska put it in a recent note.
If the economists are right, a hint at a June rate hike could come as soon as Wednesday, when the Fed will release the minutes of their last policy meeting. If the minutes find them gushing about growth and unbothered by economic and geopolitical problems overseas, it could serve as a reminder for investors that a June hike is still on the table. So, too, could the congressional testimony of Fed Chair Janet Yellen in the following week.
The Fed is "much closer to hiking then putting it off," said Neil Azous of Rareview Macro, a firm that advises large investors. After all, "it is hard to argue from an economist's perspective that they shouldn't at least start the process. Their models are telling them to, regardless of the problems abroad in Europe and Asia."
Strong job creation, especially if February's payrolls top expectations, could also hint at a tightening. "If the job market holds anywhere close to what it's been running at, then yeah, we'll get a hike," agreed Deutsche Bank economist Joseph LaVorgna. "I don't see why the Fed wouldn't go in June."
Nobel Prize-winning economist Robert Shiller has a grim message for investors: Save up, because in the years ahead, assets aren't going to give you the type of returns that you've become accustomed to.
In his third edition of "Irrational Exuberance," which will drop later this month, the Yale professor of economics warns about high prices for stocks and bonds alike.
"Don't use your usual assumptions about returns going forward." Shiller recommended to investors in a Thursday interview on CNBC's "Futures Now."
He says that stock valuations look rich. In fact, Shiller's favorite valuation measure, the cyclically adjusted price-earnings ratio (which compares current prices to the prior 10 years' worth of earnings) is "higher than ever before except for the times around 1929, 2000, and 2008, all major market peaks," he writes in his new preface to the third edition.
"It's very hard to predict turning points in markets," Shiller said on Thursday. His CAPE measure of the S&P 500 "could keep going up. ... But it's definitely high. By historical standards, it's up there."
Meanwhile, Shiller said that bond yields, which move inversely to prices, "can't keep trending down" and "could [reach] a major turning point in coming years."
It's no surprise, then, that Shiller expects little in the way of asset returns—meaning Americans will have to rely more heavily on the piggy bank.
Robert Shiller has a new source of concern.
In the first edition of his landmark book "Irrational Exuberance," published in 2000, the Yale professor of economics and 2013 Nobel Laureate presciently warned that stocks looked especially expensive. In the second edition, published in 2005 shortly before the real estate bubble crashed, he added a chapter about real estate valuations. And in the new edition, due out later this month, Shiller adds a fresh chapter called "The Bond Market in Historical Perspective," in which he worries that bond prices might be irrationally high.
Noting that interest rates (which move inversely to prices) are extremely low given historical norms, Shiller writes: "The U.S. bond market, showing such low yields, looks as it if may have gone through something of a bubble, and may collapse further, eventually."
In a Thursday interview on CNBC's "Futures Now," Shiller said that if bonds are in a bubble, it's not sort of a gleeful frenzy that the word tends to conjure images of.
For Shiller, a bubble is "a social epidemic of enthusiasm and excitement spread by word of mouth, attracting more and more investors in a market. But I don't know that the bond market is really driven by excitement. Excitement of sorts—but it isn't so optimistic. I think it's mixed with a tinge of regret about 'Why am I getting such low yields?' "
If investors want to know what stocks are doing on any given day, all they have had to do is check crude oil. Black gold and equities have begun to maintain a remarkably close relationship, and the correlation has become even tighter in the past week.
Now, the question is whether this volatile couple is finally set to break up.
Out of the past eight sessions, there have been only two when during which crude and the S&P 500 Index moved in different directions, one of them on Friday. And thus far in February, crude oil and the S&P have enjoyed a huge positive correlation of 0.86 (with 1 indicating perfect correlation). Crude and stocks have typically had no real correlation, positive or negative, over long stretches of time.
The recent relationship between stocks and crude have come as oil has turned massively volatile after a steep seven-month plunge. Recently, the critical commodity has vacillated between massive gains and losses, often taking stocks along for the ride.
Yet many market participants say that the close relationship can't last.
"As long as oil doesn't make new lows, the correlation should dissipate," predicted Chicago-based trader Jim Iuorio. "The market has become accustomed to $50 oil. I think that the speed at which it was falling was a bigger deal than the actual price."
For Curtis Holden, senior investment officer at Houston-based Tanglewood Wealth Management, stocks will be able to pay less attention to oil in the week ahead, even if crude stays volatile.
"Volatility will make the market nervous, but I think the bigger issue is just not seeing straight shots down," Holden said. "If oil is down 5 percent one day and up 5 percent the next day, that's not a big a deal as 5 percent down and then 5 percent down... then people say 'Oh my goodness, what's going on?'"
Investors often use correlations as a key to figuring out how to effectively mitigate portfolio risk. However, Holden says investors shouldn't rethink their entire portfolios just because the relationship between stocks and oil has changed of late.
"Just because this is happening in the short-term, doesn't necessarily mean that a we're in a new era where there's going to be a higher correlation," he said. "If anything, in the long-term, falling oil prices should be good for stocks."
The investor points out that falling crude need not take down the market. After all, as oil plummeted back in 1986, stocks soared. Once the jitters abate, then, stocks should do fine with the concept that fuel is much cheaper.
Crude oil settled 4.2 percent higher on Thursday at $50.48 per barrel, in a day that saw a nearly $5 range. The jump comes after oil fell 8.7 percent on Wednesday and rose 7 percent on Tuesday.
"I like volatility as much as the next guy, but 6 or 7 percent moves in a day is a little tough on a 50-year-old's heart," joked Chicago-based trader Iuorio.
Indeed, the CBOE Crude Oil Volatility Index, which measures the expected volatility of crude, continues to rise drastically. The index hit a new multiyear high on Thursday.
"I think this is part of the bottoming process," Iuorio said Thursday on CNBC's "Futures Now." "I think if crude takes out yesterday's highs [of $52.56], to me, it confirms a little bit of what I think, that the bottom is in."
"I don't believe we're going below $44 again," he added, referring to the nearly eight-year low that oil set in the week prior.
Crude oil surged 7 percent on Tuesday, taking the commodity more than $10 per barrel above the multiyear lows hit last week. But oil expert Stephen Schork believes that the incredible plunging commodity hasn't bottomed just yet.
"I do think this is a dead cat bounce," the editor of the widely read Schork Report said Tuesday on CNBC's "Futures Now." "I do expect another leg lower."
He said oil prices have been supported by the United Steelworks strike at oil products refineries, which has the potential to tamp down American energy production, and thus is bullish for oil products. Schork argues that oil has rallied in sympathy with the fundamentally sound bounce in gasoline and other products, but that the story is actually quite bearish for crude, as "1.6 million barrels a day of crude oil demand has just gone missing from the market."
"The bottom line here is, we do not have enough demand, and the demand is going to be weak for the next two to three months, and we have too much supply," he said.
Markets are throwing off some very negative signals about the U.S. economy. However, with economic data remaining relatively strong, the overhanging question is whether investors will begin to take those bad signs to heart.
Crude oil, typically taken as a barometer of industrial and consumer demand, continues its incredible plunge. The critical commodity has lost some 60 percent of its value in the past seven months, falling to levels not seen since the depths of the financial crisis in 2009.
Meanwhile, Treasury yields plumb new lows, with the 10-year yield falling below 1.7 percent on Friday even as the Federal Reserve looks to hike short-term rates. Across the Atlantic, German 10-year notes are yielding about 0.3 percent, and the Swiss 10-year yield is actually negative.
"If Rip Van Winkle were to wake up today and see where oil is and where bond yields are...he would be very tempted to say that we must be in a recession," said Nicholas Colas, chief market strategist at Convergex.
But of course, the U.S. is not in a recession. Even though Friday's gross domestic product (GDP) number showing annualized growth of 2.6 percent in the fourth quarter was a bit of a disappointment, full-year growth came in at 2.4 percent.
Separately, the employment numbers have been even better, which is set to be confirmed on Friday, when the Bureau of Labor Statistics is expected to report the 12th straight month of 200,000-plus gains in nonfarm payrolls.
It might be hard to imagine President Ronald Reagan agreeing with President Barack Obama's take on wealth inequality. But Reagan's first director of the Office of Management and Budget, David Stockman, says that the disparity in household wealth is a major problem that ought to be addressed. He just has very different ideas about how to deal with it.
Stockman's specific concern is gains in the stock market, which he say have contributed massively to wealth inequality. Since he maintains that stocks have been propped up by the actions of the Federal Reserve, he has a problem with the money that Americans have made from rising stocks.
Profits off of stocks are "totally ill-gotten gains," Stockman said Thursday on CNBC's "Futures Now."
"This is a massive windfall to the 5 percent or 1 percent" wealthiest American households, he said. "This prosperity we've had in the top 5 percent—and that's where most of the consumption growth has been—is entirely a function of artificially ballooning stock prices and other risk assets."
Meanwhile, "the 'Main Street' households in America are not doing well. Their incomes are not growing."
Even though the dollar has surged and the U.S. economy is outperforming the rest of the world, investors need to be concerned, Societe Generale head of U.S. macro strategy Lawrence McDonald.
"The dollar is creating tremendous systematic risk," McDonald said Wednesday on CNBC's "Futures Now."
One issue is created from crude oil, given that crude oil prices are inversely related to U.S. dollars, since as the value of the dollar increases, it takes fewer of those dollar to buy a barrel of oil.
"As the dollar goes higher, it drives oil lower. Russia is now junk [in its credit rating], but it's not just Russia. If you look at the corporate debt market, and the number of companies that are tied to Russia's fate, you just have a situation where there's tremendous systemic risk that's tied to oil."
On Wednesday, crude oil closed at a fresh six-year low, which appeared to weigh heavily on equities.
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