Farrell: But Still They Buy the Bonds

There has been a lot of noise about Australia raising interest ratesand starting to withdraw stimulus from the table. The Australian dollar was up about 1% versus the US dollar on both Monday and Tuesday of this week. Norway — and who ever looks at Norway; aren't there about as many people as there are at Rockefeller Center on a normal day — reported a very strong +.8% increase month over month for its August manufacturing production following a robust +.6% increase the prior month. Since the country is oil dependent there are thoughts they too may raise rates to keep inflation at bay. South Korea with its very strong manufacturing sector is also thought to be considering a rate increase. If action was taken it would indicate a willingness to potentially sacrifice export advantages for a pre-emptive strike against possible inflation. The question will be how many other nations are lining up to do the same thing.

  • Australia Housing In Recovery

MIT economist (and how can you go wrong citing an MIT economist) Simon Johnson said in a recent piece that the U.S. is engaged in a defacto dollar weakness strategy to juice up exports despite the plaintive calls for a strong dollar. The G7 met last weekend and if the U.S. wanted to campaign for a stronger dollar he feels some noise about joint currency intervention would have been bandied about. No such rhetoric was heard so he surmises the U.S. stared down its counterparts with a clear eye towards reinvigorating the industrial heartland in time for the midterm elections. It's a neat conspiracy theory, but one that seems to hang together.

It's no wonder the Gulf States and other oil exporters are rumored to be mulling over abandoning the dollar as the currency to trade oil. If the U.S. is politicized enough to sacrifice the dollar to the midterm elections (and both parties have done similar things) it would make sense for those countries to consider other alternatives. There are none right now, but it doesn't mean they aren't mad.

Yet they still buy our bonds. Wednesday's auction of 10 year notes was a big success. The bid to cover was 3.01 (again, that means 301 bonds bid for every 100 offered) and that compares to the last nine auction average of 2.56 to 1. Indirect buying (which includes foreign participation) came to 47.4% and while that is down from last auction's 55%, it compares nicely to a nine auction average of 34.9%. The world is convinced the US will not raise rates anytime soon and buying the Treasuries is a good parking place.

The PPIP (Public Private Investment Partnership) is finally going to get off the ground and I wonder why they are bothering. A total of $12.7 billion will be invested and that will probably grow towards $40 billion I read. There are several gazillion dollars worth of distressed assets potentially to be bought but the market in this stuff has greatly improved and the need to get paper off ones balance sheet is diminished. Commercial real estate assets are the next sinkhole but I don't think there will be much wading in those waters since values are highly uncertain. It was reported that commercial mortgage delinquencies rose to a recent high of 4.34% and that rents are down -8.% at last count. I would expect rents to fall further as vacancies have hit a five year high at 16.5% and look to be heading higher. The Wall Street Journal had an article detailing banks unwillingness to take commercial losses. That game won't last long.

I noticed some retail type analysts on the tube hoping for better consumer spending numbers. I think that is the last thing we want. The consumer has to retrench and repair tattered balance sheets. If debt to income were to go back towards 100% (from close to 130% now) several billion dollars would have to be repaid (or incomes would have to grow). Keep in mind the 30 year average of debt to income is 93% and things usually revert to the norm. Consumer credit was announced Wednesday afternoon and it showed a decline of almost $12 billion following two months of closer to $20 billion in shrinkage. This might be a painful step, but it is a necessary step.

Earnings start to be reported in earnest and we'll see if 1030 to 1060 on the S&P is the trading range.