The Tipping Point
By Surly Trader
The funding costs of European sovereigns has been moving one ways since March. Spain has hit 7.5% on its 10 year bonds while Italy is at 6.57%. These are two levels that are unsustainable over the long run considering current deficits and weak economies:
Ray Dalio, the head of one of the most well respected hedge funds in the world sees more pain to come:
“The breadth of this slowdown creates a dangerous dynamic because, given the inter-connectedness of economies and capital flows, one country’s decline tends to reinforce another’s, making a self-reinforcing global decline more likely and a reversal more difficult to produce…We think that the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with money to make all of these debts good should not be taken for granted,” Bridgewater said. “We think there are good reasons to doubt that the European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way.“
With this as the backdrop, does anyone see a discrepancy between where the Dollar, the US 10 year yield and the S&P are trading?
The equity market expects QE 3, but the equity market will not get QE 3 until Mr. Bernanke gets deflation – which would imply lower levels on the S&P 500 as one measure and at the very least lower measures on breakeven inflation rates:
I think the drug addict needs to go through a bit of withdrawal before he gets another shot of heroin. A few shakes and tremors might be expected.
8 Comments
@Surly, you said: “I think the drug addict needs to go through a bit of withdrawal before he gets another shot of heroin. A few shakes and tremors might be expected”. Mario Draghi begs to differ. He wants to give the addict another shot of heroin right now. We’ve seen enough shakes and tremors for now.
BL, not sure if Draghi WANTS to do it, but wants to see if he can get away with SAYING he’ll do it. So far, talk, but not action. Question: If is is so committed, why didn’t he actually DO something other than just SAY something…….?? I guess we’ll see soon enough. Still think it would be a temporary solution that will not solve the fundamental problem…
best,
rhp
What is depicted in the 3rd chart ?
US breakeven 10-year:
“The rates are United States breakeven inflation rates. They are calculated by subtracting the real yield of the inflation linked maturity curve from the yield of the closest nominal Treasury maturity.”
http://www.bloomberg.com/quote/USGGBE10:IND
So, inflation – yield.
Other way around, sorry. Treasury yield minus inflation. But you get the point.
It’s a strange analogy. If you keep giving the addict heroin, he’s going to die. If you stop, he is sick as a dog for a while but then gets better.
We have had 3 200+ Dow point up days in the last month: June 29, July 13, and today (7/26). There was no follow-up during the week after the first two short-covering rallies. There had better be a follow-through on the part of Draghi and the ECB, and also in the equities market, or we might be in for a heck of a reversal here.
Draghi only has the authority others give him and they’re all about to run off on vacation until September. “We’ll do whatever it takes, you just wait and see” may work for a day or two but weeks, I doubt it. Ben’s used up all his good ammo and now he’s down to the cheap stuff, it may pop and it may not, so he won’t do anything until he’s forced too. Everything is limping along well enough at the present so don’t look for any crack for six weeks. It could get rough next month so get your short list together and keep a close eye on your longs.