Notes From Underground: Jackson Hole is where the market focus will be … and Bernanke the main act?

It has been written in many domains that the speech to watch will be the paper delivered by Raghuram Rajan and Bill White. What will they say? We don’t have a clue but they are being given a great deal of pre-speech attention. Why? They have been proven prescient in their early views on the danger of asset bubbles and predicted the housing crash. Alan Greenspan belittled their work in 2005 and that is all we need to know. Even Bernanke, who was skeptical of the possibility of pricking asset bubbles, has given Professor Rajan much more respect than he previously did so will be particularly attentive to these two academics and the work they present.

Bill White is particularly important because of his previous role as the chief economist for the Bank for International Settlements. We have heard ad nauseam about the important need for a MACRO-PRUDENTIAL global regulator from the likes of Geithner, Trichet, King and Bernanke. The closest thing we have to that now is the BIS and its subordinate, the Financial Stability Board (FSB), and when it issued early warnings in 2006 about the asset and housing bubbles their advice was  pushed aside for the world’s bank didn’t want its lending and trading operations disrupted.

The BIS and Bill White were forced into a position of WE TOLD YOU SO and left to pick up the pieces. It is of more than passing interest that recently the BIS came forward with new global capital requirements for large multinational banks, only to have its recommendations watered down by the lobbying power of the large banks and its domestic political allies. So as usual, we have learned nothing. The ink is not even dry on the FINREG and we are back to business as usual. We await Rajan and White to see what they offer the symposium in Jackson Hole.

Wednesday, we received the data on durable goods and it was more bad news. The economy is not getting the traction that the bulls keep hoping for and that is giving even more impetus to the long end of the global bond markets. As traders, we are paying close attention to the 2/10 Treasury curve. It has narrowed from a very steep 280 basis points to 198 basis points this morning as the talking heads are all proclaiming a BOND BUBBLE.

We are not in the BUBBLE CAMP and fervently believe  we are seeing some flight to the safety of global sovereign debt but are also seeing the massive unwinding of some of the steepeners that have been on hedge fund books for quite a while. We have no intimate knowledge of this but is intuitive conjecture from 33 years of trading experience. We advise for our readers to consult your technicals and find the source of this steepening trade. But we say again that we don’t believe the BONDS are a bubble. Would we buy them for safety purposes? Not at this juncture, but we wouldn’t sell them either until we have some sense that the DOLLAR was going to be sold off or had some sense that global equities were getting ready to rally.

Short cover rallies do not make for BUBBLES and we remind our readers that the BOND FUTURES markets have not even taken out the highs that were made in December 2008. A BUBBLE that’s not making new highs is not much of a bubble, no matter what the witches brew.

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2 Responses to “Notes From Underground: Jackson Hole is where the market focus will be … and Bernanke the main act?”

  1. rg Says:

    “…the BOND FUTURES markets have not even taken out the highs that were made in December 2008.”

    not “even”? thirty-year rates have not “even” gone below 2.52%?

    if thirty-year rates are supposed to go below 2.52% before we say this is a bubble, it can only be in the context of an impending social disaster.

  2. yra Says:

    rg–probably right but I am just saying that a market that is not making new highs is not a bubble—to see a real bubble pull up a nikkei chart or nasdaq chart and i just don’t see that in hte bonds especially whne so much buying has been short covering off the steepener play

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