Bond Vigilantes, US Treasuries, US Dollar, Oil

Talk about being ahead of the curve…
I last brought this up in US Treasuries, US Dollars, Commodities.

Bond Vigilantes Who Gave Bush a Pass May Ambush Obama or McCain: “The bond vigilantes who've been missing in action under George W. Bush may be preparing for a return engagement once Barack Obama or John McCain takes office next year.

Investors and former policy makers predict that the same market forces that torpedoed President Bill Clinton's “putting people first” spending initiatives at the start of his presidency are gathering again at the prospect of McCain's tax cuts and Obama's health-care and education programs.

“Though times are different and a lot of the government spending is necessary, we're going to see rates rise in a saw- tooth pattern over the next few years,” says E. Craig Coats Jr., the head of Salomon Brothers' government securities desk when it was the world's biggest bond trader. Coats considers himself one of the original vigilantes, the bearish traders who drove up long-term interest rates, persuading Clinton to place deficit-reduction above fulfilling his spending promises.

That course-reversal prompted Clinton political adviser James Carville to observe at the time: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Economists and traders say the prospects for increased government borrowing needed for either McCain or Obama to enact their proposals will again lead investors to shun Treasuries and push up interest rates. Ten-year yields are forecast to reach 4.63 percent by the end of 2009, according to a Bloomberg survey of 68 economists.”

I’ve warned of the Bond Vigilantes in the past…

Inflation, Rates and a Fed Out of Ammo
Fed Cuts Rates, Market Raises Rates
Fed Cuts and Rates Rise: Bond Vigilantes
The Bond Vigilantes are Back

Dollar Gain Signals Pain as Rally Prompts Exit From Bull Trade: “Just because the dollar posted its biggest gain against the Euro in almost eight years doesn't mean the U.S. currency won't continue to be plagued by the nation's slowing economy, widening budget and trade deficits and negative inflation-adjusted interest rates.

The 4 percent surge against the single European currency this month was enough to prompt Bank of America Corp. to tell its customers to exit trades betting on more gains. Morgan Stanley still forecasts the greenback will approach a record low by October as the U.S. housing slump and credit-market losses keep the Federal Reserve from raising interest rates this year.”

The guys are Morgan Stanley miss the point (or are talking their book). The Euro is overvalued and will collapse as the Euroland economy dives into a recession. The ECB is definitely done raising and will most probably end up cutting.

Like I keep saying, the Global Decoupling Theory is Garbage. With real estate prices collapsing in Ireland, Spain, Greece, and now Italy NO other outcome is possible.

Jobs Jobs Jobs, It's All About Jobs

"Yippee. Oil went down... now we can party party party. Who cares we have no jobs, who cares we lost our houses, who cares we don't have cars left to put gas into."

I lifted that off a comment thread somewhere, but it pretty much captures current sentiment. Equities have ripped higher as hedgies furiously unwind the 'equity crack trade' (short financials, long energy).

Oil is done and that is NOT nearly as GOOD as you'd think. You have to ask yourself, WHY is oil down? The answer of course is that global economic growth has completely stalled out. Japan is now officially in a recession and the U.S. will be shortly. Europe is diving right in and China is down shifting from super hyper growth.

For example:

Canada hit by biggest monthly job loss in 17 years: "A surprisingly large 55,000 jobs were lost in Canada in July, the biggest monthly job loss since the 1991 recession.

The Canadian dollar dropped immediately and bonds rose in reaction to release of the Statistics Canada employment report on Friday morning. Economists called the figures "extremely ugly" and "stunningly bad."

Most of the losses, 48,000, were in part-time work and overall employment remained 227,000 higher than it was a year earlier. The jobless rate dropped to 6.1 percent from 6.2 percent as youth and some older people left the work force."

It would appear that in Canada the 'powers that be' don't fudge the numbers the way they do in the U.S.. Job losses in Canada, a much stronger economy, were the same 55 000 that were lost in the U.S. on the last non-farm payroll report. One thing, Canada has 10% of the population of the U.S., never had as massive a housing bubble, exports commodities and has a budget surplus.

Use this oil inspired bounce in equities to exit longs and reposition short. In the end, this is a global consumer lead recession and the single most important variable will be JOBS JOBS JOBS.

War: Russia and Georgia

Heads up.

Russia and Georgia are at war, with South Ossetia absolutely crushed in the middle.

Putin is at the Olympic opening ceremonies... while peace and love breaks out everywhere.

The separatist President (of South Ossetia), Eduard Kokoity, said “the storming of Tskhinvali has started” and said that separatist forces were engaged with the Georgian army on the roads into the city. A statement on the separatist government's website said: “The assault is coming from all directions.”

A Russian General has said the Georgians have bombed the capital of South Ossetia (Tskhinvali).

This could end quickly or spiral out of control.

Russian “heavy equipment” (apparently 150 tanks) are now in Tskhinvali. The Russians have a “peace keeping mandate” in South Ossetia. Also, South Ossetia linked up with North Ossetia in a referendum years ago. North Ossetia is part of the Russian Federation. Already late last night there were reports that hundreds of volunteers were on their way from North Ossetia, through the Caucasus Mountains to join their ethnic kin in South Ossetia. The leadership of Abkhazia, Georgia's other breakaway state, said that 1,000 volunteers from Abkhazia were also on their way.

FACTBOX - Scenarios for Georgia's South Ossetia crisis: “Fighting raged in and around the capital of Georgia's breakaway South Ossetia region on Friday as Georgian troops, backed by tanks and warplanes, pounded separatist forces in a bid to re-take control of the territory.

The following are possible scenarios:

* Georgia, whose army and reservists total around 18,000 soldiers, swiftly completes its assault on breakaway South Ossetia before Russia can mobilise a major military response.

A Georgian victory could spark an exodus of non-Georgians to Russia. The majority of the breakaway region's roughly 70,000 population feel close to Russia and are ethnically distinct from Georgians.

Should Georgian troops quickly establish control over the territory it could prove more difficult for the Russians, diplomatically, to seize back control of the province by sending in its own forces.

* Failure by Georgia to quickly establish full control over South Ossetia could allow Russia, which has a peacekeeping mandate in the region, time to launch a counter-offensive, arguing that it needs to protect its own peacekeeping forces as well as civilians, most of whom have Russian passports.

Georgian officials say Russian armour is already pouring into the region from across the border. Hundreds of volunteers from Russia and another Georgia's breakaway region of Abkhazia, were reported to be making their way to South Ossetia.

* If Georgian troops fail to retake South Ossetia, Tbilisi could be vulnerable to political and diplomatic pressure from the United States and Europe to halt its offensive. The European Union is wary of antagonising Russia, one of its main sources of energy. Some European members of NATO, also wary of President Mikheil Saakashvili's record in clamping down on opponents, have resisted moves to put Georgia on a fast track to membership. Russia fiercely opposes NATO membership for its former Soviet satellite.

* Outright defeat for Georgian forces, with a retreat to pre-conflict positions, would be a humiliation for Saakashvili. He has made it a priority to win back control of South Ossetia and Abkhazia, another rebel region on the Black Sea. Defeat could also boost his domestic opponents and raise doubts about Georgia's pro-market reforms and drive to align itself more closely with the West.

Some background info on South Ossetia here.

Wal-Mart: Weak Sales, Despite Stimulus and 'Slumming It' Effect

U.S. July Retail Sales Slow, Threatening Back-to-School Season: “U.S. retailers' sales in July rose at the slowest pace in four months as higher fuel and food costs discouraged consumers from visiting malls. Wal-Mart Stores Inc. said August sales won't grow as quickly as last month.”

Uh oh. As the economy deteriorates, the theory was that Wal-Mart would come out on top as middle class folks are forced into moving down the retail food chain. The theory was that the middle class would have to go ‘slumming it for a while’.

Don’t forget, those ridiculous stimulus checks are part of these numbers. So you have stimulus checks and the ‘slumming it effect’ STILL resulting in weak sales for July. This just can’t be good.

I have privately heard from retail analysts and those in the ‘export development’ arena of finance that they have started to see signs that several larger retailers are set to bite the dust in both Canada and the U.S.

Wal-Mart (WMT) looks to have failed to break out above resistance at $60.00. Poor earnings were the catalyst that put prices back “into the box”. WMT could be "dead money" and consolidate between $56 and $60 for any length of time. Failure to hold $56 and then again $55 would result in a fairly quick drop to the $50 area. This would signal a weak consumer economy indeed...

Ninjas: They're Everywhere