Diversion from the Inversion


Hey folks. 

Since my Toys-R-Us post, not much has really changed.  Still banging around 2.9, data still not stellar, Fed still hell-bent of hikes, long end still resisting.  If I go back to some of my posts 2-3 years ago, there are things that have changed, pockets of some economic hope.  At the same time, the very basis for my unmitigated, unwavering bullishness in bonds remains; technology and information. 

Unless the internet goes away, unless every machine is shut down, the very anchor on price and wage growth remains and dare I say strengthens it’s grip on inflation, and therefore; persistently low-ish rates.  As far as I’m concerned, everything else is a diversion.  I recall the reasons we boomed out of the dot.com bust; home prices, inheritance, historically low rates, intra-year tax cuts.  All transitory influences on spending. 

Note the big exclusion; WAGES.  Here we are, nearly two decades later.  In nearly the longest, yet unimaginably lumbering recovery the free world has ever seen.  What is driving us?  Home prices, tax cuts, stock prices. Familiar?  Note what is missing, yep, WAGES.  So how is now different?  Why is now different?  See every post I’ve ever done.  I don’t believe it is.  It’s a diversion, some noise from the reality of a new economy.  One that generally doesn’t support long term inflation and further creates a wealth gap that doesn’t support sustained and widespread growth. 

What does this mean for mortgage rates?  We always want to play protect, but on longer term basis I’ll just say I like the way things are shaping up.  So will there be an inversion?  It looked for some time like the Fed learned from the mid 2000’s, but perhaps they didn’t.

-Philip Mancuso

It’s All Fun and Games Until Someone Gets Hurt

OK, so I guess it’s time for the hermit to emerge from his winter’s slumber to speak a bit about the market.  I do again apologize to my followers for not speaking more often.  Anyway:

 The Fed hiked as expected yesterday, yet perhaps the market didn’t react in kind.  I going to spend a few bullet points on this before I get to why I write:

  1. Many folks were bracing for 4 hikes in 18
  2. Fed signaled 3
  3. Powell said forget about 19-20, which at the time of the statement were reason for concern
  4. We’ve been unable to break 2.9ish for some time

The longer we stay(ed) at these levels (2.9ish), the more likely it is we’ll see(saw) a bounce, just as our inability to break lower in q3 2017 inversely hurt us.  I’ll just add that I’m not so sure the Fed should have shrugged off the weak q1 consumer…

Now that’s a good segue into my point.

If you were a kid growing up in America (they later became worldwide), was there a greater place than Toys r us? I mean who didn’t want to go there?  Who’s parents didn’t shop there?  For goodness sakes, their name IS TOYS R US.  They R TOYS!!!   Well no longer.  No more fun and games.  No more holiday time retreats for kids to show their parents the toys they so want for Christmas.  They are closing the doors.  Replaced by a computer or smart phone.  Very romantic.  And why does this matter??  See every post I’ve ever written.  This compression of the retail distribution channel and erosion of price elasticity is the culprit of the persistently low inflation numbers that is so perplexing to the Fed.  Why?  I don’t get it.  To me it’s clear as day.  In a bit of irony I can’t help but feel like just as Toy R Us didn’t see this new wave of commerce as a threat, the Fed continues to miss the mark similarly of why we are in a growth and inflation-less recovery. 

We’re now almost through the first quarter of 2018 and the consumer numbers have been weak.  Really weak.  Like negative weak.  Sure there’s some stronger numbers printing here and there, but we can’t have a recovery without consumer spending.  We’ve seen homes pause here as of late as well.  Is that the result of higher rates?  Not sure, but it’s hard for me to digest a recovery if the folks who are recovering all of the sudden aren’t spending money on goods or homes.  It makes me wonder if something is brewing below the surface.  I think the next few months will be very telling. They historically have been rate friendly, let’s see what happens.  I certainly wouldn’t base my recovery estimates on the Feb BLS number.  It’s not the first time we’ve seen a blowout Feb number.  March has historically been a down month, so if we see that pattern continue it could extend the rally.  You know I’m a big ISM guy, so I’m really interested in those March numbers as well.  I’ve been surprised by the fact that the spending numbers haven’t weighed down the ISMs and wondering if/when that may happen. 

TO BE CLEAR, I’m NOT making a call here.  That said, I do think some moons are aligning that could leave us with some surprisingly disappointing economic data in the coming months.  I’m not ready to make a call yet, because frankly I do see things as being a bit better.  I get that, I see that.  For me the 64k question though is better how?  What I’m not convinced about is that unlike in the pre-web days, some extra money, a bigger smile and a job doesn’t necessarily equate to a convergence of disposable income and the willingness to spend it like a drunken sailor and both are needed to fuel real growth and inflation.

NOT making a political statement here, but maybe we’ve all gotten to be a bit too serious.  Maybe we could all use some fun and games and just maybe that’s a bit more important than saving a dollar. 

RIP Toys R Us   

I just wanted to add this to my rant from earlier.  This is quoted from an AP article.  THIS is the impact of online sales vs brick and mortar that IMHO the Fed is discounting too greatly.  While TRU only has about 30k employees, check out how many jobs outside the company might be lost if they shutter.*  Do you think this many folks have a stake in an online toy sale????

The demise of Toys R Us will have a “devastating effect” on the toy industry, said Larian, who believes that 130,000 U.S. jobs could be lost when layoffs at suppliers and logistic operations are included.

* I write IF, as there is a long shot attempt to salvage parts of the company by the CEO of toy manufacturer MGA Entertainment.

Here’s the link to the article  https://www.msn.com/en-us/money/companies/toy-company-ceo-leads-effort-to-salvage-toys-r-us/ar-BBKxNlL?ocid=spartanntp

Maybe we should be reading the tea leaves…

Q2 GDP just printed and while you can draw some near term conclusions, I’m compelled to push back a bit as I usually do.
Frankly I don’t care about 2.2 v 2.5 v 2.8 right now.  As we know this number could be off 1 anyway.  We saw 2015 rev up, 2016 and Q1 2017 rev down.  Make no mistake, net, this is a bad 2017 report.  The combined total of Q1 and Q2 miss, earnings missed, prices missed.  The other components were a bit of a mixed bag.
I don’t want to get caught up in the weeds though, I’m a bit more focused on the leaves…Tea leaves.  Why?  Starbucks is shuttering all their Teavana stores by Q1 2018.  Why?  Mall traffic or lack thereof.  Why does this matter?  Well, to TEA (sic) it up for you, here’s a refresher you can catch later:
So why do we care about mall traffic, people are just buying on the web right?  I’ve covered this topic before as well, so I’ll keep it short.  All commerce isn’t equal.  E-commerce clearly has a much smaller eco-system and lower margins.  Both equate to a much smaller segment of the population benefitting from an E-tailer’s propriety, versus a brick and mortar shop.  The result is an anchor on prices and thus inflation and wages, and oh yes, an extended period of low growth.

If you don’t believe that, check this out:

Therefore, in the near term, I still see the range intact.  Who knows if the Fed moves.  Maybe we do make a run at 3 before year end as ridiculous as I think that would be.  I have difficulty seeing a break above 2.41 in the near term though.  We have a ton of data next week, so it makes sense to play it close to the vest until then as you never know, perhaps with a slight bias to lower rates.  More importantly, until something big comes along to change things, all I keep seeing is #LowerForLonger.  It’s #InTheLeaves
#WhatRecovery #ThingsAren’tBroken #Hashtag
-Philip Mancuso

It’s 5 O’clock somewhere

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Hey folks, it’s been too long.  I just haven’t felt inspired.  My thought was I’d just do another piece on how the market got it wrong @ 2.40 and calling for 3 by year’s end.  I mean how much of that can you really hear?  Here’s a quick refresher and those new to the blog, please go back and read the previous posts to catch up.   It figures I’d pick a day with no data and where it seems all of Wall Street is likely already sipping on gin and tonics in the Hamptons to post.  At worst, they fired up the helicopters by now, I mean nothing is happening.   My screen hasn’t blinked in what seems like 5 minutes.

Anyway, a slightly positive open reinforces the trend down.  As liquidity evaporates into the Long Island sun, the afternoon could go either way.  I wouldn’t read to much into it.  

Range intact?  Check.  

2.12-2.41 with stops in between.  Check.  

Data not correlating with central banks desire to tighten.  Check.  

For the 9,833,123rd time central banks realize there will be a tantrum if they try to get serious and consequently are forced to reel it back in.  Check.

I see little inspiration to break 2.12, so I’d continue to lock the range (always look out for geopolitical stuff, etc).  Our first run at a new direction comes at the end of next week.  Durables on Thursday (meh), but a pretty important Q2 GDP on Friday.  Here’s my thought:  Central bankers are already hellbent on further tightening.  I can only see this report as surprising them to the downside and thus giving reason for pause.  I mean, what sort of blockbuster would require them to redouble their current tightening efforts.   I’ll post a strategy around mid week around that.  Locks/floats ahead of that event are really predicated on current levels, so it’s not something I’d want to advise on today.

In the meantime, it makes sense to lock whatever July stragglers are left and you you feel froggy, early August closings could float, but I’d begin locking those up if we break 2.20.

-Philip Mancuso

Who cares about rates, you need to change your cell phone plan!

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  1.  Who knew I had a bad cell phone plan.  I was looking to the Fed to set rates, but this was a huge help.  
  2.  The Fed picks now to get hawkish????  What are they seeing that they haven’t in the last 8 years?
  3.  Generally the market doesn’t care, but we’re certainly not as happy as we were at 1:59

So my near term takeaway,  most everything I said in my prior post sticks. Obviously they didn’t hold, thus we’re not seeing 2 by 5:00.  The market is having one of the expected reactions though, which is they are largely ignoring the hawkish tone due to the weakness of the underlying data.  I’d have the same approach to locking, except add a bit more caution.  I don’t think our path has changed, it’s perhaps just gotten a bit steeper and a touch longer.


In a broader view:  What the heck just happened??? Did Yellen just blame cell phone plans for being a drag on prices????

What’s next?  A leak that Wendy’s is considering taking one slice of bacon out of the Baconator as a reason to short pork???  C’mon.  Also, she clearly hasn’t been to the drug store if she thinks prescription drugs are cheaper!!  Hello, EPI pens!!?!?!?!?

I must say that I believe what possibly just happened was a worst case scenario for the economy.  The fed more bearish, announcing a hike and balance sheet activity.  This is 2005/2006 IMHO.  Ignoring the facts, being pig headed.  Staying the course because that’s what you do, that’s what we’ve always done.  This isn’t the old economy though!  This could crush the economy as it did in 2008 if they stay this course IMHO.   Just as I predicted on CNBC 2005, and I loosely quote “the fed is tightening for no reason and they are going to wake up and say oh my God what did we do?”  Now we are potentially looking at a stock and balance sheet bubble that could burst.  We already are talking about a potential yield inversion.  You know when that last happened????  You know that is usually an indicator of a recession right??

This is not good.

In terms of today, we are surging back into the closed it’s looking like 2.12.  That level in itself doesn’t tell me where we are going tomorrow, so it’s a bit of a coin toss.  I go back to earlier, I would stay the course, just with a bit more caution.  #lowerforlonger for sure though.

I have to go now.  I’m headed to the mall to change my phone plan and refill my son’s allergy prescriptions.  Who knew…

-Philip Mancuso

No bull just an outright bull rush


Nothing funny, no anecdotes, just straight stuff here.

What we are seeing is a strong move down in coupon on the data tanks. It’s unlikely we will see this in all rate sheets today as the fed is looming at 2, but all things equal we would see it in reprices later or tomorrow.  Pulling out to a higher level for a moment, when something like this happens we see lower rates improve exponentially and the belly and upper end move negligibly.  I can’t even rule out higher rates worsening slightly as par rates get adjusted.

Further, make no mistake this is a full on repricing of 2017 as far as I see it.  The Fed doesn’t have a leg to stand on right now.  Consumer crushed, inflation in check, jobs sagging.  If the Fed holds today, we may breach 2 by 5 even if temporarily.  Keep in mind we have been repricing 2017 all the way down here, so at some point there may be some profit taking.  As for the Fed, the key is looking at the projections, which by the way they haven’t gotten right since 1582. OK here’s my Mancuso soap box:

  1.  If we are getting shook here, what happens when the Summer data is typically bad?  Can we bet on that data being good?  That a typically rate friendly period all of the sudden reverses the trend, both on an intra and multi year basis?
  2.  If we’ve been in recovery as many would sell you on, then this data weakening is a sign of a potential move to recession.  This is almost year 10 of the “recovery” right?
  3.  Get ready for the hashtags

#lowerforlonger #whatrecovery #theywerewhowethoughttheywere #ifitwalkslikeaduck #sink-oohmy-o #there’sbeenanawakening #somethingfunnyhappenedonthewayto3% #thingsaren’tbroken #figureslieandliarsfigure

OK, so now a touch of reality.  Rates never go straight down.  More importantly, while my reaction today is a bit over the top, its more about “I told them so” then it is that I think something groundbreaking has happened here. I just get the sense that a bit more of the market is coming around to our way of evaluating the facts.  I would simply stay within the narrative of #lowerforlonger and therefore to hit when it makes sense. Pigs get slaughtered.  I don’t think locks here are a terrible idea, even if the full move hasn’t been realized.

We don’t know what the Fed is going to do today.  At the same time even if they fully unload on us will the bond vigilantes go over the top?  I can’t rule that out.  There are a ton of moving parts here to figure out where we go from here and it could still go either way, but I do feel pretty strong here though.  I think floats have a bit more room. Again, don’t get greedy.  If we hold these levels into the close, I’d take the winner off the table either on the first pull back or 2 neg days in a row if it’s a June/early July closing.

My bottom line for Quarter 2/3:

95% we see 2.00

65% we see 1.80

My bottom line for Quarter 3/4:

30% we see 2.42

50% we see 2.35

0% we see >2.65

-Philip Mancuso

They were who we thought they were…

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It’s been a couple weeks since my last post.  Haven’t had a ton of inspiration from this rangebound market.  There’s a chance here that we might break the range, so I figured I’d write.  As Denny Green said, they were who we thought they were.  Frankly, I was a bit surprised that the May number tanked.  I was looking more to June, but for anyone who has been following my blog, you know this has been in the cards for some time. Where does the Fed go from here?  Boy it’s tough to predict 2 more hikes at this point. And I love how the media brushes that under the carpet.  Now I’m reading maybe September, but we haven’t even had the June meeting!!!  Just a month or so ago seemed to be a fait accompli, right?!?!

I guess I wasn’t so crazy calling for a test of 2% in April.  At the end of the day, all my talk about a new range and the truth is we are still stuck in my biggest range of them all and that’s #lowerforlonger.  I hate to sound like a broken record all the time, but haven’t we heard this song before??

#lowerforlonger #homeontherange #whatcomesaroundgoesaround #whatrecovery? #itain’tbroke #haveyoufeltit? #afunnythinghappenedonthewayto3%

-Philip Mancuso