Having warned just 6 weeks ago that high-yield credit and small high-tech firms may be in a bubble, Fed Governor Tarullo,ironically speaking at the Hyman Minsky Financial Instability Conference, suggested that the recuction in share of national income for "workers" (i.e. income inequality) is troubling. Furthermore, he added, "changes reflect serious challenges not only to the functioning of the American economy over the coming decades, but also to some of the ideals that undergird the nation's democratic heritage." His speech, below, adds that since there has been only slow growth so far, expectations for a growth spurt are misplaced and that the Fed-policy-driven recovery has "benefited high-earners disproportionately."

From feb 25th, Tarullo made his concerns clear...

*TARULLO SEES RISK OF LARGE LOSSES IN LEVERAGED LOAN FUNDS
*TARULLO SEES RISK OF LARGE LOSSES IN HIGH-YIELD CORPORATE BONDS
*TARULLO: FARMLAND, SMALL TECH FIRM VALUATIONS SEEM 'STRETCHED'

But

*TARULLO SAYS QE PURCHASES 'HAVE HAD POSITIVE' IMPACT

And then today, he is a little less exuberant about that "positive" impact...

*TARULLO: FED POLICY NOT PRINCIPAL FIX FOR ECONOMIC CHALLENGES
*TARULLO SAYS UNCONVENTIONAL POLICY `CRITICAL' TO RECOVERY
*TARULLO SAYS QE HAS HAS HELPED FUEL `ECONOMIC ACTIVITY'
*TARULLO SAYS POLICY HASN'T CREATED `PREFERRED' RECOVERY
*TARULLO: REDUCED NATIONAL INCOME SHARE FOR WORKERS `TROUBLING'
*TARULLO: RECOVERY BENEFITING HIGH EARNERS DISPROPORTIONATELY
*TARULLO CALLS FOR `PROMOTING INVESTMENT IN HUMAN CAPITAL'

Full Tarullo speech available here

Wednesday, April 09, 2014 1:37 PM

"Fixed Income Only Positive Return Asset Class in 2014, 30-Year Treasury Yield Headed to 2.50%" Says Steen Jakobsen

I don't believe the growth estimates of the IMF and neither does Steen Jakobsen, Chief Economist of Saxo Bank.

Steen goes one further and calls for the yield on the 30-year long bond to drop a minimum of 150 basis points to 2.5%.

From Steen via Email

2014 started with high expectations on growth. The IMF, World Bank and ECB were falling over themselves to upgrade growth forecast for 2014 in early January but by now Q1 growth in the US is expected to come in at +1.9% after the initial +2.6% advertised by the pundits in late 2014 (Bloomberg December 12th, Survey).

The IMF forecast is despite Q4 revised considerably down from 4.1% to 3.2%, ending at 2.7% in final count. (37% drop from early to final number).

This apparently was entirely due to weather....

But the fixed income market seems to have a different opinion: This is my long term chart which have maximum one signal per year.

The model has been good in calling bigger trend changes, the last one being end of December 2012 where it bought on the close @ 2.94% yield. It's now getting ready to sell off indicating that the bond market "disagrees" more and more with the assumption on weather.

Furthermore, my gauge for central bank policy: The GDP weighted G-10 1 year interest is also making noises to the downside, although less so than long term interest rates....

The point here being that despite hearing daily from both investors and other strategist's that: "We are in clear recovery on growth and that 2014 will be a good year for stock market again".....I remain extremely disappointed on the REAL PROGRESS made in terms of structural and cyclical improvement in key indicators.

The housing market no longer supports growth.

Inverted 30 Year Mortgage Rates (Down Means Higher Rates) vs. Building Permits

It's important for me to point out that seeing new lows in yield does not imply that I am a Super Bear on world as Ambrose Evans-Pritchard said in his blog the other day: Bond Yield to Hit Fresh Lows as World Recovery Wilts, Growls Saxon Bear

It does mean that I believe the recovery or healing will be delayed into 2015 (It's a 2015 story not a 2014). Our model sees Q2-2015 as the real turning point, but more importantly presently the market is the most consensus it has been for the least amount of real data supporting it since crisis in 2009.

The world is in rebalancing mode which hurts growth in most of the world:

Asia and China needs quality growth to substitute nominal growth on over investment

The US current account is falling mainly due to less energy import leaving massive "hole in the ground on consumption" for rest of world

Europe has not even started to address it fundamental lack of reforms.

Presently Europe is trying to sell implications of low interest rates as recovery, a similar mistake similar made in Australia. Low rates are there for a reason or rather two:

Low growth and no visibility for improvement in business investment and consumer demand.

Deflationary forces - A lack of technology/innovation and a global depression (See Why world markets are in a state of flux in 2014)

If the recovery was real and deeply rooted, unemployment would be dropping, business would be investing in further capacity and most certainly the consumer would be out buying goods. No, the bond market remains the most steady hands of all markets and assets, and my conclusion remains the same:

Fixed income will be only asset class giving a positive return in 2014 leading to both inflation and growth from Q2-2015 as our rule of thumb of nine month lag from interest to the real economy will mean that the low rates seen over this summer will be positive for Q2-2015.

The world is barely growing at zero policy interest, if anything the disinflation says lower growth is coming, so the path of least resistance is lower rates first as policy makers continue to believe "guidance on interest rates" is more important than real changes.

****

Mike "Mish" Shedlock

David Stockman Interview By Tom Woods: “The Fed Has Ruined The Heart Of Capitalism”

by David Stockman • April 1, 2014

“We are in trouble because the GOP doesn’t get it. The so-called conservative party fails to understand that the Fed has ruined the heart of capitalism, which is honest capital markets….free money is not helping Main Street which has too much debt already, but is a pure gift to speculators. The Fed runs everything; it has pegged, manipulated, medicated and manhandled the entire financial system. There is not an honest interest rate left…..”

Produced and originally posted by The Tom Woods Show.

Catharsis Ours

Wednesday, April 9, 2014

Fed Admits Policies Benefit Rich, Fears For "Nation's Democratic Heritage" ... Fed running for cover ? Well , if Steen Jakobsen is correct with his call for a 2.5 % 30 year US Bond , that should tell you where the economy is heading ( and where stocks are heading too ! )

Fed Admits Policies Benefit Rich, Fears For "Nation's Democratic Heritage"

Wednesday, April 09, 2014 1:37 PM

"Fixed Income Only Positive Return Asset Class in 2014, 30-Year Treasury Yield Headed to 2.50%" Says Steen Jakobsen

David Stockman Interview By Tom Woods: “The Fed Has Ruined The Heart Of Capitalism”

by David Stockman • April 1, 2014

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