Bad Momentum, Bad Fundamentals and 10,000 in the Rearview Mirror

Yesterday, stocks attempted to add on to Friday’s rally, but the best of intentions wasn’t enough to do it in the face of bad momentum and bad fundamentals. The S&P declined 0.9%, with the Dow perhaps putting 10,000 in the rearview mirror for now by trading to 9908. Yields also rose, with 10y futures declining 12 ticks…pressured, I am sure, by the debt supply this week.

The dollar continues to strengthen, and I am not sure I fully understand that. Of course, there is a knee-jerk response to exit positions in the euro, and at the margin that makes sense to me since any bailing out of Greece would involve a lot of easy money, and any failure to bail out Greece would tend to weaken the union or raise the possibility of its dissolving altogether (this is not something I expect, in the reasonably near-term anyway). But selling the euro to buy the dollar? With our deficit, our debt, our leaders’ studied insouciance when confronting the monumental task of putting the fiscal house back in order? Maybe what Churchill once said about democracy is also true about the buck: it’s the worst (currency unit) around, except for all the others.

But if that is true, then there are clearly alternatives to currency units that preserve wealth better. I am not a fan of physical gold, since it pays no dividend but implies storage and insurance costs, and tends to be subject to much greater tides of fad and fashion than less-lustrous metals, but commodities must be a consideration if people are running to greenbacks because it “sucks less” than paper currencies. Inflation-indexed securities in your domestic currency, which do pay interest, are a superior alternative although subject to the default option if your country doesn’t control its own scrip. Although real yields are very low, we’re talking about safe havens now and surrendering 0-1% in inflation-adjusted terms over the next year or two must warrant some consideration..

Another article yesterday celebrated the “fact” that the unchanged $81bln quarterly refunding implies that the government can fund its much-larger debt this year without increasing auction sizes (and without the benefit of Fed buying, let us not forget). Let’s pretend for a second that we can somehow run the same auctions this year as last year…at least at the end of last year…with the same sizes, and yet raise more money.

A very good article by Robert Samuelson yesterday (“Big Government’s Big Shortfall“) notes that:

By the administration’s estimates, that publicly held debt (the accumulation of all annual deficits) balloons from $5.8 trillion in 2008 to $18.6 trillion in 2020.

Let’s assume too, to be generous, that the government manages to have only 30% of that debt maturing in 2020 (even though, for a very long time, the percentage of marketable debt that has been maturing every year has not fallen below 34% – see Chart below, click to enlarge, Source: Bloomberg).

Same Percentages But Bigger Debt Means Bigger Problems