A Really Big Show?

Being long bonds and short stocks hasn’t been too wonderful the last couple of days. To say the least. The really scary part is that Bill Gross is now on my side. Given how well he has done in the last year, that shouldn’t be a source of encouragement although I must say his long term record is pretty darn good.

Durations and average maturities should be at their maximum permissible limits. Even if reflation is successful it will only be because the Fed and other central banks keep policy rates low for an “extended period of time.” Financial repression depends on negative real yields and until inflation moves higher for a period of at least several years, central banks will hibernate at the zero bound.

The markets appear to have decoupled from Europe (or just become bored with the flow of bad news) and are now busily pricing in, based on an extrapolation of recent US data flow, a robust economic recovery. I don’t think so, but we’ll see. We could be setting up a really big surprise, as Ed Sullivan might say.

Edit: David Rosenberg calls it a gunfight.

As was the case last year, the first quarter promises to be an interesting one from a macro standpoint. The U.S. economy has indeed been dodging bullets for a good year and a half now. It might not be October 26, 1881, but something tells me we have a gunfight at the O.K. Corral on our hands this quarter between Mr. Market and Mr. Data.

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