Tags: GDP | jobs | Fed | taper

Dubious Data and Short Memories Mislead the Markets

By    |   Wednesday, 13 November 2013 07:24 AM

As I write this missive, the interest rates in this country are on the rise again. The 10-year note, which is used as a benchmark for various consumer loans, sits at about 2.8 percent. If you will remember, back in May of this year, we were at 1.5 percent, which was the level this benchmark rate hovered around nearly four years.

As the Federal Reserve circulated the concept of tapering, we saw the rate spike to 3.0 percent within two short months. Most economists and bank traders were fooled by the cat thrown amongst the pigeons. They read what they wanted to when the Fed announced that, based on economic data, they may begin reducing their bond buying soon.

Wanting to desperately believe that the U.S. economy was improving, the economists, traders and talking heads on CNBC ignored the "data-dependency" clause that would cause the tapering. At the same time, they were also acting on their secret fear around the bond market being in an enormous bubble, and decided to flee in droves before they were caught short.

When the Fed did not taper, the bond sellers stopped in their tracks like a deer caught in headlights. The selling reversed and we saw the 10-year rate drop back below 2.5 percent.

Now the herd is being fooled again. This time it is the third-quarter GDP data and unemployment numbers released last week. The first estimate of GDP for the third quarter came in at 2.8 percent. This seems to have generated quite a buzz in the markets. Euphoric traders started buying stocks as expected, but soon stopped with the fear that now the Fed will start tapering in December. It is incredible that they not only have such short memories, but also do not stop to think for a second about the irrational fear that drives them.

Back on Aug. 7, I wrote about the tricks that the government is about to pull on us. The calculation of GDP has been altered and as a result, we should have seen an estimated 3 percent increase in the reported GDP numbers. Now if I subtract this 3 percent from the published 2.8 percent growth, we actually had negative growth for the third quarter.

Next, the classic dodge with the unemployment numbers continue. While the government was shut down for two weeks during October, the economy added 204,000 jobs. Makes us wonder if we should permanently shut down the government, as we seemed to have done well without them! But I digress.

While the headline was 204,000 jobs, what was not announced was that the Bureau of Labor Statistics added 126,000 jobs as an estimate to that headline number as jobs they estimated as "must have been created." So once again the real jobs growth was less than 80,000.

The real news is that we are probably in a recession and have extremely anemic jobs growth. Given such an environment, do you believe we should see interest rates spike 11 percent in the past week? The clamor is now that the Fed will start tapering in December.


With the Fed chairman stepping down in January and another battle on budgets and deficits in January and February, how can anyone make such a call? Especially the CEO of one of the largest hedge funds in the country. Are we being played as he trades his position or does he really not see the obvious?

I believe we have a quick investment opportunity here. If you have a strong stomach for volatility, you can short the 10-year note using exchange-traded funds and look for a quick gain as the markets come to their senses and we see the rates drop back again within a month. You could limit your risk if you use options instead of naked short positions.

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As I write this missive, the interest rates in this country are on the rise again. The 10-year note, which is used as a benchmark for various consumer loans, sits at about 2.8 percent.
Wednesday, 13 November 2013 07:24 AM
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