Rear View Mirrors and Lemonade

Investors base buy and sell decisions on whether they have cash or need cash. We call that “liquidity. ” They’re like little kids. When they have a little money, it burns a hole in their pocket and they want to buy toys and ice cream. When they need money, they set up a lemonade stand on the sidewalk on a hot day and sell it. That’s what Wall Street does.Investors decide on whether to buy or sell based on whether they have or need cash. They decide what to buy or sell based on the recent past, because that’s all they know, and all they are able to project. I call it driving in the rear view mirror. Consequently there are lots of “accidents” when the markets get a “surprise.” Investors are forced to lurch in a different direction because they didn’t see the future coming.

Today, with Treasury prices driven, and suppressed, primarily by the level of foreign central bank (FCB) dollar recycling, which has nothing to do with inflation, we need to be especially careful about the idea that bond yields are linked to inflation. It may look that way, but that won’t be the driver. I think that T-bonds will collapse, but mostly because the level of FCB dollar recycling will diminish as US imports of oil and Chinese junk diminishes. That should be followed by a deepening of the loss of confidence in the US Government which is already under way. As the credit worthiness of the US increasingly comes into question, Treasury yields will skyrocket. But not because of inflation.