Here is a contrary opinion on bonds if there ever was one!
I posted a couple snips.
Read the whole thing.
Mish
hoisingtonmgt.com
A consumer slowdown at this time has broad economic implications. First, the best growth rate for the overall economy has passed. Second, robust consumer spending, a reduction in the tax rate, and the weakening dollar in 2003 were the main causes of the rise in corporate profits in 2003 and earlier 2004 (Chart 1). Without the consumer, profits are vulnerable as pricing power disappears due to lower final demand. The reaction time from business, in cutting spending, is likely to be very short, especially since substantial corporate tax breaks expire at the end of this year. Third, capital spending should also lose momentum due to the high level of excess resources. This can be seen in the current 17% office vacancy rate, the highest level in ten years. Industrial vacancy rates are above 11%, close to the highest level since 1981. Also, factory use in May was 75.7%, six percentage points below the post 1949 average.
The Fed - Ahead of the CurveFrom our perspective, another problem looms. Contrary to the widely held opinion that the Fed is “behind the curve”, the data suggest that the Fed may have tightened too soon, and is actually “ahead of the curve”. The most compelling argument for this is derived from the broadest measure of performance in the labor markets. Based on the index of aggregate hours worked, (if the June 30th hike in the Federal Funds rate was the start of a series of Fed rate increases), the move by the Fed was unprecedented in its modern history. Since the beginning of this index in 1965, the cyclical low in the Federal Funds rate did not occur until the aggregate hours worked (payroll employment multiplied by the average workweek) had recovered from the prior recession-related drop (Chart 3).
(1) Frail FundamentalsPrior to each of the four long rate backups from 1994 to 2002, real GDP increased by an average of 4.2% over the year. On average, real GDP then slowed to 2.8% in the next four quarters. In other words, when rates rose, the economy faltered. This time should be similar because the underlying fundamentals are just as weak, if not weaker. The economy is more leveraged than at any of these earlier periods. |
