Ahead of a record week of new government supply in the U.S., the demand for the 3-year Treasury note at yesterday's auction was unbelievable. It drew a 1.40% yield, which was 3bps through the auction bid deadline level. And indirect bidding also took up 68.6% of the auction, which in part reflects a very healthy foreign central bank appetite for Uncle Sam's obligations.
At the same time, gold, the antithesis of U.S. government credit quality, shot up to yet a new record high. Then we have the equity market, which, despite ongoing contractions in credit and employment, is approaching its bear-market-rally highs (in fact, the Dow has already accomplished that). But the rub remains that these distribution sessions where the gains are exaggerated by light volume (barely over a billion shares on the Big Board? Are you kidding? After a 16.6% plunge on Friday, volume in yesterday's session was still far below normal and the second lowest in the past two weeks). This is a sign that conviction over the current rally remains unusually light.
The U.S. dollar traded down to a 15-month low, which may help partly explain the continued run-up in gold, though bullion is in a bull run against most currencies; and the weak dollar is widely considered as the genesis for the 'carry trade' rally in risk assets, though many countries outside the U.S.A. also have their funding costs near zero. It would seem that investors are optimistic on the future insofar as governments and central banks around the globe are going to damn-the-torpedoes-and-go-full-steam ahead and act as the consumer of first and last resort for their economies. The fact that the U.S. government, at a time when the deficit/GDP ratio is already at record levels of 10%, feels compelled to:
- Extend jobless benefits for up to two years (why not just put these folks on the government payroll? At least the unemployment rate will start to go down).
- Expand the homeowner tax credit.
- Provide tax breaks to homebuilders (the ones who helped get us in to this mess).
- Provide businesses with tax credits for new hires.
- And bump up social security payments once again.
All this really attests to how rotten things are beneath the surface. No doubt that all the government stimulus is going to provide some impetus to corporate profits, but what exactly is the fair-value P/E multiple in a period of state capitalism is a legitimate question.
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