Professor Elam

Monday April 12 2010

From Dave Rosenberg, 4/12/10

One reason why interest rates cannot rise is because if they do, there will never be a sustained improvement in the pace of economic activity. Housing is the classic leading indicator, and the most interest-sensitive sector, and until it revives, it seems highly unlikely that bond yields will rise on any sustained basis or that the Fed will embark on a path towards higher policy rates. For a truly sombre assessment on the prospects for a housing recovery, see what Robert Shiller has to say on page 5 of the Sunday NYT biz section. ("Don't Bet The Farm on the Housing Recovery"). 

We are not on the same plane as Dave Rosenberg at Gluskin Sheff but…the above quote is from his daily commentary this monday.  Having said that, we believe this is convoluted reasoning, interest rates will go where they want whether it stimulates a recovery or not. INdeed he points out that most of the profit picture in the US is based on 'financial sector profits' which are based on rubber banding FASB 157 on mark to market rules. This means that the bank does not have to get a market price for questionable assets, if such price is not readily available. I suspect the banks have not been able to find those ready prices which means the assets did not get marked down which  means no write offs and we book our trading profits. Those trading profits came courtesy of 

'free TARP' money and an absence of equity sellers, bingo, these guys ran up the stock market and books bank profits, hardly the stuff of sound lending.  Roseberg notes that Jim Caron is bond bearish, Jan Hatzius is bond bullish,  Bill Gross is bearish, Jim Grant is bearish, Rosenberg noting the Japanese experience is bullish believing that rates will not rocket up.  My conclusion was that we should all simply watch the 4% resistance area on the ten year bond yield, if it goes above 4%, the bears were right, otherwise, govt bonds are a buy here.