Wednesday, May 19, 2010

May 19th in Brief

Recap in brief...

  • Squeezed Euro (though I personally think a further rebound is possible)
  • Oversold financial rebound (see GS)
  • Continued flight to high quality yield (a 3.36% 10 year Treasury yield when 4% was "rich" a bit more than a month ago... amazing for sure, but is it now overbought?)
  • Most notably... an inflation protection (i.e. hard asset) sell-off (was it once people digested the CPI print?)

There are too many people (including me) piled into the reflation trade with the view that the Fed will do anything it takes to get the job done (i.e. the strong preference for inflation vs. deflation). Thus, when it moves the other way... it MOVES the other way.

The issue is that over the shorter term it is likely to move the other way often as we are in an extremely disinflationary environment (high unemployment, low capacity utilization, low growth, deleveraging private and public balance sheets via increased savings).

That said, I am allocating for "reflation" as once it moves (in months / years), it could move quickly.

Source: Yahoo