Blog Spotlight: Capital Spectator

Another edition of our new series:  Blog Spotlight.

We put together a short list of excellent but somewhat overlooked
blog that deserves a greater audience. Expect to see a post from a
different featured blogger here every Tuesday and Thursday evening,
around 7pm.

Next up in our Blogger Spotlight:  James Picerno is the editor of The Capital Spectator (, a blog focused on economics and investment
strategy. He is also a senior writer for Wealth Manager, a trade
magazine for financial advisers to wealthy individuals. He has been a
financial journalist since the late-1980s.




Today’s focus commentary looks at:



The head of the self-proclaimed "authority on bonds" says the rate hikes are history. PIMCO’s Bill Gross wrote in his October Investment Outlook that "the Fed is done and ultimately will have to lower interest rates in order to restimulate an asset based/housing led economy that has been its primary growth hormone in recent years."

The underlying assumption in his projection is that inflation is "leveling off" and the economic growth rate is "moving towards a 2% real growth rate or less in the next year or so…." As such, the Fed "at some point in 2007 will be forced to cut short rates." Timing and magnitude are yet to be determined, he adds.

In fact, the future may be more complicated than it appears. Economist Robert Dieli of documents the finer points of this complexity by plotting the history of economic cycles against instances of inverted yield curves. As he illustrates in the chart below (which, alas, we’ve squeezed a bit from the original to fit into the confines of CS), there’s a lengthy history of yield-curve inversions accompanying economic contractions and a drop in the Fed funds rate shortly after the yield inversions arrived. But that doesn’t mean the past is prologue, at least not a prologue that’s clear and obvious.


Federal Funds Rate. Red Squares Denote Periods when the Fed Funds
Rate was Higher than the Long Treasury


In any case, the last example of rate hikes and recession came early
in the 21st century, identified on the above chart by "11." The red
dots indicate moments when Fed funds were higher than the Long
Treasury, defined here as the 20-year Treasury. As Dieli noted in the
accompanying research report, "There are no cases of a yield curve
inversion ending without a drop in the Fed Funds rate from the peak
level attained in each episode."

(As a quick digression, the two red dots between episodes 10 and 11
were, Dieli told us this morning, were byproducts of the anomalous
events associated with the implosion of Long Term Capital Management and the Treasury’s decision to stop selling the 30-year.)

Ah, but what about episodes 8 and 10? Note that the Fed funds took
flight in each of those cases without a commensurate yield-curve
inversion, suggesting, if nothing else, that sometimes the central bank
achieves something close to perfection in monetary policy. Indeed, in 8
and 10, long rates took wing but without triggering a yield curve
inversion or recession.

Episode 10 is near and dear to investors’ hearts. The moment came in
1994, when then-Fed Chairman Alan Greenspan elevated rates and
delivered the much-sought-after but rarely delivered soft landing by
way of higher rates sans recession. It was, in sum, one of Greenspan’s
finer moments. As Dieli wrote, "In episodes 8 and 10, the two
successes, the yield curve did not invert, which allowed the FOMC to
lower rates to complete the implementation of a policy accommodative of
further noninflationary growth, thereby burnishing the reputations of
Chairman Volker and Chairman Greenspan."

We are now firmly in the world of Episode 12, which admittedly has
yet to fully play out. While the world guesses what comes next, there
is at least one absolute to consider: the yield curve inversion. Fed
funds today are 5.25% and the 10-year Treasury yield resides at a materially lower level of 4.63%, as of Friday’s close. Beyond that, clarity necessarily blurs.

Dieli worries that episode 12 may become episode 3, which, as the
chart shows, was a moment when the Fed had apparently engineered a soft
landing. In fact, the early signals were misleading. The central bank
hadn’t tightened enough to battle inflation, and so was forced to
reverse course soon after by raising rates once again, which led to a

The issue, as Dieli sees it, is that the bond market has no fear of
death at the moment. "I can’t imagine the bond market feels any
particular threat in holding long positions," he tells CS
today. The problem for Bernanke and company boils down to answering
this question, as put forth by Dieli: "How do you convince the bond
market that you’re done without starting a recession?" The history of
the past 20 years suggests that bringing down the core rate of
inflation requires a recession. Will that history hold? Or is something
new and relatively unprecedented waiting in the wings? The incentive
for answering "yes" typically comes from looking to globalization and
its accompanying byproduct: disinflation/deflation argument.

In any case, the final answer may not be imminent, but it’s coming. The only question is timing and magnitude.


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What's been said:

Discussions found on the web:
  1. tg commented on Oct 12

    Great site , especially since he has a large focus on debt markets

  2. wcw commented on Oct 12

    James Picerno rocks. A longtime reader, I can report that he also knows his petroleum markets.

    Thumbs up.

  3. iwantmymoneyback commented on Oct 12

    The worse thing I did this year was park myself with the bearish camp. I learned a lot after losing some money. Being a newbie trader, I thought that the market would be a lot lower. I took in the words of what seem to be educated people. They are smart and educated but what I learned is all anyone can do is take a “GUESS.” Nothing more, Nothing less. For all the bearish info I read on the blog all year it has not made me 1 $.

    I learned the only thing that matters is price and trend. that will make money. Yes, One day all this stuff will catch up. How harsh will the correction be ? Who knows. Where will the market close next week ? Who Knows. Its kind of foolish to throw out numbers like 6800. IMO. BR~ Hey man. I learned a lesson. Markets can go up even when the overall econ numbers are horrible. The FED today noted in the Beige books that things are slowing fast and the market rallied ! So, If I knew of nothing and was just long , long I would have been good to go. Now, if I read the report I would have sold thinking “damn, this is bad”. Now, I am not reading any of it. It does not dictate where the market heads. It just creates bad emotions and feelings. Price and trend should not create any type of feelings or thinking !



    – ED

  4. mm commented on Oct 12

    You’re responsible for your own investments

  5. Mike commented on Oct 12

    to iwant…

    You made newbie mistakes. Talk is just talk. I have been in the bear camp for a while but I also know not to fight a trend. Haven’t really lost anything either. Granted I haven’t made a killing, but I don’t think anyone has. Being that it is only the second week of the quarter and a semi holiday shortened week, I am staying in the bear camp despite rising markets. Discipline and patience are mandatory. Information is just ammunition for when the time is right. The market won’t go up forever.

    P.S. The supposition that you have to play the market’s every move is an errant one, in my opinion.

  6. Barry Ritholtz commented on Oct 12

    Chris Robin, is that true? Are you scamming people with make believe names?

    I am very disappointed — I do not expect everyone to agree with my views, investing posture and/or philosophy. I got trashed in the ZSG post, and thats finbe, because it was a legitimate difference of opnion.

    But I insist upon representing your views honestly — that means who you are, what you believe.

    This is crap, CHRIS ROBIN, and if its true, then you owe all the readers here an apology.

    Otherwise, hit the bricks.

  7. iwantmymoneyback commented on Oct 12

    BR ~ it is chrisrobin … i’m just venting. i called you smart i am calling myself ‘stupid ‘ not you. by the way you should get registered users ;) by the way i am reading trading in the zone and fooled by randomness. they are helping me put things in perspective. i am telling you every trade i took seemed to go bad. i was just naive, young and naive.

  8. Mike commented on Oct 12

    Chris Robin

    You are dishonest and no longer have any credibility in my book.

  9. russell commented on Oct 12

    Well at least we are not at a stock message board. He’d have six IDs arguing with each other.

  10. brion commented on Oct 12

    “sockpuppets” is the general blog term for multiple i.d.’s…..
    ‘Tis a strange post regardless of who wrote it or why…..

  11. S commented on Oct 12

    It will be interesting to see if the deep value guys come in and buy CTX on the dip tomorrow morning. In case you missed it, CTX pre-announced 3Q earnings will miss by a wide margin. The consensus, which has already been lowered many times over the past several months, is $1.35. CTX now expects between $0.65 to $0.75.

    To me, the biggest surprise is the magnitude of the writeoffs associated with land option walkaways and land impairments costs. I figured since CTX was the first builder to start taking charge offs in the March quarter, and took subsequent charges in the June quarter, that most of that crap was behind them. Using the midpoint of the estimated charge, they amount to $132.5 million. That’s after similar charges of $29 milliion in March and $36 million in June.

    The deep value guys have been buying the dips since July (and forcing the shorts to cover). It will be interesting to see if they interpret this huge writeoff and earnings miss as so large that things can only get better from here and buy the gap down in the a.m.

  12. Barry Ritholtz commented on Oct 12

    The Bulls are in full throat — chest pouding glory — you would think witht he market up big today (on fair to medium volume) they might be more secure . . .

  13. jj commented on Oct 12

    the bulls should be 20% net short as of yesterday … but , I notice the bulls who blog here are tiny , retail hacks anyway

  14. samuel commented on Oct 13

    On CTX, remember Greenspan just proclaimed that housing has seen the worst its going to see. We all know that Greenspan is the kiss of death when it comes to economic forecasting. Greenspan is a very reliable fade.

    Also, San Diego has been a leading market example for housing in California and prices are currently down 8% off its peak.

    Mortgage applications are also very weak. The only positive indicator here seems to be the rally in the housing stocks over the past few months.

  15. Mark commented on Oct 13

    I didn’t read the post as too very critical of Barry, not on the order of some of the taunting and name calling we’ve seen lately, so I guess I have a milder reaction to the name deception than others although I do object to it. Put me in the apologize to all readers camp and move on I say.

    Re: CTX- I have been in disbelief over the moves up the homebuilders are making as I KNEW that large writeoffs were coming. But when you have a good short squeeze going, don’t let facts get in the way. Same with the indices. I think a lot of this is a good ol’ whoopin’ put on shorts by the powers that be. Doesn’t mean we shouldn’t profit from it though.

    Richard Russell is thinking this is all part of a huge top forming since 2000. Advises buying yield. Of course, he was an early buyer of gold also. If a huge top, the downside correction is by implication very large.

    P.S. Last weekend we had three separate “Mark”s posting here. Thinking of a name change myself.

  16. russell120 commented on Oct 13

    Mark just put a number after your name.

    Re: CTX

    In their last Q they had $479M land under option (which can expire)

    They have $363M in land owned.

    And they $287M of joint ventures for which they have $424M of direct debt, thought the overall venture’s debt was $1,124M -obvious potential for counter party risk problems.

    That does not count their housing project inventory of 9,242M that risks being sold at less then cost, or their assets of discontinued operations of $7,851M.

    The bulls who are basing their valuations on homebuilder book values are going to find that their is a lot of vapor in those values. That being said, waiting for the other shoe to drop on the home builders could be a very long exercise.


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