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A Market Conversation

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Stocks: hey, that retail sales number is really good for me. The economy must be strong and companies will make more profits. I am going to rally.

Bonds: hey, that number is really bad for me. If the economy is strong, rates should rise. I am going down.

Dollar: hey, that number must mean that consumers in the U.S. are spending still. This will continue to cause problems with the trade deficit, but if rates rise, that will make dollar fixed income investments on the margin better for foreigners. That means they will sell their currency to buy dollars. I will rally.

Stocks: wait a second! Those retail sales were strong mainly because of tax refunds. Those will act only like a one time boost and should run out by the end of April. In fact, I am getting a little worried with all these one time liquidity boosts. For the unprecedented amount of liquidity being provided, it is concerning that personal income is still very lackluster and consumer debt continues to exceed all time highs relative to GDP. Maybe I should rethink this rally.

Bonds: you know I would have thought that at these levels we would have seen some foreign buying. Maybe they know something I don't or maybe they just have enough of our debt and it will take much lower prices to attract them. Besides, I am not sure I really believe these sanguine inflation statistics put out by the government and I am certainly concerned with this PPI fiasco. I need to go down more.

Stocks: wow, bonds are really starting to scare me. Many believe higher rates are a good sign, but I know just how dependent buyers are on low rates: it forces them into risky things like me because they can't get decent returns on bonds. What if people, especially the elderly who shouldn't own nearly as much of me as they do, begin to move money out to bonds at these levels? I think I should go down some more.
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No positions in stocks mentioned.

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