"Always a big fan of the work that Bill O’Donnell and John Briggs do at RBS… Their morning call had some interesting commentary today:
“I’m not surprised by the pervasive pessimism given what history tells us about deleveraging processes. McKinsey Global Institute cites history that suggests the sovereign de-levering process takes around 6-7 years to work through, once started. They then add that the debt problems in the developed world today are more diffuse and deep than they’ve ever been before. Meanwhile, taxpayers are smart and know that any fiscal bone thrown them today will most likely be snatched back in the future. Others assume that any bones that are doled out will be paid for by them. We all read the papers and can see our fiscal future in the UK, Ireland, Greece and Portugal with their labor unrest and such. Indeed, I repeat my surprise that Fed Chairman Bernanke was so surprised by the excessive pessimism that he observed. Bernanke is one of the great students of financial crisis and clearly knows that deleveraging processes are both painful and long-lasting even though they get governments and households (in our case) to a better and more sustainable footing in the end. It’s the getting there that’s the problem and even though we’ve not yet seen the axe swing of fiscal austerity here yet, we still know its coming. After all, it’s now the law of the land.
The only logical outcome to the looming sovereign and household deleveraging here in the US is a lower standard of living. Yeah, we lived beyond our means for years but nobody likes to go backwards after going steadily forward for much of their adult lives. It’s just one of those things where change matters more to consumer psychology than level, and I highly doubt that Twisting the Fed’s balance sheet is going to do much to alter consumer, bank or business perceptions. These are just the conditions to foster recessions and that risk will no doubt keep bond yields low for an extended period. For example, we recently printed 10yr yields at levels not seen since 1950. Recall that the Fed capped rates for 9 years from 1942 to 1951 so there is precedent for a Japan-like compression in rates that persists for years. Anchoring short rates through mid-2013 (at least) was just a hat tip to the realities of our time and an acknowledgement that time (a lot of it most likely) is the next best healer as the Fed throws their arm out and the administration is forced to bow to the realities of a bloated budget. Treasuries are thus one of the best places to be for this long haul. Buy dips when offered up.”at http://pragcap.com/deep-thoughts-by-rbs