NEW YORK ( TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among the posts this past week were entries about the 10-year yield and the Fed.
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10-Year Yield Watch
Originally published on Friday, July 5 at 9:32 a.m. EDT. Here is my view of what the 10-year yield should be. The time to have shorted bonds might have been in 2012 when no one wanted to. As I exhibited in my Value Investing Congress presentation on shorting bonds in May over a year ago, over time, as many have observed, the 10-year yield typically trades between 0.8x and 1.0x times nominal U.S. GDP. If we assume that real growth is about 2.25% and inflation is at 1.40%, then we have nominal growth of 3.65%.
I believe strongly that structural headwinds and the residue of the depth of the last recession will continue to constrain growth, so 0.8x (at low end of the range) seems a more reasonable multiplier -- 0.8x 3.65% = 2.82%, not far from the current yield of 2.69%. That said, as I wrote in beware the interest rate cliff, I believe many market participants are underestimating the vulnerability of the U.S. economy to our addiction (in the private and public sectors) to lower interest rates. It is different this time. Very different.
The Fed Is Between a Rock and a Hard Place (Part Deux)
Originally published on Wednesday, July 3 at 10:33 a.m. EDT. The Fed has already said too much and has been too transparent. The Fed could be jammed if the economic data continues to come in OK (even on the surface). Oddly, a weak jobs report may be what the Fed is hoping for. With a strong number, how exactly can it do anything but taper and maintain any credibility? The Fed has already said too much and has been too transparent.
Fed Chair Bernanke being "puzzled" by the interest rate spike because he placed more value in the stock of bonds held by the Fed then flow and momentum forces just shows how much of an academic he truly is. It is akin to a trader staring "puzzled" at his screens over the rise in Apple (AAPL) to $700, Tesla (TSLA) to $120, General Electric's (GE) crash below $7 bucks, Greece trading like a AAA credit, etc., and then running to the library to try to understand it from an academic perspective.