WRONG-FOOTED AGAIN?

                   
"Stuck in Lodi again," an old popular tune, could easily be a metaphor for the Federal Reserve and its current wait-and-see policy.

In this case the tune would go "Wrongfooted again."
  
As today's Financial Times notes in "US bond bull run wrongfoots Wall Street," there's little sign a slowing demand for long-dated Treasury bonds.

"The big bond bull run of 2014 has made a mockery of Wall Street that US Treasuries were set for a sell-off.

For all the signs of economic recovery, and despite gains for US stocks, long-term Treasury yields, which move inversely with prices, have delivered double-digit returns this year, outpacing the S&P 500's robust performance." 

All of this has been quite unexpected and in our view is another sign that when the change comes it will likely catch most off guard. And that goes along with our recent post "To Hedge Or No?" But let's add some more to our view.

Also in today's FT "Fed ignores likelihood of weaker GDP growth." 

The US Federal Reserve may have a problem. When it finally does move to increase short-term interest rates, it may prove too late to counter a bout of higher inflation. Why? Because it is becoming increasingly clear there is a limited ceiling on the long-term growth potential in the US economy. US GDP growth is likely to average 2 per cent a year in future, rather than the 3 per cent of the past 50 years. 

There are two main reasons for this, the first being labour market dynamics. The US labour force over the past five years has risen just 0.2 per cent a year, in spite of a population increase of 10.1m. This in turn has caused a sharp decline in the labour force participation rate. 

Yellen herself has noted she believes that the labor market is different this time. And that's what this strategist is saying about the US GDP ceiling. Despite the bubble-like numbers in the bond and equity markets, interest rates and employment numbers are coming off extreme lows. 

Easy money has been squirted to extreme highs. Even that grand central banker Big Ben Benanke, patting himself on the posterior, recently called this Recession greater than the 1930's turn down.

Arrogance knows no bounds. And that my thirsty friends is one of the larger than life dangers of central banker bureaucrats.

Extrapolating the future from past data is a dangerous game despite apparent similarities. So it might take a lot less to cause a lot more trouble ahead than these big city central bankers with their big dot board calculate for. 

To date the bond market's wrong footing Wall Street and the rest of us has been the Fed's best friend. But even best friends can often times turn on you.

We think the Fed already has a problem. They just don't know it.
t. man hatter