Wednesday, December 29, 2010

2011: The Year of Volatility

All I could do was laugh after seeing today's bond auction:

"NEW YORK (MarketWatch) - The Treasury Department sold $29 billion in 7-year notes /quotes/comstock/31*!ust7yr (UST7YR 2.72, -0.16, -5.55%) on Wednesday at a yield of 2.83%, the highest since April. Bidders offered to buy 2.86 times the amount of debt sold compared to an average of 2.96 times at the last four monthly sales. Indirect bidders, a group which includes foreign central banks, bought 64.2% of the sale, the highest allotment since June 2009 and well above the average of 49.9% of recent sales. Direct bidders, a class which includes domestic money managers, purchased 4.6%, down from 9.1%, on average. After the auction, the broader bond market extended gains, as traders expressed relief that the final auction of the year was completed. Yields on 10-year notes /quotes/comstock/31*!ust10y (UST10Y 3.36, -0.14, -3.87%) , which move inversely to prices, fell 9 basis points to 3.39%."

My Take:
Get used to this volatility folks!  2011 will be the year of volatility IMO.  My first thought after seeing today's spectacular bond auction was something must be brewing in the Eurozone.  The real buying strength of this auction were the indirects overseas that I highlighted above.
As I have said in recent weeks, the Eurozone will take center stage early in 2011.  Risk is relative and the perception is that the PIIGS will die before the US.  I agree and Ben is going to get a free pass to continue printing via QE in the short term as a result.
The Bottom Line
Busy tonight so I have to be brief.  All I can say is be prepared for a series of crises next year.  I expect to see wild swings in all asset classes.  There will be a series of inflationary and deflationary panics as the financial system tries to survive multiple threats as a result of their massive debtloads. 
On the inflation side, there will be plenty of fuel for speculation in things like commodities as the central banks continue printing.  This money printing will obviously be devastating for all currencies.

 The difficulty for traders and investors will be trying to figure out which country or large bank blows up first.  Investors in 2011 will act like a bunch of mental patients with ADHD as they try and profit on the wild volatility as these huge news events hits the wires.  The specs will also focus closely on how the central banks respond to them.
Currencies will trade violently as a result of these events as this global financial crisis plays out.  For example:  Currencies like the Euro will fall sharply on bad news out of the PIIGS and then rise when bad news around the debt issues here in the US hits.  You are going to have to be very nimble if you want to trade the markets next year.
On the flip side, I expect to see deflationary panics as well.  These panics will be created as start seeing  defaults.  If a country like Greece defaults and haircuts are forced to be taken then I think you will see the big money run scared and hide in safe havens.  This will be very deflationary for the markets. 
These deflationary panics will create large market sell offs and they will also likely temporarily strengthen the US dollar because the first few blowups will likely be overseas.
I will have more around this in my 2011 piece.  Keep an eye out for it.

 As for the market today all I can say is BORING!.  I think I fell asleep watching the tape this afternoon.


getyourselfconnected said...

I have always wondered why bond buyers, and we are talking massive block buyers not small fry, can pivot and buy on such small news events for such small % things but then I am a bit slow anyways!

All my best Jeff and looking forward to writing again in the new year and making a few moves.

Jeff said...


You too my friend. I am looking forward to getting back into things as well!

Happy new year!

Anonymous said...

melt up on wall street, melt donw on mainstreet.

gas prices up, unemployment up after the holiday junk, housing prices down. wall street up.

get ready for SHTF fan time.

people are going to be reeling while wall street hits record highs, up until 2012 when god knows what will happen.

Jeff said...


Thats pretty much how I see it too!

It's going to be interesting to see how things unfold beginning next week.