a bit from russell.. and what other folks think
I want to start the site with this very insightful e-mail received yesterday, and by the way this prominent gentleman knows whereof he speaks:
"Dear Richard,
If you look at the Treasury Yield curve, inflation not deflation, seems to be the market's next enemy. Greenspan has bet the shop on beating the recession and is now caught between tightening and stalling the
recovery -- and risking inflation from the frantic monetary expansion.
"While there is a lag of 18-24 months before the price effects feed through, unfortunately for Greenspan, the debt markets will adjust yields immediately, squeezing profit margins and creating debt servicing problems for the over-leveraged. Debt quality suddenly got worse and stock markets hate inflation because at the outset, costs lead prices.
Maurice Newman
Office of Mr. Maurice Newman
Chairman, Australian Stock Exchange"
I agree entirely with Mr. Newman. As I've noted repeatedly, US corporations and consumers are up to their necks in debt. The Fed's prescription for handling sky-high debt is inflation. In other words - - make all those dollars that are owed -- worth less and less.
Conversely, the death-knell for big-time debtors is deflation. Deflation means that dollars are worth more and are scarcer. Deflation is therefore, the scariest word in the Fed's vocabulary.
But with evidence of the US economy reviving, the bonds took a tumble. And since declining bonds mean rising interest rates, the Fed got frightened and we heard various Fed governors state that the Fed has no intention of boosting rates any time soon.
So what is the Fed really wishing for? The Fed is wishing for the impossible; the Fed is wishing for just a little inflation, but with rates holding steady or better still, with rates coming down.
But the mean old bond market isn't interested in what the Fed wants. Bond-holders and bond-buyers are interested (surprise) in protecting themselves. Which is why bonds took a tumble last week. |
