martin, I have a lot of respect for Gross, but I think his analysis misses one major point, the impact of budget deficits on the cost of money, sure, Greenspan should notch up short term rates and not just to eliminate the excess in derivatives outstanding to milk the yield curve, but also to provide him with fresh ammunition in case he needs it six to 12 months hence. However, the major factor on long term rates is competition for investable money, when the treasury goes into the market to the tune of $200 B, it competes for money, that impacts long term rates even more than the hedgers feeding down the yield curve. Since September 11, the national debt has grown by a staggering $200 B (it was around $5.7 to $5.8 Trillions immediately after 9/11, as of yesterday's it stands at $6.02 Trillions, only some $13 B from the debt ceiling). That is just in six months.
Now, we had deficits of $400 B (and good stock market during those years), but the difference was that then we had visibility that these deficits are being reduced (thus causing the gradual long term reduction from the mid eighties till 2000 of long term interest rates), right now, we do not have such visibility.
Zeev |
