The question de jour for all of us seems to be how long do the central banks fiddle while Rome overheats and burns (I think almost all of us here, see this?). Or the second part of the question (let's call it the Fillmore theory) is does it matter, will other forces (bond and dollar vigilantes like Soros, Gross and Buffet) take over? And since the whole planet is lined up complacently (moral hazard run amok) behind massive levered interest rate and high risk carry trades, and is LONG, LONG, LONG, what's it all mean for those players? How much slack do they have if interest rates start spiking up? And what's the fallout if they (nearly everyone really) get trapped? It's obvious to all but the clueless that we live in very interesting, scary and breathless times. And last but not least, what's the timing, and the power of the forces unleashed?
Only thing to do is keep looking at the evidence. We clearly have not just one, but two out of control CBs; BOJ and the Fed. We see "foreign banks" (code name for BOJ) buying about $27 billion in US debt in the last two weeks, and this at a time when they report operational losses to their governments.
Message 19543666
They are doing nothing more than lining the pockets of currency traders at their taxpayer expense. What happens when the tide keeps going them and the losses mount further? On the US side, there is only some evidence so far of entering the market to directly monetize debt. That could quickly change? Instead they choose to keep providing cheap loans (through OMO activities) to the speculative levered crowd to keep them piling into the carry trades.
Message 19537308
The other CBs of the world look concerned, as well they should be. Some are even taking action. Even the slightest responsible behavior spikes their currencies.
On US Fed activity there seems to be this benign consensus developing, that they just raise rates a little at a time starting in several months, and just keep playing this game (while commodities spike higher and higher, the USD collapses, and economies around the world dangerously overheat, and the dogs run loose:http://www.siliconinvestor.com/readmsg.aspx?msgid=19541344). I for one just can't believe this consensus will be even close to being right.
cbot.com
If the world's players have their positions built around a 1 1/2% fed funds rate at mid-year 2004, I think they're going to be in a world of hurt. I even had one acquaintance (*) of mine state that he felt low interest rates were all but guaranteed through the election. It's as if most truly believe the interest rate cycle has been abolished, just because so many will be badly hurt by one. How naive, and how misguided.
(*) No dumbie at all, successful car dealership, definitely feels consumers are satiated and broke, and that a down cycle is coming. Just "next year" is all. I can't count how many "problems manana" statements I've read and heard over the last several weeks. How convenient! Here's a typical one, is Schaeffer going to be able and time this?
schaeffersresearch.com
Maybe, suppose he's guess is as good (or perhaps better?) as mine, but will it be that easy? Is the timing (much earlier, and sharper rate spike) going to be the trap that catches all the bag holders? |
