most excellent quick analysis, MishMan, truly
but I believe yours contains a single faulty assumption
it is hidden between your many lines of depth
as the Fed fights tooth & nail to prevent long rates from rising, they fully sacrifice the USDollar, as I have been describing repeatedly
my timeframe is not a quick one, so bear with my view
I believe this will take time, and I agree with you on every single point, except this assumption I describe
as the Fed sacrifices the USDollar, which is quite evident today, they will succeed for a time, maybe much longer than I expect to see, in forestalling higher longterm and shorterm rates
the first damage will come to LT rates, which are more under control of the market than the Fed and Open Market actions
the USDollar sacrifice is akin to dismantling a set of 20 pillars holding up an apartment building, where parked cars are located underneath
in the past 20 months, a few pillars have weakened badly, such as rising commodity prices, and rising energy prices
not to mention absence of foreign fixed capital investment
at the back door is the clear & now present threat of rising Asian import prices
a subterranean current is powerfully building, very difficult to catch sight of, but nonetheless very real and apparent, ready to strike hard... it is the monetary inflation which has gone badly overboard
the twin threats of USDollar sacrifice and monetary amphetamines combine for a lethal mix for the bond market in 2004, as PIMCO's McCulley notes well
additional pillars are weakening under the apartment building, such as the waning housing refinance movement, which should undercut retail consumption and all manner of other household spending
pernicious signals lurk in the darkness also, in the form of capital flight toward foreign markets, which might tend to explain the reduction in money supply underway
I believe you assume that the free market no longer has power to override the Fed's action
and that is consistently where we disagree
I believe in 2004, the undercurrent of inflation will overtake the deflationary pressures from collapsed debt and faltering demand,
AND the undermine of USDollar decline will crush the nascent recovery
AND the capital flight threat will shake the Fed to its roots
the associated high pressure and low pressure will create an effing storm the likes of which the modern world has not witnessed in many decades
THE FIRST VICTIM WILL BE THE BOND MARKET
as Fed stimulus went too far for too long, and will continue way too long
as the currency adds to cost pressures
and capital flight will require rendering financial investment in our economy more urgent
THE FIRST VICTIM WILL BE THE BOND MARKET
I expect the Fed will issue a distracting and less than sincere message soon, justifying a hike in FedFunds rate this spring or summer
not because the US Economy has gained strength
but because the threat of Argentine-like capital vacuum flight becomes a massive massive threat, and reality
happy holidays, my good man
I love to debate this crucial point with a highly intelligent, well read, and articulate fellow
/ jim |
