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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

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To: Crimson Ghost who wrote (6093)	1/24/2004 8:50:38 PM
From: yard_man	Read Replies (1) of 110194

stagflation coming up, eh? Main Entry: stag·fla·tion Pronunciation: "stag-'flA-sh&n Function: noun Etymology: blend of stagnation and inflation : persistent inflation combined with stagnant consumer demand and relatively high unemployment during the last bout of stagflation, what was happening to housing prices ... what was home ownership and homeowners equity like as a percentage of the home's worth ... if you envision treasury rates at 6% sometime -- how long do you reasonably think they could persist at that level. What do you think the demand for money would be if tomorrow treasury yields went to 4.5% or 5%?? You say bonds are grossly mispriced -- what does that mean except that having the real piece of property in x number of periods will be worth considerably more on a nominal basis than now?? Or that the principal plus interest will buy considerably less in the future than market participants currently think?? Considering how large, relatively speaking the housing market is and the market for capital goods -- is it really likely that there is an extreme danger that these will cost more across the board. I tend to think just the opposite -- untoward housing inflation has led to ->> WAY above mean levels of consumption ->> businesses to extrapolate much greater levels of demand than will be present in the future -- capacity utilization remains low for many industries, even with these high levels of demand -->> rationaliztion or liquidation has been forestalled. This all implies to me that as far as capital goods are concerned -- as far as housing is concerned -- treasuries are already yielding quite a bit with respect to "future purchasing" power. Now you will want to talk about the prices of commodities, foodstuffs, etc. for which there can be no bubble at present -- given the infatuation with all things financial -- that's all well and good, except those are not the kinds of things supported by debt -- what a dollar buys now and in the future of those goods is irrelevant to bonds, IMO. What I can't explain or rationalize is the love of "junk." That most certainly is a bubble -- it's confidences rests solely on the idea of recovery. You buy high yield in an economy on the "verge of recovery" because the discounts in there for the default risk are too high, but now everyone has bought and keeps buying because we are "perpetually" turning the corner -- until we don't?? You want something that doesn't make any sense, except in terms of high-powered, levered finance and that is it, IMO. The only reason it is happening is because of interest rate derivatives and the false sense of security they give. I'll give you my opinion FWIW -- a large number of folks hold this carp -- junk and keep buying it while holding some offsetting contracts or swaps which are predicated on interest rates rising and they think they are safe ...but I think the garbage is going to meltdown if rates go too low, too quick, because of the folks that took the other side of that bet.

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