Question to Heinz (aka Trotsky)
How do you view current and future interest rate
moves? When will the FED do the move? What would have
been the interest rates now if the Fed had not held
down short term rates?
My take:
1. longer term rates are going up only because the
market thinks that the Fed deliberately creates
inflation. If the Fed tightens then longer term rates
will come down.
2. We'll have a recession ahead, so normal rate
structure would be inverted curve (if the Fed didn't
hold down the short end).
3. Latest move in longer term rates may well prick
the RE bubble
His answer:
this is indeed a reasonable expectation - as soon as the fed tightens at the short end, the long end should rally. in any case, contrary to popular wisdom, the i-rate carry trade is NOT dead, or even in danger of dying. it will come back with a vengeance, and catch speculators with their current record high net short positions in both debt nstrument futures and Rydex (the bearish consensus on bonds in the Rydex universe is now at 99.856%, absolutely unprecedented unanimity. 2,4 BILLION dollars invested short vs. 30 MILLION invested long) with their pants down, so to speak.
the market DOES believe the Fed is 'deliberately creating inflation', but the Fed is actually not successful in doing so. in fact, commodity price inflation will have a DEflationary effect on the overall economy, and i note that wages are growing at their slowest pace ever in the past 5 years, while industrial capacity utilization remains at depression levels. deflationary slack in the US economy is as great as ever.
regarding the RE bubble, yes, this may very well finally prick it. if that happens, falling rates at a later stage will NOT be able to rescue it (see Japan, where exactly the same thing happened). if and when the RE bubble collapses, the deflationary contraction wave will go into its 'recognition phase' imo. |
