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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: Jim McMannis who wrote (21819)1/20/2005 1:59:53 PM
From: mishedlo  Read Replies (2) of 116555
 
Heinz on treasuries and the FED tightening

now, here's what's likely to happen, imo: the Fed will tighten until the asset bubbles DO begin to deflate. they will then immediately lower rates again, but it will be too late - the deflationary train will already be in motion. real interest rates should then soar in spite of new record lows in nominal rates. the 'reflation' effort of 2001-2003 has only POSTPONED the deflationary contraction, and made sure it will be worse than it would otherwise have been, since a lot of additional debt has now accumulated (backed by assets that are going to deflate rapidly when the point of no return is reached). Roach WILL get a restrictive monetary backdrop - just not in the manner he now imagines. the Longwave cycle is too powerful....no central bank can hope to deafeat it. consequently, yields on the long end of the curve will continue to decline, almost regardless of what the Fed does. in fact, tightening at the short end ensures an even bigger rally in long bonds, since the bond market is very sensitive to the underlying deflationary trend, which is reinforced by tightening. what surprises me is that they even consider such drastic tightening moves just as money supply growth has come down to 10-year lows and is even going negative in shorter term time frames (quarter-on-quarter growth). well, we can rest reasonably assured that the bond market will cotinue to surprise everyone....
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