Mish, the hedge fund speculative trades must be considered
the flat yield curve, and refusal by the long end to rise with the Fed hikes is best explained by three factors, in order of importance
the first and most powerful is the YEN CARRY TRADE
it forces convergence in bond markets
it aint no conundrum to me, not since last summer
the decline of the USDollar and USTrez long rates go hand in hand with secular deflation
twice as much bond income as bond expense out there
i.e. twice as much money taken in as bond savings yield income as mortgage and installment loan borrowing expense
so the lower interest rates go, the slower the economy gets
the REPORT CARD on the Fed Reflate initiative is long rates
dont be confused, apparently as RussW is, that raging cost inflation will push interest rates higher from asset erosion
we only have cost inflation, which kills profit margins and household discretionary spending
if China and India could be placed on twin asteroids, then costs could be passed along, price inflation on consumer items measured by the CPI would be detectable, jobs could be created, and wages would grow
but Chindia is with us
THE PRESENCE OF CHINA/INDIA GUARANTEES THAT COST INFLATION WILL NOT BE PASSED ALONG, UNLESS CHINA PASSES IT ALONG
even then, the USA will be last in line for pricing power advantages
the end result is more powerful forces to push LT rates down
EVEN MORE
1. yen carry trade will not end, will never end, until we achieve close convergence of US long rates and Japanese long rates
(why is this concept so consistently overlooked, when hedge funds have amassed over $800 billion of active spec money?)
2. recycled massive Asian trade surpluses into the only large volume markets for parked money
3. the Fed Reflation initiative has failed, and in its stead we have a powerful cost inflation phenomenon which smothers the US Economy
I remain a jackass
/ jim |
