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

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To: Fiscally Conservative who wrote (49774)	1/15/2006 2:17:49 PM
From: GraceZ	Read Replies (1) of 110194

Sounds good,although I would add these enormous number of companies that went to zero took down many shareholders. The very first thing one should be taught about taking an equity position is that most companies fail, either right away or over time. The value put into them is retained simply because the knowledge from the failures is embodied in the successes just as every great invention contains knowledge gained from all the preceding failed experiments. So while many individuals lose, society at large gains. Only those bond holders managed to save face. The much lower potential reward is offset by a reduced risk of losing it all. The bond holders maintain integrity on the backs of Mom and Pop investors via the shares purchased. Mom and Pop pretty much knew they were buying lottery tickets, they just pretended not to know afterwards. Then these bond boys get back together and decode where the next play is and on whose fertile grounds they will plant their seeds. Mom and Pop moved strongly into bonds after the Nasdaq sell off. Why do you need to blame the bond buyers? It was the speculative behavior on the part of the public that drove equity prices up to ridiculously unsustainable prices. There was indeed a massive FED injection of liquidity over these last four years. Massive during the Asian contagion, massive before Y2K, massive after 911 (which was then quickly drawn down) but in the last four years permanent creation has been about equal to the growth in demand for currency. What we did have was a massive movement of money into bonds, especially high yield and MBS: money in search of yield. Do you believe they will once again inevitably lower rates to effect a manually stimulant for further economic growth? Whatever they do it will be wrong because it isn't possible to know what the rate should be, only a free market in money could discover that. And if so,how might this impact the dollar? No one knows definitively how monetary policy moves will impact the currency (only that responsible monetary policy along with good fiscal policy tends to make for a stronger currency). I do know that attempts by the central bank to smooth out economic fluctuations at home using monetary policy tends to raise the amplitude because excesses aren't cleared, they accumulate. This has the effect that things move further inside a trend than they might otherwise. One of the worst things that Congress did to the Fed was to put the dual mandate on them, low inflation with maximum sustainable employment. The larger question,can we afford this? The Fed has the tiger by the tail, they've killed off any free market there might have been for money. The best they can do now is react to their own bad past actions. On a personal level, I think one has to develop a strategy that will do well regardless of where the dollar goes. I don't try to guess because that strategy has a very low probability of returning superior results. The landscape is littered with the burned out corpses of those who tried to make bets on what direction currencies would take.

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