The FED finds a need to talk up a strong dollar, in view of the very large position of US debt holdings among foreign investors. Yet the slowdown in housing will not be desirable if carried to an extreme. Already, retail sales are slowing. Yet the PCE price index is above 3%, highest since 1991. Average hourly pay is at a 5 year high. Inflation, year over year, is higher in the US than in almost every major industrialized country. My guess is, ultimately, the FED will chance housing distress if needed to protect the central banks. MZM, the money base they control, has been slowed from 11% growth in 2001 to only 3.3% today. This implies they won't hesitate to move rates higher.
The US stock market is in big trouble here since it's not worth the risk to be net long. The risk is of an accident-a Fed miscalculation, an oil spike, a terrorist attack. The risks are very real.
Despite rising inflation, bond yields have been declining, ie; real interest rates have been steadily declining for more than 5 years (till recently), because investors, seeking what they see as the safety of bonds, have accepted lower real yields. Simultaneously, lower yields reinforce inflation, since low real rates encourage investment in real assets such as commodities.
As for stocks, the steady decline in P/E ratios is another sign that investors are getting more worried about the impact on the economy of rising inflation.
The Bear is like an exotic dancer who likes to woo its followers into thinking that the coast is now clear to go inside for the joy ride (on the long side) only to take your money and disappoint you as she strangles you.
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