John,
Hawk, The inflation comment in the first story reflects that the Fed has not raised short rates since June 2006.
How can they raise short rates more when long rates are reflecting a lower rate? That would only invert the yield curve even more, correct?
The problem, as I see it, is that while there is a tremendous amount of liquidity out there, a lot of it has been finding a safe harbor in US T-Bills (and affiliated government backed debt instruments). There seems to be a tremendous amount of fear still residing out there that has kept US long-term rates lower than the short term.
Thus, raise short term rates even more and that will only deepen the sentiment to remain in long term bonds as it would send the message the Fed was trying to provoke a recession.
One of the reasons, IMO, we've had some a speculative real estate and sub-prime market has been the continuing flood of IRA/401K related money looking for a place to park itself. It was going into stocks in the early nineties, but then people switched into real eastate (some directly bought via self-directed IRAs) as interest rates dropped in response to the Tech bubble burst and 9/11. So that money is still piling up on a quarterly basis, and it's still looking for a home. And if it doesn't go into real-estate, it goes into bonds. And if bonds are not paying well, eventually it will have to go back into equities.
And it's that last "shoe" that I think still needs to fall before the Fed can up rates. It has to follow the long-term debt market rates that must rise above short-term rates.. But the market will really have to do that, not the Fed. All the Fed can really do is either find a way to "encourage" the money in long-term (safe) debt to find greater gains elsewhere, or provoke a economic recession that will drop equity prices to levels where only a fool would remain in bonds.
Art Cashin has just pointed out that the Private Equity privatization cycle has probably not run it's full course.
I still hold the opinion that private equity acquisitions are indications that US equities are undervalued. I know I wouldn't risk capital on taking a company private unless I was sure I could, both, net a nifty percentage annual dividend, and also be able to later take it public again as a mean and lean corporation.
And we may be seeing some first steps towards more consolidation of mega-corporations on an international level..
Let me know if you concur, or disagree. This is my "off-the-cuff" opinion on the matter, and I'd appreciate other input in order to solidify my understanding.
Hawk |
