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Strategies & Market Trends : Waiting for the big Kahuna

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To: Bilow who wrote (6149)	10/26/1997 1:29:00 AM
From: IQBAL LATIF	Read Replies (1) of 94695

Billow- Capital is coward the sudden drop in markets in ASEAN countries have made bonds a hot deal-however once markets realize that 'world is not coming to an end' the bonds will move in tandem with equities- lower long term yields with strong economy can only be justified in a non-inflationary environment. This new cocktail of 'bond rallying on fear' will only work for few days but once economic numbers indicate a direction- bonds will take its cue from fundamental numbers not some made up stories of nonb-existant fears to world finacial system. Long term yields in face of market catastrophe can move down but once these external non-exixtant threats are discounted the long bond yields and economic numbers will move in tandem. So will the equities. It is only in a dysfunctional economy like Japan where artificial measures to keep competition out and to keep aggregate demand low that governemnt bonds may become attractive and pricey but one in absence of any other altrnative is forced to invest in low returning government securities- do you know that how many billion $'s are deposited in Japanese post office accounts which are by law kept out of global markets- so to call Japanese bonds an example of divergence is not a good comparison. Japanese with high savings have little else to invest in. Bond and equities in a free market economy cannot move in two different directions- low rates will lead to higher profits and higher profits will lead to higher markets, I agree that if we are hit with deflation than situation may be different but at the moment everyone is more concerned with inflation or overheating - the other day we all were worried about very high capacity utilisation which may create bottlenecks- bonds sold off from 116,24 to 114,17 but on news of ASEAN they came back up- in my opinion this escape is a sign 'coward capital' afraid of its own shadow and unsure of its direction- if we see some signs of wage inflation are you telling me that this bond is going to ignore it- bond money is smart money and moments they will see rising wage pressures they will dump the securities.Bond prices will fall with securites heading south- I will be very concerned if bond keeps rising with inflationary numbers and equities keep dropping- in other words you are fuelling inflation and what a great short such a long bond is going to be? If I see your logic right - bonds are the new safe heaven- we have a win- win situation here by investing in bonds- if bonds and markets are dissociated markets may head south as a result of inflationary numbers- bonds are going to go north anyway 'flight to quality' so one can establish bond as an automatic hedge, like the whole market has done in last few days- a hedge against falling markets. Mark my words this is not going to happen in a non-inflationary environment because markets will not fall if it is confirmed that there is no threat from underlying wage pressures- bonds and markets will rally, however if inflationary threats are confirmed market will fall because bond will give up its gains- as short terms interest rates are raised bonds may rally once markets are sure of Fed resolve to contain inflation- by the way long-bond has already has an inbuilt premium for inflationary undercurrents 116,28 will only be broken if ECI NAPM CPI and PPI confirm no inflation. Presently bond prices so far fall on inflation so does markets in this new new topsy turvy world we will see bond price rising despite of falling markets but for that we need US economic conditions to be like Japan Since I don't see 'spiral of debt' , 'real estate asset inflation bubble' and 'failing banks' I am unable to comprehend that this bond market driven by fear can continue its run up without confirmation- you must have noticed that bond money on Friday was reactive with markets and SPZ- if SPZ was above 950 bonds were 116,10 the moment bonds closed because of fears of crisis over weekend at 116,24 selling came in. This is a short term phenomenon and will not continue. Bond is not gold 'a refuge in times of crisis'- bond is a government security and its redemption value depends on 'rate of inflation' if inflation is higher bond will selloff- the moment bond will be treated as an object of safety and dissociated with economic fundamentals we have a problem on hand- so far bonds prices have responded to 'fear' but any way there is no inflation on the scene there is no problem but I doubt bond will continue to respond the same way if ECI shows wage pressures. At this stage of economic cycle bond will respond to fundamental economy- it is only a stop gap where you may see this 'flight to quality' continue because capital needs a secure home but one thing this capital will not accept is any erosion of value- US assets will suffer in case of turn in economic fortunes- in my opinion by next week we may see all this behind us as numbers may confirm a healthy non-inflationary unlike japan economy. Bi Bi

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