Peter, interesting link. I think that guy missed his meds.;-)
Joey, bonds may retrace, but 6.5%? Come on. Real interest rates are still at reasonable levels (having come down from unreasonable ones) and inflation is the last thing we should worry about. Deflation is the bigger threat as has been the case since last fall. We will have a recession and that will relieve some of the pressure on labor markets as well as taking some more heat out of the equity markets, slow consumer spending, etc. In spite of the token 1/4% cut in fed funds, credit markets are tight - everyone wants "risk free" treasuries, no one wants non-investment grade corporate paper and banks are going to turn off the spigots (if they haven't already). Short rates will continue down as the economic slowing becomes more obvious (LIBOR got to 3.25% or maybe a little less in '93).
If the long bond retraces, it won't be because of the Fed raising rates to support the dollar, but rather because bonds are overbought in a buying panic and investors will soon realize that it doesn't pay to go long (I dumped my bond funds I bought August '97 and moved to money markets - actually outperformed equities in that time too). I wouldn't expect it to go above 5.25% any time soon and it'll spend more time below 5% as short rates continue down, but we're at or near the bottom for long rates IMO.
Now, re the Fed's involvement in the LTCM bailout, if the Fed got the parties together and talking, great. If the management of LTCM is better off as a result, that's not good, IMO, but the fund's investors are the ones that pay them. The banks really had no choice but to pump cash in to avoid forced liquidations of positions and if a more orderly liquidation over time results in the banks recovering more of their loans, then the banking system and the economy are better off for the use of the Fed's paneled offices for a meeting. The ones that lose the most in this whole mess are the investors, but they already lost before the banks "bailed out" the fund and they were the ones supposed to be at risk to begin with (not that they may not all sue Merriweather and the rest anyway).
Bankers sure have a knack for shooting themselves in the foot though, don't they? Latin American loans (the last time), real estate, bad LBOs, now stupid loans to some hot shot hedge fund(s?). Well, not all banks. NationsBank says they have zero loans to hedge funds (BofA has a little, but not to LTCM I believe). Hugh McColl is smarter than all the NY bankers put together. But that's another conversation.
G'nite,
Bob
PS: I'll call my carioca buddy tomorrow to get a Brasilian perspective rather than relying on gold bugs to predict the future of that country. No offense if you like gold, but newsletters (or whatever Peter's link was quoting) pushing gold can't be expected to be optimistic or even necessarily objective. |
