Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: t4texas who wrote (5065)	12/7/2001 7:31:25 PM
From: isopatch	Read Replies (4) \| Respond to of 36161

Glad we've looked at bond > $ > stock mkt interrelationships from time to time on the thread. Good points, t4texas. One of the most important signals of approaching $ weakness has always been increasingly volatile downward plunges in Treasuries. Then IF the dollar follows with a volatile drop we have the classic setup seen just before some of the most vicious and extreme stock market meltdowns, even WITHOUT the horrible economic fundamentals of a major recession. So far the $ hasn't broken hard to the downside. But we are getting very close unless the bond vigilantes are pacified. How can that be done? After 2 weeks of warning shots across the Feds bow, we FINALLY saw the step toward attempting to stem the episodic mini-massacres in the bonds. Are you ready folks? Brace yourselves. Today, for the 1st time in a Blue Moon<g>, Easy Al DRAINED RESERVES! app.ny.frb.org Via the NY Feds open market desk monetary authorities began selling Treasuries into the dealer market instead of buying them. This is the 1st sign of a reversal in policy after many months of perhaps the greatest frenzy of monetary pumping ever. Yup, AG caved. And he had no choice. Remember the Fed, at best, can only control ST rates. Beyond that, the private credit markets are all powerful. They have the power to put medium and long term rates dramatically higher if the see the Central Bank is pursuing too loose a monetary policy for too long a time. With the disinflationary or (to some) deflationary forces strongly at work since 9/11 it's not surprising that this vigilante reaction took this long to occur. Seems as if the the final straw was the gimmick of ending new long bond issuance. After the pop from that, the Treasury market has gotten uglier and uglier ever since. I've said more than a few times here that the Fed, the PPT and the Treasury are all avid chart readers. And every bit as good with those skills as anyone here. In light of that, it's not surprising to see what forced Greenspan's hand. In the past few days the key 10 yr Tsy broke its previous low. And AG signaled his acknowledgement. Not only did he stop the presses today, but also turned on the confetti Vacuum Cleaner (Iso lingo for draining reserves)<g> So the line in the sand has been drawn by the bond vigilantes. If the Fed crosses it by turning the presses right back on? They've made it clear the Treasury markets will crash driving Mid and LT rates sharply higher as bond holders flee fixed income in fear of FUTURE inflation (perhaps many months in the future). But such an exodus, in driving up mid and long rates would tank the economy into a deeper and longer recession. OTOH, if AG is forced to rein in monetary growth for a sustained period? Short rates will begin climbing again, also threatening the economy. More than anytime in his tenure as Fed chairman, AGs High Wire act above shark infested waters is being hampered by a wire shaking more and more from the increasing winds of the largest global economic storm in over 20 years. All JMVVHO. Isopatch