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To: ild who wrote (219868)	2/8/2003 6:30:51 PM
From: At_The_Ask	Respond to of 436258

I think the guy that wrote that didn't know what he was talking about.

To: ild who wrote (219868)	2/10/2003 1:29:11 AM
From: ild	Read Replies (1) \| Respond to of 436258

In bonds, the important divergence between straight and inflation-protected Treasuries continues. As always, the information is in the divergences. In recent sessions, that divergence has abruptly widened. The yield on inflation protected securities essentially measures the real interest rate, while the yield on straight Treasuries is the real yield, plus the anticipated inflation rate. When both yields decline, but the inflation protected yield declines faster, it means not only that real yields are declining, but that anticipated inflation is increasing (from about 1.5% in December to about 2% currently, to be exact). Since real interest rates are tied closely to future real economic growth (see prior updates on this), bond market action is giving a very specific forecast - weak economic growth combined with positive and persistent inflation. In a word, stagflation. Unfortunately, that appears to be the best case. One of the disturbing features of the current economic and political climate is the willingness of our Administration to plunge the U.S. into international isolationism. Beyond the predictable political consequences (radicalizing first-tier enemies, amplifying anti-American sentiment, and proliferating exactly those weapons we seek to contain), there is one particularly acute economic risk to this, which is the ease with which U.S. isolationism could trip the economy into a depression. The U.S. current account remains at the deepest deficit in history, the debt burden on corporations and individuals is also the greatest in history (rivaled only by the late-1920's), and rates of bankruptcy and default are already problematic. The existing current account deficit means, in practice, that present levels of U.S. economic activity and real investment are dependent on foreign capital inflows well in excess of $1 billion each day. Needless to say, the flexibility to tap this source of financing for economic activity is greatest when we are not already reliant on it. So not surprisingly, every prior economic expansion began with the U.S. current account in surplus. In stark contrast, the fastest way to "improve" a large deficit in the current account is to suffer a deep recession through profound weakness in real investment and capital spending. We need not resort to wild speculation to conclude how the deepest current account deficit in history might be resolved, if the Administration insists on forcing the issue. And this is the risk. By pursuing a stance that isolates the U.S. internationally, however great, however powerful, we pursue a stance that threatens the continued inflow of foreign capital at a time when it is central to our economic stability. The potential effect of a chill on foreign capital inflows could mirror the consequences of our retreat into protectionism during the Depression. As mathematician Rene Thom noted decades ago, catastrophe is the movement from one stable equilibrium to another, along an unstable path that can be abrupt even if the system itself is only changing gently. The apparent stability of the U.S. economy in the face of massive and continuing foreign capital inflows is a much different equilibrium than would be achieved without those inflows. One might point to Friday's unemployment report for comfort about economic strength, but it is clear that the jobs gain was a seasonal reversal of December's downward revision, and that the decline in the rate of unemployment was not due to job growth but attrition of workers from the job market altogether. It is important to distinguish the waves from the tide, and the tide in this case, is becoming increasingly precarious. hussman.com