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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (4767)	1/11/2004 11:50:34 AM
From: Wyätt Gwyön	Read Replies (2) \| Respond to of 110194

excellent post, Russ. don't you think the apparent consensus that the Fed can't or won't raise interest rates (except perhaps once, nominally in the "second half") until "after the election" is just too entrenched in the market? it is certainly a hackneyed cliche at this point. and although this doesn't mean it is a false argument, it does mean there is less to profit and more to lose from being long it, in the event of a "surprise". i don't know anything about the intermediate goods. what is your thinking? that we will see a spectrum shift in inflation from inputs to intermediates to, eventually, end prices? maybe, maybe so. Faber had a very interesting remark in his interview linked here recently--he said something to the effect that you could be right about 99 out of 100 parameters, but wrong about the last one and you're whole prediction falls apart. this brings into question the whole methodology of our opinion formation. we cannot know, ex ante, what the correlations between these parameters are, or will be, or how they will change relative to each other over time, and how they will react to each others' changes (echoes of Soros' reflexivity). so we continue to feel the part of the elephant close at hand and judge from there. what an interesting time. you can have serious people making arguments for rampant inflation, and deflation at the same time. i confess not to know the answer. but i tend to want to give the system credit for "resiliency"--the system, in this case, being the current muddle-through with excess world capacity dependent on trade surpluses with the US. i think people overestimate China's import as a "world power" in the intermediate term, even as they neglect its outsized effect on commodities and overcapacity. i appreciate the arguments brought up in CI and elsewhere regarding the "unwholesome" nature of our recovery, as seen in a lack of job/real income growth, offset by abnormal asset inflation which is extracted from home equity into short-term purchasing as an economic steroid. the system, as it is, is abnormal and ultimately unsustainable. but the system will seek to maintain itself at the same time. (what could be a clearer example of that than the housing bubble which followed the stock bubble?) i will be more surprised than you if the Fed raises rates--partly because i think they have learned not to give "bad surprises" to the markets, especially after 13 cuts--but i grant it is a possibility. i agree that cash is trash so everybody is long something--but that doesn't mean it all crashes relative to cash. i look at the relative values--i have some 20yr zeros that will triple in value by maturity. a 5.42% YTM. i don't think the stock market has a snowball's chance in hell of tripling in value with any sort of stability over the next 20 yrs. i also have some DROOY, which i believe can go up 20-fold if the dollar tanks as some expect. i calculate it will not take too large a DROOY holding to offset my dollar exposure. and 10% energy holdings, although like you i have cut back and try to remember that energy stocks are just paper, too. i also still have 35% foreign bond exposure (down from 70-80%). i am disturbed by their rapid rise. the difference between UST 10yr zeros and like maturity Anglobonds or Eurobunds is not that great. with the AUD up 34% against USD YoY, the 10yr yield delta between them would fit inside that price appreciation for decades to come. the 475bp short rate delta would fit in more than 7 times. how often does one have to "reprice" a higher yielding instrument to achieve "fair value". the bizarre thing about the currencies is that the apparent distortions do not go away. e.g., AUD worth 55 cents and 5.75% cash rate is still 5.75% cash rate at 78 cents. thus the apparent attraction does not go away. this is a possible distortion in traders' minds. by contrast, a bond priced at 5.75% yield which experiences, e.g., 34% price appreciation, will have a correspondingly lower yield and thus its apparent attractiveness will be reduced. or an appreciating stock sees its PE go up. but with currencies, there is no apparent "valuation adjustment" regardless of the crosses, unless CBs change the cash rates. i guess my ideas here are a sign of the times--after all, if cross-border money flows were limited to traders of real "goods and services", the value adjustment would indeed be apparent. but to the Leveraged Speculating Community which dominates flows, they don't care no price of tea in China; all that matters is the carry. so this is a distortion which bothers me, though farther out on the curve one sees rates are much closer together. ach, i've rambled on too long...

To: russwinter who wrote (4767)	1/11/2004 1:49:42 PM
From: Crimson Ghost	Read Replies (1) \| Respond to of 110194

S. Saville -- whom I consider one of the best market analysts -- has a scenario similar to yours. Namely a decent dollar bounce in the near future triggers a selloff in stocks, bonds, and commodities. He expects this bounce because the buck is incredibly oversold, NOT because of a Fed rate hike in the near future.