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

To: Jim Willie CB who wrote (8028)	2/13/2004 1:39:42 PM
From: I_C_Deadpeople	Respond to of 110194

"a few times I slipped and called the customer a jackass".. Wow, you got to greet Easy Al at Walmart?

To: Jim Willie CB who wrote (8028)	2/13/2004 1:51:58 PM
From: mishedlo	Read Replies (1) \| Respond to of 110194

Interesting comments from Turkey I believe these are universal idea not just as pertains to turkey morganstanley.com When output is below its potential, inflation tends to fall even if growth is vigorous. In our view, not the rate of economic growth, but the amount of economic slack is critical to the pace of domestic price changes. On our estimates, Turkey’s output gap — the difference between the current level of GDP and the level that would prevail when resources in the product and labour markets are fully utilised — shows ample slack in the economy. The output recovery process hitherto helped to recoup less than 50% of the cumulative output gap created by the 2001 crisis (see Mind the Gap, September 29, 2003). We also argue that the amount of effective slack is probably greater than most analysts think and that the above-trend growth performance is a result of spare capacity and surging productivity. Inflation is ultimately a labour-market issue, and the data point to a jobless growth. Manufacturing employment contracted by 8.5% and economy-wide employment losses amounted to 422,000 in the first three quarters of last year (see Help (Un)wanted, December 10, 2003). The lack of demand for new workers holds down real wage growth, and consequently, disposable income that provides the basis for private consumption shows no sign of threatening growth. Although the political decision to increase the net minimum wage by 34% creates upward pressure, the high unemployment rate will keep the average wage subdued even after a real decline of 25% in the last two years. Thus, a controlled wage growth, coupled with productivity gains, should keep unit labour costs at a competitive level and inflationary pressures at bay.

To: Jim Willie CB who wrote (8028)	2/13/2004 1:54:41 PM
From: mishedlo	Respond to of 110194

US$ undervalued? morganstanley.com 3. The BoE and RBA take asset prices more seriously. Ironically, two central banks that have an explicit inflation target seem to care more about asset prices than the Fed does. In devising a monetary stance, not only are deviations of expected future inflation from the target rate and deviations of output from its full-employment target important; so are asset prices. Outsize asset bubbles tend to create misalignments in consumption and investment. Second, the problem with not preventing bubbles but only dealing with the aftershock of burst bubbles could create serious moral hazard problems — by not leaning into a growing bubble, but easing aggressively after the bubble bursts, this distorts the perceived distribution of risk in the market. 4. Different monetary policies going forward. While the trajectory of US and UK policy rates will be driven by many variables, we can suppress other factors to bring into sharp relief the trade-off between (1) a ‘pre-emptive’ tightening stance (BoE) and (2) a ‘patient’ stance where low goods price inflation is more of a concern than high asset price inflation (Fed). Generally, relationships between yield curves and exchange rates are far from clear. I tend to separate out two broad effects. On the short-end, the level of the cash rate matters, because the super-low US cash rate makes the USD a good funding currency. This is in theory USD-negative. However, on the long end, in ‘normal’ circumstances, a proactive, or ‘pre-emptive’ central bank is usually awarded with a more stable long end, while a ‘patient’ central bank may make long bonds vulnerable to inflation scares. This means that the long bonds of proactive central banks have a higher chance of enjoying capital gains (declines in yield) than the long bonds of ‘patient’ central banks. Having said this, with massive interventions by Asian central banks, the cash-rate effect is likely to dominate. Therefore, I believe we are approaching a point where yields are at their worst points for the USD. Therefore, the USD may bottom in the not-too-distant future against GBP and AUD. Bottom line. While the USD index is still overvalued, in my view the USD is now grossly undervalued against EUR, GBP, and AUD. I believe we are at an important inflection point, for reasons related to valuation, the current-account deficit, and the fiscal deficit. Here, I add one more argument: that the spread in cash rates between the US and the UK and Australia may soon max out, at least in expectational terms. This is yet another reason for me to believe that we may be approaching a peak in cable and AUD/USD.