Jay, you wrote:
<I am comfortable with my view that DUEED Message 19903883 will be for about 3-4 months, and then either the cliff from the high side or the low side achamchen.com;
Jay, If driver for DUEED is the unwinding of the carry trade, Gold may be a carry trade recipient in for a bearish patch.
You wrote:
<http://www.achamchen.com/observations.htm.>
So, I agree asset value deflations must be straight ahead.
The carry trade will unwind the marginal accounts first, look at the dropoff in REITs, Emerging Market Bonds and Gold.
This was a rather prescient article on 4/30/2004:
"Many investors and traders, including hedge funds and similar entities of all sizes, jumped onto the rising precious metal and commodity bandwagons in their quest for short-term profits. They observed the rising momentum that these markets generated and wanted to join the party. They couldn’t care less if they were buying pork bellies, corn or cotton! For this reason they were not committed to the markets and exited at the first sign of adversity. Further, many then added short positions which magnified the price markdowns. "
kitco.com
and on Gold bear secular markets
"The most chilling set-back began from the peak at $200 on January 1, 1975, the day that gold again became legal for Americans to own. It terminated a year and a half later in the summer of 1976, when gold bottomed at $103.It was a grueling, nerve-wrenching period, but it was followed by gold’s march to its ultimate $875 peak in February, 1980"
You wrote:
<So, currency debasements must also be around the corner>.
As the US carry trade winds up and sucks in dollars from plundering activities in the gold mines, Emerging Market Bonds, Junk Bonds, overseas real estate, this will be an initial flight to close positions, which will support DUEED. Foreign countries, as you point out, will then raise rates to chase the draining liquidity.
You wrote
<So, natural resource inflation must logically be somewhere around>.
first, shake the loose hands of their gold, and then, back to the business of gold accumulation, I expect. The speculators in oil could have their hand shown as well, with unspeculated barrels possibly dropping to fake the market into cheaper oil for awhile. This remains to be seen. Higher interest rates may pinch the upcoming summer vacation, which relies on using credit cards to buy gas, enough to support an increase in oil reserves.
DUEED does have another consequence for the foreign investor, and that will be the dollar-denominated assets will rise in the value of the home currency. From its low of 103 late March, the $/Yen is 112, almost 10% up and in Yen terms the Yen investor sees the selloff as somewhat unspectacular, if dollar now rises above its current low for $/Yen. A foreign investor, looking at US job growth and low inflation may come to the conclusion this is an investment opportunity, may they not? Because if the assumption is higher rates, along with the return of financing of the carry trade will be new dollars. Where will these find their homes? US Bonds over stocks? Could this cause a bond or stock market rally with the dual effects of winding up carry positions strengthening the dollar plus new investments, investing in growth, not interest rates, will be looking for a home?
One byproduct of AG's failing attempt to 'paper' over America's financial asset bubble with more paper will be the increasing frequency and intensity by which the next months of AG speeches, press releases and FOMC meetings shall be anticipated, planned and dissected.
But I have one question. If AG, being able to wind up the carry trade through speeches on rate increases, and if economic growth data continues to support his story, would it not be advantageous to wait longer to raise if the market has cooled, the carry trade had wound up, and marginal borrowers aren't still buying interest-only mortgages for homes. Can't the desired effect be achieved? Low interest rates could still be a boon to many businesses, but the thought of an impending hike would shut down the marginal borrowers. Perhaps several months of sobering talk will cool this market significantly before any rate hike, or, with the realization that the low rate window is still open a few more weeks, could there be a mini-stock or bond rally? Ditto for homes? Then, the frenetic pace rises to a crescendo, and then it all falls in a cacophony. |
