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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (6081)	5/11/2004 4:55:39 AM
From: zonder	Read Replies (2) \| Respond to of 116555

I still maintain that a mere 1% hike (coupled with a slowdown in China), is all it will take to cause serious deflation Here is what Belkin says on the issue, in his 19 April weekly "Belkin Report": By now it should be abundantly clear to everyone that inflationary price pressures are rising in the US economy and that the US negative real fed funds rate is woefully inappropriate in this rising inflation environment. (...) The Fed is obviously worried about the vulnerability of financial markets to a rise of interest rates to a 'normal level' - and getting blamed for a crash. But every time Fed officials talk about a normal level of interest rates - the insinuate that current interest rates are at an abnormal level. As well they should. The average real fed funds rate from 1981 to the present is +2.9% (actual fed funds rate minus CPI inflation rate). With the CPI now at 1.74% and rising, that would imply a nominal fed funds rate of 4.64% (CPI 1.74% + avg real fed funds rate of 2.9%). Contrast that with the actual 1% current fed funds rate - and consider why financial markets are warped and what a natural de-warping process might do to short term interest rates, bonds, the yield curve, carry trades, equities, the financial sector, housing and emerging markets. To get back to a normal interest rate - short term rates have to rise more than long term rates (yield curve flattening). That event looms - perhaps prompted by an energy price shocks. Free market interest rates (beyond the clutches of the Fed) are rising - 2Yr through 30Yr Treasury yields have risen by 90b - 136 bp from their June 13, 2003 low. More threatening to the Fed's credibility (and bubble markets( is the rise of the short-term 30-day Libor interest rate above its 200 day average. This is a potential reversal of the 3.5 year interest rate downtrend (Libor broke below its 200 day average on December 6, 2000). .... Sorry I can't post a link because I receive it by fax.