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Politics : High Tolerance Plasticity -- Ignore unavailable to you. Want to Upgrade?

To: kodiak_bull who wrote (22634)	12/22/2004 8:27:50 PM
From: stockman_scott	Respond to of 23153

Martha Stewart calls for sentencing reform seattlepi.nwsource.com <<...Shares of Martha Stewart Living Omnimedia Inc. closed up 40 cents, or about 1.5 percent, at $27.64 on the New York Stock Exchange. They traded below $9 before her sentencing in July...>>

To: kodiak_bull who wrote (22634)	12/23/2004 6:53:45 AM
From: Bruce L	Respond to of 23153

Good WSJ Article On Why Low interest rates are now "abnormally" low due to temporary high demand from Asian banks. My take on this - assuming its true - is that shorting the homebuilders (at some point in the future) and buying precious metals stocks (now) would be in order. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX LONG & SHORT By JESSE EISINGER With Interest Rates 'Abnormally Low,' A Fairy-Tale Ending Gets Less Likely December 22, 2004; Page C1 Barring any significant dislocation between the Christmas ham and the New Year's hangover, long-term interest rates will finish the year right around where they started. This has to rank as the biggest financial-markets surprise of 2004. Given the fundamentals, rates should be higher. The U.S. economy's growth rate is relatively strong. The Fed has been raising short-term interest rates. The dollar has fallen. Inflation, notwithstanding government statisticians -- "No, watch this birdie!" -- has crept up. The labor market, while still feeble, is in better shape than at the beginning of the year. The budget deficit is still with us. The trade deficit is wider than it was last December. The personal-savings rate, which already was low, has fallen further. "It all looks horribly mispriced. Rates are abnormally low, so how long can they remain this way?" asks Keith Anderson, the chief investment officer of the fixed-income money manager BlackRock. Sure, there are sunshiny types who think this situation is perfect for what ails the global economy. More likely, the longer that interest rates stay artificially low, the worse the adjustment will be. "Markets sell off harder than they rally," Deutsche Bank economist Joe LaVorgna says. The problem is that while the Fed has moved up rates, it hasn't really had much of an effect in tightening the economy. Credit is cheap and widely available. The Goldman Sachs Financial Conditions index stood at 95 in the latest monthly reading. It has been lower only three other months since the firm started keeping the index in 1984. A lower number means conditions are looser, stimulating spending and investment. Monetary policy works with a lag, of course, but markets have been blasé. It could be that rates are signaling a weak economy, but the main reason for these interest-rate abnormalities is largely technical. The grasshoppers here in the U.S. continue to party. They are supported by demand for fixed-income products from foreigners, mainly Asian central banks, as anyone who is mildly interested in global economics knows by now. That demand has significantly outstripped supply this year, even though the Treasury is selling more debt to fund the budget deficit. In rough terms, while the Treasury has increased the supply of debt by about $400 billion this year, foreign investors have snapped up about $800 billion in U.S. fixed-income products. Investors are wary of being short, lest they get caught up in a foreign buying spree. "This is a buyer of an asset where price is no object," says Lehman economist Ethan Harris. "In the long run, [the Asian central banks] can't hold the market on their own but in the short term they can completely dominate the market." There is a fairy-tale ending for all this and it goes something like this: Inflation is the bogeyman that doesn't appear because global deflationary pressures act as a counterweight. U.S. companies, more competitive abroad thanks to the weak dollar, become confident enough to hire and raise wages here. A rise in exports overcomes the American consumer slowdown. Rates rise at a safely moderate pace because investors become less obsessed with the fragility of the expansion. And those rising rates don't pinch indebted consumers because, well, just because it always works out somehow and nobody can remember it not. Or maybe the tale goes like this: Higher interest rates are the only thing that can kill this expansion so if rates go up and start to slow the expansion, they will just go down again and the expansion can continue. One can run around in that circle for a long time. "It's a little too good to be true that economy is so finely tuned and regulated that the bond market can never sell off," Mr. Harris says. Interest rates don't think, they aren't characters in fairy tales and they don't want to help everyone out by settling in at just at the right level so that the porridge is never too hot or cold. It is natural for rates to rise when the economy is strong and investors anticipate continued strength. But Mr. Anderson says: "If rates remain artificially low too long, and inflation reappears, that's the ultimate risk." Rates eventually will go where they're headed. The longer it takes, the worse off it could be.