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

To: ild who wrote (24664)	1/14/2005 1:30:36 PM
From: ild	Read Replies (3) \| Respond to of 110194

Date: Fri Jan 14 2005 10:10 trotsky (mugwump@yield curve) ID#248269: Copyright © 2002 trotsky/Kitco Inc. All rights reserved if they really do that ( act to invert the curve ) , the following has a high probability of happening: the gold bull market will be over for a while. at least a medium sized financial catastrophe, if not worse, will occur as a number of carry trades that were predicated on the 'measured pace' rhetoric have to be unwound in a hurry. inter alia the stock market would probably crash ( along with corporate and emerging market bonds ) and the housing bubble should finally flop as well. following this series of financial accidents, we'd probably get a full-blown consumer recession, worse than e.g. the early 80's Volcker double-dipper. this in turn could have the unintended consequence of inducing a banking crisis in China - which would be very damaging for all of the Asian exporters to China, who have come to depend on the unsustainable credit boom there. emerging market liquidity would evaporate, commodities and commodity currencies would crash as well. the word deflation would be back in fashion faster than you can say '1929'. next, the gold bull market resumes as CBs all over the show frantically attempt to stop the deluge with emergency rate cuts and 'extraordinary measures' ( helicopters ) . however, i don't think it'll really come to that ( i.e. the inversion ) . not because they know what's going to happen, but because some of it may happen before they get around to hiking that far. economic growth is already decelearating from what was really the most anemic recovery in 60 years. in leading indicator economies the consumer spending light-switch has already been abruptly turned off. there is a huge global malinvestment bulge that has formed as a result of several years of EZ credit in addition to the as-of-yet unliquidated malinvestments dating from the previous boom, so the house of cards has simply acquired several new stories. none of this is sustainable in the face of tighter credit conditions. and it won't help much that long rates keep falling, since everybody has shifted the maturity spectrum of their debt downward which increasingly necessitates ever bigger rollovers of maturing debt - an activity that's per definition dependent on ample liquidity - which is what the Fed is now threatening to take away. they may talk the talk, but they won't walk the walk imo...and the same goes for the recent 'we'll cut the budget deficit' pronouncements from the administration. they have of course no intention whatsoever to cut spending - instead they're secretly hoping that revenues will keep recovering , which they then want to sell as proof of a successful 'plan' ( Iraq is testament to their planning abilities...if these guys had been in charge of the Soviet Union, it would have collapsed a few decades earlier than it did ) . this hope is grounded in the mainstream economic consensus which basically always consists of 'what happened last year will happen this year as well'. only, it probably won't. the lag effect of higher energy costs is imo beginning to bite and should accelerate the slowdown that has been in evidence since mid '04 ( the 'soft patch' ) . barring an out-and-out dollar crisis, short rates should hurry back to the 'zero boundary' by the end of the year...at a distinctly 'unmeasured' pace.