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

To: Elroy Jetson who wrote (29960)	4/3/2005 10:53:26 PM
From: SouthFloridaGuy	Read Replies (3) \| Respond to of 110194

The end of our rope could be this year. My team has done studies comparing the risky spectrum of equities versus the risky spectrum of debt. We have found that market tops are signified by a decoupling of equities from debt as generally investors chase for yield and overstay their party in the midst of Fed liquitidy tightening. The decoupling process lasted from about last spring to this January when we saw the first hints of credit spread widening and high risk equities getting clobbered at the same time. Once this process begins, it ususally lasts for about 9-12 months and we see a market shock (1987, 1994, 1998, etc). What makes this cycle particularly worrisome is that the Fed has raised rates 7 times yet real interest rates have moved from negative territory to only 1/2 percent. This is because we have seen a moderate move in inflation statistics and judging by the price action of the CRB this looks like it could possibly get out of hand. In a normalized Economy the real interest rate should be closer to 3%. If investors do not get this rate, they will have no reason to continue to buy dollar assets as they are already quite underwater on their low yielding, depreciated investments of the last few years. The dollar will be sold off wholesale and the Fed will be FORCED to contain inflationary pressures by picking up the pace of interest rate hikes. Problem is that given the amount of leverage in the economy, long rates will not and are not moving at nearly the same pace. Greenspan's connundrum speech gave a temporary kick in the market, but nothing has happened since. Long rates are probably capped at about 5%... Hence the Fed will effectively be forced to flatten or invert the yield curve to contain a Balance of Payments crisis. If ever there were a time for this to happen, it's now, given the increased correlations between asset classes and multiple simultaneous bubbles.