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

To: Box-By-The-Riviera™ who wrote (30795)	4/17/2005 1:36:16 AM
From: SouthFloridaGuy	Read Replies (3) \| Respond to of 110194

First, it cannot be stressed enough that the Fed does not control the long bond either directly or indirectly. Why should the Fed care about protecting the dollar? Relatively speaking, Greenspan and the Fed don't care about dollar or inflation, they want it - desperately I might add. The world is starving for yield. Last year, our diversified fund made 8% and it was considered fantastic (saved by the election rally). Another fund of ours, a libor+ alternative which is well loved by Japanese investors, made 4% and only started losing investors at year-end precisely because risk-free yields were rising. This year our funds are flat. It is impossible to make a return and other than some quantitative strategies, we can't figure out what on earth will make money. Deflation is taking a hold - again - and I believe it will be worse this time. So that's why the 10 year is rallying. 4.25% guaranteed in the bank in the most liquid debt in the world - I'll take it. Furthermore, each and every US recovery since 1990 has been based on the ability of the Central Bank to turn off and on the leveraged carry trade at will. Theoretically so long as the Fed can manipulate the yield-spread, they can facilliate a subsequent credit boom, inflate, and this could be done in perpetuity. This policy was further validated by the $USD stability and strength in the 1990's. Logically, anybody with 1/2 a brain cell knows that infinite prosperity is impossible. As players realize that the competition for returns is increasingly more difficult, the competition for yield increases and hence asset allocation models increasingly point toward fixed-income. It is a bitter irony that the liquidity that catalyzed the previous booms, effectively comes back to haunt it. So in effect, the market is slowly making the Fed impotent by closing the gap between where the bank's borrow and where they lend. This effectively chokes the lending process and renders the Fed useless much like the BOJ. When a drunkard has taken his last drink and wakes up the next day - the hangover is always quite bad - and this is where the US is heading over the next few years. By the way, there is absolutely no way to avoid this process. I would expect the 10 year to continue rallying in the face of stock and high yield bond catastrophes.