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

To: mishedlo who wrote (39658)	8/24/2005 11:50:11 PM
From: rayok	Read Replies (2) \| Respond to of 110194

"Interest rates are set by perceptions of inflation and inflation expectations. I think inflation looking forward, is not a problem and the market agrees. You can look at hindsight I am looking at what is coming." What if the bond market is just another clueless, liquidity driven bubble? You still remember the predictive powers of Nasdaq 5000...........don't you? The trend is your friend.........until it isn't.

To: mishedlo who wrote (39658)	8/25/2005 9:07:09 AM
From: GST	Read Replies (1) \| Respond to of 110194

<Interest rates are set by perceptions of inflation and inflation expectations.> Sorry Mish -- but that is a bit simplistic. Interest rates reflect supply and demand for credit plus a risk premium -- credit risk (risk of default), currency risk, etc. INflation is one aspect of currency risk -- or put another way, a foreign source of credit will view currency risk as an inflation risk. If the supply of credit falls more quickly than the demand for credit then interest rates are bid up. If credit risk goes up, then so does the cost of credit. And of course in a global economy, currency risk immediately translates into inflation risk for the foreign holder. <Your theory that interest rates are low because the economy is strong or perceived to be stong is quite simply preposterous.> The supply of credit will drop -- how fast depends in part on our current account deficit which is the source of the buffer of additional cheap credit that has held down credit costs thus far. The supply of credit worthy customers will likewise drop -- and with falling asset prices it could drop significantly. But these poor credit risks will be in debt up to their ears and they will be in need of constant refinancing of their debts. Some will be in constant negative ammortization heading towards default -- some will merely see all of their discretionary cash flow go into debt service. Higher risks and lower supply will hurt the dollar -- and if the dollar was not perched way, way out on a thin branch this would be a minor consideration. For the US, with a stupendous current account deficit and government budget deficit, a consumer who is up against the wall and a Fed that has shown its willingness to pump money to "save" the economy -- the stage is set for a credit supply implosion that outstrips any falloff in credit demand -- with credit demand being the least likely factor to influence interest rates no matter how you look at it. As I said before -- it is interest rates that set housing prices, and not the other way around. As for the price of goods -- they might well fall in the rest of the world and yet still rise for us when denominated in dollars. Either way you end up at the same place -- increasing relative poverty.