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

To: russwinter who wrote (44804)	11/5/2005 10:25:01 AM
From: J_Locke	Respond to of 110194

I think this points to the real conundrum. In order to normalize the current account we need both higher real interest rates to dampen consumption and raise saving, and a weaker dollar to boost exports and curtail import growth. Seems you can have one but not the other since the higher interest rates stoke the carry trade and keep the dollar from devaluing. New Zealand is an interesting test case. They've already raised short term rates to 7%, yet asset based consumption remains surprisingly "sticky", the savings rate is still far in the negative range, and the Kiwi dollar is super strong. The dynamic in play now is that the net external debt of the debtor nations (primarily the Anglo-Saxon countries) continues to grow, but now they have to service those debts at higher rates, with the magic of compound interest biting ever deeper. At the same time they're denied any hope of a soft landing by stubbornly strong currencies. The only possible adjustment is a major consumer recession, which is likely to precipitate a global trade war. Ultimately the money center banks will have to be reigned in on a global basis, with much higher reserves set on those who lend to hedge funds and leveraged speculators, but I doubt this is even on the radar screen at the central banks.

To: russwinter who wrote (44804)	11/5/2005 10:57:51 AM
From: UncleBigs	Read Replies (1) \| Respond to of 110194

I disagree with Doug Noland. Euro/Japan carry trade flows cannot possibly mitigate rising mortgage rates. Housing is at the core of the U.S. economy and it is showing clear signs of deterioration. I notice that Doug Noland used to talk about the California Real Estate Bubble and now does not. Listings continue to pile up, market times are extended and prices are softening. To the extent that home values cannot be tapped to fuel consumer spending, our economy will crumble. It won't matter that a hedge fund is borrowing Yen to buy U.S. bonds.

To: russwinter who wrote (44804)	11/5/2005 12:28:26 PM
From: UncleBigs	Read Replies (1) \| Respond to of 110194

<<<This liquidity will continue to mitigate the tightening influence of rising U.S. mortgage rates, in the process prolonging the inflationary boom and delaying the desperately needed adjustment process.>>> The liquidity Doug Noland is referring to is the Euro/Yen carrytrade. I disagree that the carrytrade will mitigate higher mortgage rates and prolong the inflationary boom. I fail to see how a cross border carrytrade does anything to extend the housing/remodeling/consumption binge in the U.S. When home prices stop rising and Americans are unable to spend the equity in their homes, our economy falls apart. The cross border carrytrade is entirely insignificant to this process except that it's unwind will tend to exasperate the problem as money exits the US dollar.