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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 (49779)	1/15/2006 9:36:38 AM
From: russwinter	Read Replies (3) \| Respond to of 110194

Think you've largely nailed it (except I consider longer dates Treasuries part and partial to the same general speculative "buy everything" trade). Of course credit spreads could blow out at any time, regardless of the Fed. The next hike will make financing for this even more stressed. The junk market is setting up similar to the fallout we are now witnessing from mortgage companies who "offered competitive rates". Message 22062026 Message 22055103 Speculation keeps leaking into silly transactions, and the purveyors quickly get in trouble, but they just do the same basic thing somewhere else, quite inexplicable. Cash balance sheets are in great shape now compared to 2001-2002. The problem is that there are numerous junk bond offerings all for the purpose of share buybacks at absurd prices. Corporations are wasting their cash on buybacks and leveraged buyouts and mergers just as happened in 2000. It seems no one has learned a thing. That is the problem the FED faces and it is not pretty. To rein in the junk bond bubble the FED may have to futher risk a substantial hit to the housing bubble where a peak is clearly in place. But if the FED allows the junk bond bubble to continue, corporations will continue draining their cash as they did in 2002. If the FED pauses early they give a continued green light to the junk bond market. That is the dilema facing the FED today. The FED must at all costs act to rein in the corporate bond bubble. A "mild recession" hoping to deal with the aftermath may be what the FED is shooting for. Furthermore, I doubt the FED cares much about consumers or consumer problems until it starts seriosuly affecting corpoarte balance sheets. It's a tough balancing act that is in fact impossible to solve. More than likely the FED has more than overshot when it comes to housing and consumer spending but has not overshot when it comes to popping the junk bond bubble. Those looking for a bubble in bonds should be looking at the junk bond market not treasuries. Even the junkiest of corporation are having an easy time raising cash for no other purpose than stock buybacks. Literally it is insane and that is one thing the FED is fighting (at least that is what I hope they are doing). So.... Does the FED really think this economy is strong or are they providing an excuse to keep tightening until the junk bond market gets the idea? Am I giving the FED too much credit? Do they really even know what they are doing at all? If the FED is targeting asset prices, credit lending, and junk bonds, housing might be flattened by the time junk bonds capitulate. Then again there could be some sort of "credit event" as we saw with LTCM where overnight we went from complacency to near panic. The middle ground is to look for two more hikes, followed by a long pause. That is what happened in the UK and we seem to be following in their footsteps. A recession is coming but somehow the junk bond market and the equity markets have not gotten the message or worse yet just do not care (for now).