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To: Win-Lose-Draw who wrote (129342)	2/9/2006 7:56:21 PM
From: mishedlo	Read Replies (1) \| Respond to of 209892

Hypothetical question: if the 3-month yield was 6 percentage points higher (ie, 10.5% instead of 4.5%), in a muddling-through economy like we appear to be in, what do you feel would be appropriate yields for the 2yr and 10yr? I think we can muddle thru only so long. It is very hard to say (short term) what is appropriate. It seems to me the FED is targeting junk bonds, IPOs, merger mania etc that is taking place. As long as that is taking place the FED is probably correct to tighten. It is a mess they created. Not only is there a bubble in housing, there is a bubble in junk bond, and a bubble in the stock market. Of course they can get bigger (although the top in housing is likely in). Perhaps I am giving the FED way too much credit. I would not be surprised if they really do not know what is going on and are genuinely in a conundrum. There is no conundrum IMO, the bond market sees the deflationary crash that is coming IMO. In a sense I think the FED is screwed no matter what they do. But I do expect to see the 10-yr at 3 within several years. But there are other kickers such as Congressional spending etc. There is undoubtedly a housing slowdown. That will cascade over into loss of jobs at some point. I do not believe that jobs are strong and the way we calculate unemployment is nearly a joke. Furthermore we keep losing high paying jobs, replaced by jobs at Walmart. A negative savings rate and a dieing housing market does not imply muddle thru either. All that said, there is mammoth speculation in the stock market, Cramer can send a stock up 25% overnight (just like what happened in 2000). The FED would do well IMO to totally crush that optimism. Right now the ONLY bright spot is that corporations appear to be in better shape than they were in 2001. If corporations waste all of that cash on buybacks and mergers the situation would be even more serious than it is. Given all the cross currents the FED is damned if they do and dammed if they don't and I do not want to be in Bernanke's shoes. The carry trade has switched from the US$ to the YEN now. A warning shot was fired but when the BOJ did not end their ZIRP today, boom back up went gold. The market has learned to expect central bankers to bail them out. I guess we will see but I think that bail can not possibly be big enough once a serious slide in housing starts. After all this typing I just noticed you said 10.5% (I missed that instead thinking you meant 6% of 4.5% higher). Well this economy would grind to an immediate halt at 10.5%. So in a sense the question is moot. Obviously the FED can not hike to 10.5% overnight, nor is there any reason to get there. But hypothetically speaking 10.5% 6mo, 6.5% 2 yr, 4.5% 10 yr. It would be one freaking inverted curve. Mish