To: Les H who wrote (64791 ) 6/29/2006 8:36:36 AM From: russwinter Read Replies (2) | Respond to I really feel the 5 and 10 year rate below the Fed funds rate is an indication of too much liquidity still in the system. It has little to do with inflation expectations. Contrary Investor (*)has a great discussion of this in today's issue. The five and ten year is just one more leveraged buy everything trade in many respects. However, part of this may be caused at present more by China and Japan's hyper low rates, more so than by US monetary policy. Japan has completely stopped tightening since May 15, and China is WAY behind the curve.It very well could be that ten year Treasury yields may be facing influential circumstances at the moment much more powerful than a potential US economic slowdown. First, inflation could be a much bigger systemic problem than even we believe and the global central bankers may have only begun to tighten up excess liquidity circumstances. Secondly, it very well could be that as global liquidity contracts and the multiplicity of global carry trades begins and continues to unwind, the 10-year Treasury is simply a short-term casualty of financial carry trade realignment. After all, didn’t the prior period of wildly easy money globally contribute to ten-year yields falling to the low 3% level during 2003 in the first place? Sure. But we also believe that, depending on trajectory and speed, the removal of excess liquidity from the global financial system may be the very action that brings real world global economic and financial imbalances directly into the investment decision-making process spotlight. As you know, for years now we have been treated to in depth and insightful Street analysis such as, “deficits don’t matter”. “We have a global savings glut” (never once mentioning global liquidity creation, of course). “The global community knows that the US is a great place to invest.” You know the rest. It’s simply fact that for literally years now, global economic and financial imbalances have been explained away by pundit after pundit in a matter of fact manner. Is global excess liquidity recession the event that triggers the basic economic fact that imbalances do indeed matter? Without trying to sound wildly pessimistic, we believe this needs to be given serious consideration. The sheer act of global excess liquidity stimulus itself created a series of unintended consequences. Unintended consequences that have been swept under the proverbial rug in terms of serious mainstream analysis as long as continued liquidity creation was forthcoming. So will the act of removing excess liquidity spark yet a further series of unintended consequences (unintended by central bankers)? It’s a good bet.
