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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 (66540)	7/20/2006 9:59:04 PM
From: yard_man	Respond to of 110194

wnd.com

To: mishedlo who wrote (66540)	7/20/2006 10:01:05 PM
From: russwinter	Read Replies (3) \| Respond to of 110194

This economy is clearly slowing> Which economy, Brazil America, or Bully? There are two distinct US economies now. "This economy is clearly slowing", does not equal lower bond yields in this environment. That's not what is causing this particular bond rally, it's just another Risklove rotation is all, and based on perceived words from the Wizard that pauses and cuts are on the way. In fact, I can't imagine a worse environment for notes and bonds than now, I'm extremely bearish on them, the rest of this year will be when they really blow up. Here's what the environment will look like: Brazil America and Bully Wannabes (80-90% of the population, and 10-15% of the buying power) will continue to sink. Bully 10-20% of the population, and 85-90% of the buying power will continue to leverage inflation and excess demand, and parade around saying, "the economy is slowing, blah,blah, cut rates" . If the Fed responds to this with looser money than now (10% credit growth already), you will see oil at $100, and so on. Brazil America wil sink even more, and the gini coefficient will get even worse. Meanwhile China will increase prices for even more inflation effect. Soon the "markets" (effectively just central banks) will wake up and realize they may as well be holding Brazilian bonds, in fact that may be an insult to Brazil, by the time this is over.

To: mishedlo who wrote (66540)	7/20/2006 10:42:05 PM
From: bond_bubble	Read Replies (1) \| Respond to of 110194

Most of the junk bonds are probably hedged against US treasuries and if the US treasuries rallies when the junk bonds crash, there will NOT be a serious credit bust in junk bonds. This is the reflation mechanics for Fed since late 1980s. If US treasuries rallies, I'm pretty sure Fed will be able reflate the economy just as it did after 2000 crash. The credit deflation expectation will have to be postponed for the next boom to go bust. i.e if treasuries rallies, the systemic risk will be averted for now. In Japan, the credit deflation has been so far very minor. The systemic risk was averted because they ploughed their savings (Japanese pensions, savings, assets etc) into US consumers. What they experienced until now is not exactly a credit deflation. I anticipate the real deflation to attack Japan going forward!! The systemic risk in Japan cant be averted this time as they have no more savings. In 1929, US had gold exchange standard - with some gold devaluation in 1933. i.e in 1929, US (the population + govt) had quite a bit of savings in Gold. Savings in gold can never be shortchanged with credit. This savings allowed US to lower rates in 1929 just as savings did in 1990 Japan. I anticipate higher Fed rates in Japan and US when the systemic risk kicks in full gear going forward. In 1929, UK had PPI inflation positive inspite of GDP fall because of pound devaluation against gold (i.e USD) i.e pound fell against commodities inspite of GDP fall. You have been questioning USD crashes against what? USD crashes against commodities!! i.e ALL currencies crashes against commodities as they all try to peg with USD!! i.e all the currencies will be inflated to peg with USD and these newly created currency credits will be spent to purchase commodities causing the boom in commodities (and hence layoffs in industries, and hence the depression etc i,e the PPI higher than CPI). BTW, UK increased the interest rate when the depression stuck in late 1930s!! You are wrongly assuming that as commodity prices rise, the output would have also increased!! Canada oil sands was profitable with oil at $40. But in last 18 months, cost of developing oil sands has gone up more than 50% and hence the oil has to be $60. But sour crude is less than $60 (oil sands produce heavy oil). some of these oil sands projects are being canned now because of non-viability (Jubak had an article last week). So, more oil is not coming. Likewise, speculation in metals is keeping the prices high as it is profitable to hoard!! Do you think CPI inflation is GDP growth phenomenon OR is it monetary phenomenon? I believe it is more closely related to monetary phenomenon than GDP growth phenomenon. i.e even if GDP slows, CPI inflation need not slow as it did not in late 1970s. Even in US, the CPI was negative only during 1931 and 32 and it was always positive for the rest of the depression (you can check BLS data). This positive CPI is probably what limited US govt to go gung ho in 1930s. Actually, Fed increased rate in 1931 to prevent gold loss (i,e to prevent currency devaluation against commodities). I dont think there is excess capacity in commodities. A credit bust and rally in treasuries will allow govt to increase consumption of commodities (i,e build hoover dams etc) to boost the economy (i,e prevent crash). Currently, there is humongous speculation in commodities. If there is a guarantee by the govt that, they will increase spending (this is what happens if treasuries rally), then the speculation in commodities will be even more severe!! Just to avoid this commodity (PPI) inflation, Fed rates will go higher. Or else, CPI rise will be lower than PPI rise causing job losses. The gold exchange standard was the only thing that prevented US from raising rates in 1930s as govt was guaranteeing USD value against commodities.