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

To: John McCarthy who wrote (69985)	9/19/2006 10:18:40 PM
From: bart13	Read Replies (2) \| Respond to of 110194

(a) the Fed cannot directly manipulate long term rates (and I could be wrong) Well, here's the record of the 10 year against the Fed's Securities Lending operation. Notice how the green line precedes rate increases and drops occur when the green line is low. A mild correlated pattern also exists with Fed custodials. What do you think now? (b) if announced inflation rates were allowed to rise anywhere near 10% it would instantly give us problem(s) with: Ah yes grasshopper... and the key is "announced". There are so many lies and so much fiddling in the CPI, and very few seem to be aware of the depth of the issues. Notice how much the Fed has been talking about "inflationary expectations" lately too - in my opinion, its just attempted misdirection. My own fairly mild public page on the game: nowandfutures.com John Williams goes into much more depth on his site at shadowstats.com why not (from the fed's point of view) allow a hit to housing prices .... to within some range .... Check Greenspan's speech at Jackson Hole in August of 2005, you'll find as clear as statement of that as you can ever expect from a central banker. "If we can maintain an adequate degree of flexibility, some of America's economic imbalances, most notably the large current account deficit and the housing boom, can be rectified by adjustments in prices, interest rates, and exchange rates rather than through more-wrenching changes in output, incomes, and employment." federalreserve.gov When it comes to housing vs. the dollar, housing loses.

To: John McCarthy who wrote (69985)	9/20/2006 9:13:55 AM
From: Mike Johnston	Read Replies (2) \| Respond to of 110194

John, you pose some very good questions. First of all, my theme in the post was "high inflation and low interest rates". In a free market economy those two things are mutually exclusive, high inflation causes high interest rates and low inflation causes low interest rates. So at first look, my arguments might be seen as nonsense. But this is exactly what we are dealing with now. Interest rates are negative, despite some developments that might be seen as hyperinflationary: The dollar has collapsed, oil and some commodities have tripled, house prices have tripled, gas prices have tripled, food prices have doubled etc. In late 80's and 90's we have had much lower inflation but interest rates were quite a bit higher. Now to your questions: 1. I believe we have experienced 10%+ inflation in the economy in the last 4 years. Recent drop in oil and gold does not change that fact. 2. The fed can manipulate long term rates directly or indirectly in many ways. For example, FCB buying of bonds is a de facto monetization since they use freshly printed currency to do that and technically they never have to sell those bonds. 3. Why not (from the fed's point of view) allow a hit to housing prices .... to within some range .... The answer to this question is easy. Housing would need to deflate 50-70%. The consequences of such a drop would be too catastrophic for the economy, starting with millions of foreclosures, double digit unemployment, GSE and bank failures. So the fed will simply print money and try to cover up real increases in money supply. If they are successful or not , i don't know. One thing i am certain, there will be some extreme measures taken by the fed. House prices have tripled in a bubble. Back in 2001 it seemed unthinkable that it would happen, at least to me. Could something on an equally unthinkable scale happen in the next few years ? If yes, what ? Could bond yields go down to 2% ? Could the Dow go to 25,000 ? Anything is possible. Keep in mind that 2x insanity still= insanity