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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (62195)	3/25/2010 9:18:21 AM
From: carranza2	3 Recommendations Read Replies (3) \| Respond to of 217615

In his latest, Russell makes what I think are great points. But I think misses a significant issue. The rates on the long bonds are beginning to inch up. They will have to [note that even Berkshire H.'s bonds are now yielding less than the UST long bond] in order that unfunded liabilities attract financing. There is simply too much global debt, public and private. Paying for it will probably lead to a difficult period where there will be increased demand for dollars to either engage in a carry trade or pay the debt. This should not affect the long term trend on the long bond, which is of course is lower because of higher rates. As long term interest rates go up, short terms rates are likely to remain near zero since these rates are the only ones the Fed can control. But with long term rates going higher, the banks are going to be even less willing to lend since they can borrow at near zero and invest in higher yielding long bonds on a nearly risk free basis. This should stifle recovery, put a blanket over the housing market, keep unemployment high and ultimately depress stock prices [except for financials of course, which will do fine as they engage in the risk free trade suggested above.] I see a lot of pressure on gold for the next 2-3 years as interest rates rise. A lot of deflationary pressures, too, as demand is dampened. Cash may well be king once again. Bill Gross sees things differently. His latest suggests that higher interest rates and higher deficits are inflationary. In a normal environment, I would agree, but these are not normal times. I think it is likely that short term rates will remain low as longer rates increase. Nothing inflationary about that. Th real challenge for the central bankers will be to find a way to keep short term rates low while making sure that the banks loosen up credit rather than engage in a nearly risk-free carry trade as long term rates inch up. Smaller economies will be hit hard, and the USD should keep rising as demand for it as a debt-paying currency increases. It looks like the USD should do well and gold might well be pressured.