Wednesday, September 21, 2005

Oops! They did it Again

Oops! They did it Again

Fed raised rates by 25bp again yesterday and got the opposite of what they wanted: long term bond yields dropped!

Despite a short-term setback due to Katrina, this is not going to slow the US consumer, nor the real estate market. And that’s because, unlike in the UK, US mortgages are mostly fixed rates.

The only place where the consumer will feel a little pinch is on her credit cards. But what’s an extra 0.25% when you’re already paying 18%? And of course there is the gas price, but the US consumer seems immune to that so far.

So, after a small setback, equity prices will recover because bond yields are so low, commodity and real estate prices will keep on going up, and the Fed will keep nudging up interest rates…

I guess some bubbles have to run their course or they wouldn’t be real bubbles.

Saturday, September 17, 2005


This is a test

Friday, September 16, 2005

What Will the FOMC do next Tuesday?

For some time now, the Fed has been trying, rather unsuccessfully, to get long term interest rates to rise. This is because the abundance of global liquidity risks creating a global asset price bubble (real estate, equities, bonds, commodities are all getting quite expensive), if not rising inflation. And the Fed, even if it is not mandated to control asset prices, knows that an asset price bubble can have dire consequences if left unchecked.

Rising short term interest rates have not proved effective in raising long term rates because at each step higher, the market has expected the economy to slow and pushed long term rates down.

Hurricane Katrina could provide the opportunity for the Fed to get long term interest rates rising again at last. Despite the short term slowdown due to this terrible shock, the extra budgetary spending and reconstruction effort is inflationary , and the bond market knows that.

But if the Fed just keeps gradually removing policy accomodation, the market will not get worried, and long term rates will stay where they are.

The uncertainty created by Katrina provides the Fed with an excuse to pause in September, pretexting that it needs more time to assess the state of the economy, while issuing a statement that promises faster interest rate increases in the future if the economy does not slow down.

After an initial jolt, the bond market will take a big hit, and the Fed will have achieved tighter monetary policy (through higher long term rates) while at the same time appearing both humane and resolute.

But then again, Greenspan and Co. might not be so machiavelic, and the asset price bubble will run its course till the very end...

Thursday, May 12, 2005

Somebody is hurting bad

The US economy seems very resilient and the Fed is still hiking rates. But bonds are refusing to drop and equities to rise. There might be a very large technical squeeze coming.

Hedge funds are positioned for stronger equities and weaker bonds, but they are beginning to hurt. A couple of widely publicized blow-ups will send everybody running for cover. The Fed would cut rates or refrain from raising them, compounding hedge funds' difficulties. A wild ride could be coming.

Friday, April 01, 2005

Current Market Themes

Too much money sloshing around, pushing yields lower; and property, commodity and equity prices higher.

Too much savings outside US, not enough in US.

Foreigners happy to lend to US, and US consumers happy to borrow and spend. US trade deficit financed by foreign savings.

Companies are not finding lucrative enough projects, so not investing for growth but giving back money. This is bad for future growth prospects.

Fed is scared of inflation so will keep talking long term rates up.

If this hurts the US consumer (the only spend-happy consumer these days), watch out for housing and stock market collapse around the world. Rapid rate cuts will not be able to resurrect US consumer as property price drop will hurt bad. Foreign investors will pull money out of US sending the USD lower. In the meantime it is possible for EUR to fall back as low as around USD1.10 as sentiment too bearish on USD and Fed raising rates.


Buy EUR and JPY on extreme weakness.

Sell CAD on strength with stop above the very long term downtrend around USD 0.90(commodities will not stay high when economy weakens).

Sell equities on rallies.

Buy bonds on extreme weakness.