Monday March 14, 2005 - 11:23:21 GMT
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Black Swan Capital - www.blackswantrading.com
Bonds and the buck
“Speculation in the truest sense, calls for anticipation.”
Is the bond “conundrum” still a conundrum? Have rising yields and falling bond prices of the 10- and 30-year variety solved the riddle of low rates for Mr. Greenspan and the market at large? If so, might this parabolic rise in the commodities index (CRB) be in a bit of jeopardy of at least a correction?
CRB vs Bonds Chart
It would seem the rocket launch of the commodities index (granted crude makes up much of this move) is predicated on liquidity as far as the eye can see. And so far, that is all the market has seen—a sea of liquidity.
M2 Money Supply Chart
I have noted on the money supply chart above where the US financial bubble was supposedly popped 5-years ago. You notice how quickly the supply of funds ramped up, but we still haven’t seen a new high in US stocks. Much of this liquidity has poured into real estate—much as the liquidity created after the Japanese stock market bubble did.
You wonder why inflationary expectations haven’t soared through the roof if inflation is truly a monetary phenomenon. Could it be our “friends” in Asia are pumping out massive amounts of deflationary pressure?
So instead of inflationary pressure driving interest rates, we got huge raw commodities demand from Asia, plenty of money for hedge funds to jump on that train, and we got massive deflation through final goods prices flowing back to US shores. It has been a great game—a neat balancing act. Of course the dollar has done its part in driving those deflationary pressures—every ratcheting down in the buck has made the Chinese final goods that much more competitive in every nook and cranny of world markets.
China has been happy. Liquidity and low rates have hid the rot within its so-called banking system and papered over the massive misallocation of credit to its state owned industries. Not to mention the soaring overcapacity within key industries. The US has been happy because China’s goods deflation is a direct subsidy for all those WalMart shoppers.
Real estate and mortgage brokers have been ecstatic—a bounty has fallen upon them that again they may never see in their lifetime.
And every financial market guru worth his salt, who supposed began selling the dollar at just the “right” time, is ecstatic—because after all—it’s the deficit that has driven the dollar in the tank. But what if this dollar move has almost nothing to do with the deficit and almost everything to do with liquidity funneled by the Fed?
And the bigger question is this: Can Mr. Greenspan and Co. continue to run the global economy via financial bubble creation or will they finally come to terms with the post bubble bubbles that they have created to save the global economy?
I’m not sure. But, if I were sitting on a bunch of commodities and expecting the dollar to continue in free-fall mode, I might be taking out some insurance just in case the bond conundrum is solved.
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