Wednesday April 20, 2005 - 11:04:34 GMT
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Black Swan Capital - www.blackswantrading.com
Comdols like the conundrum
“Most schemes of political improvement are very laughable things.”
That crafty conundrum continues to confound. A look at the Treasury yield curve chart courtesy of The Wall Street Journal tells the tale.
chart: yield curve
And yesterday, the conundrum sparked a relief rally for the “reflation trade” crowd. They were hooting it up!
Yet another move higher in bond prices yesterday on news US producer prices were subdued launched gold, beans, silver, copper, commodity dollars, and crude (and several other commodities of your liking) on a nice little ride higher.
There are several questions to ask at this stage, but very few answers—or should I say, there are many answers, but very few good answers. When it comes to the game of speculation, one has to attempt to boil the question down so that it can be answer by saying either yes or no. Period! The question may be wrong, the answer may be wrong, but one doesn’t know that till after the fact. The important point is that a yes or no answer is what allows one to act i.e. pull the trigger or at least position the trigger in a manner such that the answer to the yes or no question eventually triggers action.
So, given that diatribe of an explanation, here is my question: Is the market (again) underestimating the Fed? My answer: Yes!
A reader of Currency Currents was kind enough to forward a link to Fed Governor Susan Schmidt Bies speech at the Canisius College Richard J. Wehle School of Business Community Business Luncheon in Buffalo New York on Monday.
Here are some highlights with my emphasis:
• I believe that, while underlying inflation is expected to continue to be low, the Federal Reserve must be more alert to monitoring incoming data, and continue to remove policy accommodation at a measured pace, consistent with the incoming data and its commitment to maintain price stability.
• In addition, many firms have taken advantage of low long-term interest rates to refinance high-cost debt, and others have used profits from operations or asset sales to retire debt. As a result, interest expense burdens have declined on balance and nonfinancial corporate debt has grown only modestly in recent years, its slowest pace since the early 1990s.
• These repairs to balance sheets have also reduced the exposure of many firms to rising interest rates, especially in the near term. In particular, the replacement of short-term debt by long-term bonds means that less debt will have to be rolled over in the near term at higher rates.
• In the household sector, some analysts have expressed concern about the rapid growth in household debt in recent years and the decline in the household saving rate. They fear that households have become overextended and will need to rein in their spending to keep their debt burdens under control. My view is considerably more sanguine. Although pockets of financial stress exist among households, the sector as a whole appears to be in good shape.
Many analysts say the Fed will slow its march to normalize interest rates because they believe neither business nor consumers can handle higher interest rates. Well, Ms. Bies is a member of the Federal Open Market Committee (FOMC). She is at the table when the votes are counted. And she seems to make it very clear that business and consumers will have no problem handling higher interest rates.
I know conundrums can be exciting. But I think it might be just a bit early for the “reflation trade” crowd to strap back on those party hats.
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