Tuesday July 19, 2005 - 11:09:46 GMT
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Black Swan Capital - www.blackswantrading.com
Hiding in the dollar...
“I don’t believe that I am the only person who cannot predict future prices. No one consistently can predict anything, especially investors. Prices, not investors, predict the future. Despite this, investors hope or believe that they can predict the future, or someone else can. A lot of them look to you to predict what the next macroeconomic cycle will be. We rely on the fact that other investors are convinced that they can predict the future, and I believe that’s where our profits come from. I believe it’s that simple.”
John Henry, quoted in Trend Following, by Michael Covel
We read in The Wall Street Journal this morning that “Mr. Greenspan has long rejected the use of interest rates to tame asset bubbles.” That’s odd, especially since he had no problem using interest rates—driving the Fed Funds rate to 1%--to create said asset bubbles. Is it a green-light for those in bubble blowers to continue to ply their trade?
Though one is never sure of these things, but we suspect bubble blowers everywhere should continue on with there 3-step addiction recovery program: 1) recognize the problem, 2) stop leveraging, and 3) never again watch CNBC or read the financial pages. Why our concern? It’s the strange site we have witnessed recently—US Treasury bond prices falling, or long rates creeping higher, however your perspective.
That wasn’t supposed to happen anymore. With inflation tame (and a slight deflationary bias to boot), long rates were to continue to drift lower (prices higher) as far as the eye can see. Actually, we do have at least one foot in that camp. Maybe this “correction” in bond prices has more to go. Or maybe there is a lot more beneath the surface than meets either the eye or a good story.
Recently, the Bank for International Settlements (BIS)--the central bankers bank--warned in its annual report that “time might be running out” to avoid an international crisis given growing domestic and international debt levels. The obvious answer to the problem was a “measured withdrawal of the stimulus put into the system,” the Bank said.
Now the armchair psychology: We know that Mr. Greenspan is doing just what the BIS ordered—a measured withdrawal of stimulus through its continued hiking of the Fed Funds rate. So the fact that Mr. G is soft peddling the use of interest rates as a methodology to tame those bubbles tells us he could be quite concerned.
OK…assuming any of our concerns prove true, what is the dollar impact: We believe the dollar benefits on two fronts should we see some type of debt repudiation: safe haven and yield—we just can’t think of any better hiding place than short-term Treasury paper. But then again—we know that John Henry nailed it in the Quotable above: “No one consistently can predict anything, especially investors.” We muddle onward.
Black Swan Capital
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