Tuesday November 15, 2005 - 11:26:31 GMT
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Black Swan Capital - www.blackswantrading.com
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“What man wants is independent choice, whatever that independence may cost and wherever it may lead.”
Two horses from the same stable?
Comstock Partners 10 Nov 05:
“Wall Street is assuming that core prices will remain under control and that the Fed is near the end of its tightening cycle, seemingly without realizing that these potential outcomes are contradictory. A benign tightening period is not a viable option. As long as the rate hikes have no effect and consumers continue spending, the Fed cannot stop tightening. They realize that if they stop tightening too soon, and inflation takes off, it will eventually be that much harder to bring it back down.”
I don't think he dares. Look, to stop inflation the Fed would have to drive rates above the inflation rate. The Fed has lied all along about the true inflation rate. But let's get real, the actual inflation rate today is running above 5%, probably nearer 7% -- let's just call it 5%. To halt inflation, the Fed would have to push rates above 5% and probably to 7% or more.
Richard Russel 11 Nov 05:
“Volcker could do it -- he could do it because consumer debt during the early 1980's was not nearly as high as it is today. Look, between mortgage debt, credit card debt and other forms of debt, US consumers today are carrying a total of about $10 trillion of debt. Personal bankruptcies are already climbing, and the new bankruptcy laws are tougher. If inflation starts to really accelerate, and I think it will, the Fed wouldn't dare raise rates above the inflation rate. If they did, it would surely send the debt-laden US economy into a deflationary recession -- and that's the one thing the Fed fears most.”
12 ratchets of the rate screw yet liquidity abounds.
“Do I dare give it a half or full turn” ponders our protagonist. For the “core” seems well contained; but over “all” it may be a bit out of control…
It would seem bond traders are favoring the inflation thing; while stock traders prefer the money supply thing. And ladies and gentlemen, we have quite a divergence shaped-up on the chart:
It’s “step right up and place your bets” time!
But in the end, we think our protagonist, along with his friends, will do the “right” thing.
“As the dollar strengthens, the effectiveness of alternative liquidity will decline and global liquidity tighten. Furthermore, by all indications, the ECB and BoJ should have begun to tighten by mid-2006. Global liquidity could drop sharply by that time. This could cause the risk appetite in the world to decline significantly,” writes the illustrious Andy Xie of Morgan Stanley.
Will this be a self-feeding process? Strengthening dollar triggers tightening liquidity, triggering a safe haven play out of Asia and into Treasuries as the dollar strengthens? It is one of our scenarios for the final leg up in the buck. A dollar bear’s worst nightmare: the financial system beginning to shred and the dollar, warts and all, shines. Stranger things have happened!
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