Monday August 7, 2006 - 10:27:36 GMT
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Black Swan Capital - www.blackswantrading.com
Betting on the bond market...
â€śThere are some people who, if they don't already know, you can't tell 'em.â€ť
Itâ€™s a battle of inflation prognosticators vs. the bond market. Weâ€™ll go with the bond market.
â€śTraders must be nuts buying bonds when inflation is soaring,â€ť says the inflation crowd. Maybeâ€”maybe not!
1) Inflation is a late cycle lagging indicator
2) China is exporting deflation again (the chart below is from Gavekal Research www.gavekal.com ):
---The red line represents China Re-Export Prices i.e. Chinese re-export prices are falling during the backdrop of soaring raw materials prices. Something very deflationary seems to be going on there.
3) US hosing is falling. A Wall Street Journal story today suggest it could be â€śhardâ€ť landing, instead of the softer variety most expect. No real surprise given we havenâ€™t seen these ozone levels before in housing.
4) Job growth tepid.
5) Inventory build
6) Capital spending now in doubt. The advance GDP report suggested that corporate capital spending may be subdued. This was one of the key kickers expected to drive growth in most forecasts (after all corporations are flush with cash).
7) Factors 2 thru 6 feedback into factor #1 and already low inflation expectations embedded in bonds, and highlighted in the inverted yield curve, shrink and push bond prices higher.
Viola! Bond traders may not be crazy after all. The Fed pauses tomorrow.
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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