The remarkable bull run in equities can be explained through the following sequence of events. Long time readers will know about this from prior posts but newer readers might not. So, here is a quick review:
Track the bond yields.
It's very simple. Traders are shorting the dollar index if 10-30 year yields rise too high.
This is all tied to keeping 30 year mortgage rates <6.5-7%. Bernanke NEEDS those low rates to keep the RMBS spreads narrow in the ABS market. (He is price fixing it through treasuries yields) At those levels, the Feds will intervene by buying up bonds thus further weakening the dollar and leading to renewed bullish activity among equity traders both in the US and abroad.
Emerging markets in high beta countries - such as Russia and the Gulf - have staged impressive equity rallies (moreso than the much vaunted S+P index of the US).
However, (and this is where traders and economists start arguing among themselves) I believe these actions are STAGFLATIONARY instead of inflationary. Deflation remains the real threat - not the hyperinflation envisaged by wide eyed, frothing goldbugs. See earlier post about the Eurozone this past weekend for a more detailed explanation. If you want to play the inflation game then I prefer agriculture and direct dollar shorts over accumulating precious metals - but that is just my preference.
It is my belief that the USA is headed towards price controls in basic food supplies w/in the next 3-4 years. Be prepared.
Here is another sobering look at the situation:
http://www.nakedcapitalism.com/2009/06/
fed-clueless-perplexed-about-spike-in-bond-interest-rates.html
Monday, June 1, 2009
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