The very low Fed Funds rate has caused the CARRY TRADE AND A VERY
STEEP YEILD CURVE.
That may be ending......
But, I'm still sticken to my story that Mr G will NEVER increase
rates......
Mr G is basically stuck in a new kind of "liquidity trap." Not the
kind where liquidity "doesnt' help." No, that would be too easy!
The NEW liquidity trap is one where YOU CAN'T ESCAPE FROM VERY LOW
RATES WITHOUT CAUSING A HORRID CRASH IN THE ECONOMY. Sorta Japanitis!
That's where we are today.
Or lets call it FANNY'S REVENGE! Or, FREDDIE STRIKES BACK!
ANY ATTEMPT TO RAISE RATES, EVEN A LITTLE BIT, WILL LEAD DIRECTLY TO
A VICIOUS STAGFLATION--THAT NO ONE WILL BE ABLE TO TOLERATE.
At this point, a hyper-inflation would be more palatable than a
STAGFLATION!
REMEMBER, THE LAST TIME WE HAD STAGFLATION; IT TOOK A 20% PRIME RATE,
FOR YEARS TO GET OUT!
BUT ALAS, THE US ECONOMY WAS MADE OF STRONGER STUFF BACK THEN!
I do expect the yeild curve to flatten NOW; despite the low Fed Funds
rate.
INDEED, A FLAT YEILD CURVE WOULD BE FITTING FOR A STAGFLATION
ECONOMY! Don't ya think?
To wit:
HIGER SHORT RATES, BECAUSE OF THE INFLATION PART OF THE ECONOMY.
BUT, LOWER LONG TERM RATES, BECAUSE THE ECONOMY IS BASICALLY
STAGNATED!
SO, DUMP SHORT TERM BONDS.
AND BUY WHATEVER WILL THRIVE WITH A FLAT YEILD CURVE.
LET'S CALL IT THE WORST OF BOTH WORLDS.
I DOUBT HOWEVER THAT WE WILL HAVE A 1970'S STYLE "HAPPY ENDING"
HERE. THERE ARE JUST TOO MANY MACRO-FACTORS THAT ARE VERY, VERY
NEGATIVE FOR THE US LONGER TERM.
THIS AIN'T GONNA BE YOUR FATHERS STAGFLATION!
FOR ONE; WE ARE BECOMING ARGENTINA! OR, IF WE'RE VERY LUCKY THE UK!
Sooner or later, our politics will suffer. And, if you think we are
polarized now, you ain't seen nuttin' yet! But that's another story.
Stay tuned.......
