Wednesday, December 17, 2008

Watchful, Skeptical Flexible!

I heard nothing in the Fed statement that sounded like anything but a dirge for our economy---with implications for all other economies. Perhaps I have a tin ear! That both the bond markets AND the stock markets rallied in an asynchronous synchronicity (if there is indeed such a thing). Can both markets be correct? Shouldn't the bond market be moving in the opposite direction? Who is the dotard?

I'm hearing lots of yapping about the appeal of high yield bonds and municipal debt. If the consumer is 70% of the GDP (they are) + the consumer as not been re-liquefied (they have not been) + the consumer is facing employment headwinds to me the balance of the equation is this: dead stocks walking and soon to be dead bonds defaulting.

The grasping at lower gas as some reason for hope for the consumer is just that--grasping. Lower interest rates are nice, but if one does not have a job there is so much more at stake. What bears watching is employment. While I would not expect to see job creation, if we can quell job losses, then we might have a fighting chance. I'm not hopeful because the consumer has not been re-liquefied; the consumer is scared, and they are trying to get their own house in order.

Treasuries are almost dead money. Is that by design to induce the private sector into wading into attractively yielding CDO's? Isn't the private sector's voracious appetite for these high yielding assets what caused so much of the problem to begin with? Will we have a credit implosion Part Deux? They bought these things and then the pricing collapsed (and crumpled the asset side of the ledger). IF, then, the CDO's are trading at an attractive enough discount, then perhaps they are the buy of the generation as the discount will more than enough make up for the real default rate. I suppose if they are not bought with 10:1 levered money, there is hope.

While some are hand wringing over inflation, deflation is what is at issue. Isn't it funny how reticent folks were to even discuss deflation? They dismissed it as an impossibility. "We could never be like Japan," they cried. But increasingly there are more discussions about it.

I'm being watchful, skeptical and flexible.

1 comment:

Anonymous said...

under Leisa's theme of "watchful", IMHO, it helps to have a framework in your head to observe the global market / economy and guide your studies. Here is what has worked for me, in this order (by "working for me", I mean that I am close to acheiving my goal for 2008 of being "flat" on returns.....slightly positive as I write this):
1) economic history
2) human psychology
3) political tactics (note I don't call it "policy", because they don't really have any for this financial environment. That realization, in itself, should tell you something...)
4) stock fundamentals / technicals

I have interjected #3 only recently, and am scrambling to better understand and organize my thoughts on the political piece of econ history