Thursday, September 20, 2007

[Latest Global Dollar Liquidity Measure: +13.4% annual growth rate; latest Endogenous Liquidity Index: -21.4%]

1998 or 2001?; PIMCO & the UK fixed-income market; a look at our "Goldilocks/Stagflation" indicator. [More updates expected ...]

[1] Is it 1998 redux? Or is it 2001 again? The very busy Krishna Guha asks himself, rhetorically: Are we in a 1998-style situation, or rather in a 2001 style-situation? The 1998-like scenario would see risky assets fly for many months, until central banks engineer a new round of monetary tightening. Tom Graff of Accrued Interest is in that camp. On the other hand, a 2001 style situation would see falls in asset prices followed by a "sustained rate-cutting cycle", where rates could fall below 4%. That would be Todd Harrison's position. The Minyanville CEO is wary of encouraging folks to "climb aboard the Rally Express," because "I’ve seen that movie before (in 2000) and a lotta folks never made it out of the theater".

[2] PIMCO Bonds on the UK fixed-income market. According to PIMCO's Myles Bradshaw, the UK economy will experience a significant slowdown as "higher mortgage rates and debt-service costs are occurring against a backdrop of tepid income growth". His conclusion: "Consumers will see higher interest rates as fixed-rate mortgages roll off and as mortgage spreads widen. Tepid income growth and debt-servicing costs near record highs mean consumers have little to cushion them against higher interest rates. Facing this storm, the U.K. economy is likely to slow down and grow below trend. The silver lining: This bodes well for U.K. fixed income".

[3] A look at our "Goldilocks/Stagflation" indicator. Our market-based "Goldilocks/Stagflation" indicator comprises the platinum/gold ratio (numerator) and the 10y/10y inflation breakevens (denominator). A strong showing is indicative of a Goldilocks scenario, whereas a falling number describes the nightmarish Stagflation scenario. It currently trades a 0.79, a four-month low. On the heels of the credit crisis, the platiunm/gold ratio has declined from 2.01 to 1.81, reflecting —quite logically— slower global economic growth. On the other hand, inflation breakevens, although still relatively low, have risen sharply over the last couple of sessions. All in all, the message is: risky assets have become significantly more expensive.

[4] Forget the 1990s! Forget the 2000s! The 1970s are ... baaaack! Richard Bove, over at Punk Ziegel, says the Fed actions are reminiscent of the ... 1970s! That's right, the 1970s: soaring inflation rates, a highly politicized Fed, a falling dollar and surging commodity prices. The aggressiveness of the Federal Reserve —unmatched by other central banks— will result in higher, not lower, long-term interest rates. The higher cost of capital will be particularly detrimental to U.S. broker-dealers.

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