Wednesday, June 08, 2005

The Big Picture: "Its different this time."

The Big Picture: "Its different this time.":

The following is a comment I posted on The Big Picture.

"I hear crying as if the system is broken? If it ain't broke, don't fix it; it ain't broke!

I'll take the results of post 9/11 any day to the results of post 1929 or 1989 Japan. Besides, it is wonderful that the Asians are willing to export wage deflation and to finance the sales!
I wish someone would offer me import rights for low cost foreign goods with 100% financing. American consumers are making out like bandits.

There is no doubt that the spread between nominal GDP and the 10 year bond must narrow. GDP is around 6.25% and the ten year is around 3.9%. Either the economy must slow dramatically, long rates must go up dramatically or some combination of changes must move these numbers toward equilibrium. The stock market says 6.5% is the correct number.

If the stock market is correct, inflation over the next year or two must be headed to almost zero. Has anyone predicted $30 oil or $300 gold lately? Thirty dollar oil sounds ridiculous but what other piece of this puzzle solves the riddle? (Again the answer could be a combination of $40 oil and moves in stocks, bonds and GDP.)

Another part of the conundrum is the opposite of irrational exuberance; irrational fear. Investors world wide are still hiding from bubbles and terrorist attacks by hunkering down. Bonds are not yielding 3.9% because supply of bonds is low but because demand is huge! "