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03-22-2002, 11:17 PM
overall with salaries haven risen in the past two years and oil soon to be likely higher over time. inflation must rear its ugly and welcome head. so it soon may be time for bonds to fall as interest rates are raised at the next few fed meetings.

this may well shipwreck the stock markets recent upswings over the past few months.

what do you think is a good strategy for this senario not knowing of course when these events will unfold.


a simple one is to buy oil and short bonds and stocks that you think will get the worst of it.

03-23-2002, 08:09 AM
Fed funds is already pricing in a 25 point hike in May and another 25 in June with 150 by year end. So while i agree with you that rates will certainly rise significantly over the next year, its pretty much priced in.


About your trade idea, oil prices have risen in anticipation of Iraq. However, the situation is a bit different from last time. First, Iraq's contribution to the world oil supply is fairly small and more importantly there is no threat to the Saudi oil supply(which was the real reason why oil spiked prior to the last gulf war). Still if tensions escalate, there is a very good chance that oil will rise in the short term.


Being short bonds and stocks is a very interesting play. Up to now, the two have been negatively correlated so that kind of trade would be a wash but we may now be looking at a regime shift in which the correlation will become positive. This would happen if confidence in the fed were to fall, especially with regard to inflation(which is a real risk since Greenspan's attempt to talk down the strength of the economy and hence bring down the long end of the curve has failed in the face of very strong US data).


But i still think the best trade idea is to be long investment grade corporates and short equities. Corporates are still suffering from Enron aftershock while equities have fully priced in a recovery.

03-23-2002, 01:23 PM
An important thing to note is that through all the fed easing's (450bps) longer term rates have not really budged (over the last year). As was posted above about 150 of tightening is priced in for the rest of the year (check out euro dollar futures contracts). Its not clear how this will effect long rates. I think inflation is the real worry for longer maturity paper - but supposedly the market feels an active fed can control this.


One interesting trade (hinted at in the above thread) is to buy corporate bonds but hedge away the interest rate risk - perhaps using swaps - good luck with it all.

03-24-2002, 11:10 AM
The Fed won't be raising interest rates anytime soon, and if they do it will be small incremental changes such as 25 basis points.


Remember, the Fed made an "emergency" 100 basis point (1%) cut after the attacks that they never would have done otherwise, so this 100 basis points will probably be given back, but most likely this will take 6 months to a year.


Even if the Fed does start raising rates right away, and I am wrong, this does not bode all that badly for the stock market. Yes, there will be an initial "gut reaction" like there usually is but two or three minor rate increases isn't a bad thing. Rates are still very, very low. After the third rate increase you can start to reevaluate.


The only stocks I would be "shorting" at this point in time are the still over valued tech stocks and possible bankrupt to be past high fliers such as Lucent and Nortel. K-Mart will most likely go to zero, but it could take some time. The cyclicals are doing well now and it could take a while for tech to tag along especially since sector rotation is currently underway.

03-29-2002, 07:28 AM
I actually like going long on bonds...though I would go for U.S. Treasuries with around 10 year maturities. I like the shorting of equities, especially in tech companies running in 2nd place or worse in their market.

The market has priced in a nice recovery but I think a double dip recession is likely. I don't like the risk of the corporate bonds...the market has priced in a lot of "Enron" risk but not enough true, economical risk. I don't think it's worth chasing the % points with all the risk considering long term you're better off in stocks(not now though). I think when the time comes to buy heavy into stocks again you won't want those corporates because they will have dropped in value considerably because of the negative sentiment. I would stick with the safety of Treasuries which are more liquid and may actually increase in value due to a flight to quality.


Basically, I think the economy is worse than people think. GDP is going up partly because we are importing less which actually causes GDP to rise. Also, 0% financing of autos and cost slashing can only prop up demand for so long. I think all the bullets are spent. The manufacturing sector is temporarily heating up again but they may be in for a rough surprise when inventories start piling up again.


Inflation is a problem on the horizon so I would stay away from something like any bond in the 30 year vicinity.

03-29-2002, 12:21 PM
My worry with $ denominated bonds is currency declines.


I like funds: TGG GIM FAX FCO TEI and TIPS bond funds.


As to stocks if you like energy you might consider PEO or royalty trusts.

03-29-2002, 04:49 PM
Well I just get back from a long vacation and see another doom and gloomer? While growth won't be around 4.5% all year like its almost certain to be Q1, I see at most a 5% chance of another recession. The only things that could cause it are another major terrorist attack or some Middle East countries or Venezuela completely shutting off the oil spigot. Neither is all that likely. Your GDP assessment is wrong, imports are down but exports are down too. The change between good economic times and bad economic times is almost neglible. While the auto and home purchasing spree did help things out a bit, I don't think we were really in a recession of much magnitude to start, after all it didn't even fit the simplistic definition of it with only one quarter of negative growth. Without the terrorists we wouldn't have had a real recession. Right now there is far too much stimulus to the economy from the Fed and from government spending to have another recession. Our real concern should be inflationary growth because oil prices are going up and the whole world economy suddenly got its feet with even Japan possibly adding a bit of growth (much better than being negative!). The downturn (better name for it) came so quickly it caught a lot of people off-guard and the upturn probably will do the same. I see inflation being fairly troublesome by this time next year, after all unemployment still isn't much of a concern from a historical basis so if business starts hiring late this year, we could see unemployment in the 4's again with a real chance of running high 3's by next summer. That will definitely pick up inflation because the whole world seems likely to participate in the recovery and that fact alone probably will devalue the dollar pretty hard. Falling dollar and low unemployment spell BIG trouble for inflation.

03-29-2002, 11:33 PM
but inflation always leads to higher interest rates. and higher interest rates must mean the stock market will fall or not rise as much as it would have. the higher the price of capital the lower companies earnings will be. and companies are valued on their earnings and almost nothing else except on short term trends which are clearly a mistake imho.


so, wild bill's senario should mean a decrease in stock prices next year anyway. right.

03-30-2002, 02:33 PM
I'm surprised you would say the 9/11 attacks caused our recession. Manufacturing had been in the tank long before 9/11. Outside of a temporary loss of demand for airlines and tourism, the 9/11 attacks didn't do much to the overall economy.

If we weren't in a recession, then how come all those people lost their jobs?

03-30-2002, 02:38 PM
By the way...imports dropped more than exports dropped. Hence, there is a net negative impact on imports which causes GDP to look better than it is.


Recessions happen. Are you a believer that the normal business cycle no longer exists? Hasn't the govt. had all the tools in the past (spending and rate cuts) to boost the economy? If nothing is different from the past then recessions will happen again.


Tell the Japanese that rate cuts boost the economy. They have been at near 0% for a long time and are still having problems. It is all part of the normal business cycle.

04-01-2002, 06:05 AM
All a matter of timing. There was a fall-off in manufacturing for a long time and yet it wasn't a technical recession until the 9/11 attacks sealed that fate. There were clear signs that the economy was slowing improving just prior to the attacks and we probably would have seen a GDP slightly above 0 in Q4 without the huge affects of the attacks. Business and people literally stopped living for a week after the attacks and never really regained their balance until the end of the quarter and yet there was only a modest negative drop and it was a one quarter drop. That speaks volumes about the strength of the economy in the face of a staggering blow that had people plopped at home in front of TVs and not working for a long time. I wasn't about to say that recessions won't occur from time to time, its just I think the Fed timed things fairly well and the economy was working from such a strong position a recession when (and if) it did happen were very difficult to bring about.


To answer the rest of the questions, its time for a very important lesson of sorts. I think a lot of people, the world around really, are missing this important point. Bonds and currency are the main worry right now of a lot of pundits. However they are so caught up in backwards thinking it just amazes me. There are about 140 countries in the world I believe (give or take a few) and probably all but 10-20 could be manufacturing based economies provided the capital is invested in them. However, there are about 20 countries that can be service based. Somehow the union leaders and some idiots in our government are under the impression that service based economies are bad things. Nothing could be further from the truth. Service economies are the hallmark of wealth in the world. Any country that spends too much time or consideration (capital) of maintaining a strong manufacturing sector is asking for trouble. I can't believe this point is being missed, even by the Bush administration right now. Think about it, the hallmark of a service economy is two things, a strong currency and low interest rates. Well there you have the US economy and it has been that way for quite some time now. Yet we have idiots saying this is a bad thing!!! Seems economists and the government have done a terrible job of explaining things so maybe I will give it a shot. The simplest way to look at it is that service economies offer the best return on capital. Generally this is because of two things. One is that they allocate less resources in capital intensive activities such as manufacturing. Manufacturing is terribly inefficient as far as return goes, way too much money is tied up into capacity that gets obsolete very fast these days...and to save that original investment more money is put in to chase after it! How come people miss this point? Are we after efficiency or giving people a job? Ridiculous really. Second is that its a lot harder to copy a service than it is to copy manufacturing. Anyone can make steel, a car, assemble things. All these things can and should be sent elsewhere, but they aren't in the name of saving jobs. Services are very exclusive however and the US does this far better than most of th world. Fortunately we have done a much better job of shipping off these low return processes than the rest of the developed world while keeping services for ourselves, hence our much better returns on capital and why the money keeps flowing here. Europe is so hopelessly attached to their job creation machines they have little hope of matching our returns on capital anytime soon and further many of the important service functions in Europe are run by American companies or depend heavily on American expertise. So getting to Ray's question/assertion, no improved economy doesn't necessarily mean higher interest rates if the currency doesn't collapse. As long as we focus on being a high-intellect service economy, our cost of capital will stay low as there is less need for heavy investment and our currency will stay strong meaning the Fed won't have to try to defend the Dollar. Will it work out? Well there might be some peaks and valley as always in the global economy, but hopefully people in high places will figure it out and be forward thinking instead of looking back on the old economy and trying to defend the times of the past.

04-02-2002, 10:27 PM
Well, I agree with all you say except the recession. Goverment numbers are crap..so I don't rely on those. The govt. puts out whatever is convenient. It is clear the country was in a recession. In fact, the fact that the market dropped was pricing in future slowing of the economy. The market is a great leading indicator or economic strength.


As for the other stuff you wrote...I see your point but knowing that won't help you make money in the market.