my doxy

Orthodoxy is my doxy; heterodoxy is your doxy.
--William Warburton

Commentary on politics, finance, and sometimes other tidbits when I can't restrain myself.

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Thursday, June 05, 2003

Easings appear to be on schedule

As was expected, the ECB eased a half-point today, and I just read that the T-bill has a 93% chance of a .25 % easing in June priced in.

I suspect there will be more to come.

Wednesday, June 04, 2003

Avoid Treasuries

Note: My wife hates it when I give investment advice--I can't help it today.

If you are not a central bank or a trader, buying T-notes or bonds at current quotes is unwise. If you can't stand not owning bonds, buy a short corporate fund--it will stink less. You can buy TIPS if you want--the return isn't too good down here, but it would be safer.

The only way buying T-securities at these prices could be a good idea is if there is deflation or near-deflation for quite a while. That is doubtful (see previous post). Presumably the reason rates have gotten this low is that central banks (including the Fed) are buying them. They don't need to make profits, but I presume you would prefer to. This is not the way.

In the early eighties, when bonds had double-digit yields, people avoided them--the experience of the 70's said they were "certificates of confiscation". Now, most likely, they really will be.

Monday, June 02, 2003

Deflation in the US--I think not

There has been a lot of talk in the press about the possibility of a general deflation in the US; even Fed Chairman Greenspan has lent it credence,although as a remote possibility.

It is possible this could happen if nothing was being done about it, but I do not think that is likely.

One of the benefits of the federal government issuing TIPS is that it gives us an easy way of telling what the market thinks inflation is going to be, by looking at the rate spread between regular Treasury securities and their inflation-protected equivalents. Currently, the market seems to be pricing in an inflation rate of 1.5% - 2%, so it appears that market participants do not expect deflation.

The Fed has made it clear that they will use whatever means are necessary to prevent deflation. It is possible that they would not be willing to live with the consequences of those means, but my current presumption is that when the Fed prints a lot of money, and the dollar continues to fall, the Europeans, Japanese, and Chinese will not want their currencies to rise too much against the dollar, and will have to inflate their currencies as well. We have already seen Japan intervene to keep the yen from rising too much, and it would not be surprising to see a ECB rate cut next week. China and much of the rest of Asia is maintain a de facto currency peg to the dollar, and you would probably see increased Asian central bank purchases of US debt used to recycle the excess dollars those countries accumulate.

Such a policy mix is not sustainable, and probably will have various drawbacks in the longer-term, but it is almost certain to prevent deflation.

The strongest objection to this scenario that I am aware of is the fact that Japan has tried to reflate and it hasn't been able to--some would say it is in a liquidity trap where monetary policy is ineffective.

There are three main reasons why I think Japan is different:

  • Japan was first

  • Japanese production and consumption patterns are very different

  • Japanese demographics are very different

  • but going into those details will require a separate post.