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  • Debunking the Falling Yield (and other crap) [Edit or Delete]0 comments
    Aug 16, 2011 12:43 PM
    The market is back in 'buy all dips' mode with the bears failing to get even a 100 point selloff as the huge funds buy with impunity. A couple weeks ago Bernanke gave the green light for nosebleed asset prices by vowing to never raise rates again. Get ready for more pain at the pump and higher energy prices as the Q4 rally and winter kicks in to gear. But rejoice it's not inflation because the core CPI still at 1%.

    And the usual economic misconceptions are abound on the blogs.
    Even Joe W. mistakenly attributes the falling yeild curve to be a bearish sign, reminiscent of Japan. 

    This is wrong on three counts.

    First, even if all yields are plunging the yield curve is still rising in that the 10 year at 2.35% is much higher than the short term yields. In the late 90's and  in 2007, however, you had an INVERTED or flat yield curve where short term and long term rates converged.

    Second,  yields falling because of huge demand for US dollars, not because of weakening economic fundamentals. This dollar buying spree which hit a fever pitch in 2008-2009 isn't bearish for the economy as evidenced by the quarter after quarter of blowout profits and earnings and super low PE ratios. Lowes and home deport just reported earnings that topped estimates yet again.  S&P 500 retail sector spider at a near 52 week highs and higher than it was in 2007. Hardly a recession. The world is awash with so much liquidity that all asset classes from treasuries to munis to stocks & commodities are all going up together. 

    Third, Japan's economy really sucks. They have too much entitlements, a high personal savings rate, an insular culture, and lousy demographics- none of which the United States has.

    Another myth: "the debt threatens national security"

    Do you think Khalid Sheikh Mohammed was thinking about debt when masterminded 911? So if we balance the budget Al Qaeda will dissolve? lol How about the 2004 Madrid train bombings? Or the 2005 London Bombings? Was debt, not loathing of western civilzation, the culprit?

    Another myth: "we need to raise taxes to reduce the debt"

    Wrong. The bond market is alluding to lower taxes by how yields are still at 'crisis levels' and raising taxes would be suicide politically and hurt the economy. It's not like 'read my lips' 1988 when annual inflation was in the 5-6% range and the only way to reduce inflation was to raise taxes and rates.

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