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Minyan Mailbag - Balance



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.


I first have to tell you that I love your writing, I have never read anybody more thoughtful and intelligent. Thanks for sharing that with the rest of us.

I have a question and it may be dumb but I am going to ask it anyway. I have been a big picture bear for awhile like a lot of people but what concerns me at this point is what Brian Reynolds points out with the bond market. He has been on the money with this stuff and if I am reading him correctly it sounds like this market could really take off to the upside. My question then is how do you balance that with what you believe is happening out there?

I hope this question makes sense.

Minyan David


If you read "To Whom It May Concern" in conjunction with some of my other writings and also seredipitously Fleck's latest piece, you will get a sense that very "disinterested" parties (meaning people whose motivations are not fiduciary in nature, but self-promotional) are in charge of vast amounts of money.

Brian's writings are reflecting current conditions: those disinterested parties struggling and focusing on "not underperforming" at the expense of controlling risk. So Brian is describing a situation where the risk premiums are approaching historically low levels, managers simply taking way too much risk (e.g. buying much riskier corporate bonds versus treasuries just to pick up a few extra basis points or buying stocks that are going up just because they are going up) for their "clients".

Brian is in the background very cautious. He is not making a judgment statement that what these managers are doing is right (I know he doesn't think so), he is just saying that is what they are doing. Brian knows that in the end the risk is much too high and that could (will) cause major problems at some point.

What is happeing out there just "is". The rubber band continues to stretch. I have said many times that the key is the long bond price and the dollar yen. It is the Japanese that are primarily allowing the U.S. to stretch that rubber band. Watch for a break-down in the dollar yen (first below 105, then 103, the 100...) for signs that the Japanese are faultering. This will drive up U.S. rates at the wrong time and kill the party.

Until then, the bear remains in slumber.

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