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The Neutered Bear


I have written about debt levels ad nauseum. I wrote a piece a few days ago called Lose Lose where I pointed out the amount of U.S. debt that Japan has bought over the last year, buying in the face of and almost certainly to stem a declining dollar.

It is certainly a fact that the equity and the bond markets do not care about this, at least not yet. My suspicion is that massive and coordinated intervention in the currency and bond markets, and maybe a few others, is masking turmoil beneath calm waters.

I am on record several months ago calling for a much lower dollar. That has come to pass. I am also on record calling for a bear market in equities once the dollar began its decline; this has not.

My reasoning was that as the dollar declined our foreign creditors would demand higher rates to compensate them for a weak currency. These higher rates would in turn sour a nascent economic recovery, one fueled by fiscal and monetary induced consumption. Japan has so far stepped up to neuter this situation.

I have heard the argument that if rates rise then trillions in money markets will travel into bonds to stem any rise in rates. I just don't buy that. Money market money is liquidity money, it is not bond money. Perhaps some will trickle over, but historically the total amount of money in money market funds is pretty sticky: when the spending party spends it, the selling party deposits it.

So I still believe the situation to be unstable. So does gold. Apparently so does Dr. Mundell.
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