Minyan Mailbag: Rocks and Hard Places
One more hard run?
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this exchange with that very intent.
In normal times, I would think that lower rates are the "risk" to the market...but these aren't normal times. The market is addicted to the free money from the Fed. Its "heroin." It needs it, can't live with out, and if it is taken away it will die. In my opinion we are either heading towards stagflation or depression. If we continue the slow drift it will lead to stagflation. If we get a sudden shock accompanied be a sharp drop in long rates we fall off the cliff of deflation. Short term the market either is in denial or better yet a "heroin" induced delusion.
In normal times the long end should be going up and that is what everybody is looking for. It helps maintain the denial. Short term; though, I think there are signs that the fed may slow or pause their tightening pace. The short end is flattening, the long end is getting steeper, and today's "conundrum" comment underscores Elmer's concern. I feel strongly that he knows the risks, but doesn't know what to do. This is why he has been harping on the deficit and ss for the last 2 years. Also, he is facing a "Cassandra" situation. He sees the future, and does the only thing that he knows: Fed intervention. But like Cassandra, it won't help long term. This is why I think the fed is going to pause fairly soon.
They are worried (not confused ala "conundrum" comment) about how fragile the economy is and will error on the side of inflation over deflation. I would be surprised if they lower by this summer (Reamer's view) without a shock, but I will say that 12 - 18 months from now, rates will be lower than they currently are now. Soon I feel the Fed will signal this pause, crouch it in language that they have reached an "equilibrium" point and will stand back for awhile. I could see them raise one more time (25-50 pts), take out the measured language, and say that risks are balanced. The market will knee jerk down, but them pop back because it gets to keeps its "heroin." This could spark a blow off top. I feel that 2005 will probably be a big candlestick year for the markets.
As to corporates: they have been a great tell, and the "Horse" better be making 8 figures, because he is that good. But, I feel the reasons for corporates' out performance are a combination of Insurance Co's and pension funds desperation for yield (Succo) and their cleaned up balance sheets ( lowers risk to hold). This could change fairly quickly. In any event, short term I am looking for the market to push higher as long as it gets its fix. I, like you, have shortened my time horizon and have been much quicker to get in and out, short/ long, etc.
Your scenario is certainly plausable and the notion of a "blow-off" top wouldn't shock the schvitz out of me. That dance between the elephants--if it occurs--is not without risk, however, and should be approached with defined risk and a ton of discipline.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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