As the trade deficit reaches new records it becomes more evident to me that the dollar must drop significantly to correct this fundamental imbalance.
"Fedspeak", the process by which officials of the Federal Reserve talk, massage, and yes even manipulate various markets into "ranges" that assuage and confuse participants into believing what the Fed wants them to believe, is alive and well as evidenced by comments made on Friday. The purpose of these comments were to make the markets believe that the Fed is "on top of rates and will raise them aggressively if need be".
I think that is what the Fed wants us to believe, but is far from the truth. Long rates can rise, and are, and the Fed can drag their feet to keep the carry trade going and allow banks to make money. That is unless the dollar falls precipitously and gold commensurately rises. That would be a wrench that the Fed could not turn.
But despite all this the dollar is not rallying and bonds are not either. Gold is down off the heels of a bad trade deficit number? Hmm. The markets do eventually see through the Fedspeak, sometimes sooner, sometimes later.
Given the slack in retail sales figures, low consumer confidence numbers, and sanguine "official" inflation statistics, and with a "diligent" Fed, bonds should be acting better than they are. But there is a strange seller of long term bonds out there. Could it be foreign selling, just at a time when it is most unwelcome?
Don't listen to what the Fed says, listen to what the markets say. That can only come from watching prices (and volume).
Stay especially diligent to long term bond prices. Bond vigilantes are not dead, although they may have been comatose for a while. If they wake up and decide that the Fed is not really in control of this situation, they will punish bonds with a vengeance.
Stocks will not go up as long rates rise.
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