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Is There A Business Cycle or Not?


Are curve inversions important? Is it 'different this time?'


I say this will all the respect possible for all concerned. It is at the heart of the economy and bond market at this moment. Late yesterday, Toddo responded to a question from Minyan Dave that concerned my thought that markets don't USUALLY rise (history backs this up) until the second rate cut.

Todd asked Snoop Tony Dwyer (very smart guy) what his thoughts were on the subject and Tony's opinion, if I read it correctly, was that because of the TYPE of economy we are in - service based (over-leveraged hunk of junk in my book), as opposed to manufacturing based - the theory no longer holds water.

I would like to respectfully throw in my response to that answer (this is what makes MV so fun for me and why I am looking forward to discussions at MIM3). To say this means there really is no more business cycle is wrong. I mean, if rate cuts don't matter, why do rate rises matter? What is the difference if we are making cars, planes, trains, Barbie Dolls, software or video games? People still work and yes, there is a business cycle - just ask the homebuilders - and homebuilders and retail are the key to the economy. And they are up to their eyeballs in debt and have no way out. I have the stats to back it up, trust me.

So, where does this leave us? I agree that the market has reacted 'differently' since 1982 and particularly since 1995 when it comes to rate cuts and market bottoms. Tony is absolutely right about that. But I am focusing particularly on the period from 1985-1995, when M3 grew at 3.8%, (see chart below) and then, magically, from 1995-2005 it grew at nearly 8% (see chart below).

Is it any surprise than that when you look at the BIG picture (see chart below) here, that when you look at M3 growth from 1970 to 2005, you see the nearly parabolic nature that began to take place in 1995 in M3? THAT IS HOW BUBBLES ARE BORN. Also, 1982 ushered in the greatest secular bull ever. Of course, markets act differently with money stoked secular bulls/bubbles then secular bears and that is the heart of the matter.

Why is it that the 2 year note is trading 30 basis points THROUGH FED FUNDS? Because, sports fans, the business cycle is alive and well, IMHO. It doesn't matter to me what we make - trains and planes or software and video games. It is why we loaded the boat with 2's at 5.25% and again at 5.12% (actually we bought discounted 3 years for the convexity - see bond basics) and can't contemplate buying 3 year corporates even yield to Fed Funds. My brain won't allow it.

Anyway, that is my take on this mess that Big Ben will have trouble finding his way out of. Questions now or at MIM3 are welcomed and I say all these things not only because I believe them to be true but because I think they are important for ALL investors.

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