Yal asked "are A-rated suppsosed to behave like this ?"

Well, it's not supposed to do that, but the truth is that it really isn't A paper. It may be rated A, but it ain't that quality. That was the point of this morning's Bloomberg bomb article.

OT but hilarious... appears Chinese have issues with bonds too [surprise, surprise]...

10 ways to dispose of RMB 1.55 trillion worth of bonds

1) Include RMB 1 billion worth of bonds with every DVD player sold in America and the EU.

10) Open your capital account and allow foreigners to have access to onshore rates and currency risk

Just a few of the things our boys can learn from the Chinese...

CR, there's an interesting article on the possibility of the Fed transitioning to targeting a lower 1.5% PCE by Greg Ip on the Economist's View and related commentary by Mark Thoma.

Economist's View: A Third Inflation Regime?

Your estimate of the PCE seem to confirm this speculation.

From Thoma's comments - "Whatever we hear about target inflation rates and target ranges, practically in recent years there have been two inflation regimes for the core measure, the 4% regime from about 1983 to 1990, a transition period from 1991 through 1993, then a 2% regime ever since. The question is whether the Fed will be satisfied to stabilize inflation around 2% as it has recently, or whether it intends to stabilize at a new, lower target establishing a third regime."

From Ip - "When core inflation was at 2.4%, as it was as recently as February, it was relatively easy for members of the Federal Open Market Committee to agree inflation was “elevated.” No member apparently thinks a number that high represents price stability.

At 2%, the question gets stickier. Some Fed officials say their comfort zone is 1% to 2%, and inflation above the 1.5% midpoint of that range leaves them unsatisfied. But some others, who have not publicized their views, don’t share that. Extensive staff work, plus the experience of foreign central banks, have suggested 2%, or something slightly lower, might be better. That number would makes deflation less likely and avoid the potential costs of forcing the public to adjust to a lower inflation rate.

As is well known, the FOMC is deep into a lengthy internal discussion of communication issues, including the question of an inflation target. Until that’s settled (if it ever is – progress has been slow), the FOMC, in its official pronouncements, is likely to remain agnostic on the appropriate inflation rate. Dropping the reference to “elevated” without replacing it with anything may have been necessary to satisfy those who don’t buy into the 1% to 2% comfort zone without arousing objections from those who do."

Excellent analysis, CR, and very, very significant. The bulls can try spinning this if they like, but the message is unmistakable. For those not familiar with the importance of PCE as a leading stock market indicator, a visit here would be in order:

Ahead of the Curve by Joseph H. Ellis

There is definitely a bell ringing now -- ignore at your own risk.

There are so many possible unintended consequences that could come from this as to boggle the mind.

INO Equities Stocks Indexes - U.S $ INDEX (NYBOT:DX) Price Chart and Quote

The dollar won't exactly be starting this fall from it's high either.

Sigh Not good.. This could lead to a reciprocal spiral of protectionism and tariffs. It happened once before..

Tariffs in American history - Wikipedia, the free encyclopedia

"Woodrow Wilson made a drastic lowering of tariff rates a major priority for his presidency. The 1913 Underwood Tariff cut rates, but the coming of world war in 1914 radically revised trade patterns. Reduced trade and, especially, the new reveues generated by the federal income tax made tariffs much less important. When the Republicans regained power after the war they restored the usual high rates. The Great Depression was worldwide, and international trade shrank drastically. The crisis baffled the GOP, and it unwisely tried its magic one last time in the Smoot-Hawley Tariff Act of 1930. This time it backfired, as Canada, Britain, Germany, France and other industrial countries retaliated with their own tariffs and special, bilateral trade deals. American imports and exports both went into a tailspin. Franklin Roosevelt and the New Dealers made promises about lowering tariffs on a reciprocal country-by-country basis (which they did), hoping this would expand foreign trade (which it did not.) Frustrated, they gave much more attention to domestic remedies for the depression; by 1936 the tariff issue had faded from politics, and the revenue it raised was small. In World War II both tariffs and reciprocity were insignificant compared to trade channeled through Lend Lease."

This little tidbit was interesting also regarding tariffs after the civil war and the rise of American Industrialism. --

"Apart from wool and woolens, American industry and agriculture—and industrial workers—had become the most efficient in the world by the 1880s. They were not at risk from cheap imports. No other country had the industrial capacity, the high efficiency and low costs, or the complex distribution system needed to compete in the vast American market. Indeed, it was the British who watched in stunned horror as cheaper American products flooded their home islands. Wailed the London Daily Mail in 1900,

"We have lost to the American manufacturer electrical machinery, locomotives, steel rails, sugar-producing and agricultural machinery, and latterly even stationary engines, the pride and backbone of the British engineering industry."

Nevertheless American manufacturers and workers demanded the high tariff be maintained. The tariff represented a complex balance of forces. Railroads, for example, consumed vast quantities of steel. To the extent tariffs raised steel prices, they felt injured. The Republicans became masters of negotiating exceedingly complex arrangements so that inside each of their congressional districts there were more satisfied "winners" than disgruntled "losers." The tariff after 1880 was an ideological relic with no economic rationale—it was a timebomb waiting to explode—and it repeatedly did explode."

LCDS spreads are up 28 bps in one week.

since LBO deals are made based (mostly) on the spread between LBO traget on going profits and bond rate this 28 bps is a substential part of the LBO profitablity.

more smoke but no fire yet:

HEDGE HELL'S SPELL - NYPOST.com

For the wikipedia entry, substitute China for America to analogize today's situation.

The libertarian "ownership society" is dead. It has gone the way of communism. The European/Canadian/Japanese model looks a lot better than the U.S. model at the present...

Even though I'm in mfg I am NOT a 'protectionist'... But I can tell you 100% that the Chinese are not clean on this issue either... not even close.

They protect via bureaucratic favoritism & currency manipulation. I have seen the inside workings & their results...

In one case a company I work with was able to get free land, very attractive financing, five year tax holiday, infrastructure improvement (superior access to ports) for their Chinese subsidiary... all because their parent company (large US based MNC) had connections among the regional & local party apparatchiks & bureaucrats. The cost advantage even excluding labor rate differentials was very significant. Throw in cheap labor & it is unbeatable. You do not want to be in their cross hairs if you are a competitor.

Result is a lot of jobs will be lost in the US as a result of this kind of 'free trade'... and these industries aren't like service companies you can start up overnight in a vacant strip mall (not like mortgage brokers)... it takes decades and many hundreds of millions of dollars to develop a market like this (unless you have tons of gov't help - i.e. free capital).

I don't have the answer but know for a fact if the dollar falls vis a vis the RMB most of the 'advantage' the Chinese have that I described above evaporates... then it comes down to which company, plant, workers really are the most productive. Then 'comparative advantage' starts to work again.