Thanks for more great analysis.

You mention that the rising long rates where what you expected as part of your "vicious cycle" post, but I'm curious: Is this the time line you had in mind? It seems like this is happening awfully fast, but I don't have the experience or knowledge to know what a "normal" time line is.

Well, don't you think that the Hedge Funds are in this "for the trade" and are probaly exaggerating the speed of the movement. If the US economy doesn't go into recession, this will reverse. That is the FED's bet, I think.

" Surely the Fed is not as blindly naive as so many writers suggest. "

Could be.

I think that I read in a recent poll - 80% of repubs thought the economy is doing great. And only 1/3rd of dems thought the same.

yes wally they are.

post from yesterday...still works:

Let's look at things like Sean Corrigan recently did:

Twilight of the Gods - Sean Corrigan - Mises Institute

(BTW Tanta might enjoy this article for the language itself. Sean is a well educated Scott)

1. The US primary exports are scrap, food, and toxic paper.

1.1 Scrap is used to make stuff. People buying stuff will delcine.

1.2 Peak food/Stupid gov't subsidized "BIO" fuels. Definately going up in dollars. Increasing faster than dollar drop? Yes, currently. Good for exports...eh. Bad for eaters in US? Duuuuuur.

1.3 Toxic paper...isn't selling. Dropping dollar helpful? NO! Increase as an export...If you don't know, go back to top of page and reread.

1. Where does that leave US? Well dollar sales will increase interest rates...at least at the long end. Mish sees the interest rate pivot between FED pushing down low rates and long rates at 5 year tbills:

http://globaleconomicanalysis.bl...eres- value.html

I suspect that pivot moves left going forward. Also FCB dollar sales/reduced buying equals inflation.

1. Physical and Labor capital is badly mal-invested in US. (Huh? The Fed prints capital. Go read at least the first few paragraphs of Sean's article above) Market conditions don't need War Shriek hucksters, more banksters, more mortgage hucksters, more contractors, more real estate officers, etc. ad. nauseum. In fact we need far fewer. We also don't need more residential or commercial real estate...more coming on line...we need less. Similairly we don't need more Home Depots, or the stuff they sell. So we don't need all the people, plants and equipment producing those goods. I could go on, I think the point is made.
2. Thus, we have dollar sales, rising long end interest rates, lower employment, and rising costs in food, oil, and imported goods, as well as a drop in exports.
3. Wages won't keep up with inflation as all the unemployed mal-invested (mal-educated, mal-trained, etc.) people will be selling labor services cheaper and cheaper to get a job, in an economy with falling employment. Housing prices must follow this trend.

Does this smell like a really serious Stagflation? Does to me. Is this a a potentially stagflationary-depression? Smells like it to me.

Battery pack hooked up to the tin foil hat ultimo.

Banker bunker stocked and ready.

Cheers,

Paulson: Lenders may handle jumbo loans

Shifting course, Treasury Secretary Henry Paulson planned to tell Congress that the Bush administration would consider allowing the big mortgage companies Fannie Mae and Freddie Mac to temporarily buy, bundle, and sell as securities loans exceeding $417,000.

Paulson: Lenders may handle jumbo loans - The Boston Globe

WOW...

Okay, so what they need to do, in addition to the nevermind, is to say oops, we made a mistake. Then they blame the secretary and say they meant to raise rates a half point. Which actually might help squeeze out some of the rot and infection and do something positive for credit availability. But can you imagine the bleating and squealing from the sheeple? To say nothing of the brave criminals in congress.

So lets start a pool on how much the market would drop when the mistake is announced. We all put in a dose of our favorite controlled substance, it oughta be fun!!

Several times over the past couple of weeks Kumblow would cast this silly notion to his bull cheerleader numbskull guests that if the Fed would cut 50bpts the dollar would rally. Some would agree and others would smile and change the subject fully aware that it was nonsense. We won't hear another peep about that prediction again since it's already been squashed. Maybe it'll rally after another 50bpts? It can't go to ZERO, can it?

Shameless cheerleader stooge, that Kumblow.

Looks like the ten year yield is heading back up to 5%, maybe more. If it does, this will cause further shock to homebuilders, REITs, and utilities. Most importantly, it will be another time bomb for the debt markets, yet again. Time will tell.

Breadth in SPX is flashing ominous signal despite it is near all time high. The same signal I see in the Brazilian market, one of the hottest market. I dont know what (and when) could trigger a new wave of sales. Unless those signals fade I will keep a very caution stance in the short term.
EWZ

...the Fed was surprised by the housing and borrowing boom on the upside, and now fears it will be surprised on the downside.

I think it's fair to say that it would've been a lot easier to do something about the former than it will be about the latter.

Is an advantage to being a history buff who's lived long enough to see a fair bit of it.

Double digit inflation is possible, even probable...we've had it before, will again, soon. Markets will fall..have before, will again..soon.

And then all will turn and we'll have a rally to beat any previous rally and life will be good..not that it's all that bad in the valley.

And I write this knowing the comments here are mostly more negative than reality.

When are folks' gonna learn?

THE FED DOES NOT "CONTROL" RATES! Especially on long-term (mtg) paper. The bond mkt is the "decider". Not Bernanke, not Bush, not Gigi Twinkletoes.

All this Fed "rate watch" action has gotten so annoying! The buildup was like a damned pay-per-view ocatagon cage event.

Come to think of it...

BoJ awake.

Yen 115.4

Does the Fed read this blog? Does anyone in a decision-making position? Apparently not.

Before declaring disaster, we might want to examine the other possibilities. The problem the Fed needed to solve in credit markets was a money market problem, more than anything else. That problem has been somewhat relieved by the Fed's rate cut. Dollar Libor rates are below their month-ago levels and below their Monday levels at every maturity. The 3-month rate is now well down from the steady rates it was trading prior to the credit problem.

Headlines keep howling that higher long rates suggest higher inflation. In the medium term that's true, but we should never mistake short-term wobbles for the medium term. The difference between 25 bps and 50 bps on overnight money is the difference between an OK steepening trade and a wildly successful steepening trade. Long rates have gone up at least in part because you gotta sell the long end to enter a steepener. Once those trades are established and their impact fades, we will start to see what the curve is going to look like in this new environment.

And, yes, the Fed had reason to believe the dollar would sag is they eased. If you look at the Fed's prescription for reducing the current account deficit, it involves a weakening of the dollar. Read any Fed official's speech about international accounts in recent years, and the notions that foreign appetite for US assets will fade and that the dollar will weaken are part of the deal. If it has to happen some time, sooner is better than later, and we could use the stimulus of stronger net exports.

I'm not saying that when the dust settles, we are going to be happy with what the Fed has accomplished. We may not, but we need to figure out what they were trying to accomplish, and be a bit patient, before we start declaring a failure.

EWZ -

what ominous signal is the market flashing?