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It certainly appears that inventories are doing a better job of tracking
demand, however I don't think that means an end to recessions - companies
may be able to more quickly match supply and demand but they do not have the
ability to turn excess production capacity into cash by any method other
than flooding the market with ever cheaper goods. This expansion has built
heavily on consumer spending fueled by credit expansion and upon peacetime
government deficit spending (take the SS surplus off budget and you have a
$100B+ deficit). What politicians refer to as a budget surplus is really
cash flow surplus fueled by baby boomer SS contributions. At any rate, I
believe we will have a recession when the economy will no longer support
continued credit expansion. The Fed's 3 rate cuts may have eliminated that
immediate threat at the expense of allowing the credit bubble to grow. The
total credit bubble (including off-book obligations such as car leases) is
larger than it has ever been and it can not continue to expand at recent
rates.
I don't disagree that the supply of net fresh government paper is declining,
however consider that the pool of money seeking debt paper also appears to
be declining because the stock market looks so much juicer. Perhaps a
stand-off for now, but the Fed has done such a great job of priming the
stock market pump with 3 rate cuts, that there may be few buyers for debt at
any price short of the guaranteed 20-30% annual returns which the public
believes are to be found in the stock market.
Good crystal balls are hard to find and mine is just as cloudy as the next
guy's, however I do try to keep the government propaganda wiped off on a
regular basis. Generally, it's my perception that the Fed has done a great
job of keeping the economy humming but that the true costs of unrivaled
prosperity have yet to be calculated. AG talked a good game of "irrational
exuberance" but the fact is, that when he looked Irrational Exuberance in
the eye, he blinked and cut rates. I suspect that history may perceive AG
not as the man who presided over one of the world's great economic
expansions, but as the man who presided over one of the world's great
manias.
All of which says that bonds may go up or bonds may go down. Ultimately one
must go with the historical trend of falling rates while watching all
corners for cracks.
Earl
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