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Kahn
I don't have adequate authority to pontificate on this subject but here are my
opinions on the longer term prospects for bonds.
There may very well be a rally in bonds. The way bonds can rally is 1) by
rising form a very oversold condition, 2) by having yields decline by reducing
the inflation premium built in to them. 3) by having inflation decline some
and thus rates decline. 4) and by having rates decline because economic growth
slows or shifts to a recession.
Point 1) rallying from an oversold condition is likely. Point 2) yields
declining from a decline in the inflation premium is possible. Point 3) having
inflation decline is highly unlikely because we are in the phase of the business
cycle where inflation rises putting pressure on the credit markets, and 4) when
an economy slows or especially when it goes into recession at least in the old
economy, there occurred a significant rise in inventories and accounts
receivable from the inflow of goods that were already ordered and not sold from
the slowdown in sales. This situation forced heavy short term bank lending with
consequent rises in short term interest rates.
I am not optimistic about a significant rally in the bond market.
This cycle has, however, been amazing in the persistence of the rally in bonds
and the decline of short term rates long into the economic up swing that began
in 1991. In my economic consciousness long rates would decline only for 6 to 18
months into the economic expansion.
The main causes of declining rates have been the continuous decline in inflation
rates significantly caused by skillful monetary policy by Greenspan. Another
aspect as been the rise of the world economy (international trade) which has
caused unusual levels of competition. The new economy has permitted something
that previously was not so readily possible. That is international labor
competition which has held down wages. I find it extraordinary my, Indian
manager reported that a friend in his home state hired many hundreds of Indian
programmers to sort through US y2k computer code in COBOL in India. Of course
we know that data entry is done in Jamaica, software and architectural drawing
is done in the former Russian satellites, computer help lines are being run out
of Ireland, the Philippines and every other English speaking country. Laundry in
southern California is done in maquiladoras on the other side of the Mexican
border. Not only manufacturing is international but services are too.
Despite the above we should really expect economic constraints to be reached and
for inflation and interest rates to rise (despite Greenspan) this late in the
economic cycle. S.E.Asia has come booming out of its mini depression, Japan is
growing by beginning to do the right things like lowering taxes, regulation and
restructuring interlocking ownership, Europe is growing partly because it has
created the common currency and is contemplating the restructuring of
interlocking corporate ownership. Backwaters like Latin America are growing
because they are doing doing intelligent things. World economic growth is
rising.
As I read the events, this is not an environment for a long round of rising bond
prices.
Stuart
Khan wrote:
> It looks like Richard Russel is bullish on bonds. Read below
>
> >March 20, 2000 -- Question: If the Nasdaq (which has been the "engine that
> >could" since last August), loses upside momentum and tops out, will the
> >rest of the market including the "old economy" stocks, top out with the
> >Nasdaq? Or, if the Nasdaq tops out, will the "old economy" stocks take up
> >the slack and start rising on their own?
> >
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