[OPE-L] Where’s the juiciest bear food?

From: Alejandro Valle Baeza (valle@SERVIDOR.UNAM.MX)
Date: Mon Dec 17 2007 - 16:05:36 EST

The Bear’s Lair: by Martin Hutchinson
Where’s the juiciest bear food?
December 17, 2007

Martin Hutchinson is the author of "Great Conservatives" (Academica
Press, 2005) -- details can be found on the Web site

In the spirit of the endless year-end speculations about developments in
2008, I thought it worth looking at which markets – debt, equity,
commodities or real estate -- were most overvalued in December 2007 and
hence could be expected to provide the best “bear food” for the year
ahead. After all, for us bears picking losers is much more enjoyable
than picking winners!

Overall, 2008 looks to be a good year for bears. The Fed has been
walking a tightrope since August between the precipices of a collapsing
financial system and resurgent inflation. With a 3.2% November Producer
Price Index rise (7.2% over the previous year) announced on Thursday and
a 0.8% Consumer Price Index rise (4.3% over the previous year) announced
on Friday, it can now be officially confirmed that the tightrope has
vanished into thin air. The United States over the next 12 months will
experience both a collapse in its financial sector and a violent
resurgence in inflation, and there’s nothing whatever the Fed can do
about it, no interest rate trajectory that will not worsen one problem
more than it alleviates the other.

If the Fed lowers interest rates further to bail out Wall Street, it
will worsen inflation. Oil prices moved from $70 to $90 on the 0.75%
drop in the Federal Funds rate from 5.25% to 4.50% so will surely soar
to around $120 if the Fed is foolish enough to lower it to 3%, as
several Wall Street and permabull commentators are calling for. Equally,
if the Fed were to raise rates, even gently, in order to contain
resurgent inflation, the US stock market will tank and the housing
finance market will suffer yet further losses, as housing
“affordability” diminishes as interest rates rise. The right stance
would be a significantly higher level of rates, perhaps in the 6.5%-7%
range, which would be fairly close to neutral on inflation, but that
would devastate stocks and housing – both necessary declines, but the
Fed’s #1 objective is not to be blamed for such events. Most likely, the
Fed will be frozen into immobility, keeping interest rates at or near
their current levels, in which case both inflation and the housing
crisis will steadily worsen, while stocks decline.

Full article at: http://www.prudentbear.com/index.php/BearsLairHome


Posgrado Facultad de Economía

Av. Universidad 3000 Circuito interior

México 04510, DF México

Tel. 55-56222148 fax 55-56222158

Página web: http://usuarios.lycos.es/vallebaeza

This archive was generated by hypermail 2.1.5 : Mon Dec 31 2007 - 00:00:04 EST