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 www.greatconservatives.com 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
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