Wednesday, December 09, 2009

MidWeek Readings

-PIMCO hired former assistant to the Secretary of the Treasury, Neel Kashkari.  Bill Gross told us a year ago his strategy was to "shake hands with the government."  I guess he wasn't kidding.

-Morgan Stanley thinks the Fed will raise rates to 1.5% in the second half of 2010
-Goldman says no rate hikes until 2012

I'm with Goldman on this one, especially as Citi/BAC are paying back TARP funds.  Why does that matter? Well, It should be clear that C/BAC are far from financially lush - they are paying back TARP funds hastily because they don't want the government all up in their bid-ness.  The government knows that once it lets these guys pay back TARP, there can be no second bailout - the public would riot in the streets.  THUS, they have to ensure that policy is kept such that C/BAC can continue to print money - via near zero rates.

-MISH: Questions on Inflation Expectations.  MISH raises some great points here (a sampling):

1. When was the last time you bought a computer? Did you expect prices to drop? Did you buy a computer anyway?

2. When was the last time you bought a flat panel monitor or TV? Did you expect prices to drop? Did you buy them anyway?

3. If you expected the price of steaks to keep rising, would you buy a years’ worth? Six months worth? Do you even have a freezer?

4. If you expected the price of milk to keep rising, how much supply would you keep?

5. Do you have a storage tank for gasoline when you expect gas prices to keep rising?

6. If your refrigerator was in good shape would you buy another one if you thought they were going up in price.

7. If your refrigerator, microwave, TV, or even car went out, would you buy them or wait if you thought prices would drop?

8. I keep hearing how inflation expectations will cause people to buy consumer items, or deflation concerns cause people to not buy consumer items, but in light of the above practical test questions doesn’t that seem to be a potty notion?

9. What about asset prices? Would people buy stocks if they thought they were going up? Houses? This one I will answer for you (you bet).

-Michael Panzner "Doesn't Sound V-Shaped to Me."  More anecdotal evidence from the front lines showing that things may not be improving as fast as the spin job would have you believe.

"Assuming a 28% tax bracket, the effective yield on a 4% yield muni is 5.56. 20 year treasuries are yielding about 4%. A lousy 1.5% is all you get for the additional risk that a municipal bond blows up. I hardly see how it can possibly be worth it."

It's return free risk, MISH!   Of course, there's also clearly the widespread belief that the government will not let municipalities default on their debt. 


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