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Bonds, Stocks, and Commodities

 
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PostPosted: Sun Mar 18, 2007 6:00 am    Post subject: Bonds, Stocks, and Commodities Reply with quote

The first chart shows TLT (long-bond ETF; black line and left scale) and SPX (red dashed line and right scale) remain at high levels. Typically, after stock market corrections, both TLT and SPX fall (while cash is raised or investments are deleveraged). The 10-year bond yield has traded around 4 1/2% recently, while TLT has traded around 90. Also, below price chart, gold (GLD) has outperformed the commodities index (CRB), which reflect inflationary and slow growth concerns. Consequently, bond yields may rise and TLT may fall (I've added the most recent "Monthly Economic Review & Forecast" below the charts for free this week). So, TLT Sep puts may be buys. The second chart suggests the NYMO 50-day MA and NYSI haven't bottomed and will not bottom for at least a month. So, SPX may fall much lower or trade in a lower range.





The U.S. economy had a quick and massive "Creative-Destruction" process from 2000-02 that made Information-Age firms more efficient and freed-up resources for emerging industries. The U.S. had slow growth from 2001-03, after the mild 2001 recession. However, real growth was around 4% for three years, in the mid 2000s, and has slowed recently, since the Fed is attempting to achieve a soft-landing, e.g. roughly 2 1/2% real growth. U.S. actual output generally slightly exceeded potential output in the mid and late '90s and U.S. actual output has generally been slightly below potential output in the early and mid '00s. Consequently, the U.S. had a slight economic boom/bust cycle. The Fed targets the general price level. Asset prices are only residuals. The U.S. has gained the most in the foreign economic boom and will lose the least in the foreign economic bust, because of monetary, fiscal, and globalization policies. The U.S. is in position to increase output through exports. So, actual output may rise to and slightly exceed potential output over the next few years.

Many people underestimate the benefits of globalization, particularly in the U.S., which has less restrictive policies than its major trading partners. Basically, U.S. consumers benefit directly from cheaper imports, Older U.S. producers benefit from greater foreign competition, which raises productivity or keeps prices low. Newer U.S. producers benefit from the freed-up resources of older U.S. producers. So, more new high value products can be created and produced. It's a virtuous cycle that benefits U.S. consumers and producers. Globalization tends to increase the economic pie, e.g. through the Law of Comparative Advantage. However, the U.S. benefits more, in part, because of relatively less restrictive globalization policies.

Also, I may add, export-led economies have been financing much, if not all, of the U.S. war in Iraq and those economies will end up paying for much of the war.

A precipitous fall in the U.S. dollar will make U.S. exports cheaper and U.S. imports more expensive. Consequently, the U.S. will have inflationary growth, while export-led economies will have slower growth or recessions. The U.S. will tighten the money supply, while export-led economies will ease their money supplies. Nonetheless, U.S. trade deficits will become much smaller. U.S. bond prices should fall. So, export-led economies will lose in the U.S. bond market. If those economies shift into U.S. stocks or physical assets, they'll pay premiums. The adjustment is inevitable, whether it takes place slowly or suddenly.
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