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July 02, 2005

Pin Pricks 1/2
by John Mackenzie

We are patiently awaiting the spine tingling 'event' that Alan Greenspan is attempting to use in order to break the unparalleled, bullish market psychology. Interest Rate hikes are yet to have the desired effect, Crude Oil demand is continuing to decrease; commodities such as aluminum and lumber are seeing price/demand begin to drop precipitously.

The Fed is looking to cool the speculative and grossly overextended 'Housing Bubble' with their primary short term tool, Nominal Interest Rates. The Fed and US Government need bond inflows to assist in the deluge of new issuance and refundings.

The irony here is the 'Financial Economy' hinges upon cheap and available credit. The risks compound as bets are increasingly levered in order to simply maintain returns while spreads collapse. For all of the symbiotic pabulum spread throughout the Financial Media and sideshow channel cheerleaders the Fed has aligned, the moral hazards go right on compounding, one atop another.

For nearly three years the liquidity injections and intervention within the Financial System have been unparalleled since Alan Greenspan assumed the role as head Vampire.

The repetition of semantically challenged pandering remains a farcical message track. Somehow, 'believing, suggesting and expecting' are to be commended as the deeply entrenched mess we have found ourselves within is to be avoided like the avian bird flu.

That the Fed 'should' or 'likely' remain upbeat is 'apparently' just peachy, although Fleece Street appears to have been looking for signs of aquaman at the punch bowl, he was a no show.

Believe the Fed, as I have stated for some time, will continue raising rates. Alan Greenspan has repeatedly suggested he would continue hiking rates throughout 2005 at both high and low profile venues. I see no reason not take him at his word. The monetary methods employed have been used time and again. Near the tail end of the prior bubble in equities, the Fed decided it was time to take away some of their Guyana punch.

The present script suggests cooling the latest bubble, housing, with higher nominal rates.

According to the Financial Media, the Fed believes the long end of the Yield Curve will catch on at a 'measured pace,' thereby removing the curve's inversion. No mention of the massive intervention ongoing in the Yield Curve, none, nada, zero and zip.

CNBC has lost a large percentage of its audience and with good reason, the analysis is simply pathetic in my opinion, Hollywood Squares for bag holding cheerleaders. Bill Gross ought to be ashamed to admit Fannie Mae is his second largest holding behind US Treasury Debt. Come to think of it, he ought to be nearly as ashamed for holding far too many of Uncle Sam's promise tickets. Shortly after the close Lawrence Kudlow's happy hour went ahead in typical pom pom flagging style and begged the question, 'Interest Rates hikes coming to an end?'

And so it goes, until it breaks, this speculative house of paper cards.

The Fed is merely going to respond after they have, once again, gone too far. They well know the long end of the Yield Curve is going to respond to their failures. Monetizing too much DEBT, facilitating far too much Bank Credit, forcing unwinds of speculative carry's and a waning loss of confidence is stressing the interdependent Financial Economy.

Fleece Street wanted to hear the end of this rate cycle is in sight. Sir Alan refused to stand and deliver. The DOW decided it would have a tantrum and ended up down 99 on close.

Our illustrious Chairman is going to attempt to flatten the Yield Curve as he presently believes 'this time it's different' with respect to what this means. This, according to the Chairman, does not necessarily suggest that 'Recession' is guaranteed. Of course, we can look forward to further explanations that may contain words such as: ' likely, should, apparently, believe, expect and suggest.'

I sincerely doubt any of the Dotcom bubblers who were pricked by Alan find any of the above too reassuring. Come to think of it, the former Enron employee's 'expectations (likely) remain well contained.'

As the 5 & 10 begin to reach parity, I suspect we witness a simultaneous lift in rates across the Yield Curve from the 2's out to the 10-30. Viola, the next conundrum awaits and it's 'likely' to fail miserably.

Program trading is increasingly taking hold of the broad markets, electronic combatants now account for in excess of 76% of trading volumes. Yesterday's Securities Lending set a record @ $9.479 billion. The Morgans, Citi, Merrill and Solomons are enjoying less than modest proposals with the Fed's Open Market Operations Desk.

The Futures interventions that began in mid Summer 2002 as the Market was experiencing serious selling, continue unabated to this day. The only thing that's changed is the scope and scale of these operations. Ben Bernanke's alarmist policy laid out the extraordinary measures the Fed would take; including buying assets from private companies. All that was needed was indication the United States Economy had fallen into a condition that the general populous associated with the Great Depression.

Bernanke was referring to 'deflation,' or as the Fed prefers; a fall in the general level of prices, and according to their metrics, the polar opposite of inflation. According to Fed Governor inflation is too much money chasing too few goods and deflation is too little money chasing too many goods.

In my opinion, it is the above is entirely inaccurate. Deflation/Inflation/Dis-Inflation are merely vastly misunderstood structural phenomena that naturally occur, Intervention in the 'Business Cycle,' another Fed induced malignancy through Interest Rate manipulation, is simply that; interference in Markets, that left to their own devices, would clear supply and demand imbalances through Price/Value equilibrium.

To suggest such horrific events are purely monetary phenomena is flawed.

'Sustained deflation can be highly destructive to a modern economy and should be strongly resisted.' Ben Bernanke.

Nothing has been more destructive to the US Economy than the Federal Reserve, nothing.

John Mackenzie

John Mackenzie manages private capital - Email: m2jrmfl@bellsouth.net

Copyright © 2004-2005 John Mackenzie

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