The comparisons discussed below are based on super long term rgression
models built around the 12 mo. moving average of the CPI.
With a CPI of 3.3%, the Fed Funds rate should be between 5.0 - 5.25%. The
Fed is bringing the FFR%, now at 4.25%, steadily higher, but it still
remains well short of where it should be. That short rates have been too
low for some time is well attested by a continued zero savings rate for
the consumer sector and the increased use of real estate based leveraging
techniques by same. To preserve domestic purchasing power, dollars saved
need to earn returns which greatly offset inflation and the income tax bite.
Homeowners have come to regard unrealized appreciation in home value as a
prime source of savings. This has been nice to have, but it is an unwise
practice since the great Baby Boomer housing boom is winding up to a close
now, and appreciation in home prices above the inflation rate will be ending.
By my models, the 30 yr Treasury should be trading around 6.375%. The market
is currently at 4.65%. The model value is a little high since Fed tightening
should lead toward a flattening of the yield curve, but, that said, The Bond
is still to dear in my view. There is insufficient premium for key long
term risk factors such as market volatility and a prospective rising supply
of new issues. I love trading the bond market but I have stayed away since
March, 2005 because I would prefer to trade bond volatility around fair value.
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