Only cycle-meister Bob Bronson came to mind the other day when I tried to think of forecasters who have been calling for significantly lower lending rates. Turns out Bob is not alone. I heard yesterday from two readers who are bullish on yields, for reasons that are worth sharing. The first, Phil C., thinks it's all being engineered by Machiavellians intent on getting Mr. Bush re-elected. Since the stock market is showing signs of toppiness, the thinking goes, the trick is to stampede investors out of shares and into bonds now, forcing yields lower. Then, they believe, in the remaining eight months till the election, the puppeteers can do whatever it takes to get the stock market moving higher again.

In the reader's own words: "The market was 'helped' to go up as much as it did for as long as it did. Once it became clear that the rally was over and beginning to roll over, they might as well cause a sharp drop to get it out of the way fast, which allows the bond market to suck up the dollars, i.e. lower yields, for a refinancing cycle. This way the economy gets one last fix, even though I don't believe it is going to do much good. Bush is in a no-win situation. The bad news is Kerry is the next President, the somewhat good news is, that because he ends up being the sap in office during the depression and dollar collapse, Rudy ends up beating Hillary in 2008!

Fascinating stuff, especially the prospect of a match-up between Hillary Clinton and Rudolph Giuliani. But I'm not buying it, for the risks of taking stocks down "temporarily" are simply too great. Furthermore, it ascribes to mere politicians and their courtesans on Wall Street a degree of control that is not just unrealistic but practically unimaginable. Remember, these are the same nebbishes and wonks who so far have been able to create only the dim illusion of a recovery, and even that required a epic mess of flat-out lying with statistics that would have made Goebbels cringe.

But here's a subtler, and in my mind far more credible, explanation from George P. concerning why yields are headed still lower. Stick with this one, because George's logic is absolutely pellucid:

"My friend Roger A. has lamented being one of the only macro guys who is making a lower rate call. His basic take is that large institutions and central banks have too much cash to invest anywhere but the sovereign and mortgage-backed markets. He backs this up with data that shows large financial institutions moving huge sums into Treasuries earlier this year. His basic take is global deflation and that another global downturn is imminent.

"I am basically in agreement, but I think that the inflation/deflation argument will be more complex. I believe that both will happen simultaneously in different markets. In the bond market, low rates make long-term bonds unsuitable as a cash flow investment, BUT they become an excellent capital gains (speculative) tool because of the mathematics of the yield/price relationship. Therefore, the carry trade will force (guaranteed) low-interest short-term credit into long-term bonds and money-supply inflation will channel into long bonds as the preferred speculative market. It will turn into more of an arbitrage play until either the Fed tightens (unlikely in the near term) or the yield curve flattens. All of this credit flowing into bonds may choke off the rest of the economy, we may be seeing this already in the money supply figures."

www.rickackerman.com

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