"The bond market appears to be focused on the longer term here (12 months?). What happens after the two collateral assets are deflated? Best template... Japan. If the fed is concerned about risks rising in the banking system due to aggressive real estate lending http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050516/ and they have observed that the 'savings crisis' is linked to irrational expectations of real estate appreciation http://www.federalreserve.gov/boarddocs/speeches/2005/20050422/default.htm ... they're likely to continue on their path until the risk of aggressive lending is recognized and the irrational expectations are corrected- regardless of inflation numbers.

So they deflate expectations in the stock and real estate markets. And in so doing we solve the spend thrift consumer problem! Might be some side effects.

12 months out I think our concern will be deflation. Our stock (SPX) and bond (TNX) markets are tracking with Japan's from point of market (SPX)peak. Chart available by email."

Regards-

John

Long STRIPS, TLT, Cash, Staples, Drugs, Utilities

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About a week ago, I wrote that I'm getting a whiff of deflation. I think John here is making good points.

My point is that between now and when the marketplace accepts this view, there will be another pullback of the USD, and rally in Gold, plus the odd bear cycle corrective (i.e., bullish) rally in industry groups like the Oils, the Basic Materials, the Homebuilders, some of the other Consumer Cyclicals (as I pointed out a couple weeks ago just prior to the jump in GM), etc.

I jumped out of the homebuilders just before getting John's mail, in any event.

I recall saying in a recent blog that I'm now of the view that deflation vs inflation is probably the likeliest event longer-term (say a year out) by a 60:40 guess on my part.

If that happens to evolve into something greater, then my March 2 call was a good one, i.e., to sell everything, get a good job, go to cash, or whatever else I was ranting about as I listened to Greenspan talk to Congress that day, when the words "possible systemic failure" seemed to be flying over everybody's heads.

I may now have to stay on the short side (net of course) for much longer than I had anticipated, or even contemplated. We'll see.

Maybe 2005-2006 becomes a replay of 1974-1975. If that were to happen, then I have words to the prudent employees of investment banks and financial product/service sales companies: look for another job unless you are in the top quartile of the High Producers list, and have eliminated your debts and pared your living expenses to the bone.

It's going to get tough.

Hopefully, we don't go into a period of deflation in North America like Japan endured. Hopefully John is wrong. The truth is I don't know. Greenspan doesn't know. Maybe Mr. Joe knows.