A Time to Pause...

I doubt it! The Fed funds market has decreased the likelihood of a hike in short-term rates to 5.5% from approximately 40% to 20%. But I think that this is a little too neat a package. And I say this primarily due to intangible factors. Specifically, the character, or unpredictable nature of Ben Bernanke. I believe that "Helicopter Ben" will eventually become known as "Sweet and Sour Ben", or "Hot and Cold Ben", or "Manic Depressive Ben", or my personal favorite: "Rollercoaster Ben". (He even has his own ready-made theme song from the 70's.) But I think that his overly reactive nature and desire for credibility MAY cause him to tighten one more time to convince the markets that he is serious about containing inflation. Especially, since I think he realizes that the numbers on inflation are not going to be moderating for some time, probably not until next year. So if he stops now, he will have to face explaining why the Fed stood by while inflation got out of control (I doubt that this will happen, although asset inflation is already out of control). The alternative is that he tightens again here and risks sinking the economy. That is likely to happen anyway, in my humble opinion. But I would imagine that he has the utmost confidence in the Fed's ability to reflate, if need be. And this is his character flaw, that Mr. B has an almost religious belief in the power of the US Federal Reserve. This may prove to be his undoing. Because the day is coming when the world will wake up to what has been happening for the last twenty years and lose faith in the US and especially the Fed. And when that happens, it will not matter what the Fed does, its actions will be ineffectual. Because the world's financial house of cards is built upon a foundation of sand, namely the confidence (almost blind faith) in the Fed. So the Fed should deal with the imbalances with calm, careful, considered moderation and great humility. This would produce an orderly adjustment, which would hurt the financial community, while inflicting minimum damage on the real economy. What we are likely to get is the opposite: aggressive policy moves which produce increasing market volatility for years to come. So, while I don't think it is a good idea, generally, to bet against the markets. This is one of those times, where the odds might make it worth it. I would guesstimate that the odds of a hike at the next Fed meeting are 60%. 5.5% is my target.

Notice the yield of the ten-year note at 4.9%. Off from 5.15% only a few months ago. Look for support at the 4.7% level(10% probability), if this is broken, look for a move to 4.0% level (my most likely scenario, 60%), with a break of that level leading to a retest of the 2003 lows in the 3.5% range (20%), with a drop below that level indicating financial calamity and deflationary depression not seen since the Great Depression (10%).