Replies to post #89853 on Biotech Values

[zipjet]

For 2010, one of our most significant economic concerns is that central banks in the developed economies will misjudge inflation risks and begin raising interest rates too quickly.

I would talk of increasing interest rates by central banks a little differently. I agree that raising rates too soon is a risk. The greater risk is that once the Fed starts raising rates they raise them too far.

In the last cycle, the Fed raised the FFR from 1% to 5.25%. Doing so, and holding the rates too high for too long started the credit avalanche that was stemmed at great cost. Once RE prices started the decline I stated that the Fed would have to lower rates below the prior low of 1%. They did.

A similar proposition suggests itself on the up side. IF the FED raises rates by the same amount as last time (425bps) or more, we will have another credit problem. Since we are starting at essentially 0% they will not be able to raise rates to 4.25% without a roll over.

So while I agree with CAT that increasing the FFR (or other Central Bank primary rates) too soon is a serious risk, I judge the greater risk to be raising rates too high and maintaining them there too long.

When rates reach these higher levels we will be hearing the same error repeated, namely that it worked last time. We hear this reasoning a lot. E.g. "We are just taking tax rates back to where they were under Clinton and that was a prosperous time."

This past-is-our-guide approach errs because as profit margins narrow the economy becomes ever more sensitive to interest costs (or other costs like taxes). The narrowing of margins is also why firms increased financial leverage to maintain returns on equity - with foreseeable outcomes.

ij

[DewDiligence]

Economic barometer: In May 2010, CAT’s worldwide end-user sales were up year-over-year (+11%) for the first time since the summer of 2008:

http://www.reuters.com/article/idCNN1822923420100618

Maybe bladerunner will finally stop posting about a double-dip recession.