Liquidity

Here my new liquidity thesis, with a little help from Gregor (see last post).

The liquidity bubble started with lower rates in 2002. It's now continuing with the resurgence of the carry trade. Liquidity is coming from the Bank of Japan, not the Fed. It doesn't really come from the BoJ, but from whoever buys Japanese bonds at 0.5%. Who would buy that? Well, I'll have to leave that question for another day, but I'll speculate that it's Japanese citizens who see 0.5% as a safe play against Japan's 20 years of deflation.

What happens in the future? If the Fed lowers, the carry trade just shifts to the Pound and the Euro, and the Dollar tanks. (Remember Soros' rule that inflation and a weak dollar are good for the stock market). If the Fed raises, then that will just pull more liquidity out of the carry trade. Besides, real 10-yr. rates are only 2.1% over inflation. That can't last.

The world is long dollars, short Yen.

The housing downturn should be contained, and the ripples outward should diminish rapidly. In fact, if it doesn't damage liquidity, it will just attract more people to look away from real estate and towards the stock market..

Actions: sell QID. look for growth aka Apple. Adobe? Financials? GS? Commodities?