"Why" many ask, "is the stock market going up when the bond market is telling us the recovery will be tepid? Isn't there a disconnect?" And the answer is that there is, and this week good friend and fishing buddy Paul McCulley of PIMCO fame discusses that very topic with his usual insight and wit. He poses the conundrum that those expecting a "V" shaped recovery have pushed risk assets up quite high, and that the real risk to their position is that they in fact get a "V" shaped recovery. And yet, they could go higher and into bubble territory.
For the policy wonks among you, I offer a link to a recent paper by the Cleveland Fed, which suggests that the Fed could hold rates lower for far longer than we would think normal. Which makes What Paul writes even more important to understand. http://www.clevelandfed.org/research/commentary/2009/0809.cfm
I think you will find this a very interesting read. Meanwhile, I am off to Philadelphia where a team from Dallas was treated very well last night. I hope I get the same warm reception. And then to Orlando and back to Dallas. Have a great week.
Your just trying to puzzle it all out analyst,
John Mauldin, Editor
Outside the Box
The Uncomfortable Dance Between V'ers and U'ers
Around the world, in investment committee meetings and on trading floors (and at the Fed!), one question dominates discussion and debate:
How can it be that risk assets, notably common stocks, have been roaring ahead, presumably discounting a robust V-shaped economic recovery, while Treasury bonds are holding their own with a bull flattening bias, presumably rejecting the V-shaped hypothesis, instead discounting a…