Friday, July 27, 2007
1. Are we now at the point where good = bad? In other words, might a strong US GDP figure, chock full of real final demand, actually be a bad thing for risky assets? Such a number could suggest to the Fed that its forecast of moderately below trend GDP remains on track, there's no need for a growth scare, and thus no need to ease rates (as the Cramers of the world hope.) A bad number, with below expected growth concentrated in inventory accumulation and weak final sales, could perhaps kindle further hopes of a monetary balm and deliver a "don't fight the Fed" rally, however temporary it might be.
2) Is there a double entrendre more compelling that "redemption" right now? On the one hand, a redemption for the market means a normalization of the credit market and a recovery in risk assets- hurrah! On the other hand, the single greatest threat to market stabilization is the forced sale of illiquid securities by funds to raise cash to meet month-end redemptions. Some hedge funds may unilaterally choose to susend redemptions, but there is plenty of toxic dross held by mutual funds that don't have that option. As end users read their FTs, WSJs, Economists, and the like, the risk must be that they decide over the weekend to raise a little cash...which could mean price-insensitive selling next week. Consider yourself warned!