The logic of liquidity
The perverse bubble-inflating logic of the market continues as a new week begins. Last Friday's ugly US (un)employment report only served to embolden the risk bulls, who see the Fed on hold indefinitely and only helping to feed the liquidity and USD carry trade inflating risk bubble. After Friday's data, US 2-year rates, at a pathetic 85 basis points, have now fallen within a couple of basis points of their lows since this spring when the equity market was bottoming. Shortly put: Down with Logic, Long Live Liquidity! The worst thing for risk investors in this bizarre environment would be real signs of an economic recovery in the US, one that would put the real threat of a more hawkish Bernanke on the radar screen. As long as this eventuality fails to materialize, it appears this bubble will only pop under its own weight, or due to some black-swanish exogenous shock.