I agree credit spreads started moving in June, but that was a month before the actual event. I guess I was trying to make the point, sloppy as usual, that the irony is fixed income market long knew (participants) that the bubble was massive, but the price of inaction trumped all else. In short, the markets are not really an efficient discounting mechanism in the short run as we know from history. As an aside, if the markets only reflected the bubble one month proir to the eruption, what does that say about preventing bubbles?

I recall speaking with a major IB internal risk person who predicted in late ‘06 that they expected the wheels to come off in 2Q:07. They ended up being short subprime. Subprime was not a black swan event at all. It was fully expected almost universally across the Street, it was just too expensive not to play. Sort of like commodities right now.

We are a long way from d-day in the whole debt/Fed/Consumer hot potato game. Also, while I agree printing is in the offing to replace the bad debt, Mish will eventually be right about full blown deflation. That after all is what occured in 1930s.

RK makes a very good point about defining mean. The Fed defines mean as 2006 which is of course ludicrous. There is no such thing as high and low equilibriums. There is a market clearing equilibium and the longer we try and reverse the pull of gravity the more painful it will be.

Was it here or somewhere else that I saw the article the other day about why the bond market was no longer able to police inflation?

Moe Gamble

I’m not posing this as a simple question; it isn’t. But despite asset price declines in the US we are far still from outright deflation by any definition. If and when assets fall below long-term trends or just approach them, we have ‘real delation.’ Don’t ask me where that is precisely, but someone can and should be calculating that. If medium-sized, creditworthy businesses with customer demand can’t get operating credit, we are deep in a deflationary spiral. We’ll know when we get there, it it happens. Personally, I think the Powers That Be will monetize debt and push us into a near hyperinflationary state at some point—because they can, while deflation is much harder to fight.

I recommend this article by Mike Shedlock and this article.

Actually, in early June 2007 there was a big move in bonds that was widely seen by participants as an end-of-an-era signal at the time. About a month later (early July) I called the beginning of the bear credit market, and that again was based on commentary and market moves.