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MICHAEL DARDA, CHIEF ECONOMIST, MKM PARTNERS, IS INTERVIEWED AT BLOOMBERG SURVEILLANCE
AUGUST 19, 2011
SPEAKERS: TOM KEENE, MIDDAY SURVEILLANCE HOST
MICHAEL DARDA, CHIEF ECONOMIST, MKM PARTNERS
12:43
TOM KEENE, MIDDAY SURVEILLANCE HOST: Michael Darda with us, MKM Partners. Sometimes, research notes stick out like a sore thumb as his did yesterday. It was short. But it was real.
Michael, the 30-year bond, down, down it goes. What does it signal as the 30-year bond blows (ph) through the 2010 low yield?
MICHAEL DARDA, CHIEF ECONOMIST, MKM PARTNERS: Hi, Tom. Well, I think it signals collapsing future nominal GDP expectations. This is also showing up in a narrower term structure or the yield curve spread which is also collapsing. You mention that every morning on the radio, and widening debt spreads.
So these are all indicators that are market-based, that are telling us that we may be in the throes of a negative velocity shock.
KEENE: Well, you've seen the negative velocity shock. Define velocity for us. When you say velocity, what is that?
DARDA: Velocity is just the ratio of nominal GDP to money. And if you end up with less nominal GDP going forward, velocity tends to fall. So what we've had happened recently is a big rush into risk-free cash assets.
So some of the money supply figures have started to surge. But that is not a virtuous cycle of lending and spending going on. Commercial bank credit's been flat for two years. What we have instead is a dash for cash and safety.
And you know, people holding back, basically, so nominal GDP probably will be growing at a slower pace and it's already been slow in the quarters ahead.
KEENE: Wlel, that sets it up nicely. Let's look at the velocity chart here. We've entitled it "Darda Decelerates." And you can see the velocity. This is, again, the spirit of the economy compared to our money supply.
And it rolls over and it's just rolled over again, a little weak down in that right-hand corner. Michael, you talk about nominal GDP. Are you suggesting the Fed needs to make inflation its friend?
