In a move that had already been well telegraphed, the Federal Reserve (FED) raised the discount rate from .50% to .75%. Is this the beginning of a new tightening cycle? NO! What readers of "Marko's Take" already know is that any major upward move in rates is not in the cards for 2010.
Reason 1 is the size of the National Debt, which had its ceiling recently raised by Congress to in excess of $14 Trillion! A 1% increase in rates translates into an additonal $140 billion per year increase in our budget deficit! Reason 2 is that the economy is NOT in a recovery, but slipping into the second dip of this "Double Dip Hyper-Inflationary Depression". Any material increase in rates is just not going to happen.
Furthermore, for any "tightening" to occur, the FED must raise rates FASTER than the increase in inflation. The "real" interest rate is defined as the prevailing interest rate MINUS the ongoing inflation rate. Historically, real rates have been slightly positive - about 2%. However, at the present, real rates are NEGATIVE and given the latest release in the Producer Price Index (PPI), a meager .25% increase in rates still keeps the FED way behind the curve.
Negative real rates were a FED policy blunder in the 1970's. The result was Stagflation and a mania in Gold. Fast forward to the 2010's and HISTORY WILL REPEAT!
The FED's move may also have been a token measure to appease China, which has been vocal in its displeasure with U.S. monetary policy and the debasement of the dollar.
Foreign owners of US government debt reduced their holdings by the largest monthly amount ever in December, with China offloading so many Treasury securities that it is no longer the largest foreign holder! Total foreign holdings of treasury securities plunged by $53 billion in December. China led the sell-off, reducing its holdings by $34 billion, while Japan increased its holdings by $11 billion to become the new largest foreign holder of Treasuries.
China has increased their holdings of U.S. Treasuries eight-fold over the past decade, so this latest dumping is relatively small in the grand scheme of things. It is newsworthy only in the fact that China is no longer the largest holder of Treasuries and this could be the beginning of a much larger trend to divest of U.S. debt.
The discount-rate move didn't affect the FED's main policy tool, the federal-funds rate, a FED-influenced rate that banks charge each other on overnight loans. That benchmark rate filters through to other market rates. The FED on Thursday reiterated the fed funds rate will remain near zero for an "extended period," which means at least a few more months.
So, while the FED has taken this rather minor move, the big picture remains unchanged. The FED is far more concerned about NOT derailing the incipient "recovery" it maintains is taking place. What recovery?
Love the FED? Hate the FED? TAKE ME ON!
Marko's Take
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Showing posts with label national debt. Show all posts
Showing posts with label national debt. Show all posts
Friday, February 19, 2010
Friday, January 29, 2010
Markets Trading Strategy Update: What To Do Now
Nothing! For the moment, the case I laid out is playing out very close to the scenario I've forseen with a couple of exceptions.
Gold is trading this morning at BELOW $1080. My hunch is that it will visit the vicinity of $1000, so I continue to recommend that investors stay as light as possible in this sector. I believe we are a few weeks away before a decent buying zone, so, for the moment, stay put. In fact, once gold miners DO fully reflect a lower Gold price, there will come a time to back up the truck, load up on selected junior mining shares and watch the fireworks unfold.
The re-nomination of Ben Bernanke, in my opinion is all the evidence we need that 2010 will turn out to be one helluva great year for Gold investors. Stay patient.
Another certainty with "Helicopter Ben's " re-appointment, is that interest rates will remain low, stupidly low.
Yesterday, Congress approved an increase in the National Debt ceiling to more than $14 TRILLION! This means that a 1% increase in interest rates across the board will increase the budget deficit by $140 Billion per year! Yup, more low rates and ANOTHER Bubble!
But, this can't go into effect until Mr. Obama recovers from his injury sustained during his "State Of the Union Address" in which he patted himself on the back so many times that the rumor is he dislocated his shoulder and is unable to sign new legislation (http://markostake.blogspot.com/2010/01/obamas-state-of-onion-address-more-you.html).
As far as the overall market goes, I continue to maintain that it is in territory that is both rarified and subject to great risk. It reminds me of Wile E. Coyote, after having stepped off the cliff, hovering in mid-air before he realizes that it's a long way down.
What makes me so suspicious about the stock market is the fact that even decent earnings have been met with a yawn. This tells me that the "good news" is fully factored in. Currently, the market is merely digesting the sudden plunge of last week - a process I expect to be very short lived. I, therefore, re-iterate, the trading postures I recommended last week (http://markostake.blogspot.com/2010/01/preparing-for-coming-waterfall.html).
Fortunately, as the result of this week's lull, it isn't too late to get prepared, and even take advantage of the misery set to befall stock market investors.
I'll make today's blog a short one. Hope you have a great weekend!
Disagree? TAKE ME ON!
Marko's Take
Gold is trading this morning at BELOW $1080. My hunch is that it will visit the vicinity of $1000, so I continue to recommend that investors stay as light as possible in this sector. I believe we are a few weeks away before a decent buying zone, so, for the moment, stay put. In fact, once gold miners DO fully reflect a lower Gold price, there will come a time to back up the truck, load up on selected junior mining shares and watch the fireworks unfold.
The re-nomination of Ben Bernanke, in my opinion is all the evidence we need that 2010 will turn out to be one helluva great year for Gold investors. Stay patient.
Another certainty with "Helicopter Ben's " re-appointment, is that interest rates will remain low, stupidly low.
Yesterday, Congress approved an increase in the National Debt ceiling to more than $14 TRILLION! This means that a 1% increase in interest rates across the board will increase the budget deficit by $140 Billion per year! Yup, more low rates and ANOTHER Bubble!
But, this can't go into effect until Mr. Obama recovers from his injury sustained during his "State Of the Union Address" in which he patted himself on the back so many times that the rumor is he dislocated his shoulder and is unable to sign new legislation (http://markostake.blogspot.com/2010/01/obamas-state-of-onion-address-more-you.html).
As far as the overall market goes, I continue to maintain that it is in territory that is both rarified and subject to great risk. It reminds me of Wile E. Coyote, after having stepped off the cliff, hovering in mid-air before he realizes that it's a long way down.
What makes me so suspicious about the stock market is the fact that even decent earnings have been met with a yawn. This tells me that the "good news" is fully factored in. Currently, the market is merely digesting the sudden plunge of last week - a process I expect to be very short lived. I, therefore, re-iterate, the trading postures I recommended last week (http://markostake.blogspot.com/2010/01/preparing-for-coming-waterfall.html).
Fortunately, as the result of this week's lull, it isn't too late to get prepared, and even take advantage of the misery set to befall stock market investors.
I'll make today's blog a short one. Hope you have a great weekend!
Disagree? TAKE ME ON!
Marko's Take
Wednesday, January 6, 2010
Have Any Interest In The Future Direction of Rates?
I do. And, I'll bet you do, too. Interest rates affect so many factors in our financial lives. They determine our compensation for saving, affect our willingness to take risk, cause or deter us from borrowing or lending and many, many other decisions.
Currently, interest rates are embarassingly low. For example, the 4-week Treasury Bill rate is a whopping .025%. But don't worry. If you only extend the maturity to 6 months, you'll receive a very generous 0.18%. See? No problem.
Now if you really have a strong stomach and can wait two years until your Treasury Note matures you can actually earn 1.09%. Still not satisfied? You can buy notes maturing in five years and get 2.65%. If that doesn't float your boat, you can buy 10-year notes and receive 3.85%. If that doesn't do it, you must be one major ingrate!
If you have the willingness to invest in Corporate Bonds, rated BAA by Moody's, you could receive 6.39%.
BAA is the lowest rating above "junk bonds", the type that default often. Great risk/return profile, eh?
It would seem that the only direction interest rates can go is up, but before you conclude that, read further.
The National Debt exceeds $12 trillion!! For every 1% across-the-board increase in rates, an additional $120 billion would be added to the budget deficit annually! I contend, therefore, that rates will continue ridiculously low for a long, long, time, despite Fed Chairman Bernanke's suggestions that rate hikes are "on the table". The very same man, who along with his predecessor Alan Greenspan, have succeeded in one thing only: creating asset bubble upon asset bubble only to attempt to cure the very bubbles they created with the identical medicine which CAUSED the bubbles... low interest rates. Ben Bernanke as "Time 's "Man of the Year" Great choice!
Tomorrow, we'll take a peek at "Peak Oil". If you don't know about "Peak Oil", I hope I have your interest piqued. See ya then.
Marko's Take
Currently, interest rates are embarassingly low. For example, the 4-week Treasury Bill rate is a whopping .025%. But don't worry. If you only extend the maturity to 6 months, you'll receive a very generous 0.18%. See? No problem.
Now if you really have a strong stomach and can wait two years until your Treasury Note matures you can actually earn 1.09%. Still not satisfied? You can buy notes maturing in five years and get 2.65%. If that doesn't float your boat, you can buy 10-year notes and receive 3.85%. If that doesn't do it, you must be one major ingrate!
If you have the willingness to invest in Corporate Bonds, rated BAA by Moody's, you could receive 6.39%.
BAA is the lowest rating above "junk bonds", the type that default often. Great risk/return profile, eh?
It would seem that the only direction interest rates can go is up, but before you conclude that, read further.
The National Debt exceeds $12 trillion!! For every 1% across-the-board increase in rates, an additional $120 billion would be added to the budget deficit annually! I contend, therefore, that rates will continue ridiculously low for a long, long, time, despite Fed Chairman Bernanke's suggestions that rate hikes are "on the table". The very same man, who along with his predecessor Alan Greenspan, have succeeded in one thing only: creating asset bubble upon asset bubble only to attempt to cure the very bubbles they created with the identical medicine which CAUSED the bubbles... low interest rates. Ben Bernanke as "Time 's "Man of the Year" Great choice!
Tomorrow, we'll take a peek at "Peak Oil". If you don't know about "Peak Oil", I hope I have your interest piqued. See ya then.
Marko's Take
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