Ya gotta love them boys at the Federal Reserve (FED). Alan Greenspan gave us asset bubbles while warning about "irrational exuberance". Now, "Helicopter Ben" Bernanke gives us "unusual uncertainty" and "quantitative easing" (QE).
If you missed your class on QE, here's a crash course. It refers to a series of extraordinary measures that the FED is prepared to undertake to stimulate the economy. Bernanke earned his nickname by saying that the FED was prepared to throw money out of helicopters if that's what it took.
If the FED has been trying to inject liquidity into the system, they've done one helluva lousy job. The broadest measures of money supply, known as M2 and M3, are plunging at record rates. In fact, they are at Great Depression levels of reduction. Bernanke is an academic and a student of the Great Depression. Specifically, his interest has been to attempt to understand what went wrong. So, the helicopter plan was borne out of this knowledge, although clearly he was being figurative and not literal.
The dropping money supply, however, is probably not entirely Bernanke or the FED's fault. An uncontrollable variable, called "velocity", is providing a stiff headwind against the FED's efforts. Velocity is a measure of the rate at which money circulates. If everyone were to put their savings under the mattress, for example, velocity would be zero. On the other hand, if folks were to be engaging in a lot of transactions and borrowing to finance growth, velocity would be high.
Velocity is hard to control, since it's the result of trillions of personal decisions. It is a function of consumer and business confidence. Low confidence equals high risk aversion and no willingness to expand, therefore, low velocity.
It is believed that the FED will monetize its mortgage portfolio and use the proceeds to purchase long term U.S. Treasury Bonds. That will do absolutely NOTHING to increase velocity. In fact, interest rates are at generational lows already, and may go lower if the economic downturn intensifies as we expect. Japan, a decent analog, has sub 1% long term rates.
Using FED funds to purchase Treasury Bonds is nothing more than a monetization of the U.S. budget deficit, now running at $1.5 trillion per year.
Unfortunately, the FED is powerless. Yes, you read that right. The FED is virtually powerless. They can't reduce rates which are already near zero. Any policy moves like changing reserve requirements or Open Market Operations will have absolutely no effect in the current business climate. To be effective, the budget needs to be brought under control, jobs need to be created and confidence needs to be restored. However, none of those can happen as long as the FED is powerless to stimulate the economy. The very definition of a vicious cycle if I ever heard one.
We are facing an impending economic death sentence. The only remaining question is whether we die by lethal injection, electrocution or hanging.
Marko's Take
On Sunday August 22nd, I would like to invite any Southern California readers to join me for an event sponored by the California Wildlife Center, called "The "Wild Brunch: Fawntasia". For more information on this organization and to purchase tickets for the event, click here http://cwcthewildbrunch12.eventbrite.com/.
Showing posts with label interest rates. Show all posts
Showing posts with label interest rates. Show all posts
Wednesday, August 11, 2010
Sunday, March 28, 2010
Treasuries Having Harder Time Finding A Good Home
It was inevitable. You can't spray the world with an endless supply of something and not expect an adverse price effect. The U.S. has been living on borrowed time, but now our bonds are looking square in the eye of the "Grim Reefer". Country after country has either drastically curtailed buying our debt, stopped buying our debt altogether, or is looking for ways to offload it on someone else.
It's utterly amazing that nothing has happened... yet! Now, the over-supply is creating a saturation in the market place, whose consequences have yet to be felt. Another week, another financial problem. That's what happens in a BEAR market: whatever CAN go wrong, WILL go wrong!
For more than a year, analysts have been warning that record-sized debt sales by the U.S Treasury were utterly inconsistent with a 10-year yield below 4%. This past week, the yield on 10-year notes jumped from 3.65% to as high as 3.92% on Thursday. On Friday, it was 3.87%.
Tame "reported" inflation, rising unemployment, the housing market slump, the Federal Reserve’s policy of a virtually zero Fed Funds rate and its purchase of up to $1.7 trillion in bonds have all helped keep Treasury yields near historic lows.
But, this week the mood sharply deteriorated as yields for $118 billion of newly-issued U.S. debt were much higher than forecast, sparking overall selling of Treasuries. Sentiment also deteriorated in the U.K. bond market after the government’s proposed budget failed to resolve doubts over future spending and debt reduction.
It hasn’t helped that the U.S. announced a big overhaul of its healthcare system this month, adding to worries about the scale of U.S. spending. Thank you Obamacare! (sarcasm intentional!)
Also un-nerving U.S. investors this week was a report by the Congressional Budget Office that falling payroll taxes, resulting from high unemployment, means that Social Security will pay out more in benefits than it receives for this fiscal year.
“A sustained rise in yields is upon us and bond funds will start to incur losses,” says Jim Caron, Global Head Of Interest Rate Strategy at Morgan Stanley. He expects 10-year yields to reach 4.5% in the second quarter, as investors pull their money from bond funds. March looms as the first month for negative returns for investors in Treasuries this year. Year-to-date, Treasuries have returned a scant 0.7% and threaten to slip into negative territory.
The 10-year note’s yield rose 15 basis points, or 0.15% , to 3.85%, according to BGCantor Market Data. The price of the 3.625% note due in February 2020 fell $12.19 per $1,000 face amount.
The increase in the yield was the biggest since an advance of 0.27% for the week that ended Dec. 25. The yield touched 3.92% on March 25, the highest level since June 11. The two-year note’s yield rose 0.05% to 1.04% and reached 1.12% this week, the highest level since Jan. 4.
Unfortunately, the unsatiable appetite to fund America's bloated budget can only get worse. The world has had it with our fiscal irresponsibility and the era of low interest rates will become harder to sustain.
Marko's Take
For new readers, please visit us on YouTube at http://www.youtube.com/markostaketv. Our newest episode on the legality of the Personal Income Tax will be posted in the next two days.
It's utterly amazing that nothing has happened... yet! Now, the over-supply is creating a saturation in the market place, whose consequences have yet to be felt. Another week, another financial problem. That's what happens in a BEAR market: whatever CAN go wrong, WILL go wrong!
For more than a year, analysts have been warning that record-sized debt sales by the U.S Treasury were utterly inconsistent with a 10-year yield below 4%. This past week, the yield on 10-year notes jumped from 3.65% to as high as 3.92% on Thursday. On Friday, it was 3.87%.
Tame "reported" inflation, rising unemployment, the housing market slump, the Federal Reserve’s policy of a virtually zero Fed Funds rate and its purchase of up to $1.7 trillion in bonds have all helped keep Treasury yields near historic lows.
But, this week the mood sharply deteriorated as yields for $118 billion of newly-issued U.S. debt were much higher than forecast, sparking overall selling of Treasuries. Sentiment also deteriorated in the U.K. bond market after the government’s proposed budget failed to resolve doubts over future spending and debt reduction.
It hasn’t helped that the U.S. announced a big overhaul of its healthcare system this month, adding to worries about the scale of U.S. spending. Thank you Obamacare! (sarcasm intentional!)
Also un-nerving U.S. investors this week was a report by the Congressional Budget Office that falling payroll taxes, resulting from high unemployment, means that Social Security will pay out more in benefits than it receives for this fiscal year.
“A sustained rise in yields is upon us and bond funds will start to incur losses,” says Jim Caron, Global Head Of Interest Rate Strategy at Morgan Stanley. He expects 10-year yields to reach 4.5% in the second quarter, as investors pull their money from bond funds. March looms as the first month for negative returns for investors in Treasuries this year. Year-to-date, Treasuries have returned a scant 0.7% and threaten to slip into negative territory.
The 10-year note’s yield rose 15 basis points, or 0.15% , to 3.85%, according to BGCantor Market Data. The price of the 3.625% note due in February 2020 fell $12.19 per $1,000 face amount.
The increase in the yield was the biggest since an advance of 0.27% for the week that ended Dec. 25. The yield touched 3.92% on March 25, the highest level since June 11. The two-year note’s yield rose 0.05% to 1.04% and reached 1.12% this week, the highest level since Jan. 4.
Unfortunately, the unsatiable appetite to fund America's bloated budget can only get worse. The world has had it with our fiscal irresponsibility and the era of low interest rates will become harder to sustain.
Marko's Take
For new readers, please visit us on YouTube at http://www.youtube.com/markostaketv. Our newest episode on the legality of the Personal Income Tax will be posted in the next two days.
Thursday, March 11, 2010
Budget Deficit On Parabolic Path
In February, the U.S. Government ran its largest ever monthly deficit — $221 billion, the U.S. Treasury said in releasing its monthly budget statement Wednesday. By comparison, the government in February 2009 ran a budget deficit of nearly $194 billion.
The U.S. February deficit came in below the Congressional Budget Office's (CBO's) estimate of $223 billion. The CBO projected the year-to-date budget deficit would hit $655 billion.
The CBO has forecast a $1.56 trillion deficit for fiscal year 2010, or 10.6% of the economy measured by Gross Domestic Product (GDP). This funding gap is up from a 9.9% share of GDP in 2009. But, the shortfall was forecast to shrink to 8.3% of GDP in 2011. This would be a drop of 50% from the level Obama inherited when he took office by the time his term ends in January 2013. Right! (Sarcasm intentional!)
The deficit's rise in 2010 was partly due to the $787 billion stimulus package Obama pushed through Congress soon after taking office last year to fight the recession. Obama, a Democrat, and ever so eager to accept responsibilty (sarcasm intentional!), pinned the financial mess firmly on his Republican predecessor President George W. Bush.
The CBO's budget deficit forecasts are premised on some pretty flimsy assumptions, such as that the GDP will grow by 2.7% in 2010, 3.8% in 2011 and more than 4% in successive years. As readers of Marko's Take already know, the economy is poised to re-enter the second dip of the Double-Dip-Depression, therefore, this assumption is preposterous.
The budget also assumes unemployment will fall to 8.2% in 2012 from 10% this year, while inflation stays mild and interest rates rise only slightly.
Government receipts posted a rare increase in February, while soaring spending pushed the nation's year-to-date deficit up to a record $651.60 billion.
The government's fiscal 2010 year-to-date deficit is up 10.5% from fiscal year 2009.
February 2010 marks the 17th consecutive month in which the U.S. has posted a budget deficit. The country has posted a budget deficit for 43 of the last 56 Februarys.
There was some good news. The government saw its monthly receipts in February increase on a year-over-year basis for the first time in nearly two years. An increase in corporate tax collections, coupled with lower refunds to individual taxpayers, drove receipts up 23% to $107.52 billion in February 2010 from $87.31 billion in February 2009.
The U.S. spent $16.1 billion last month to service its debt, an annualized amount of approximately $200 billion. Given the nearly $14 trillion in national debt, a 1% increase in interest rates would add $140 billion to debt service. That's why interest rates will NOT be allowed to rise until forced to do so by hyper-inflation and the demands of the market.
Undoubtedly, the "rosy" projections of the CBO will vastly understate the budget deficits that will ultimately be realized. In turn, this will create demand to borrow more money, which will expand the deficit and the vicious cycle will continue until the U.S. Dollar is debased to nearly worthless.
Think the country's on the right path? If so, TAKE ME ON!
Marko's Take
Please visit our new YouTube channel at http://www.youtube.com/markostaketv. We have 5 new episodes to be added over the coming weeks. Stay tuned!
The U.S. February deficit came in below the Congressional Budget Office's (CBO's) estimate of $223 billion. The CBO projected the year-to-date budget deficit would hit $655 billion.
The CBO has forecast a $1.56 trillion deficit for fiscal year 2010, or 10.6% of the economy measured by Gross Domestic Product (GDP). This funding gap is up from a 9.9% share of GDP in 2009. But, the shortfall was forecast to shrink to 8.3% of GDP in 2011. This would be a drop of 50% from the level Obama inherited when he took office by the time his term ends in January 2013. Right! (Sarcasm intentional!)
The deficit's rise in 2010 was partly due to the $787 billion stimulus package Obama pushed through Congress soon after taking office last year to fight the recession. Obama, a Democrat, and ever so eager to accept responsibilty (sarcasm intentional!), pinned the financial mess firmly on his Republican predecessor President George W. Bush.
The CBO's budget deficit forecasts are premised on some pretty flimsy assumptions, such as that the GDP will grow by 2.7% in 2010, 3.8% in 2011 and more than 4% in successive years. As readers of Marko's Take already know, the economy is poised to re-enter the second dip of the Double-Dip-Depression, therefore, this assumption is preposterous.
The budget also assumes unemployment will fall to 8.2% in 2012 from 10% this year, while inflation stays mild and interest rates rise only slightly.
Government receipts posted a rare increase in February, while soaring spending pushed the nation's year-to-date deficit up to a record $651.60 billion.
The government's fiscal 2010 year-to-date deficit is up 10.5% from fiscal year 2009.
February 2010 marks the 17th consecutive month in which the U.S. has posted a budget deficit. The country has posted a budget deficit for 43 of the last 56 Februarys.
There was some good news. The government saw its monthly receipts in February increase on a year-over-year basis for the first time in nearly two years. An increase in corporate tax collections, coupled with lower refunds to individual taxpayers, drove receipts up 23% to $107.52 billion in February 2010 from $87.31 billion in February 2009.
The U.S. spent $16.1 billion last month to service its debt, an annualized amount of approximately $200 billion. Given the nearly $14 trillion in national debt, a 1% increase in interest rates would add $140 billion to debt service. That's why interest rates will NOT be allowed to rise until forced to do so by hyper-inflation and the demands of the market.
Undoubtedly, the "rosy" projections of the CBO will vastly understate the budget deficits that will ultimately be realized. In turn, this will create demand to borrow more money, which will expand the deficit and the vicious cycle will continue until the U.S. Dollar is debased to nearly worthless.
Think the country's on the right path? If so, TAKE ME ON!
Marko's Take
Please visit our new YouTube channel at http://www.youtube.com/markostaketv. We have 5 new episodes to be added over the coming weeks. Stay tuned!
Saturday, January 16, 2010
10 For 10: 10 Predictions For 2010
Every pundit puts out an annual list of what to look for in the upcoming year. Most do so in either late December or very early January. It's now this pundit's turn to give his "Take".
In no particular order of importance, I expect to see the following:
1. The economy, currently in "recovery" mode, will start to sputter by no later than the middle of the second quarter, and will cascade lower into the end of the year (http://markostake.blogspot.com/2009/12/recovery-recession-or-depression.html).
2. Residential home prices wll RISE through 2010 (http://markostake.blogspot.com/2010/01/bottom-in-real-estate.html).
3. Commercial real estate collapses, led by closures of strip malls and the failure of small businesses (http://markostake.blogspot.com/2009/11/small-business-failures-leading.html).
4. Stocks RISE in 2011 (http://markostake.blogspot.com/2010/01/why-does-stock-market-act-like.html).
5. Republicans take the House and the Senate.
6. Interest rates will remain low throughout the year (http://markostake.blogspot.com/2010/01/have-any-interest-in-future-direction.html).
7. Some version of a "Windfall Profits Tax" gets enacted on oil companies.
8. Obamacare does NOT pass in anything close to its current form, unless via executive mandate (http://markostake.blogspot.com/2009/12/obamacare-part-1-whos-fer-it-whos-agin.html), (http://markostake.blogspot.com/2009/12/obamacare-part-2-when-us-gets-involved.html),
(http://markostake.blogspot.com/2009/12/obamacare-part-3-economic-reality.html).
9. Shortages of necessities such as food, water, gasoline and other staples will lead to unprecedented civil disobedience and riots.
10. Gold will reach something in the order of $5,000 and Silver $250 per ounce by the end of the year or early 2011.
11. I will make an 11th prediction: The U.S. Dollar will be virtually, if not entirely relegated to second-tier status.
As you can tell from the 11th prediction, at least one of my forecasts came true. I did indeed make an 11th prediction!
You didn't think I'd take a chance on going 0 for 10 did you?
Thanks for reading! If you have some predictions of your own or think I missed mentioning one, you know what to do: TAKE ME ON!
Marko's Take
In no particular order of importance, I expect to see the following:
1. The economy, currently in "recovery" mode, will start to sputter by no later than the middle of the second quarter, and will cascade lower into the end of the year (http://markostake.blogspot.com/2009/12/recovery-recession-or-depression.html).
2. Residential home prices wll RISE through 2010 (http://markostake.blogspot.com/2010/01/bottom-in-real-estate.html).
3. Commercial real estate collapses, led by closures of strip malls and the failure of small businesses (http://markostake.blogspot.com/2009/11/small-business-failures-leading.html).
4. Stocks RISE in 2011 (http://markostake.blogspot.com/2010/01/why-does-stock-market-act-like.html).
5. Republicans take the House and the Senate.
6. Interest rates will remain low throughout the year (http://markostake.blogspot.com/2010/01/have-any-interest-in-future-direction.html).
7. Some version of a "Windfall Profits Tax" gets enacted on oil companies.
8. Obamacare does NOT pass in anything close to its current form, unless via executive mandate (http://markostake.blogspot.com/2009/12/obamacare-part-1-whos-fer-it-whos-agin.html), (http://markostake.blogspot.com/2009/12/obamacare-part-2-when-us-gets-involved.html),
(http://markostake.blogspot.com/2009/12/obamacare-part-3-economic-reality.html).
9. Shortages of necessities such as food, water, gasoline and other staples will lead to unprecedented civil disobedience and riots.
10. Gold will reach something in the order of $5,000 and Silver $250 per ounce by the end of the year or early 2011.
11. I will make an 11th prediction: The U.S. Dollar will be virtually, if not entirely relegated to second-tier status.
As you can tell from the 11th prediction, at least one of my forecasts came true. I did indeed make an 11th prediction!
You didn't think I'd take a chance on going 0 for 10 did you?
Thanks for reading! If you have some predictions of your own or think I missed mentioning one, you know what to do: 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
Tuesday, December 1, 2009
Exactly Why IS The Stock Market Rallying?
To he honest answer is that I don't know! But, I can think of several possibilites. In fact, NO ONE can know with any degree of certainty. The fact is that markets of all sorts do what they want and when they want. The reasons are only clear in hindsight. What I CAN do is review the potential reasons and make an educated guess.
One possibility is that the economy is indeed recovering. That's less ridiculous than it might seem at first. Given the level of stimulus, coupled with the high level of growth in the money supply, the economy typically would respond with an initial recovery. The unfortunate side effect of all the economic juicing is that eventually, prices start to rise at an accelerated rate. A good analogy would be a drug addict. At first the drug gives one a "high" but is followed by the inevitable withdrawal symptoms. The drug addict then builds a tolerance and needs MORE of the drug. Subsequently, the crashes become more painful.
Another reason for this rally may be inflation expectations. In Zimbabwe, which is just starting to recover from one of the most severe bouts of hyperinflation I've ever heard of, their stock market shot up exponentially. Zimbabwe's inflation rate was so high that it reduced the value of ITS dollar to 6 QUADRILLIONTHS of its value in 2003! However, in the U.S., in the late 1960's through 1982, a period of high inflation, stocks fell by an astonishing 90% from peak to trough, if the cumulative inflation was taken into account. That loss was virtually identical to that experienced during the Great Depression.
A third possibility is that we are in a temporary rally within a longer-term overall downtrend. This is a very common occurrence, especially after the severity of the accelerating panic that engulfed the market between the emergency takeover of Bear, Stearns in 2008 and the March lows of 2009. The market behaves like a pendulum. It frequently overshoots in one direction only to be followed by a sudden sharp about-face.
Finally, the idea that the market is manipulated by agents or proxies of the government is gaining acceptance. It has also been, to some extent, even admitted to, but only very recently. Until we get an audit of the Federal Reserve, we won't know with any certainty as to what extent this may or may not have occurred. It's clear the Federal Reserve DOES manipulate some markets such as interest rates and, therefore, the price of bonds.
They also manipulate the U.S. Dollar. But we don't know how far that manipulation extends, nor its overall effect on the stock market. If this indeed is true, it will ultimately fail because it can only work temporarily. We can be certain that whatever power the Federal Reseerve exerts, it must be limited. Otherwise, the market would have never crashed in the first place!
So, here's "Marko's Take" on all this! My own personal belief is that we are indeed in a temporary rally that will ultimately prove to be of limited duration and NOT make new highs for a long time. And it may be somewhat overdone with help from our friends and their proxies at the Federal Reserve. Even if I AM correct, I don't have any firm conviction as to how long it will last, nor how high it will ultimately go.
I'm always delighted by your comments, pro or con. If you like what you've seen, it would thrill me to have you email this piece, or any other of my pieces, to a friend or two.
Marko's Take
One possibility is that the economy is indeed recovering. That's less ridiculous than it might seem at first. Given the level of stimulus, coupled with the high level of growth in the money supply, the economy typically would respond with an initial recovery. The unfortunate side effect of all the economic juicing is that eventually, prices start to rise at an accelerated rate. A good analogy would be a drug addict. At first the drug gives one a "high" but is followed by the inevitable withdrawal symptoms. The drug addict then builds a tolerance and needs MORE of the drug. Subsequently, the crashes become more painful.
Another reason for this rally may be inflation expectations. In Zimbabwe, which is just starting to recover from one of the most severe bouts of hyperinflation I've ever heard of, their stock market shot up exponentially. Zimbabwe's inflation rate was so high that it reduced the value of ITS dollar to 6 QUADRILLIONTHS of its value in 2003! However, in the U.S., in the late 1960's through 1982, a period of high inflation, stocks fell by an astonishing 90% from peak to trough, if the cumulative inflation was taken into account. That loss was virtually identical to that experienced during the Great Depression.
A third possibility is that we are in a temporary rally within a longer-term overall downtrend. This is a very common occurrence, especially after the severity of the accelerating panic that engulfed the market between the emergency takeover of Bear, Stearns in 2008 and the March lows of 2009. The market behaves like a pendulum. It frequently overshoots in one direction only to be followed by a sudden sharp about-face.
Finally, the idea that the market is manipulated by agents or proxies of the government is gaining acceptance. It has also been, to some extent, even admitted to, but only very recently. Until we get an audit of the Federal Reserve, we won't know with any certainty as to what extent this may or may not have occurred. It's clear the Federal Reserve DOES manipulate some markets such as interest rates and, therefore, the price of bonds.
They also manipulate the U.S. Dollar. But we don't know how far that manipulation extends, nor its overall effect on the stock market. If this indeed is true, it will ultimately fail because it can only work temporarily. We can be certain that whatever power the Federal Reseerve exerts, it must be limited. Otherwise, the market would have never crashed in the first place!
So, here's "Marko's Take" on all this! My own personal belief is that we are indeed in a temporary rally that will ultimately prove to be of limited duration and NOT make new highs for a long time. And it may be somewhat overdone with help from our friends and their proxies at the Federal Reserve. Even if I AM correct, I don't have any firm conviction as to how long it will last, nor how high it will ultimately go.
I'm always delighted by your comments, pro or con. If you like what you've seen, it would thrill me to have you email this piece, or any other of my pieces, to a friend or two.
Marko's Take
Saturday, November 21, 2009
The Interest Rate Conundrum
If the economy were truly in recovery, as we have been told time and time again, market interest rates ought to be MUCH higher. For example, according to the U.S. Treasury's own website, as of last Friday, 1 month TBills yielded a scant .04%, 3 month TBills .02% and if you entrust the government with your dough for a year, you'll see a "fat" .26%. If you're willing to tie up your money for 10 years, the yield jumps to a "juicy" 4.03%!
So, one has to wonder why ANYONE would accept so little on Treasuries. My guess is that either people are afraid of yet more bank failures, or the Federal Reserve has become a large clandestine buyer. (As bond prices rise yields go down, therefore significant purchases of bonds would tend to drive yields lower). We know the largest buyer through last year was China but they have stopped buying, and are instead accumulating hard assets like Gold. If the Fed indeed is buying Treasuries, it might go a long way to explain why all attempts to audit the Fed have been blocked despite the support of an overwhelming majority of the House.
To be fair, the United States still carries the highest credit rating, AAA, but so did issuers of mortgage derivatives, who ultimately led the meltdown of 2008. So this rating may not last or be accurate.
The market is telling us that there IS risk to government debt. The financial instrument employed to provide insurance is also known as a Credit Default Swap. According to Rob Kirby, who writes the fabulous newletter, Kirby Analytics (http://www.kirbyanalytics.com/), the "cost" of insuring $10MM of 10 year Treasuries is $25,000. He further states that this in itself is a fraud, since if the insurance were made good, the proceeds would be in dollars. Now I ask you, what would a dollar be worth if the U.S. did indeed default?
Normally, one would expect even short term rates to exceed the rate of inflation, which the Bureau of Labor and Statistics claims to be running at about 0% annually, but has turned up markedly from mid-year. By comparison, John Williams, who has a site called Shadow Stats (http://www.shadowstats.com/), puts that figure at 3%. As you may recall from a prior essay, Mr. Williams computes key government statistics in the same way as they were calculated prior to a revision in algorithms instituted by the Clinton administration. His measures reveal a much higher level of inflation: 3% and rising. With the dollar having fallen so far this year, we KNOW that our imports are costing on the order of 10% more.
California's rating was recently cut by Fitch to BBB, a rating which is barely above junk status. Fitch is a respected credit rating agency. California has begun to issue "IOUs", whose value is at best, uncertain. The "IOUs" may ultimately turn out to be "worth" a fraction of their face value.
Problems like this are cropping up world-wide. For example, Fitch cut its ratings on Ukraine to B-, a very low quality junk bond rating. And, according to a recent Bloomberg news story, both Japan and Switzerland have fallen off the list of the top ten safest sovereign debtors. Safest countries include Denmark, Finland, Australia, New Zealand and the United States. The inclusion of the United States surprises me, especially given its enormous unfunded liabilities like Social Security and Medicare. In addition, the already enormous budget deficits are projected to rise as far as the eye can see. But then, who am I to argue with the market?
I hope you enjoy these essays and visit often. I appreciate comments, pro or con, and we cover a variety of topics that are simply too convoluted for just about anyone to understand. But, I'll do my best to clarify these issues. Our growing library includes pieces on Gold, Silver, Taxes, and much more.
Marko's Take
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So, one has to wonder why ANYONE would accept so little on Treasuries. My guess is that either people are afraid of yet more bank failures, or the Federal Reserve has become a large clandestine buyer. (As bond prices rise yields go down, therefore significant purchases of bonds would tend to drive yields lower). We know the largest buyer through last year was China but they have stopped buying, and are instead accumulating hard assets like Gold. If the Fed indeed is buying Treasuries, it might go a long way to explain why all attempts to audit the Fed have been blocked despite the support of an overwhelming majority of the House.
To be fair, the United States still carries the highest credit rating, AAA, but so did issuers of mortgage derivatives, who ultimately led the meltdown of 2008. So this rating may not last or be accurate.
The market is telling us that there IS risk to government debt. The financial instrument employed to provide insurance is also known as a Credit Default Swap. According to Rob Kirby, who writes the fabulous newletter, Kirby Analytics (http://www.kirbyanalytics.com/), the "cost" of insuring $10MM of 10 year Treasuries is $25,000. He further states that this in itself is a fraud, since if the insurance were made good, the proceeds would be in dollars. Now I ask you, what would a dollar be worth if the U.S. did indeed default?
Normally, one would expect even short term rates to exceed the rate of inflation, which the Bureau of Labor and Statistics claims to be running at about 0% annually, but has turned up markedly from mid-year. By comparison, John Williams, who has a site called Shadow Stats (http://www.shadowstats.com/), puts that figure at 3%. As you may recall from a prior essay, Mr. Williams computes key government statistics in the same way as they were calculated prior to a revision in algorithms instituted by the Clinton administration. His measures reveal a much higher level of inflation: 3% and rising. With the dollar having fallen so far this year, we KNOW that our imports are costing on the order of 10% more.
California's rating was recently cut by Fitch to BBB, a rating which is barely above junk status. Fitch is a respected credit rating agency. California has begun to issue "IOUs", whose value is at best, uncertain. The "IOUs" may ultimately turn out to be "worth" a fraction of their face value.
Problems like this are cropping up world-wide. For example, Fitch cut its ratings on Ukraine to B-, a very low quality junk bond rating. And, according to a recent Bloomberg news story, both Japan and Switzerland have fallen off the list of the top ten safest sovereign debtors. Safest countries include Denmark, Finland, Australia, New Zealand and the United States. The inclusion of the United States surprises me, especially given its enormous unfunded liabilities like Social Security and Medicare. In addition, the already enormous budget deficits are projected to rise as far as the eye can see. But then, who am I to argue with the market?
I hope you enjoy these essays and visit often. I appreciate comments, pro or con, and we cover a variety of topics that are simply too convoluted for just about anyone to understand. But, I'll do my best to clarify these issues. Our growing library includes pieces on Gold, Silver, Taxes, and much more.
Marko's Take
.
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