irvine_grad_IHB
New member
food for thought: <a href="http://www.bloomberg.com/apps/news?pid=20601110&sid=a6sv0hG.nW7g">Wells Fargo's Profit Looks Too Good to Be True: Jonathan Weil</a>
Economic Commentary
- Thread starter BondTrader_IHB
- Start date
usctrojanman29_IHB
New member
[quote author="irvine_grad" date=1239925264]food for thought: <a href="http://www.bloomberg.com/apps/news?pid=20601110&sid=a6sv0hG.nW7g">Wells Fargo's Profit Looks Too Good to Be True: Jonathan Weil</a></blockquote>
Great article...really explains what I've been trying to say that these banks have "smoke and mirror" earnings. Trust me, sooner or later reality will set in and then it's back on the chopping block and off to Uncle Sam for more billions.
Great article...really explains what I've been trying to say that these banks have "smoke and mirror" earnings. Trust me, sooner or later reality will set in and then it's back on the chopping block and off to Uncle Sam for more billions.
BondTrader_IHB
New member
The mark to market accounting change saved the banks in Q1, wonder what bull#$%& the government will/can pull to save them in Q2. Credit market didn't improve last month whatsoever.
usctrojanman29_IHB
New member
[quote author="BondTrader" date=1239944524]The mark to market accounting change saved the banks in Q1, wonder what bull#$%& the government will/can pull to save them in Q2. Credit market didn't improve last month whatsoever.</blockquote>
I think they did that so that the banks could go out in the private markets and raise their own capital (bond sales and secondary stock offerings). If the banks are in such great shape, the FED should come out and say they no long need to guarantee any of their loans or their losses (WAMU losses that JPM has to deal with and Wachovia losses that WFC has to deal with). There are a lot of skeltons...errr..."other, other assets" that we don't know about on the balance sheet of many of these banks.
I think they did that so that the banks could go out in the private markets and raise their own capital (bond sales and secondary stock offerings). If the banks are in such great shape, the FED should come out and say they no long need to guarantee any of their loans or their losses (WAMU losses that JPM has to deal with and Wachovia losses that WFC has to deal with). There are a lot of skeltons...errr..."other, other assets" that we don't know about on the balance sheet of many of these banks.
ukyo116_IHB
New member
I am absolutely dumbfounded.
<a href="http://www.reuters.com/article/bondsNews/idUSNYD00046720090416">N.Y. Federal Reserve buys $1.5 bln of TIPS</a>
<a href="http://www.reuters.com/article/bondsNews/idUSNYD00046720090416">N.Y. Federal Reserve buys $1.5 bln of TIPS</a>
BondTrader_IHB
New member
<strong>1) Consumer price index is already deflating</strong>
The CPI is already in deflation mode, having fallen 0.4% on a year-over-year
basis, the first such negative trend since 1955. It is not just the actual deflation
rate, but the extent of the deceleration, since this time last year the pace was
running at +4.0%.
<strong>2) Pricing power is fading across a very broad front</strong>
This is not just a case of energy prices sliding from their lofty year-ago levels.
Looking at the CPI data sequentially and by sector, it is increasingly obvious that
pricing power is fading across a very broad front. Appliance prices fell 0.3% MoM
in March, apparel prices also dropped 0.3%, hotel rates sagged 2.4% and are
down six months in a row, airline fares also slipped 2.3% and have now deflated
seven months in a row, and home improvement materials fell 0.3%. In addition,
autos, communication services, restaurants and recreation were all basically flat.
<strong>3) More deflation coming down the road</strong>
Producer prices in March sank 1.2% sequentially and a record -3.5% year-overyear.
This time last year, the YoY rate was +6.7%, for a compression of over
1,000 basis points. The sustained deflation in the core crude and intermediate
price pipeline is probably a sign of what is still coming down the road in terms of
final goods prices.
<strong>4) Home prices declining at an accelerating rate</strong>
Case-Shiller home prices are actually declining at an accelerating rate and are
down a record 19% year-over-year. The pace of decline is accelerating with the
three-month trend running at a -26.5% annual rate.
<strong>5) Real estate values of all types deflating at a record rate</strong>
Real estate values of all types are now deflating at a record rate: -11.5% YoY for
apartment buildings, -3.3% for industrial properties, -6.1% for office buildings, and
-2% for retail complexes.
<strong>6) Record amount of spare capacity</strong>
The capacity utilization rate in manufacturing has declined to an all-time low of
65.8% from 66.9% in February and 77.7% a year ago. Only one other time in
recorded history has the CAPU rate fallen so far so fast.
<strong>7) Slack in the labor market at a lifetime high</strong>
The broadest measure of resource slack in the labor market is the U-6
unemployment rate and it rose to a lifetime high in March as well to 15.6% from
14.8% in February and 9.1% a year ago. Never before has the jobless rate risen
so fast.
<strong>8) Bank credit has contracted for three straight months</strong>
Bank credit contracted at a 2.9% annual rate in March and has declined now for
three months in a row. Data into early April point to a fourth monthly decline,
which would be unprecedented.
<strong>9) Record decline in household incomes</strong>
Nominal personal incomes less government transfers deflated 0.5% in March and
have now fallen for six months in a row. Since last August, the personal sector
has lost $234 billion of organic income (wages/salaries, rent, interest, dividends,
and proprietary). Take it from us that such a decline in household incomes has
never happened before.
<strong>10) Household net worth has contracted $20 trillion</strong>
Household net worth has contracted $20 trillion or by 30% since the third quarter
of 2007. The lags on consumer spending and the savings rate can last as long
as three years.
The CPI is already in deflation mode, having fallen 0.4% on a year-over-year
basis, the first such negative trend since 1955. It is not just the actual deflation
rate, but the extent of the deceleration, since this time last year the pace was
running at +4.0%.
<strong>2) Pricing power is fading across a very broad front</strong>
This is not just a case of energy prices sliding from their lofty year-ago levels.
Looking at the CPI data sequentially and by sector, it is increasingly obvious that
pricing power is fading across a very broad front. Appliance prices fell 0.3% MoM
in March, apparel prices also dropped 0.3%, hotel rates sagged 2.4% and are
down six months in a row, airline fares also slipped 2.3% and have now deflated
seven months in a row, and home improvement materials fell 0.3%. In addition,
autos, communication services, restaurants and recreation were all basically flat.
<strong>3) More deflation coming down the road</strong>
Producer prices in March sank 1.2% sequentially and a record -3.5% year-overyear.
This time last year, the YoY rate was +6.7%, for a compression of over
1,000 basis points. The sustained deflation in the core crude and intermediate
price pipeline is probably a sign of what is still coming down the road in terms of
final goods prices.
<strong>4) Home prices declining at an accelerating rate</strong>
Case-Shiller home prices are actually declining at an accelerating rate and are
down a record 19% year-over-year. The pace of decline is accelerating with the
three-month trend running at a -26.5% annual rate.
<strong>5) Real estate values of all types deflating at a record rate</strong>
Real estate values of all types are now deflating at a record rate: -11.5% YoY for
apartment buildings, -3.3% for industrial properties, -6.1% for office buildings, and
-2% for retail complexes.
<strong>6) Record amount of spare capacity</strong>
The capacity utilization rate in manufacturing has declined to an all-time low of
65.8% from 66.9% in February and 77.7% a year ago. Only one other time in
recorded history has the CAPU rate fallen so far so fast.
<strong>7) Slack in the labor market at a lifetime high</strong>
The broadest measure of resource slack in the labor market is the U-6
unemployment rate and it rose to a lifetime high in March as well to 15.6% from
14.8% in February and 9.1% a year ago. Never before has the jobless rate risen
so fast.
<strong>8) Bank credit has contracted for three straight months</strong>
Bank credit contracted at a 2.9% annual rate in March and has declined now for
three months in a row. Data into early April point to a fourth monthly decline,
which would be unprecedented.
<strong>9) Record decline in household incomes</strong>
Nominal personal incomes less government transfers deflated 0.5% in March and
have now fallen for six months in a row. Since last August, the personal sector
has lost $234 billion of organic income (wages/salaries, rent, interest, dividends,
and proprietary). Take it from us that such a decline in household incomes has
never happened before.
<strong>10) Household net worth has contracted $20 trillion</strong>
Household net worth has contracted $20 trillion or by 30% since the third quarter
of 2007. The lags on consumer spending and the savings rate can last as long
as three years.
BondTrader_IHB
New member
[quote author="usctrojanman29" date=1239948298][quote author="BondTrader" date=1239944524]The mark to market accounting change saved the banks in Q1, wonder what bull#$%& the government will/can pull to save them in Q2. Credit market didn't improve last month whatsoever.</blockquote>
I think they did that so that the banks could go out in the private markets and raise their own capital (bond sales and secondary stock offerings). If the banks are in such great shape, the FED should come out and say they no long need to guarantee any of their loans or their losses (WAMU losses that JPM has to deal with and Wachovia losses that WFC has to deal with). There are a lot of skeltons...errr..."other, other assets" that we don't know about on the balance sheet of many of these banks.</blockquote>
You are spot on!
I think they did that so that the banks could go out in the private markets and raise their own capital (bond sales and secondary stock offerings). If the banks are in such great shape, the FED should come out and say they no long need to guarantee any of their loans or their losses (WAMU losses that JPM has to deal with and Wachovia losses that WFC has to deal with). There are a lot of skeltons...errr..."other, other assets" that we don't know about on the balance sheet of many of these banks.</blockquote>
You are spot on!
usctrojanman29_IHB
New member
[quote author="BondTrader" date=1240007742][quote author="usctrojanman29" date=1239948298][quote author="BondTrader" date=1239944524]The mark to market accounting change saved the banks in Q1, wonder what bull#$%& the government will/can pull to save them in Q2. Credit market didn't improve last month whatsoever.</blockquote>
I think they did that so that the banks could go out in the private markets and raise their own capital (bond sales and secondary stock offerings). If the banks are in such great shape, the FED should come out and say they no long need to guarantee any of their loans or their losses (WAMU losses that JPM has to deal with and Wachovia losses that WFC has to deal with). There are a lot of skeltons...errr..."other, other assets" that we don't know about on the balance sheet of many of these banks.</blockquote>
You are spot on!</blockquote>
Here is an example of the "smoke and mirror" accounting tricks that helped Citi to post a profit for this quarter:
"Citigroup posted a $2.5 billion gain from accounting rules that allow companies to profit when their own creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit."
"The quarter?s results included a $250 million gain from releasing reserves that previously had been set aside for potential litigation expenses, Citigroup said. The bank also booked a $110 million tax benefit related to the ?resolution of certain issues? in an Internal Revenue Service audit."
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6My3P.WwqPs&refer=home
I'm thinking that the banks will have good earnings reports for 2Q09 due to further "smoke and mirror" accounting tricks because they didn't want to take all the benefits in one quarter (assuming the economy doesn't hit a brick wall between then and now). However, 3Q09 earnings will get worse and you'll see the crap hit the fan with 4Q09 earnings and 2010 guidance. Hence, my predication for new lows coming before the end of the year.
I think they did that so that the banks could go out in the private markets and raise their own capital (bond sales and secondary stock offerings). If the banks are in such great shape, the FED should come out and say they no long need to guarantee any of their loans or their losses (WAMU losses that JPM has to deal with and Wachovia losses that WFC has to deal with). There are a lot of skeltons...errr..."other, other assets" that we don't know about on the balance sheet of many of these banks.</blockquote>
You are spot on!</blockquote>
Here is an example of the "smoke and mirror" accounting tricks that helped Citi to post a profit for this quarter:
"Citigroup posted a $2.5 billion gain from accounting rules that allow companies to profit when their own creditworthiness declines. The rules reflect the possibility that a company could buy back its own liabilities at a discount, which under traditional accounting methods would result in a profit."
"The quarter?s results included a $250 million gain from releasing reserves that previously had been set aside for potential litigation expenses, Citigroup said. The bank also booked a $110 million tax benefit related to the ?resolution of certain issues? in an Internal Revenue Service audit."
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6My3P.WwqPs&refer=home
I'm thinking that the banks will have good earnings reports for 2Q09 due to further "smoke and mirror" accounting tricks because they didn't want to take all the benefits in one quarter (assuming the economy doesn't hit a brick wall between then and now). However, 3Q09 earnings will get worse and you'll see the crap hit the fan with 4Q09 earnings and 2010 guidance. Hence, my predication for new lows coming before the end of the year.
awgee_IHB
New member
Soaring U.S. Budget Deficit Will Mean Billions in Bond Sales
By Michael McKee
April 22 (Bloomberg) -- Millions of lost jobs mean billions in lost tax revenue for the U.S. government, and billions in additional Treasury debt to fund a federal budget deficit that may soar to more than four times last year?s record $454.7 billion.
Employers cut 3.7 million positions from their payrolls in the six months since the fiscal year began Oct. 1, and the unemployment rate reached a 25-year high of 8.5 percent in March. That suggests receipts for April -- the biggest month for tax collection -- are likely to come in well below April 2008, analysts said.
With spending on unemployment insurance and other safety- net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.
?Tax receipts are just collapsing,? said Chris Ahrens, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid at Treasury auctions. The need to sell more debt ?is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause.?
The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS. From October through December, the Treasury sold a record $569 billion, up from $82 billion in the same period a year earlier, and auctioned another $493 billion in the last quarter, up from $156 billion. That helps to make up for the drop in tax receipts, pay for the rise in spending and refinance maturing debt. Along with the principal, the sales add additional interest costs to the deficit for years to come.
Unemployment Benefits
At the same time, government spending has climbed 33 percent in the fiscal year through March, as relief programs such as unemployment benefits expand. Labor Department expenditures have more than doubled to $52.7 billion and payments by the Department of Health and Human Services have risen by $40.6 billion, or 12 percent. Spending by the Agriculture Department, which runs the food-stamp program, is 18 percent higher, or $9.9 billion more than in the same period a year ago.
These increases will contribute to a record federal budget deficit this fiscal year. On March 20, the Congressional Budget Office forecast the shortfall will reach $1.85 trillion, dwarfing the previous peak. UBS estimates a budget deficit of $1.65 trillion, Ahrens said.
Plummeting Receipts
Rising unemployment and lower consumer spending helped drag income-tax receipts from individuals and small businesses down 15 percent in fiscal 2009 through March, compared with a year earlier. Data due in May will likely show that the recession curbed estimated-tax payments in the first quarter, while the drop in financial markets caused capital gains to shrink.
With the tax cuts from President Barack Obama?s stimulus package also taking effect in April, ?that combination is going to give you weak tax revenues,? said Douglas Lee, chief economist at Economics From Washington, an independent consulting firm in Potomac, Maryland.
From the start of the fiscal year through March, personal income-tax payments fell to $429.7 billion from $503.5 billion in the year-earlier period, according to Treasury budget statistics. That?s the first such drop since 2003, according to department records.
?There?s been a huge hit, not just to income but to wealth,? said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York. ?The economy did not turn in the first quarter of the year.? The numbers ?are worse than most of us would have expected coming into the tax season.?
Lower Earnings, Higher Refunds
The federal government is also losing revenue from corporate tax receipts, which have fallen 57 percent from the first six months of fiscal 2008. Not only are companies earning less -- and paying less in taxes -- they are getting more in refunds.
Obama?s economic-stimulus package included a provision allowing small businesses with losses in 2008 to carry back those losses for five years rather than two, so companies can claim refunds against taxes paid in the past. Business refunds in January through March of this year were $40.4 billion, almost double the $22.3 billion of a year ago.
Personal income-tax refunds are also higher than last year, up 11 percent to $207.8 billion. That may be because people who pay estimated quarterly taxes based their estimates on 2007 earnings, and overpaid as the economy collapsed in 2008, Lee said.
Close the Gap
States and cities are also being hit hard by unemployment?s effect on tax revenue. The 23,300 Wall Street jobs that disappeared in the year through February helped blow a $16 billion hole in New York state?s budget. State officials are trying to close the gap by raising taxes, which will likely restrain spending and slow recovery.
The attack on bonuses led by members of Congress also hurts. As payments are scaled back or eliminated, tax revenue falls. It?s not just a problem for New York: Individual tax receipts were 4.5 percent less than forecast in Minnesota during February and March.
?While lower-than-expected withholding-tax receipts are always a matter of concern, this shortfall appears to be due to lower-than-projected bonus payments,? the Minnesota Management and Budget office said in its April Economic Update.
At the federal level, concern over the budget deficit extends beyond this year?s ?disaster,? Harris said. Social Security and Medicare costs are also rising as baby boomers age, and the Obama administration has a number of new programs beyond stimulus -- including revamping health care -- that it wants to spend money on.
?It?s going to be a structural issue,? Harris said. ?You have a Congress that?s lost its fear of deficits, so it?s still going to be hard to turn the deficit around once the economy and tax receipts have recovered.?
By Michael McKee
April 22 (Bloomberg) -- Millions of lost jobs mean billions in lost tax revenue for the U.S. government, and billions in additional Treasury debt to fund a federal budget deficit that may soar to more than four times last year?s record $454.7 billion.
Employers cut 3.7 million positions from their payrolls in the six months since the fiscal year began Oct. 1, and the unemployment rate reached a 25-year high of 8.5 percent in March. That suggests receipts for April -- the biggest month for tax collection -- are likely to come in well below April 2008, analysts said.
With spending on unemployment insurance and other safety- net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.
?Tax receipts are just collapsing,? said Chris Ahrens, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid at Treasury auctions. The need to sell more debt ?is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause.?
The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS. From October through December, the Treasury sold a record $569 billion, up from $82 billion in the same period a year earlier, and auctioned another $493 billion in the last quarter, up from $156 billion. That helps to make up for the drop in tax receipts, pay for the rise in spending and refinance maturing debt. Along with the principal, the sales add additional interest costs to the deficit for years to come.
Unemployment Benefits
At the same time, government spending has climbed 33 percent in the fiscal year through March, as relief programs such as unemployment benefits expand. Labor Department expenditures have more than doubled to $52.7 billion and payments by the Department of Health and Human Services have risen by $40.6 billion, or 12 percent. Spending by the Agriculture Department, which runs the food-stamp program, is 18 percent higher, or $9.9 billion more than in the same period a year ago.
These increases will contribute to a record federal budget deficit this fiscal year. On March 20, the Congressional Budget Office forecast the shortfall will reach $1.85 trillion, dwarfing the previous peak. UBS estimates a budget deficit of $1.65 trillion, Ahrens said.
Plummeting Receipts
Rising unemployment and lower consumer spending helped drag income-tax receipts from individuals and small businesses down 15 percent in fiscal 2009 through March, compared with a year earlier. Data due in May will likely show that the recession curbed estimated-tax payments in the first quarter, while the drop in financial markets caused capital gains to shrink.
With the tax cuts from President Barack Obama?s stimulus package also taking effect in April, ?that combination is going to give you weak tax revenues,? said Douglas Lee, chief economist at Economics From Washington, an independent consulting firm in Potomac, Maryland.
From the start of the fiscal year through March, personal income-tax payments fell to $429.7 billion from $503.5 billion in the year-earlier period, according to Treasury budget statistics. That?s the first such drop since 2003, according to department records.
?There?s been a huge hit, not just to income but to wealth,? said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. in New York. ?The economy did not turn in the first quarter of the year.? The numbers ?are worse than most of us would have expected coming into the tax season.?
Lower Earnings, Higher Refunds
The federal government is also losing revenue from corporate tax receipts, which have fallen 57 percent from the first six months of fiscal 2008. Not only are companies earning less -- and paying less in taxes -- they are getting more in refunds.
Obama?s economic-stimulus package included a provision allowing small businesses with losses in 2008 to carry back those losses for five years rather than two, so companies can claim refunds against taxes paid in the past. Business refunds in January through March of this year were $40.4 billion, almost double the $22.3 billion of a year ago.
Personal income-tax refunds are also higher than last year, up 11 percent to $207.8 billion. That may be because people who pay estimated quarterly taxes based their estimates on 2007 earnings, and overpaid as the economy collapsed in 2008, Lee said.
Close the Gap
States and cities are also being hit hard by unemployment?s effect on tax revenue. The 23,300 Wall Street jobs that disappeared in the year through February helped blow a $16 billion hole in New York state?s budget. State officials are trying to close the gap by raising taxes, which will likely restrain spending and slow recovery.
The attack on bonuses led by members of Congress also hurts. As payments are scaled back or eliminated, tax revenue falls. It?s not just a problem for New York: Individual tax receipts were 4.5 percent less than forecast in Minnesota during February and March.
?While lower-than-expected withholding-tax receipts are always a matter of concern, this shortfall appears to be due to lower-than-projected bonus payments,? the Minnesota Management and Budget office said in its April Economic Update.
At the federal level, concern over the budget deficit extends beyond this year?s ?disaster,? Harris said. Social Security and Medicare costs are also rising as baby boomers age, and the Obama administration has a number of new programs beyond stimulus -- including revamping health care -- that it wants to spend money on.
?It?s going to be a structural issue,? Harris said. ?You have a Congress that?s lost its fear of deficits, so it?s still going to be hard to turn the deficit around once the economy and tax receipts have recovered.?
BondTrader_IHB
New member
<strong>Woes in commercial real estate to intensify</strong>
For a look at how the problems in commercial real estate are likely to intensify,
look no further than page C1 of today?s WSJ, ?In Atlanta, Irrational Building
Exuberance?. Four upscale office buildings are scheduled for completion within a
year and none of them have any leasing activity. Another $600 million outdoor
shopping mall underway has suspended construction to save money.
<strong>More job cuts to come to the fore</strong>
The employment declines look likely to continue through the end of the year. A
poll by Watson Wyatt found that almost half of companies surveyed expect to
announce layoffs during the next 12 months. Nearly 20% are expected to freeze
salaries and cut the workweek.
<strong>Florida placed on ratings watch by Moody?s</strong>
In yet another sign of the intensifying strain at the state government level,
Moody?s placed Florida and its Aa1 general obligation rating on watch for a
possible reduction. The state has been significantly hit by the housing downturn,
which has led to an enormous drop in revenue creating deeper budget shortfalls.
<strong>More deflation signposts</strong>
We caught this headline across our Bloomberg screen yesterday: ?Toyota Prius
Gets $1000 Price Cut in Duel With Honda?. And, take a look at ?Weyerhaeuser to
Temporarily Suspend 401(k) Matching?. Also see ?Leaner Laptops, Lower Prices?
on page D1 of today?s Wall Street Journal and ?Orbitz to Cut Hotel-Booking Fee?
on page D5. And, ?Chinese Steel Producer Warns Over Prices? on page 25 of
today?s Financial Times.
For a look at how the problems in commercial real estate are likely to intensify,
look no further than page C1 of today?s WSJ, ?In Atlanta, Irrational Building
Exuberance?. Four upscale office buildings are scheduled for completion within a
year and none of them have any leasing activity. Another $600 million outdoor
shopping mall underway has suspended construction to save money.
<strong>More job cuts to come to the fore</strong>
The employment declines look likely to continue through the end of the year. A
poll by Watson Wyatt found that almost half of companies surveyed expect to
announce layoffs during the next 12 months. Nearly 20% are expected to freeze
salaries and cut the workweek.
<strong>Florida placed on ratings watch by Moody?s</strong>
In yet another sign of the intensifying strain at the state government level,
Moody?s placed Florida and its Aa1 general obligation rating on watch for a
possible reduction. The state has been significantly hit by the housing downturn,
which has led to an enormous drop in revenue creating deeper budget shortfalls.
<strong>More deflation signposts</strong>
We caught this headline across our Bloomberg screen yesterday: ?Toyota Prius
Gets $1000 Price Cut in Duel With Honda?. And, take a look at ?Weyerhaeuser to
Temporarily Suspend 401(k) Matching?. Also see ?Leaner Laptops, Lower Prices?
on page D1 of today?s Wall Street Journal and ?Orbitz to Cut Hotel-Booking Fee?
on page D5. And, ?Chinese Steel Producer Warns Over Prices? on page 25 of
today?s Financial Times.
Anonymous_IHB
New member
Da future?
Darling Taxes Incomes Over 150,000 Pounds at 50% (Update1)
<a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=agIVVzlvzf.U&refer=home">http://www.bloomberg.com/apps/news?pid=20601087&sid=agIVVzlvzf.U&refer=home</a>
Darling Taxes Incomes Over 150,000 Pounds at 50% (Update1)
<a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=agIVVzlvzf.U&refer=home">http://www.bloomberg.com/apps/news?pid=20601087&sid=agIVVzlvzf.U&refer=home</a>
BondTrader_IHB
New member
<strong>Universities fall on hard times</strong>
Some colleges across the country are so financially-strapped that some are
selling off school radio stations, paintings and dipping into their endowments to
stay afloat, causing anger among many donors. Have a look at the front page of
today?s WSJ, ?New Unrest on Campus as Donors Rebel?.
<strong>Americans losing their health insurance at rapid rate</strong>
If the earnings out of the nation?s big health insurance companies are any
indication, Americans are losing their health insurance at a rapid rate. According
to the Kaiser Family Foundation, for every percentage point increase in the
unemployment rate, the number of uninsured grows by roughly 1.1 million. For
more, take a look at page B1 of today?s WSJ, ?Health Plans Lose Members Due
to Layoffs?.
<strong>Companies will continue to shed employment</strong>
Take a look at page B4 of today?s WSJ, ?Employers Make Cuts Despite Belief
Upturn is Near?. According to a new Hewitt Associates survey, 54% of US
companies surveyed believe the economic upturn will begin at the end of 2009.
Yet, a large percentage have plans for further layoffs, salary reductions, and
benefit cuts.
<strong>Confidence among luxury consumers improves</strong>
According to researcher Unity Marketing, confidence among wealthy Americans
rose for the second consecutive quarter. The group?s Luxury Consumption Index
rose 1.5 points in 1Q to 43.2 from 41.7 in 4Q and from a record low of 40.3 in 3Q.
The group reported that while respondents were feeling better about their own
personal financial situation, it was noted that the luxury consumer would not come
back the way it was before, after this recession ends.
Some colleges across the country are so financially-strapped that some are
selling off school radio stations, paintings and dipping into their endowments to
stay afloat, causing anger among many donors. Have a look at the front page of
today?s WSJ, ?New Unrest on Campus as Donors Rebel?.
<strong>Americans losing their health insurance at rapid rate</strong>
If the earnings out of the nation?s big health insurance companies are any
indication, Americans are losing their health insurance at a rapid rate. According
to the Kaiser Family Foundation, for every percentage point increase in the
unemployment rate, the number of uninsured grows by roughly 1.1 million. For
more, take a look at page B1 of today?s WSJ, ?Health Plans Lose Members Due
to Layoffs?.
<strong>Companies will continue to shed employment</strong>
Take a look at page B4 of today?s WSJ, ?Employers Make Cuts Despite Belief
Upturn is Near?. According to a new Hewitt Associates survey, 54% of US
companies surveyed believe the economic upturn will begin at the end of 2009.
Yet, a large percentage have plans for further layoffs, salary reductions, and
benefit cuts.
<strong>Confidence among luxury consumers improves</strong>
According to researcher Unity Marketing, confidence among wealthy Americans
rose for the second consecutive quarter. The group?s Luxury Consumption Index
rose 1.5 points in 1Q to 43.2 from 41.7 in 4Q and from a record low of 40.3 in 3Q.
The group reported that while respondents were feeling better about their own
personal financial situation, it was noted that the luxury consumer would not come
back the way it was before, after this recession ends.
BondTrader_IHB
New member
<strong> Upside surprise to consumer spending</strong>
If there was an upside surprise in the GDP data, it was consumer spending, which
managed to post a 2.2% annualized advance. Many pundits are pointing to this
as a sign of stabilization in the most critical segment of domestic demand. Then
again, we know from the monthly retail sales data that the bulk of this first quarter
growth took hold in January, which followed a record 30% annualized plunge as
2008 drew to a close.
<strong>We advise investors to view consumer rebound as a blip</strong>
While most of the post-Lehman collapse in spending, output and credit supply is
behind us, we would advise investors to view the consumer rebound in 1Q as
'noise' or a blip in what is still very likely going to be a secular (multi-year)
downtrend. The process of liquidating debt and rebuilding depleted baby-boomer
savings is barely one-third over (with a savings rate of barely more than 4% from
0.2% a year ago.).
<strong>Difficult to see recession ending anytime soon</strong>
So, we view the recovery in consumer spending that has the bulls rather excited
as temporary and as we said, mostly reflecting a bounce in January. What we
see in the data supporting the consumer in 1Q was a $193 billion (annualized)
decline in tax payments by the household sector. Meanwhile, organic personal
income (excl government benefits) contracted at a 5.9% annual rate (-$154 bln).
In the absence of a recovery in wage and salary income, we think it will be very
difficult to paint a picture of the recession coming to an end anytime soon.
If there was an upside surprise in the GDP data, it was consumer spending, which
managed to post a 2.2% annualized advance. Many pundits are pointing to this
as a sign of stabilization in the most critical segment of domestic demand. Then
again, we know from the monthly retail sales data that the bulk of this first quarter
growth took hold in January, which followed a record 30% annualized plunge as
2008 drew to a close.
<strong>We advise investors to view consumer rebound as a blip</strong>
While most of the post-Lehman collapse in spending, output and credit supply is
behind us, we would advise investors to view the consumer rebound in 1Q as
'noise' or a blip in what is still very likely going to be a secular (multi-year)
downtrend. The process of liquidating debt and rebuilding depleted baby-boomer
savings is barely one-third over (with a savings rate of barely more than 4% from
0.2% a year ago.).
<strong>Difficult to see recession ending anytime soon</strong>
So, we view the recovery in consumer spending that has the bulls rather excited
as temporary and as we said, mostly reflecting a bounce in January. What we
see in the data supporting the consumer in 1Q was a $193 billion (annualized)
decline in tax payments by the household sector. Meanwhile, organic personal
income (excl government benefits) contracted at a 5.9% annual rate (-$154 bln).
In the absence of a recovery in wage and salary income, we think it will be very
difficult to paint a picture of the recession coming to an end anytime soon.
irvine_grad_IHB
New member
i'm starting to like this Paul Vigna guy: <a href="http://markettalk.newswires-americas.com/?p=1487">DowJones Markettalk: Wag the Dog</a>
SoCal78_IHB
New member
<img src="http://goldseek.com/news/2009/5-1tm/3.png" alt="" />
awgee_IHB
New member
The Greatest Cost:
An astute analyst posed the following question yesterday: "The current debate is centered on whether the Fed can take back the liquidity in time in order to prevent inflation. Suppose it can. Suppose they execute this perfectly. But if the Fed is able to flood the system with the liquidity (thus reducing the severity of the downturn) and take it back before it causes inflation, it seems there is a free lunch. We get something for nothing. So, assuming a perfectly executed game plan by the Fed, is there a cost? Do they keep rates low for a time, only to raise them a lot a year down the road - is that the cost? Or is there another cost?"
I'm short on time today, so I'll attempt a brief response.
First of all, while it often appears otherwise, finance provides no free lunch. The mispricing of Credit and misperceptions of risk in the marketplace have deleterious effects, although their true impact may remain unexposed for years. Indeed, the more immediate (and always seductive) consequences of loosened financial conditions tend to be reduced risk premiums, higher asset prices, and a boost to economic "output". Conventional analysis of monetary policymaking still focuses on "inflation" and "deflation" risks. I would strongly argue that our contemporary world has already validated the analysis that acute financial and economic fragility are major costs associated with market pricing distortions.
When the Federal Reserve collapsed interest rates following the bursting of the technology Bubble, the results seemed constructive. Stock and real estate prices inflated; a robust economic recovery ensued. There was at the time some recognition of the potential for real estate excesses. But this was seen as such a small price to pay in the fight against the scourge of deflation. It was not until 2007 that the nature of the true costs of a massive "reflation" began to come to light.
Many would today argue that it was simply a case of the Fed's failure to take the punchbowl away in time. Such analysis misses a key facet of Bubble dynamics. Once the Mortgage Finance Bubble gained a foothold there was absolutely no way policymakers were going to be willing to risk bursting such a consequential Bubble.
I see ample support for my view that Bubble dynamics have taken root throughout government finance. This unprecedented inflation includes Federal Reserve Credit, Treasury borrowings, Agency debt, GSE MBS guarantees, FHA and FDIC insurance, massive pension and healthcare obligations, the myriad new market support programs, etc. This Government Finance Bubble is domestic as well as global. Amazingly, the scope of the unfolding Bubble dwarfs even the Mortgage Finance Bubble. And, importantly, it is reasonable to presume that the Federal Reserve will find itself in the familiar position of being trapped by the risk of bursting a historic Bubble.
So I see the probabilities as very low that the Fed will reverse course and impose tightened liquidity conditions upon the marketplace. Actually, reflationary pressures may force the Fed to increase its Treasury holdings in an effort to maintain artificially low interest rates. At the same time, I don't see higher inflation as the greatest cost associated with this predicament. Much greater risk lies with the acute systemic fragility that I believe is inherent to major Bubbles. Similar to mortgage finance 2002-2007, the marketplace is significantly mispricing the cost - and failing to recognize the risks - of a massive inflation of government finance. And while every Bubble has its own dynamics and nuances, the unfolding Government Finance Bubble has even more precarious Ponzi Finance dynamics than the Mortgage Bubble.
The markets are on tract to accommodate two Trillion or so of Treasury issuance this year. This incredible amount of debt creation is in the range I would expect necessary to temporarily stabilize the U.S. ("services") Bubble Economy. Importantly, this amount of new finance both plugs financial holes and works to stabilize inflated income levels. From yesterday's income data, one can see that Personal Income was up 0.3% y-o-y to $12.04 TN. And while 0.3% is very meager growth, without massive government fiscal and monetary expansion (inflation) the economy would have suffered a destabilizing income contraction. Keep in mind that personal income has inflated 65% since 1998 and 33% from 2003.
I'll try to explain my belief that dangerous Ponzi Finance Dynamics are in play with the current course of policymaking. First, I view panicked policymakers as seeing no alternative than to try to sustain the current (deeply maladjusted) economic structure. A more natural course of economic adjustment - from finance and consumption-driven Bubble Economy to a more balanced system - was going to be much too painful to endure. So a massive government inflation was commenced in desperation - with the grandiose objective of revitalizing securities markets, housing prices, and the overall U.S. economy. I just don't see how this reflation goes much beyond stoking a susceptible artificial recovery.
First and foremost, with government finance now completely dominating the Credit system, I can't even begin to contemplate how this process might nurture an effective allocation of financial and real resources. Indeed, I see today's manifestations of Credit Bubble Dynamics as an extension of similar mispricing, misperceptions, and over-issuance that led to last autumn's near financial collapse.
Admittedly, the massive extension of government Credit and obligations works wonders in stabilizing a devastatingly impaired system. Inflationism is always seductive; Trillions worth is absurdly seductive. Yet this extra layer of debt does little to affect change to the underlying economic structure. Actually, a strong case can be made that it only delays and sidetracks the necessary adjustment process. And, importantly, this enormous additional layer of system debt exacerbates system vulnerability.
At the end of the day, a system is made or lost on the soundness of its underlying economic structure. I posit that a sound economic structure is reliant upon only moderate Credit growth and risk intermediation. Our system requires massive Credit expansion and intensive risk intermediation. I would also posit that there are no benefits - only escalating costs - to throwing massive Credit inflation upon an unhealthy economic structure. And, returning to Ponzi Dynamics, one of the major costs to such inflationism is a massive expansion of non-productive Credit - obligations that are created without a corresponding increase in real economic wealth producing capacity. The debt can only be serviced by the creation of more debt obligations.
The danger is that markets too easily and for too long accommodate massive Credit expansion during the boom. Federal Reserve policies are fundamental to this dynamic. But at some point and out of the Fed's control, as Wall Street learned, greed inevitably turns to fear and a reversal of speculative flows marks the onset of the bust. And it's the massive inflation of non-productive Credit that ensures the unavoidable crisis of confidence. Can the underlying economic structure service the mounting debt load or, instead, is it the massively inflating debt load that is sustaining a vulnerable economy? And it is in this vein that I fear the Government Finance Bubble is on track to destroy the Creditworthiness of the entire economy. And this Ponzi Dynamic is The Greatest Cost to what I fear is a continuation of unsound policymaking.
Doug Noland
An astute analyst posed the following question yesterday: "The current debate is centered on whether the Fed can take back the liquidity in time in order to prevent inflation. Suppose it can. Suppose they execute this perfectly. But if the Fed is able to flood the system with the liquidity (thus reducing the severity of the downturn) and take it back before it causes inflation, it seems there is a free lunch. We get something for nothing. So, assuming a perfectly executed game plan by the Fed, is there a cost? Do they keep rates low for a time, only to raise them a lot a year down the road - is that the cost? Or is there another cost?"
I'm short on time today, so I'll attempt a brief response.
First of all, while it often appears otherwise, finance provides no free lunch. The mispricing of Credit and misperceptions of risk in the marketplace have deleterious effects, although their true impact may remain unexposed for years. Indeed, the more immediate (and always seductive) consequences of loosened financial conditions tend to be reduced risk premiums, higher asset prices, and a boost to economic "output". Conventional analysis of monetary policymaking still focuses on "inflation" and "deflation" risks. I would strongly argue that our contemporary world has already validated the analysis that acute financial and economic fragility are major costs associated with market pricing distortions.
When the Federal Reserve collapsed interest rates following the bursting of the technology Bubble, the results seemed constructive. Stock and real estate prices inflated; a robust economic recovery ensued. There was at the time some recognition of the potential for real estate excesses. But this was seen as such a small price to pay in the fight against the scourge of deflation. It was not until 2007 that the nature of the true costs of a massive "reflation" began to come to light.
Many would today argue that it was simply a case of the Fed's failure to take the punchbowl away in time. Such analysis misses a key facet of Bubble dynamics. Once the Mortgage Finance Bubble gained a foothold there was absolutely no way policymakers were going to be willing to risk bursting such a consequential Bubble.
I see ample support for my view that Bubble dynamics have taken root throughout government finance. This unprecedented inflation includes Federal Reserve Credit, Treasury borrowings, Agency debt, GSE MBS guarantees, FHA and FDIC insurance, massive pension and healthcare obligations, the myriad new market support programs, etc. This Government Finance Bubble is domestic as well as global. Amazingly, the scope of the unfolding Bubble dwarfs even the Mortgage Finance Bubble. And, importantly, it is reasonable to presume that the Federal Reserve will find itself in the familiar position of being trapped by the risk of bursting a historic Bubble.
So I see the probabilities as very low that the Fed will reverse course and impose tightened liquidity conditions upon the marketplace. Actually, reflationary pressures may force the Fed to increase its Treasury holdings in an effort to maintain artificially low interest rates. At the same time, I don't see higher inflation as the greatest cost associated with this predicament. Much greater risk lies with the acute systemic fragility that I believe is inherent to major Bubbles. Similar to mortgage finance 2002-2007, the marketplace is significantly mispricing the cost - and failing to recognize the risks - of a massive inflation of government finance. And while every Bubble has its own dynamics and nuances, the unfolding Government Finance Bubble has even more precarious Ponzi Finance dynamics than the Mortgage Bubble.
The markets are on tract to accommodate two Trillion or so of Treasury issuance this year. This incredible amount of debt creation is in the range I would expect necessary to temporarily stabilize the U.S. ("services") Bubble Economy. Importantly, this amount of new finance both plugs financial holes and works to stabilize inflated income levels. From yesterday's income data, one can see that Personal Income was up 0.3% y-o-y to $12.04 TN. And while 0.3% is very meager growth, without massive government fiscal and monetary expansion (inflation) the economy would have suffered a destabilizing income contraction. Keep in mind that personal income has inflated 65% since 1998 and 33% from 2003.
I'll try to explain my belief that dangerous Ponzi Finance Dynamics are in play with the current course of policymaking. First, I view panicked policymakers as seeing no alternative than to try to sustain the current (deeply maladjusted) economic structure. A more natural course of economic adjustment - from finance and consumption-driven Bubble Economy to a more balanced system - was going to be much too painful to endure. So a massive government inflation was commenced in desperation - with the grandiose objective of revitalizing securities markets, housing prices, and the overall U.S. economy. I just don't see how this reflation goes much beyond stoking a susceptible artificial recovery.
First and foremost, with government finance now completely dominating the Credit system, I can't even begin to contemplate how this process might nurture an effective allocation of financial and real resources. Indeed, I see today's manifestations of Credit Bubble Dynamics as an extension of similar mispricing, misperceptions, and over-issuance that led to last autumn's near financial collapse.
Admittedly, the massive extension of government Credit and obligations works wonders in stabilizing a devastatingly impaired system. Inflationism is always seductive; Trillions worth is absurdly seductive. Yet this extra layer of debt does little to affect change to the underlying economic structure. Actually, a strong case can be made that it only delays and sidetracks the necessary adjustment process. And, importantly, this enormous additional layer of system debt exacerbates system vulnerability.
At the end of the day, a system is made or lost on the soundness of its underlying economic structure. I posit that a sound economic structure is reliant upon only moderate Credit growth and risk intermediation. Our system requires massive Credit expansion and intensive risk intermediation. I would also posit that there are no benefits - only escalating costs - to throwing massive Credit inflation upon an unhealthy economic structure. And, returning to Ponzi Dynamics, one of the major costs to such inflationism is a massive expansion of non-productive Credit - obligations that are created without a corresponding increase in real economic wealth producing capacity. The debt can only be serviced by the creation of more debt obligations.
The danger is that markets too easily and for too long accommodate massive Credit expansion during the boom. Federal Reserve policies are fundamental to this dynamic. But at some point and out of the Fed's control, as Wall Street learned, greed inevitably turns to fear and a reversal of speculative flows marks the onset of the bust. And it's the massive inflation of non-productive Credit that ensures the unavoidable crisis of confidence. Can the underlying economic structure service the mounting debt load or, instead, is it the massively inflating debt load that is sustaining a vulnerable economy? And it is in this vein that I fear the Government Finance Bubble is on track to destroy the Creditworthiness of the entire economy. And this Ponzi Dynamic is The Greatest Cost to what I fear is a continuation of unsound policymaking.
Doug Noland
freedomCM_IHB
New member
that was brief?
awgee_IHB
New member
Michael Pento
Posted May 5, 2009
It is disappointing to discover that the Harvard- and M.I.T.-educated Ben Bernanke did not learn while attending school that long-term interest rates must be set by the free market. Belatedly, the Chairman of the Federal Reserve is about to learn this valuable and costly lesson because these rates cannot be manipulated lower by any central bank for a great length of time.
On March 18th, the Federal Reserve committed to buying up to $300 billion in long-term Treasuries over the ensuing six months. After that announcement, the market initially celebrated and interest rates immediately fell on the 10-year note from 3.02% to 2.51%. But less than two months later, rates have spiked up to 3.17%, 66 bps higher than the reaction low on the day of the announcement.
That jump in rates places into jeopardy the nascent recovery in the market and economy because so much of Washington?s planned ?healing? is predicated on halting the fall in real estate prices, which have implications for consumers? and banks? balance sheets. Thirty-year fixed mortgages, which had fallen to a recent low of 4.625%, now face the pressure of a rising 10 year note, which has a direct impact on newly-minted mortgages (as opposed to LIBOR rates which affect ARMs).
The recent rise in Treasuries has created an incredibly important standoff between Mr. Bernanke and the bond vigilantes whose clients demand a real return on their investments.
You see, rates on the long end of the curve are primarily concerned with inflation; if inflation is expected to increase, rates must eventually reflect this by moving higher. I realize that today many are mistaking the deleveraging processes seen in stocks and real estate prices as deflation but as long as the Fed continues to monetize Treasury debt, the money supply will continue to increase dramatically and deflation in the long run will be off the table.
So just how realistic is the current level of Treasuries? As noted in my commentary written in October 2008 entitled ?The Debt vs. Interest Rate Conundrum?, the 46 year average constant yield for the 10 year note was 7.04%. The yield rose above 3% in June of 1958 and did not drop below that rate until November of 2008! Back in 1958 the monetary base was just $38 billion and the gross Federal debt was only $279 billion (60% of GDP). Today, base money has grown to $1.7 trillion - with more than half of that amount having been added just since last Autumn - and the National debt has skyrocketed to $11.2 trillion (80% of GDP). Therefore, from both an economic and historic perspective the yield on the Ten year note is unnaturally and unsustainably low.
Some may also say that today?s low rates are justified given the fact that Consumer Price Index increased just .1% for all of 2008. But when you look at the first three months of 2009, the CPI is already rising at a 2.2% annual rate; clearly, traders in the bond market are beginning to realize that deflation will not be our next major concern.
This, when you think about it, is completely justified given the tremendous increase in debt and money supply, which are the progenitors to rising inflation.
So how high will the Fed allow long-term rates to rise and how much money will they print in an attempt to stem that increase? Ben Bernanke may be surprised to learn that the more Treasuries he buys, the lower their prices will go. After all, printing money is the definition of inflation and investors simply cannot tolerate a negative return on their money for very long.
Will the Federal Reserve abandon its dangerous current course and let our economy experience a painful, but much needed recession or will it persist in its belief that long-term rates are under its dominion? Unfortunately, it seems clear that instead of capitulating to the bond market?s clear signals and reversing course, Bernanke will continue down this path. Indeed, if long-term rates go much higher from here - and it is pathetic to think our economy can?t stand a 10-year Treasury rate of much over 3%-- don?t be surprised if the Fed soon announces additional commitments to purchase even more government debt in a futile attempt to keep Treasury yields artificially low and to sustain the ?recovery? now supposedly in progress. And that, unfortunately, spells disaster for both an inflationary outcome and the viability of our debt-laden and credit-dependent economy in the not-too-distant future.
The market will not be fooled by this game indefinitely, as the 10-year yield is already hinting.
Posted May 5, 2009
It is disappointing to discover that the Harvard- and M.I.T.-educated Ben Bernanke did not learn while attending school that long-term interest rates must be set by the free market. Belatedly, the Chairman of the Federal Reserve is about to learn this valuable and costly lesson because these rates cannot be manipulated lower by any central bank for a great length of time.
On March 18th, the Federal Reserve committed to buying up to $300 billion in long-term Treasuries over the ensuing six months. After that announcement, the market initially celebrated and interest rates immediately fell on the 10-year note from 3.02% to 2.51%. But less than two months later, rates have spiked up to 3.17%, 66 bps higher than the reaction low on the day of the announcement.
That jump in rates places into jeopardy the nascent recovery in the market and economy because so much of Washington?s planned ?healing? is predicated on halting the fall in real estate prices, which have implications for consumers? and banks? balance sheets. Thirty-year fixed mortgages, which had fallen to a recent low of 4.625%, now face the pressure of a rising 10 year note, which has a direct impact on newly-minted mortgages (as opposed to LIBOR rates which affect ARMs).
The recent rise in Treasuries has created an incredibly important standoff between Mr. Bernanke and the bond vigilantes whose clients demand a real return on their investments.
You see, rates on the long end of the curve are primarily concerned with inflation; if inflation is expected to increase, rates must eventually reflect this by moving higher. I realize that today many are mistaking the deleveraging processes seen in stocks and real estate prices as deflation but as long as the Fed continues to monetize Treasury debt, the money supply will continue to increase dramatically and deflation in the long run will be off the table.
So just how realistic is the current level of Treasuries? As noted in my commentary written in October 2008 entitled ?The Debt vs. Interest Rate Conundrum?, the 46 year average constant yield for the 10 year note was 7.04%. The yield rose above 3% in June of 1958 and did not drop below that rate until November of 2008! Back in 1958 the monetary base was just $38 billion and the gross Federal debt was only $279 billion (60% of GDP). Today, base money has grown to $1.7 trillion - with more than half of that amount having been added just since last Autumn - and the National debt has skyrocketed to $11.2 trillion (80% of GDP). Therefore, from both an economic and historic perspective the yield on the Ten year note is unnaturally and unsustainably low.
Some may also say that today?s low rates are justified given the fact that Consumer Price Index increased just .1% for all of 2008. But when you look at the first three months of 2009, the CPI is already rising at a 2.2% annual rate; clearly, traders in the bond market are beginning to realize that deflation will not be our next major concern.
This, when you think about it, is completely justified given the tremendous increase in debt and money supply, which are the progenitors to rising inflation.
So how high will the Fed allow long-term rates to rise and how much money will they print in an attempt to stem that increase? Ben Bernanke may be surprised to learn that the more Treasuries he buys, the lower their prices will go. After all, printing money is the definition of inflation and investors simply cannot tolerate a negative return on their money for very long.
Will the Federal Reserve abandon its dangerous current course and let our economy experience a painful, but much needed recession or will it persist in its belief that long-term rates are under its dominion? Unfortunately, it seems clear that instead of capitulating to the bond market?s clear signals and reversing course, Bernanke will continue down this path. Indeed, if long-term rates go much higher from here - and it is pathetic to think our economy can?t stand a 10-year Treasury rate of much over 3%-- don?t be surprised if the Fed soon announces additional commitments to purchase even more government debt in a futile attempt to keep Treasury yields artificially low and to sustain the ?recovery? now supposedly in progress. And that, unfortunately, spells disaster for both an inflationary outcome and the viability of our debt-laden and credit-dependent economy in the not-too-distant future.
The market will not be fooled by this game indefinitely, as the 10-year yield is already hinting.