Worth thinking about who might be in control when the Fed loses it? Mr. Market? Politicians? Burocrats? Heaven help us!
Benn Steil and Paul Swartz, director of international economics and an analyst, respectively, at the Council on Foreign Relations, explain how the Federal Reserve has sustained "extraordinary lending and monetary policies," as Chairman
Ben Bernanke put it, by reinvesting proceeds from its mortgage-bond portfolio. Eventually, the Fed must exit from such stimulus, with the strategy involving a transformation, Steil and Swartz write. The plan also implies that the central bank will not be able to control any interest rate, including the federal-funds rate.
The Wall Street Journal (click on heading above for full article)
Showing posts with label interest rates. Show all posts
Showing posts with label interest rates. Show all posts
Thursday, August 19, 2010
Monday, August 9, 2010
Fed set to downgrade outlook for US
We wait with bated breath for Wednesdays Fed Statement.
By James Politi in Washington Full article in Financial Times (click heading above)
Published: August 8 2010 19:15 | Last updated: August 8 2010 19:15
"The Federal Reserve is set to downgrade its assessment of US economic prospects when it meets on Tuesday to discuss ways to reboot the flagging recovery.
Faced with weak economic data and rising fears of a double-dip recession, the Federal Open Market Committee is likely to ensure its policy is not constraining growth and to use its statement to signal greater concern about the economy. It is, however, unlikely to agree big new steps to boost growth."
By James Politi in Washington Full article in Financial Times (click heading above)
Published: August 8 2010 19:15 | Last updated: August 8 2010 19:15
"The Federal Reserve is set to downgrade its assessment of US economic prospects when it meets on Tuesday to discuss ways to reboot the flagging recovery.
Faced with weak economic data and rising fears of a double-dip recession, the Federal Open Market Committee is likely to ensure its policy is not constraining growth and to use its statement to signal greater concern about the economy. It is, however, unlikely to agree big new steps to boost growth."
Wednesday, July 14, 2010
Interest rate dilemma
"At 4.6 percent, 30-yr mortgage rates are already at historic lows, yet housing demand cratered as soon as the government's homebuyer tax credit expired in April. If you think lowering long-term rates and reducing the spread between short and long rates will stimulate the economy,think again. The steep yield curve is the most powerful thing the economy has going for it right now."
Caroline Baum
Caroline Baum
Friday, May 29, 2009
Breakeven on investing activities
On the inflation front, the GDP price index was revised to an annualized 2.8 percent increase in the latest GDP report issued today by the Commerce department.
Factoring these new estimates the following are the Minimum Rates of Return required to Breakeven after Tax and Inflation
In the 35% Tax Bracket -- 3.915%
In the 25% Tax Bracket -- 3.625%
In the 15% Tax Bracket -- 3.335%
This means that if you have money invested and are earning less than 3.3% on it at present, you will be losing purchasing power and will be worse off in the near future.
Translation: you are not earning enough on your money to buy the same amount of goods and services (the things you use to live on)a year from now than it costs you today for those same items.
This is, of course, a moving target. The current economic climate in the USA (and worldwide) will be getting worse from your point of view. The things you need to buy, like gasoline and food, will become more expensive at the same time that governments worldwide will be trying as hard as they can to keep rates of return down as low as they can.
What to do: find someone who can show you where you can earn more than 5% on your money. It can be done. But not by investing with the Government. The Government investments are among the most risky to your purchasing power that you can make now.
Factoring these new estimates the following are the Minimum Rates of Return required to Breakeven after Tax and Inflation
In the 35% Tax Bracket -- 3.915%
In the 25% Tax Bracket -- 3.625%
In the 15% Tax Bracket -- 3.335%
This means that if you have money invested and are earning less than 3.3% on it at present, you will be losing purchasing power and will be worse off in the near future.
Translation: you are not earning enough on your money to buy the same amount of goods and services (the things you use to live on)a year from now than it costs you today for those same items.
This is, of course, a moving target. The current economic climate in the USA (and worldwide) will be getting worse from your point of view. The things you need to buy, like gasoline and food, will become more expensive at the same time that governments worldwide will be trying as hard as they can to keep rates of return down as low as they can.
What to do: find someone who can show you where you can earn more than 5% on your money. It can be done. But not by investing with the Government. The Government investments are among the most risky to your purchasing power that you can make now.
Friday, March 20, 2009
Bond King Bill Gross says Bernanke's funny money isn't enough...
The latest from master bond investor Bill Gross: Total Fed money printing so far isn't enough to restart the American economy.
As Bloomberg reports: "We need more than that," Gross said today in a Bloomberg Television interview from Pimco's headquarters in Newport Beach, California. The Fed's balance sheet "will probably have to grow to about $5 trillion or $6 trillion," he said.
Gross is almost always right on these sorts of things... so expect more money printing... and expect it to lead to inflation in a few years. And expect commodity bets to keep working.
As Bloomberg reports: "We need more than that," Gross said today in a Bloomberg Television interview from Pimco's headquarters in Newport Beach, California. The Fed's balance sheet "will probably have to grow to about $5 trillion or $6 trillion," he said.
Gross is almost always right on these sorts of things... so expect more money printing... and expect it to lead to inflation in a few years. And expect commodity bets to keep working.
Bernanke wants mortgage rates at 3-4%; "massive assault"
From Dow Theory Letters:
Russell Comment -- They're calling it "The Rambo Fed." Bernanke is not fooling around any longer. He's playing all his cards. He's going to put a floor under housing and boost asset prices in an all-out attack on the bear market. Bernanke wants to drive mortgage rates down and refinance housing at 3-4%. On the news, the dollar swooned, the Euro surged, the long T-bond exploded higher by six points, and the yield on the ten-year Treasury bond sank to 1.51%. Whew, what a day and what an announcement.
The Bernanke plan -- smother deflation with money and put a floor under housing. Bernanke will in no way accept deflation. The Fed will go all-out in printing Federal Reserve Notes in its massive assault on deflation. Bernanke will accept a collapsing dollar rather than a repeat of the Great Depression. Actually, the Fed would like a lower (not a crashing) dollar. A lower dollar would be inflationary, which is what the Fed wants.
Russell Comment -- They're calling it "The Rambo Fed." Bernanke is not fooling around any longer. He's playing all his cards. He's going to put a floor under housing and boost asset prices in an all-out attack on the bear market. Bernanke wants to drive mortgage rates down and refinance housing at 3-4%. On the news, the dollar swooned, the Euro surged, the long T-bond exploded higher by six points, and the yield on the ten-year Treasury bond sank to 1.51%. Whew, what a day and what an announcement.
The Bernanke plan -- smother deflation with money and put a floor under housing. Bernanke will in no way accept deflation. The Fed will go all-out in printing Federal Reserve Notes in its massive assault on deflation. Bernanke will accept a collapsing dollar rather than a repeat of the Great Depression. Actually, the Fed would like a lower (not a crashing) dollar. A lower dollar would be inflationary, which is what the Fed wants.
Wednesday, March 18, 2009
Jim Rogers' prediction is coming true...
Master investment gurus Warren Buffett, Jim Rogers, and Marc Faber all went on record recently to say the U.S. government would start buying its own debt... which would stoke inflation down the road. And now it's happening...
The Federal Reserve just announced it would buy $300 billion of long-term Treasuries to keep interest rates low and help along the economic recovery. Of course, no real work or toil will create the money it takes to buy the debt. The money will be created at the stroke of a computer key. Short-term, it will boost a lot of assets. Long-term, it's going to be a disaster... so own gold, real assets, and bet on higher rates.
The Federal Reserve just announced it would buy $300 billion of long-term Treasuries to keep interest rates low and help along the economic recovery. Of course, no real work or toil will create the money it takes to buy the debt. The money will be created at the stroke of a computer key. Short-term, it will boost a lot of assets. Long-term, it's going to be a disaster... so own gold, real assets, and bet on higher rates.
Tuesday, March 10, 2009
The next bubble to pop?
You must recall, me saying on more than one occasion that I believed U.S. Treasuries were the next bubble to pop... If you're with me on that, then let's talk about something that might cause that bubble to pop... Ahhh...
Here we go! We have 3 separate auctions going on this week with a total of $92 Billion of Treasuries on the selling blocks...
We start with an astronomical $63 Billion of 3-year notes, followed the next day by $18 Billion of 10-year Notes, and finally $11 Billion of 30-year bonds...
Now... Let's circle back to the financing of our deficit...
Recall that many times I've explained how The deficit needs to be financed by foreigner purchases... And when those foreigner purchases aren't enough to finance the deficit, the Gov't only has two choices...
They can raise interest rates aggressively in an attempt to attract foreign investment... (but by doing so, would bring their economy to their knees) -OR- The Gov't can allow / force a debasement of their currency, a general weakening if you will, to allow those purchases to be made at a "discount".
For you see, any foreign investment into Treasuries, has to be made with dollars, so the foreigner needs to convert their currency for dollars... If those dollars are at a "discount" then the foreign investors gets the bargain!
So... Here we go with the big crescendo... The fears late yesterday and in the overnight markets is that these auctions carry notes and bonds with yields that just aren't of the making to attract enough investment interest to be covered... Well... If the auction doesn't go well, that means we have a financing problem, and with our economy in the shape it's in, there's no ability to aggressively raise interest rates... So... the only choice is to have a weaker dollar! And here's where I get to mock those that believed that "deficits don't matter"... They all come home to roost eventually folks...
Here we go! We have 3 separate auctions going on this week with a total of $92 Billion of Treasuries on the selling blocks...
We start with an astronomical $63 Billion of 3-year notes, followed the next day by $18 Billion of 10-year Notes, and finally $11 Billion of 30-year bonds...
Now... Let's circle back to the financing of our deficit...
Recall that many times I've explained how The deficit needs to be financed by foreigner purchases... And when those foreigner purchases aren't enough to finance the deficit, the Gov't only has two choices...
They can raise interest rates aggressively in an attempt to attract foreign investment... (but by doing so, would bring their economy to their knees) -OR- The Gov't can allow / force a debasement of their currency, a general weakening if you will, to allow those purchases to be made at a "discount".
For you see, any foreign investment into Treasuries, has to be made with dollars, so the foreigner needs to convert their currency for dollars... If those dollars are at a "discount" then the foreign investors gets the bargain!
So... Here we go with the big crescendo... The fears late yesterday and in the overnight markets is that these auctions carry notes and bonds with yields that just aren't of the making to attract enough investment interest to be covered... Well... If the auction doesn't go well, that means we have a financing problem, and with our economy in the shape it's in, there's no ability to aggressively raise interest rates... So... the only choice is to have a weaker dollar! And here's where I get to mock those that believed that "deficits don't matter"... They all come home to roost eventually folks...
Tuesday, February 3, 2009
Inflation? bond traders bet on it
Bond traders are making bets the inflation is coming to the U.S.
The yield on a 30-year bond has risen to 3.6% today, about 100bps higher than all-time lows set in late 2008. Might not seem like much, but it’s pretty breakneck for the bond world… economists polled by Bloomberg didn’t predict yields that high until 2010.
The yield on a 30-year bond has risen to 3.6% today, about 100bps higher than all-time lows set in late 2008. Might not seem like much, but it’s pretty breakneck for the bond world… economists polled by Bloomberg didn’t predict yields that high until 2010.
Another argument for higher interest rates
This is a little technical, courtesy Niels Jensen , Managing Partner of Absolute Return Partners based in London, courtesy of John Mauldin. Thanks John, your work is much appreciated:
"So when we are told that the bailout cost, although large, is still manageable, it is only half the story.
The loss of tax revenue is another nail in the coffin and could lead to a dramatic – and unpredicted - rise in public debt. Have you heard any mention of that from your government?
At this point I need to introduce something as alien as the "flow-of-funds accounting identity"3:
Δ(G-T) = Δ(S – I) + ΔNFCI4
I rarely throw formulas at you for the simple reason that it scares many readers away. I urge you to stay with me for a bit longer, though, because this formula is critical in order to understand how the government response to the current crisis is likely to impact interest rates longer term. The equation states that any change in fiscal stimulus (Δ(G-T)) must equal the change in private sector net savings (Δ(S-I)) plus the change in net foreign capital inflows.
Translation: If our government stimulates the economy through public spending, as it is currently doing in spades, we must either save more or we have to rely on foreigners being prepared to invest in our country. There are no exceptions to this rule.
The key question, as our economic adviser Woody Brock points out, is what will cause this equation to hold true? It is quite simple. We will save more if we get paid more to do so (through higher interest rates) or if we are so scared of the future that we stop spending and start investing instead.
Foreign investors are no different. Now, with the trillions of dollars being spent around the world to shore up our financial system, the fear factor alone is not going to be enough. Higher – possibly much higher - interest rates will be required to ensure sufficient savings.
Obviously, there is another option at the government's disposal. The central bank can monetize some or all of the deficit by buying the bonds issued by the government. This line of action will keep Δ(G-T) down; hence the need for increased private savings (and/or capital inflows) drops accordingly. The problem with this approach, as an old Danish saying states, is that it is like wetting your pants to stay warm. Monetization executed on a big scale is highly inflationary in the long run, inevitably driving bond yields higher.
The good news is that we are very unlikely to loose control of inflation in the short run. The economy is simply too weak for that to happen.
"So when we are told that the bailout cost, although large, is still manageable, it is only half the story.
The loss of tax revenue is another nail in the coffin and could lead to a dramatic – and unpredicted - rise in public debt. Have you heard any mention of that from your government?
At this point I need to introduce something as alien as the "flow-of-funds accounting identity"3:
Δ(G-T) = Δ(S – I) + ΔNFCI4
I rarely throw formulas at you for the simple reason that it scares many readers away. I urge you to stay with me for a bit longer, though, because this formula is critical in order to understand how the government response to the current crisis is likely to impact interest rates longer term. The equation states that any change in fiscal stimulus (Δ(G-T)) must equal the change in private sector net savings (Δ(S-I)) plus the change in net foreign capital inflows.
Translation: If our government stimulates the economy through public spending, as it is currently doing in spades, we must either save more or we have to rely on foreigners being prepared to invest in our country. There are no exceptions to this rule.
The key question, as our economic adviser Woody Brock points out, is what will cause this equation to hold true? It is quite simple. We will save more if we get paid more to do so (through higher interest rates) or if we are so scared of the future that we stop spending and start investing instead.
Foreign investors are no different. Now, with the trillions of dollars being spent around the world to shore up our financial system, the fear factor alone is not going to be enough. Higher – possibly much higher - interest rates will be required to ensure sufficient savings.
Obviously, there is another option at the government's disposal. The central bank can monetize some or all of the deficit by buying the bonds issued by the government. This line of action will keep Δ(G-T) down; hence the need for increased private savings (and/or capital inflows) drops accordingly. The problem with this approach, as an old Danish saying states, is that it is like wetting your pants to stay warm. Monetization executed on a big scale is highly inflationary in the long run, inevitably driving bond yields higher.
The good news is that we are very unlikely to loose control of inflation in the short run. The economy is simply too weak for that to happen.
Higher interst rates are inevitable!
As things currently stand, the government and the Fed may take any steps they want to stabilize the economy, no matter how much these steps cost.
Now, the government is like a fat schoolboy taking candies from a well-dressed stranger. It has spent $8.5 trillion of future taxpayers' and foreign creditors' money guaranteeing debt and bailing out failed companies. But the government doesn't have its own money to pay for these remedies. So it borrows and inflates.
Analyst Jim Bianco's research shows the government's remedies have now cost America more than World War II. The Fed is expanding the money supply at a current rate of 151% a year... and in the last three months, the Treasury borrowed $485 billion. It has never borrowed this much in 12 months.
In 2009, the government will run the world's first trillion-dollar deficit.In 2010 or 2011 – when the Chinese arrangement ends – the Bond Market Vigilantes will return. Watch gold for the signal.
Gold is a much smaller market than the bond market, so it's more nimble. When gold makes a new high above 1,050, you should immediately start looking for shelter. It means the Chinese arrangement is winding down and the Vigilantes are coming.
The Vigilantes will run interest rates up by at least 10%.
They will force the U.S. economy to deal with its debt problem, the root of all our troubles today. No more bailouts, no more government guarantees, no more expensive spending programs, and no more printing money. This is what the situation was like in the early 1980s. It was chaos, but those who prepared ahead of time made a fortune.
This time around, while the vigilantes restore balance, you should own only gold, cash, and short-term money-market instruments. In the meantime, you should use the stability to earn as much income as you can by selling options against blue-chip stocks and holding high-yield bonds and other income investments.
These investments prosper when there are no Bond Market Vigilantes around.
Now, the government is like a fat schoolboy taking candies from a well-dressed stranger. It has spent $8.5 trillion of future taxpayers' and foreign creditors' money guaranteeing debt and bailing out failed companies. But the government doesn't have its own money to pay for these remedies. So it borrows and inflates.
Analyst Jim Bianco's research shows the government's remedies have now cost America more than World War II. The Fed is expanding the money supply at a current rate of 151% a year... and in the last three months, the Treasury borrowed $485 billion. It has never borrowed this much in 12 months.
In 2009, the government will run the world's first trillion-dollar deficit.In 2010 or 2011 – when the Chinese arrangement ends – the Bond Market Vigilantes will return. Watch gold for the signal.
Gold is a much smaller market than the bond market, so it's more nimble. When gold makes a new high above 1,050, you should immediately start looking for shelter. It means the Chinese arrangement is winding down and the Vigilantes are coming.
The Vigilantes will run interest rates up by at least 10%.
They will force the U.S. economy to deal with its debt problem, the root of all our troubles today. No more bailouts, no more government guarantees, no more expensive spending programs, and no more printing money. This is what the situation was like in the early 1980s. It was chaos, but those who prepared ahead of time made a fortune.
This time around, while the vigilantes restore balance, you should own only gold, cash, and short-term money-market instruments. In the meantime, you should use the stability to earn as much income as you can by selling options against blue-chip stocks and holding high-yield bonds and other income investments.
These investments prosper when there are no Bond Market Vigilantes around.
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