Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in the METAVERSE Stocks Universe - 8th Dec 21
Stock Market Sentiment Speaks: I Expect 15-20% Returns For 2022 - 8th Dec 21
US Dollar Still Has the Green Light - 8th Dec 21
Stock Market Topping Process Roadmap - 8th Dec 21
The Lithium Breakthrough That Could Transform The Mining Industry - 8th Dec 21
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Cutting Through the Fed U.S. Interest Rate Tightening Claptrap

Interest-Rates / US Interest Rates Jan 08, 2010 - 07:23 AM GMT

By: Mike_Larson

Interest-Rates

Best Financial Markets Analysis ArticleThere’s a real debate waging on Wall Street. Just like that famous scene from the 1974 movie Chinatown, where Faye Dunaway’s Evelyn Mulwray goes back and forth saying “She’s my daughter … She’s my sister,” today’s pundits keep debating the Fed. “The Fed will tighten” … “The Fed won’t tighten” … “The Fed will tighten” — the commentary shifts with each new data point that crosses the transom.


Me? I’m going to keep things simple. This Federal Reserve, under the guidance of Helicopter Ben Bernanke, will NOT tighten until it has absolutely no other choice.

Forget the day-to-day noise.

Forget the speech-making from Fed governors and board members.

Forget the economic data crossing your screen.

Instead, focus on what is REALLY driving the actions of Bernanke and crew: Fear of the “Double Dip.”

1937-38 on Bernanke’s Brain

The latest economic data leaves no doubt in my mind that the economy is improving. Whether you’re talking about the slowing pace of layoffs … rising auto and retail sales … or the broadest measure of economic output, the GDP, you can see that we’ve put the deepest depths of the recession behind us.

Yes, a good portion of this is because of government spending and stimulus. But it’s still a recovery. And it’s happening at the same time that market-based indicators of inflation fears (TIPS spreads, the yield curve, etc.; I covered them in more detail on November 13) are climbing inexorably higher.

All of this merits a shift in monetary policy. The Fed should start raising short-term interest rates, and more aggressively curtail its emergency support measures.

But the Fed just won’t do it. Instead, policymakers keep going out of their way to stress that nothing is going to change. Fed Governor Elizabeth Duke was just the latest, stressing earlier this week at a Raleigh, N.C. event that …

“The FOMC continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. Such policy accommodation is warranted to provide support for a return over time to more desirable levels of real activity and unemployment in the context of price stability.”

Why? Why the intense resistance to tightening policy?

Bernanke wrote the book on massive money printing.
Bernanke wrote the book on massive money printing.

Look at Chairman Bernanke’s background. Massive money printing is at the heart of his entire philosophy. He literally wrote the book on this subject — the book that’s now essentially the Fed’s operating manual on precisely how to print enough money to overwhelm almost any economic collapse.

Bernanke believes in his heart of hearts that the Fed prematurely hiked rates in 1937, prolonging the Great Depression into 1938 and beyond. He’s convinced that that single, momentous blunder of history is what doomed the world to a nasty “double dip.”

So, yes, the Fed may give lip service to inflation concerns. And it may banter about reducing a few supportive programs at the very periphery of the markets. But Bernanke’s actions speak much louder than his words.

No matter how much he protests … no matter how many new bubbles he creates as a side effect of his easy money policies … he will consistently bend over backwards to avoid raising rates. And he will continue to do everything in his power to pump more and more liquidity into the economy.

Treasury to Torpedo the U.S. Balance Sheet, too!

Ideally you’d have some counterbalancing activity over at Treasury. You’d want to see tighter fiscal policy considering monetary policy is all-out expansionary, or vice versa.

But neither the Obama administration nor Congress is showing any fiscal discipline. They’re coming up with new and interesting ways to torpedo the U.S. balance sheet instead!

Why?

It all goes back to the 1937-38 analog. The folks I like to call “Krugmanites” (after New York Times economic columnist Paul Krugman) are in charge in Washington. Krugman warned in a recent column that people like me — those asking for actual rationality in fiscal and monetary policy — are crazy, saying …

“Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

“But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.”

There is zero doubt in my mind that Treasury Secretary Tim Geithner is singing from the same hymnal. So are most other members of President Obama’s economic team and a large contingent in Congress. They’re NOT going to raise taxes and cut spending to get the deficit under control. If anything, they’re going to spend even more borrowed money to stimulate the economy.

Our officials in Washington are showing no signs of fiscal discipline.
Our officials in Washington are showing no signs of fiscal discipline.

What this Means for Your Investments

The philosophical approach that’s dominating Washington policy has obvious investment implications. A few of them:

First, several people have expressed disbelief — or worse — at my call from this past spring that housing was bottoming. They keep saying things along the lines of “as soon as the government curtails its support for housing and mortgages, the market will tank again.”

My response: Forget about what SHOULD happen. Think about what WILL happen. And it’s clear to me the government subsidies are going to continue until the cows come home!

Do you really think the Fed is going to stop buying mortgage backed securities cold turkey on March 31, 2010, if doing so might cause home loan rates to surge?

Do you really think the government is going to force Fannie Mae and Freddie Mac to shrink their mortgage portfolios at a time when everybody’s worried about credit availability?

Do you really think the Federal Housing Administration is going to significantly tighten FHA loan standards when the program is pretty much the only game in town for borrowers with lousy credit and little down payment money?

Of course not!

Fannie Mae, Freddie Mac, and Ginnie Mae — which backs FHA securitizations — now help finance roughly 9 out of 10 U.S. mortgages. The mortgage backed securities market is dramatically overpriced, and being propped up by Fed buying. There is no way in you-know-where Congress, the Fed, or the administration will back away and upset the apple cart.

Expect the Fed’s rock-bottom interest rate policy to drive long-term bond prices lower.
Expect the Fed’s rock-bottom interest rate policy to drive long-term bond prices lower.

So if you’re looking for a renewed plunge in housing as a result of government aid being cut off, forget about it. It ain’t going to happen!

Second, the Fed’s extreme resistance to raising short-term interest rates virtually ensures that long-term inflation expectations will climb. That, in turn, will help drive long-term interest rates higher and long-term bond prices lower.

Last year was the single-worst year for long-term Treasury bonds in decades. If you got hammered in 2009, don’t let 2010 result in more of the same. Consider dumping your long-term government debt (Short-term bills with maturities of three months or less are fine).

Third, consider starting to trim your holdings of long-term junk and corporate bonds, as well as municipals. Shrinking spreads — the difference in yield between non-Treasury bonds and Treasuries of equivalent maturity — have helped offset the impact of rising Treasury rates.

But we’ve already seen extreme spread compression. That tells me we’re in the late innings of this move. I’m also concerned because everybody and his sister has dog-piled into virtually every corner of the bond market.

Their belief? That non-Treasury bonds are impervious to price declines resulting from higher rates. Rest assured they are not. Think about taking some of your profits off the table. Now.

Until next time,

Mike

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in