The Department of Labor’s (DOL) jobs number was a big miss! So much so, that it led me to think that it might have been “a fix.” The reactions of many ranged from dis-belief to comments of the markets being nothing more than “a casino” as one trader remarked on the Talking Stocks Forum message board.
Now, at putting myself at risk of sounding like another “conspiracy theorist crackpot,” let me explain my rationale on this idea. Of course, readers should decide for themselves, but I only ask that readers consider the evidence.
First, keep in mind that the ADP payroll report showed 100,000 more private payroll jobs just the day before the DOL release. ADP is a very large payroll processing firm, and they have direct access to the payroll systems of many private employers. So, it stands to reason that ADP can see first hand if private employers are adding to or subtracting from their payrolls.
In the recent past, many popular media and government pundits have attempted to diminish the ADP numbers as being less reliable than the DOL’s numbers, but this attempt at slighting ADP’s results seems to be more of a miss direct attempt to inflate the value of the government report versus the actual payroll results of a top vendor in the payroll services sector.
The government report uses many adjustments including seasonality factors and a birth-death model for businesses that many experts question. The ADP number on the other hand, at least as it relates to private payrolls, is pretty much an un-doctored number.
So, if one assumes that the ADP monthly jobs report is is closer to reality (at least with private payroll figures), then let’s move on to some reasons that would be motivations for the Fed to hold interest rates steady (and keep bond interest rates low).
The first reason is the monthly Treasury bond auctions which occur this week in the U.S. As I have noticed time and time again, bond yields tend to fall in the week of each re-funding. However, there has to be some sort of fear of bad news in the air to drive down interest rates, and this bad news often seems to arrive in the week of each month when the Fed holds its largest bond auctions.
With our large sovereign debt ($19 trillion), it makes sense to try to auction off new treasury notes and bonds at as low of an interest rate as the markets will accept. As it is now, the US can only cover its interest rate payments, and that is at a stretch without sacrificing other areas of the bloated budget.
So, from the federal government’s position, it makes sense to try and auction off new treasury notes and bonds at the lowest possible interest rates. During times of fear, investor money typically rotates into US treasuries as they are perceived to be both liquid and safe investments. Bond prices tend to rise (and interest rate yields fall) during times of fear, due to the safety perception of this investment.
Yet, the Federal Reserve had been preparing us for another rate hike either in June or July, which is contradictory to the directions that yields take during times of worry. A rate increase seemed to be increasingly likely, and the short end of the yield curve was rising in anticipation of it. Rising interest rates create a problem of interest rate coverage– a financial concept that says that net tax receipts have to at least cover the interest rate payments on the treasury notes and bonds.
So, if the Treasury can auction off those debt instruments at lower interest rates, then those low rates remain intact to maturity some ten to thirty years out. Since interest rates are at near historic lows, and the amount of US debt is very large, it only makes sense for the government to try to auction off their paper at the lowest possible rates.
Now, back to the Fed. The US central bank had one caveat to its forecasts, and that was that an interest rate hike would be “data dependent.” On Friday, that data came in weak. So, the stunning low jobs number did “the dirty work” for the auctions by driving bond yields down and delaying a threatened Fed hike in June.
The low jobs number also helps several other concerns as far as keeping interest rates low:
Those examples include “Brexit,” China, and Europe. In the case of Brexit, the Fed can now avoid a mistake of raising rates right before the Brexit vote in the UK. A vote to leave the European Union could un-glue markets worldwide, and so keeping the US interest rates on hold (and thus keeping the US dollar soft) lessens the chance of large capital outflows from Europe and the UK, which could trigger a financial crisis.
And the lack of a Fed rate hike also keeps China from doing a devaluation of the yuan. The last major yuan devaluation occurred on August 24th of last year, and so take a look at your stock charts to see what happened last year on that date and you will understand why it is important for the Fed not to raise rates while China’s economy is weak!
China’s currency is weak but still pegged to the US dollar, so with the greenback now conveniently weakened, that takes pressure off China having to de-value its currency. A weaker dollar is in essence, a de facto devaluation of the Chinese currency relative to other currencies around the world. Yet, since China does not have to officially de-value its currency, the world financial markets remain calm.
So, regardless of whether you buy into my thesis that the weak jobs number was contrived, there is no denying that the result plays right into the hands of what the global elite were secretly hoping for.
So, welcome to the casino! The house welcomes you to pull up a chair, and place your bets on the next roll of the roulette wheel. The markets continue to gyrate without any consistent direction because the global elites (who control the financial institutions) are trying to keep a weak and sensitive financial system from falling out of balance.
So, we lurch from one crisis point to the next. While the Fed and other central banks talk about a controlled economic recovery, what they really seem to be doing is trying to keep currency crosses moving in a narrow channel so as to avoid a sudden spiral of financial conditions.
NOW, if all of what I have speculated on seems to make no sense, then I ask that you at least consider that the US dollar daily chart shows the buck was hitting the late January down-trend resistance line. That line is also very close to the down-trending 50 day line. So, when the greenback hit that yellow-dotted line on my chart, that was a natural resistance point where a reversal could take place….and it sure did!
Take a look….
So, was the Jobs number a fix? Whether or not you accept the theory of a contrived report, then perhaps we can agree on this: the US dollar chart was set up to reverse, and it was conveniently right for it to do so as far as “the house” was concerned! The Fed saves face because it cannot raise rates in the wake of weak data, and the day of reckoning in the financial markets is delayed yet again.
Today, I wish to follow-up on a couple of previous blogs with recent updates from the news.
Recently, as I predicted in my blog last month, China came down pretty hard on the Bitcoin. They basically have barred the on-line services like Baidu (BIDU) and Tencent (TCEHY) from accepting payment in Bitcoin. Furthermore, pressure was put on China’s largest bitcoin exchange from accepting Yuan in exchange for Bitcoin. I theorized that countries with positive balance sheets and balance of trade such as China had the most to fear from the Bitcoin. As a result of these actions in China, the value of the Bitcoin collapsed by hundreds of dollars in the past week.
Since my blog, I have come across other opinions, and I have refined my views of the upstart currency. More precisely, it seems that the Bitcoin is an exchange medium lacking any store of value beyond the perceptions of what people believe it is worth. For example, even fiat currencies (such as the US dollar and most all foreign government currencies) are backed by assets such as debt instruments, and further backed, in an indirect way by Special Drawing Rights (SDRs) of the International Monetary Fund (IMF) and World Bank. Also, they are implicitly backed in an indirect way to some small extent by gold.
However, the Bitcoin has no store of value backing it. Its value is simply the result of supply and demand. So, if perceptions are that it is not such a great investment, then its value should fall, because Bitcoins are not anchored by any stores of value. Despite all of its inherent weaknesses, the US dollar, by comparison, is anchored in value by “assets” which mostly consists of debt paper issued by the US treasury. Also, as I mentioned in my previous blog, the value of a country’s currency has historically been linked to the Gross Domestic Product (GDP) of a given country. The US has the highest GDP still, which is one reason its currency remains the world’s main reserve currency. (As I have also pointed out numerous times, the US dollar has many problems these days too, but for the simple comparison versus the Bitcoin, I have to spell out reasons why the world economic community accepts dollars more than other currencies.)
Also, as I think about it, the Bitcoin is not so much of a challenge to paper currencies, but more of a challenge to other forms of electronic payment systems. Electronic payers such as the credit card companies like Visa (V), Mastercard(MA) and Discovery, as well as Paypal, Ebay’s (EBAY) popular payment system, might be more threatened by Bitcoin.
However, if Bitcoin is viewed in this light, then what makes Bitcoin so special? How is it any better than Visa or Paypal? I suppose the argument can be made that Visa or Paypal requires one to convert between currencies if doing business overseas or traveling abroad–Bitcoin, if it is to be accepted worldwide, could conceivably do away with currency exchange and its costs. Otherwise, I cannot think of any advantage that Bitcoin offers over a service like Paypal.
Well, the Federal Reserve finally announced its tapering program which is scheduled to begin in January. In brief, the Fed will reduce bond purchases from $85 billion a month to $75 billion. In essence, it’s a small start, but nonetheless, a reduction in the wild money-printing that the Fed has resorted to in an attempt to induce greater growth and inflation in a weakened economy. In order to get the stock market and other risk investors on board with the pullback of the free-flowing “punch,” the Fed chairman, Ben Bernanke, announced that zero interest rate policy would continue at least until 2015 and perhaps 2016.
Bingo! As I pointed out long ago in two previous blogs well over a year ago, the Fed was planning to hold short term interest rates near zero at least until early 2016 even though the news media and market pundits acted like this could not be predicted… and the reason I said this was one of economic mechanics. In short, the Fed’s Quantitative Easing (QE) policies were sacrificing the purchase of short term treasury bills for longer term treasury notes and bonds, as well as long-dated mortgage-backed securities. In essence, the Fed was whittling down its holdings of short term treasury bills to zero!
Further, as I alluded to then, the Fed would not be able to sell any maturing long term paper until 2016, which would be the earliest date that the Fed would have capital to buy back some t-bills. Why this is important is that the Fed can’t mechanically raise short term interest rates without having the t-bills on its balance sheet; once on the balance sheet, the Fed could then sell the bonds into the open market, thus forcing interest rates higher as it has done in the past. (The Fed does have an untested back-up plan that would force banks to sell excess reserves and thus, accomplish the same task if it could not do it itself.)
I just checked the Fed’s balance sheet, and it shows a big ZERO next to Treasury Bills, so it still has no t-bills. In fact, you may wonder how does the Fed hold interest rates near zero if it doesn’t own any? That’s a good question, and all I can say is that it has a marvelous “communication strategy” that effectively compels the big market players in debt securities to keep these short term debt instruments near zero. That communication strategy basically acts to keep all members of the banking and investing communities in line so if one acts out of line, the other members, will in theory, make the renegade member pay dearly with financial losses.
However, to help soothe the nerves of the debt trading institutions that support the t-bill market, the feds do a good job of containing inflation, if only by modifying the measurements of what goes into a Consumer Price Index (CPI) or other official inflation reports. Just as important is a news media that does not question how inflation is measured officially, and so long as the accepted notion is that inflation does not exist, the Fed is able to contain short term rates for a very long time with the cooperation of all parties.
This all works fine in Washington, but I can’t help but notice that same car model I bought new five years ago now costs about 20% more–or that the same groceries I buy each week are costing me about 10% more than they did a year ago. Or how about that mobile phone bill I pay each month? Each time a member of my family upgrades to the latest, greatest smart-phone, I notice new surcharges added to my bill–permanently. From just two years ago, my monthly phone bill has jumped over 25%!
If you don’t believe that inflation is worse than officially reported, then try this: watch an old movie from 40, 50 or 60 years ago and pay close attention to any price or wage mentioned or shown in the movie. It might be the cost of a loaf of bread or a gallon gas or how much a store clerk earned–compare that to today’s prices. You will be amazed at how much more these things cost compared to only a couple generations ago! By my own back-of-the-envelope calculations, general inflation has increased by 1,000% since the mid-1950s (though I think wage inflation has lagged considerably). Yet, the calculators that use official government statistics will show inflation has increased by “only” 730%. That car of mine that I mentioned (now transferred to my college-aged son) is supposed to cost only 8.3% more, but as I say, it costs about 20% more for the same model today which also comes with fewer features in its standard offering. So why don’t more people ask where is the dis-connect?
So, what does this mean for investors? In short, the Fed will continue to keep the punch bowl out for those who seek to use local, cheap debt to create a carry trade into more rewarding payoffs elsewhere. This policy should continue to create the leverage that the bloated markets require to continue to reward the risk investors. So long as the market participants know that the Fed will keep the punch bowl out (all they had to do was read my blogs from 18 months ago!), they will know how to play the game to reap their gains.
However, the Fed is now prepared to turn off the fountain that feeds the punch bowl so that it won’t be over-flowing like it has been in 2013; but the punch bowl will be left out for another couple years at least. Or, will it? What could cause short term interest rates to rise sooner? In my opinion, only a rapidly rising inflation rate, and one that could not be hidden by government contrivances, could cause a re-think on rates. If inflation were to take off in strong manner in 2014 or 2015, this could compel market participants to start selling off t-bills at higher rates and thus forcing the proverbial punch bowl off the party table.
Indeed, the seeds for a massive inflation have been sewed into the fabric of the economy via Fed stimulus measures, but so far, those seeds have failed to induce an increase in the velocity of money circulating in the economy. If that should change, then the markets could force short term interest rates higher, and the Fed could either print money to try to contain those rates or sit idly by while the bond markets take control. If the bond markets were to get the upper hand, then a stock market crash and general asset crash could be in the cards. If, somehow the Fed were to print money to buy those rising t-bills, then the value of the US dollar itself could be called into question.
Even now, the market pundits talk of a rising dollar as the Fed begins its tapering program, but I can’t help but think that the communication strategy by these pundits is failing miserably….as I look at the US Dollar Index chart (see below), the US dollar recently experienced a “death cross” and the breakdown from a head-and-shoulders pattern, which are technical terms that mean the forex community of currency traders are selling dollars, and not buying them, as the pundits would have us believe.
Now, if only the massive communications strategy against gold could also begin to fail as it seems to be failing against the dollar supporters, then this could get to be a very interesting 2014!
It’s been a busy month for me which has not allowed much time to post my latest observations on the markets. I would like to remind readers that I do post on the Ace Talking Stocks Forum on a fairly regular basis under the name of “AceStockPlayer”, and there are a number of other traders who also post daily commentary on stocks, the markets or whatever grabs them at any moment in time…the Forum is open to public view (please read the disclaimers on the site before contemplating any actions on your part and always seek the advice of a registered stock broker or investment advisor– note that the forum does not offer any such advice–the forum represents only the opinions of anonymous posters which are not intended as investment advice.)
…and finally, I wish you a very Happy Holiday season! Thanks, and I hope you return again and again in 2014. It promises to be an exciting year around here!
Copyright 2010-2014 by Chiron Information Services. It is acceptable to link blogs from AceStockTrader.com so long as credit is given for the source of this original content. Otherwise, written permission is required to reproduce any of our blogs.
It’s no secret by now that recent comments by the Federal Reserve’s Chairman about “tapering” bond purchases has triggered significant turbulence in stock, bond and commodity markets around the world. The imbalances have been triggered by sudden withdrawal of carry-trade financing of simple, profitable trades–trades that are profitable only so long as the Fed remains “status quo” in its stance with quantitative easing.
The Fed’s official announcements have never wavered on the $85 billion a
month purchases…Chairman Bernanke only suggested “tapering” during Capital
Hill testimony when put to the question by a Congressman–and followed that up a week later at a news conference by stating that tapering
would only occur IF market conditions continued to improve with the
word IF emphasized.
So, for one thing, it seems that on the surface, markets over-reacted since the Fed has not done anything yet to slow down bond purchases from it’s $85 billion a month pace. The second thing to consider is that even when the Fed does start to taper (as soon as September according to some prognosticators), that it will only be slowing down its purchases to a smaller monthly number; it almost certainly won’t be ending its bond purchases “cold turkey.”
Yet, the world markets reacted to this tapering speculation as if the Fed had not only ended its bond purchases, but was out-right raising interest rates. Of course, Fed officials were wheeled out in the past few days to calm markets by telling the world that short-term interest rates would remain low (near zero) for an extended period of time.
Well, I say, of course!
(Image of the Federal Reserve Building, Washington, DC)
I personally believe that most people, including a number of market pros, do not really understand Fed policy or the complexities of how the Fed conducts its policy. A Case in point were the comments by esteemed money manager, Ron Baron on CNBC-TV this past week. Mr. Baron said he attended a private dinner where former US Treasury Secretary Tim Geithner spoke. According to Mr. Baron, the former Treasury Secretary said that the Fed would not end its QE (including tapering) for about 5 years.
When questioned about this, Mr. Baron was fairly certain that Geithner meant that tapering would not end for 5 years. Of course, most Fed watchers, including myself, were almost certain that Mr. Baron had misinterpreted the Secretary’s remarks. More likely, Mr. Geithner meant that the Fed would not raise short term interest rates for about 5 years and/ or begin to unwind its previous bond purchases of US Treasuries and Mortgage Bonds. As far as tapering goes, it would be almost reckless of the Fed to continue its quantitative easing program for 5 years. For one thing, the Fed’s balance sheet would balloon to a very dangerous point. Indeed, some Fed watchers (myself included), already worry that the balance sheet of the Central Bank is too large. It’s capital-to-debt ratio is more stretched than that of the world’s most shaky banks (at roughly a 2% ratio currently).
Second, another 5 years of quantitative easing (QE) would surely cause huge disruptions in world markets by continuing to prime an artificial carry-trade as well as exporting inflation to other parts of the world that may not want our exports of dollar cash infusions. Politically, the Fed would not be able to continue its QE program for as long as 5 years without incurring the wrath of many of our trading partners.
Now, I am not here to try and sound smarter than Ron Baron; the guy has proven to be an investing genius, by using a fairly simple formula over the years. He invests in under-valued companies that have strong cash flows and are priced with low earnings yield. His fund has returned handsome gains through smart investing, low turnover costs, and compounding returns. It’s not that this formula is something new, but few money managers have had the convictions of Mr. Baron to carry through with their investment plans in unwavering fashion and reward investors.Yet, the comments of Ron Baron about Fed policy seems to point to an interesting observation: even many professional money managers and otherwise smart financial types don’t fully understand how the Federal Reserve works or how it carries out its policies.
Tapering itself, concerns withdrawing (slowly) the bond purchases of longer-term debt instruments. This is why the 10-year treasury note and 30-year bond’s interest rates have spiraled higher in recent days, as they are long term bonds. Many forms of long term financing, such as mortgages, longer term corporate bonds, and auto loans with several years of payments have reacted negatively. However, shorter term financing, such as 30-day and 90-day corporate money market instruments have barely budged.
In other words, tapering affects longer term debt financing. This longer term debt is subject to bigger swings in the value of the bonds, because, a 100 basis point move in the interest rate on a 30 year bond reflects higher interest rates for up to 30 years, which is offset by a lower bond price over 30 years. (The prices of bonds and notes fall when yields rise, and vice-versa.) Contrast this to a one-year note where the interest rate affects the price of the note for only one year.
Now, another thing to understand is that before the Fed can begin an exit strategy (which means raising interest rates as the economy improves and also to control inflationary pressures), it must first end quantitative easing. This means the Fed must taper its bond buying program down to zero new purchases of long term bonds and continue with only its long term program of buying and selling short term notes.
However, The FED is trapped with a very limited EXIT STRATEGY–it’s
only tool for exiting its low interest rate strategy is to use Excess Reserves on deposit with its
member banks–the Excess Reserves strategy, though brilliant, has never
been tested in the real world. It is basically an unproven theoretical
strategy that the FED will use only if it’s back is up against the wall
in having to raise interest rates.
This leads up to the observation that the Fed likely floated a trial balloon recently to see the reaction of the world markets to the threat of pulling back the punch bowl a little. As we have seen, the markets have reacted rather violently to the loss of the QE stimulus, if even done slowly over many months. We have already seen how just the mere
suggestion of TAPERING has caused huge sell-offs in places like Japan
and the Emerging Markets where the Yen and Dollar Carry-trades help to
support the leverage in those markets.
Another observation: if the Fed allows
long-expiration interest rates to climb, then this raises the US
Treasury’s borrowing costs. Even with today’s very low interest rates,
the interest payments are the 4th largest item in the US’s
“budget”; imagine what would happen if interest rates on the 10 year
were to double to market fair value at 4%!!!
Through all of this exercise, there is one thing that is apparent… and that is that the Fed’s continuous stimulus of the US economy (and the world economy through the carry-trade function), has put markets in the precarious position of massive upset and dislocation at the very thought of ending “the sugar high” created by the US Central Bank.
The more I look at it, the Fed has no choice but to begin to taper its bond purchases, no matter how slight, to get markets use to the idea that they cannot always have a crutch to prop them up. Otherwise, the capital system of finance we as Americans have long known and which affects our daily lives in so many ways, is doomed.
What’s also worrisome, and little talked about by the financial media, is the Fed balance sheet. No one ever asks how the unthinkable could occur, but what would happen if there were “a run” on the bank–not just any bank, but a run on the central bank? Could it happen?
With an estimated less than 2% capital-debt ratio, what would happen if the depositors of the Fed’s capital were to suddenly demand their money back? I guess that amounts to understanding who the investors of this capital are?… which I assume are its member banks in the reserve system.
The Fed is all powerful, and the member banks always fall in line when the Federal Open Market Committee (FOMC) sets policy. Yet, I ask, what would trigger such an event? Is it unthinkable? It’s such a complex subject that no one seems to have an answer, or at least, no one who knows is willing to offer an answer. At
any rate, I think some members of the FOMC are beginning to pressure
Mr. Bernanke into curtailing his QE program before we have to find out
what could happen to the Fed’s own capital if it had to suddenly sell
some of its assets (bonds) before they reach maturity. A bankrupt
central bank would be the technical result.
Perhaps the answer is purely academic, because the Fed will always have its printing press and can create as many dollars and as much “capital” as it pleases.
In the end, the real result may some day be played out in the currency markets when other countries of the world become fed up with Fed policy. Based on recent strength in the US dollar and the fragility of world markets, it seems that day of reckoning has been delayed for a much later date–or at least that’s what the market pundits want us to believe. My concern is that in this fast-paced computer-driven financial world we live in, the world capital markets themselves may suddenly choose to dis-obey the voices within the government (and quasi-government) institutions that guide monetary policy. Value is in the eye of the beholder after all.
Anyway, I apologize for daring to think the unthinkable.
Copyright 2010-2014 by Chiron Information Services. It is acceptable to link blogs from AceStockTrader.com so long as credit is given for the source of this original content. Otherwise, written permission is required to reproduce any of our blogs.
all along that the dollar would be getting stronger as the Fiscal Cliff
draws near as supposedly more money barrels into the “safety” of US
Treasuries….well, I do hear that the demand for Treasuries is strong
right now….but a curious thing is that the US dollar has not been
I was looking at the UUP (a popular ETF that tracks the US$ against a basket of 6 world currencies) chart just a day or two
ago, and I am surprised at how weak it looks compared to the non-stop
blather I heard from some observers that it would
get stronger and stronger by year’s end.
here’s the US dollar chart itself….ummm, where are those who told us
to bet the dollar and sell everything else? It hasn’t happened
yet….although I suppose there’s still time if the Fiscal Cliff
situation isn’t resolved….my hunch is we will go over the cliff, and so conventional wisdom holds this to be an austerity type event, and the dollar should be strong in such a situation
am holding off on more gold purchases until that happens….once we are
over the cliff, the sell-off in gold will be over just as
others are chasing into the short trade….gold should really shine once we get
moving into February and March, imho!
not saying this is going to happen, but I am suggesting we need to keep
a close eye on things next week. Normally, on days when the long bonds
(10s and 30s) are auctioned, the news media tends to get very negative
and this drives people to a risk off position (sell stocks and buy
bonds), which is precisely what the US Treasury and Fed want people to
do. As soon as the auctions are over, the news tends to lighten up, and
stocks start to gain again. That’s been a persistent pattern for over a
However, that game is based on the FED having control
of the bond market, especially on the longer end (10s and 30s again),
where the FED is the main buyer of these bonds. Conspiculously absent
from these auctions has been many of the foreign buyers, like China and
Japan of late–leaving only the FED as the main institutional buyer.
Why? Because the FED is holding down rates to artificially low levels
and no one with any sense wants to hold bonds for 10 year or more if
they are not priced to the market.
What’s interesting in the past
couple days is that the TLT is falling out of bed! I am short the TLT
as many of you know, and I predicted that the 50 day line would hold,
and it has….it has gapped down the last two days. If the move can
break the neckline, then the bond market will be in real trouble.
a bust in bonds could lead to a serious sell-off in stocks, thus
breaking the correlation between bonds and stocks (typically, the
algorithms assume that as bond interest rates rise, stocks rise)….
chart is rather a slow moving one compared to many stocks. The move
that is going on there could take two or months to complete. That would
get the FED past the election on November 6th. Of course, there is the
Fiscal Cliff bunch who believes that treasury interest rates will drop
like a rock the last couple months of this year as the prospect of
AUSTERITY looks Americans dead in the eye (higher taxes and spending
cuts at the same time).
I agree with the Fiscal Cliff fear mongers,
except they are forgetting that there is also a Credit Cliff situation
about the same time as the Fiscal Cliff when the Congress and White
House must decide to raise the debt ceiling again–everyone seems to
forget about the debt ceiling. Ultimately, I think the government
leaders will blink and kick the can down the road again….this will be
the impetus for the great bond bust and gold’s next major breakout–but
probably there will be a sharp pullback in equities first for the Fiscal
Cliff (and a likely bond bounce at the same time), and then everyone
will wake up and realize the Credit Cliff is the bigger problem…only
it will be too late. This December and January period could be the most
VOLATILE period of trading any of us will ever witness in our lifetimes.
However, we have to remember that on the long bonds (10s and
30s), the FED is really the only major buyer of them these days. China
and Japan, normally big buyers of these in the past have suddenly
dropped out. The FED is buying these bonds with printed money, as many
of us know. The bond market might suddenly leave the FED exposed if they
back off from buying any of them….actually, it will be the CURRENCY
Markets that will eventually call the FED’s bluff….dollar collapse
likely if and when that happens. Got Gold?
With the Fiscal Cliff situation looming for the USA toward the end of year 2012, I have been doing a little research on the subject for a white paper project. This led me to come across an interesting site called the National Priorities Project (nationalpriorities.org) which is an excellent interactive site about the Federal government’s spending and revenues. The site is a real eye-opener for those of us who wonder where all that money goes that our government spends.
One thing that catches my eyes is that interest on our national debt is our fourth largest expense item at 6.76% of the projected 2013 Obama budget. When one considers that the US Treasury is paying out the lowest interest rates in 60 years, this should be raising some concerns as to what we will do when the day comes that interest rates return to their historical averages–or worse! For example, the 10 year Treasury Note now pays out at about 1.65% interest…but historically, over the last 50 years, I would say the going interest rate for this note was around 4% to 6%. If one assumes an average of 5% for the 10 year, and perhaps 2% or so for the 1 year notes (which now pay about 0.3%), then interest rates would triple or more from where they are currently.
Does this mean that the cost to service our debt could triple if interest rates return to their historical norms? Well, I guess the answer is, “it depends.” For example, some debt is probably long term debt at a fixed rate of interest and may not fluctuate much.
Yet, even if we assume there are some long term fixed payouts in our national debt, even a doubling of the payouts could push US interest debt on our Treasuries to around 13% or more of our total annual government budget and leaving it closer to the annual cost of our military’s overall budget. Also, one would have to assume that if interest rate debt is consuming a larger part of the annual outlays, then the percentage of some other expenses such as the military could suffer cutbacks.
The prospect of a large increase in the service of our national debt should clash with fiscal austerity as many people are pushing for smaller deficits in 2013 and beyond. We cannot continue to roll over our interest payments or re-structure then forever without coming face to face with some tough decisions. At such point, would the Federal Reserve defer to just printing more money (like Quantitative Easing) just to ease the pain and circulate enough money to pay down the debts? If so, imagine what that might do to the value of the US dollar? Or to future interest rates, especially if the major ratings agencies should lower the US’s high ratings.
A significant drop in the US’s ability to re-pay its debts would only cause more money printing, I fear. Or do we just walk away from our national debt at some point? Good luck with that, because it would crush the value of the American dollar and cause great pain to the American people!
Ultimately, I do believe that the Fed and most other central banks plan to print–and print!– more money to try to monetize our way out of the sovereign debt fix that so many countries are now involved with –but they will only do that after they see that other programs just aren’t doing much good. When their backs are against the wall, the world’s central banks, led by our own Fed, will choose the easy way out–print more money!–even if it should bring on a large dose of inflation. The Fed and most central bank leaders fear deflation more than they fear inflation. Inflation is like a hidden tax–most people don’t see its effects day to day but only notice it over time. Deflation is easily seen right away in fewer jobs, depressed wages, lack of growth, and of course lower prices which few can appreciate since they aren’t earning much money! Given the fears of deflation, most central bankers realized that inflation is an easier animal to deal with in keeping the masses satiated enough not to throw our government leaders out of office. However, that’s a subject for another day.
All in all, this site offers a lot of interesting interactive displays on the Federal Budget. I don’t know much about the supporters of the site–it seems to be formed by some independent-minded intellectuals looking to better educate Americans on what goes on in Washington. I suppose some would say this is a “commie liberal” site but I try to remain objective, and what I see here is pretty much not politically motivated–just the hard facts. But even if a reader is suspicious of the site by its intellectual tone (which I know some people affiliate with liberalism) of the site, I still think everyone should keep an open mind and evaluate the data that is here objectively, whether or not one agrees with “the tone” or message of the site operators.
The Federal Reserve’s decision to extend its Operation Twist program out to the end of this year seems to many observers to be a fairly benign attempt to keep some juice flowing into a skittering US economy. There were some market observers who were calling for an outright quantitative easing program (most likely dubbed as “QE 3”) to be launched, but the Fed was not ready for that sort of ammunition. So the continuation of Twist seemed a palliative approach to appease those arguing for more monetary stimulus.
Operation Twist is a program where the Fed “trades” its short term notes (mostly US treasury bills of 3 years or less duration) in for longer duration notes and bonds of somewhat greater risk (on average). The duration of US treasuries purchased is a minimum of 7 years and as long as 30 years. In addition, the Fed program will continue to acquire mortgage-backed securities and other long-dated mortgage type paper in an attempt to keep mortgage rates low and stimulate a mostly moribund housing market and slowly expanding business community.
Singer/dancer Chubby Checker delighted audiences some 50 years ago with his dance songs called “the Twist.” The Fed’s Operation Twist derives its name from that dance.
Recent economic reports show a slowing US economy on many fronts from jobs to retail store sales to regional industrial activity reports. A lot of the blame can be placed on the financial mess in Europe as well as fear that China’s exports are hurting due to the European recession. Furthermore, as this is a presidential election year where both parties remain polarized over many issues, it seems to many observers that nothing of importance will occur between now and the election in November. Also, with fears of what “America’s Fiscal Cliff” dilemma could do to this country during the period of the lame duck Congress, the Fed has decided that some form of monetary stimulus must remain in place until the end of this year to try to over-ride the effects of weak fiscal stimulus from the US government.
In his meeting with the news media after Wednesday’s Fed announcement, Chairman Bernanke said that by the end of this year, the Fed’s balance sheet would reflect almost no short duration debt assets (in banker’s parlance, debt instruments are actually called “assets”). Almost all of the debt that the Fed expects to hold by January 2013 will be long-dated maturities. The Wall Street Journal points out in its June 21st edition that the Fed’s balance sheet will be approaching $3 trillion, and almost none of that debt paper will be short-term maturities.
When one sharp reporter asked Bernanke about the state of the Fed’s balance sheet and how that affects the Fed’s ability to stimulate the economy to meet its jobs mandate, Bernanke admitted that the extended duration of the balance sheet would limit any further action with a balance sheet strategy–his eyes shifted from right to left as if to imply he didn’t know where to go from here. Hastily, he added a wishy-washy answer “that we would have to take other kinds of steps to create stimulus in the economy.” He shifted nervously in his chair after making that statement. For me, this was the key moment of the last few years of Fed policy! (You can see it and hear it at about the 40 minute mark of this C-Span video.)
Bernanke quickly moved on to another question before any reporter asked for further clarification. Not one reporter (save perhaps the one from The Economist who asked the question) in the room seemed to grasp the immense meaning of this remark–or at least they did not wish to pursue it. The big question in my mind became, what are these “other kinds of steps?”
In short, without boring you dear reader, the implications of the extension of Operation Twist leads me to draw the following conclusions, and not necessarily in this order, but rather as random thoughts that rush into my mind…
1) The Fed intends to keep short-term interest rates near zero until at least year 2016. Up to now, the Fed has explicitly said that short-term rates will remain near zero until late 2014, and in one of my previous blogs, I spelled out the real reaons why the Fed had made this unprecedented announcement to keep interest rates low to a future target date many months off. Yet, as the Wall Street Journal points out, the Fed’s balance sheet will not have any sizable maturing assets until January 2016 due to all the longer-date maturities it will have on its balance sheet. So, how can the Fed begin to raise short term interest rates if it will have no short term paper to sell? Indeed, Mr. Bernanke admitted in the June 20th press conference that “large asset purchases increase the size of the balance sheet…and makes an exit a more extended process.” Therefore, in translating this Fed-speak, I predict that before too long, Bernanke will announce that short term interest rates will be kept low through for at least another year beyond the previous target (well into year 2015 and possibly into early 2016). The reason will be that the Fed will be trapped in a corner with virtually no ammunition to fight rising interest rates before then –but the Fed will not give this as an official reason as it would cause panic in the markets. Instead, the excuse will be blamed on a continuously weak economy.
2) OK, so if the Fed has no short term paper to sell, should it need to raise interest rates sooner, it will have only one real option: it could sell the long-dated paper on its books. The problem with this strategy is very dangerous for two reasons: first, the selling of long-dated maturities would force up the cost of mortgages and capital loans to businesses, thus choking the economy as well as possibly fueling more inflation (as long bonds with rising interest rates are usually the barometer for higher inflation) and this would do little to stop the fuel of inflation which requires interest rates to rise on shorter-term paper. Additionally, if the Fed sells any meaningful amounts of this long-dated paper, it basically exposes itself to mark-to-market values for those bonds, thus exposing the Fed to insolvency since the Fed has little capital on its balance sheet compared to the debt it holds. What would the world think of an insolvent central bank that stands behind the world’s main reserve currency? The answer to this question would not have a pretty result, I fear.
3) In the same Wall Street Journal story, the reporter said that the Fed could always print more money
to work its way out of a corner–this raised my eyebrows, since printing more money is inflationary to the economy. Sure, if the economy remains weak and deflationary forces remain, then printing money (quantitative easing) is certainly a tool that remains for the Fed. However, in a scenario where the Fed confronts future inflation, money printing would not be an option. There is also the basic mechanical problem to consider, which is the Fed would have no short term paper to sell back into the market which would force up short term interest rates and thus slow inflation, as one of Bernanke’s predecessors (Paul Volcker) did so brilliantly in 1980 during a very inflationary time in the US.
So, here I harp again, but I foresee this Fed strategy as quite risky in the long run for our economy. As I have elaborated before, China is doing just the opposite of the Fed, in that it is trading its longer-dated US maturities for our short term paper. In other words, as the Fed sells the short term debt, China is most likely one of the biggest buyers of this debt. At the same time, we know from the Fed’s own published reports, that foreign buyers appear to be buying less of our longer-dated debt in the past year; while the Fed is the largest de facto buyer of this type of debt which foreign buyers seem to want less of.
In that same Wall Street Journal edition of June 21st, another report indicated that China was preparing to open up its markets more to foreign investment (including its stock market) as it works toward making its currency one of the global reserve currencies (currently the US dollar and the Euro are the two main world reserve currencies). China intends to create a liquid bond market in Chinese sovereign bonds and its stock markets. In other words, China is working in a very obvious way to position its yuan to assume the role of reserve currency for the world by year 2020, I believe, if not sooner.
If the Fed is boxed in a corner should inflationary pressures build before 2016, it will have no bullets to fight inflation. Should the Fed attempt to sell its long-dated paper in an attempt to absorb some demand from the economy, then that would choke off certain parts of the economy while also exposing the Fed to insolvency. This would put China in the cat-bird’s seat as it would create a new flight to safety toward Chinese bonds and other investments should its markets be at least partially developed by such time.
There would also be a flight to quality, in my opinion. That flight to quality would be to the world’s one asset currency….gold (and it’s sister currency, silver). In this scenario, I can foresee gold doubling or even tripling from today’s price near $1,560 an ounce.
The Fed chairman has remarked many times that his strategy with Operation Twist as well as Quantitative Easing is an experimental one. Indeed, all past leaders of the Fed followed a much more conservative strategy of owning mostly short term treasuries and some short term high-grade corporate debt. No Fed, except this one, has chosen to experiment in such a way with long term debt and with debt of questionable quality (mortgage-backed securities as example).
The one thing that strikes me the most is that the financial media and our leaders in Washington seem to not understand what a grand experiment this has all been….and I fear, this is one experiment that should have been tested more in the laboratory of our economic schools before being unleashed into the real economy. If a chemist took his experiment out of the lab before seeing the potential results, would that chemist not cause great trouble for his community?
Perhaps things will all work out and my fears are overblown? I’m sure many who read this blog will think so. Well, there would be one easy way out for the Fed…if the economy were to truly remain weak until year 2016 and the velocity of money remain weak too, then the Fed might possibly be able to get out of the fix it is already into. If this is to be the result, then is all of this talk about monetary stimulus just a lot of noise and a waste of time and resources?
Now I begin to understand how we may be repeating the lost two decades that Japan has experienced…is not the safest and best solution for the Fed to see us going down the same road as Japan has done? Sadly, a zombie economy for years to come may be the safest solution.
The US equity markets remain in correction, and the the surprise big
trading loss at JP Morgan (NYSE: JPM) reported on Friday and the
resulting Fitch downgrade on Friday night has sent a new shiver into the
The lowering of reserves in China this weekend may send a temporary
stimulus into the Asian markets, but this also gives strength to the US
dollar at a time when US growth is slowing.
Continued unrest in Europe, including new demonstrations in key European
cities this weekend puts the European economy and its currency under
In the short term, it appears that the US dollar will continue its new
move higher this upcoming week, and in this day and age, a stronger
dollar actually serves to hobble the US economy due to its large
deficits and debt situations. It’s the wrong medicine for a reserve
currency that represents a country with huge imbalances in trade and
debt with the rest of the world as well as debt within its own borders.
In short, ACE suggests staying mostly to cash and other liquid
investments. If you’re invested in stocks, stick with high quality
stocks, particularly ones that have positive cash flow and pay dividends
and have relatively low PE ratios. ACE does believe that a bounce may
occur in the markets later this week as the Facebook IPO approaches.
However, the bounce may be short-lived.
ACE also suggests that this is a good time to accumulate new positions
in gold and silver (GLD, SLV and CEF come to mind as well as physical
coins) even though the precious metals are in a precipitous fall at this
time– ACE believes this is a temporary phenomenon and that 12 to 24
months from now, the precious metals may well double or triple in price
from today’s levels, relative to the US dollar.
ACE also suggests that starting long-term positions in the TBT
(Proshares Lehman Ultra Short Treasury Fund 20+ Years) is a wise
strategy now that bond yields are depressed and continue to fall. ACE
has invested in 2013 LEAPS, and may also choose to buy 2014 LEAPS in the
coming days as the price of TBT continues to bottom. The 2014 LEAPS are
the wiser strategy, but the 2013 LEAPS could deliver huge gains too if
the FED resorts to QE3 later this year or if Congress and the White
House choose to extend many of the Bush tax cuts which expire late this
year, in an attempt to goose the economy–with an election in November,
anything is possible. A simple investment in the TBT shares would make
sense for those who choose not to play the options.
So far, from a technical perspective, the pullback had been constructive
in that the key long term Moving Average lines on the major indices
remained supportive until late this week. Now, the SPY chart shows a perceptible negative direction in the benchmark 50 day moving average with the price trapped underneath. The Dow Industrials chart shows its key 65-day moving average line has flattened, which is generally a slightly negative situation. Further, a lot of destruction of growth
stock charts has occurred in recent weeks, and so one must remain
vigilant and conservative in this environment. Expect a bounce in the markets as the Facebook IPO approaches, but also understand that the bounce may be one final chance to close out profitable trades. ACE will continue to monitor the situation in the coming days for any change in forecast.
FOLLOW-UP: The market sold off in dramatic fashion, though it did find a weak bounce near the Facebook IPO launch date. Gold did manage its single biggest daily gain shortly after this blog posted. Nice calls, Ace! Editor.
Today marks the 100th anniversary of one of the most told and repeated tragedies in modern history–the sinking of the Titanic. For those who don’t know this true story (and unbelievably, there are many young people who believe that the Titanic’s tragic story is only a fictional movie), it was a passenger ship considered to be the crowning achievement of mankind’s progress against nature and the elements in its day.
Though I had read and heard the story many times, I thought I would sit down and watch the movie “A Night to Remember” (released in 1958 and considered the original Titanic movie–before the DiCaprio and Winslet creation that became the most popular movie of all time) on the evening of the 100th anniversary. Yes, there was a previous movie to the DiCaprio version, and according to at least one Titanic historian, A Night to Remember is more accurate in re-telling the tragedy as it really happened–mainly because it leaves out the fictional side stories of romance in the later version.
However, my blog today is not meant to debate the merits of the two popular movies about the sinking of the Titanic (yes, the Night to Remember was a very popular movie in its hey day too)–but rather, I wish to make light of a couple of the lessons of the Titanic tragedy and how those lessons might apply to today’s precarious financial situation around the world.
Perhaps you have heard it said by a few market commentators and a precious few economists that today’s modern world financial moves by central banks and sovereign governments are akin to “re-arranging the chairs on the deck of the Titanic?”
What do these commentators mean by this comment, and what great iceberg lies out there in the darkness on the horizon that could prove to be capitalism’s undoing?
First, let’s understand what the news media and pundits had said about the Titanic in the year 1912 as it was christened for its maiden voyage–that it was unsinkable! Indeed, the words unsinkable and Titanic were often spoken in the same breath…as synonymous as reserve currency and US dollar are spoken of today. The Titanic had been designed with special compartments built into its hull that would trap and contain any leaks, should they occur, and allow the ship to stay afloat. The ship was the early 20th century’s equivalent to today’s Boeing Dreamliner (B-787)– a mode of passenger transportation that was the epitome of travel–sparing little expense for comfort and luxury–and quite fast and efficient as a mode of travel.
So confident were the Titanic’s designers about the invincibility of their ship that they placed only enough lifeboats on the ship to save less than half of the ship’s expected passenger loads–and that placement was only to meet a code in existence at the time. Otherwise, the designers might not have put any lifeboats on the big ship.
Now, back to the future….in 2008, as most of us know, the US and world economy experienced a dramatic unraveling of the world financial system which exposed many problems within a system that had previously been believed to be safely buttressed with back-stops and insurance mechanisms that would keep the machinery of finance running, even in a worse case scenario. However, as we now know, the worse case scenario was not even needed to cause a panic and unraveling of the global financial system.
If not for the quick actions of the Federal Reserve (the US central bank), the world economy might have fallen into a deep and dark depression. Many ills were exposed–long time axioms like “too big to fail” were severely tested and found to be false to some extent. Market insurance instruments such as derivatives like “swaps,” futures and options were found to be less secure than previously thought.
At the time, there was much debate about how to change the financial system to make it safer going forward–swaps would be moved to a transparent system such as a market exchange…institutions that were too big to fail would be downsized or slowly unwound and shut down, it was said. Today, some four years later, very little has changed, except for a maze of greater rules and regulations created by a Congress that little understands how the complexity of financial markets work–such as the Dodd-Frank Act and the Volcker Rule.
The Fed’s injection of liquidity certainly worked to end the immediate crisis–but it failed to do so for the cause of the ailments–namely a lack of solvency in many economies of the world. The Fed’s actions, and the actions of the legislative and executive branches of government, both here and abroad, have failed to address the underlying structural problems that created the financial mess in the first place.
As I said earlier, the words reserve currency and US dollar are often spoken of as if they are one and the same. Indeed, for the lifetimes of most people living today, the US dollar has often been called “king dollar” because it has long assumed the role of “money.”
For what is money, but a store of wealth that people everywhere consider a safe place to store the credits of their fruit (the wages from work) until such time as they need to acquire something that fulfills a need or a want (spending). In short, a sound currency is perceived to be the place where people “bank” their savings until they make a purchase somewhere else. In its simplest form, a currency is store of wealth that can be transferred for purchases or investments. Without a currency, we would all be living in in a society as barbaric as the ones before the ancients where barter was the only way to acquire something from someone else.
Now, let’s go a step further, and think about this: it is often assumed by market participants that “risk on” investments such as stocks or commodities should be sold when there is a fear of downward pricing because of deflationary events. Included among the commodities are gold and other precious metals. Yet, to some observers, precious metals, and especially gold, are considered forms of money in themselves.
Few market participants stop to ask why it is assumed that when the world is troubled, one should seek safety in the US dollar currency–and in the assets of the government from which the dollar derives its strength. The main “assets” of the US government are its debt-backed instruments, the treasury notes and bonds that it sells to the investing public–and which offer a rate of investment return (interest) and relatively low volatility–and the promise that the debts will always be paid back in full by the US government.
Now, it goes without saying that for a good many years the US dollar was absolutely the safest currency in the world….up until the early 1970s…and again in some years of the 1980s, the US was a creditor nation. A creditor nation is one which takes in more money than it spends, either by government spending or by balance of trade with other countries–or ideally, by both scenarios.
But as luck would have it (or was it by poor planning?), the US over the years has become a debtor nation…and indeed, it is now the largest debtor nation in the world! Actually, let me define that one more step–the US is the largest debtor nation in the history of the world…and has been for a good many years.
Yet, somehow, the US dollar stays on as the main reserve currency of the world. Yes, the Euro came along and h
as also developed a reserve currency status as about 20% of the world’s reserves are invested with the Euro currency. Yet, as we know, the European continent is suffering from a malaise of over-spending and debt, which is restraining that currency from becoming the world’s predominant currency.
So, it is by default that the US dollar remains the world’s top reserve currency–but other challengers are growing with the Chinese currency, the renminbi being the greatest threat among the developing nations’ currencies. However, even China, with its $3 trillion dollar trade surplus has many hidden bombs within its financial system, such as the large number of under-performing loans to local governments by banks that are back-stopped by the Chinese government…and what some consider to be an over-heated real estate market backed by shaky mortgages.
What ALL of the paper currencies of the world represent are debts–they are not truly assets, but backed by debt instruments–which represent promises to pay. Take a look at the money in your wallet– a US dollar bill has this language printed on it: “This note is legal tender for all debts, public and private.” Notice the key word in that sentence is debt, which I have underlined. What does that mean? Does anyone really know?
I will tell you what I think it means: that all of the debt issued by the US treasury…and all of the debt issued by US private companies such as financial firms like banks or large industrial companies is what backs up the value of the US currency. This might come as a surprise to many of you, but the US dollar is a function of this nation’s debt, and it represents a promise by the debtors to repay those debts. Consider that the US dollar is a reserve note of the Federal Reserve and since the Fed is essentially a bank, like all banks, it thinks of debt as assets. Ask any accountant who does the books for the banks, and in their realm, a loan (debt) is classified as an asset. (Conversely, in a bank, a deposit by a saver is viewed as a debt of the bank, because the debt must eventually be re-paid to the depositor when the depositor withdraws the funds.)
So, does that mean that our currency and all paper currencies should be treated as worthless? The short answer is no. This is because the realm of finance, and indeed, the realm of most commerce relies on debt to function efficiently. Short term debt can occur in many forms, such as the traditional business transaction that allows a business a certain number of days to pay for a shipment of goods–for those who operate a business, the term “net 10 days” or “net 30 days” should be a familiar term. This term means that a business promises to make payment on a shipment of delivered goods within the time limit and will often receive a discount for doing so. A good and trustworthy customer is usually “good” for the terms of the agreement–the paper currency we carry around in our wallets is the conduit that allows this type of finance to occur. Of course, many other forms of finance exist from simple short term loans to longer term loans; nearly every American has taken on some form of debt to obtain the dreams of tomorrow today.
Indeed, debt has long been the American way–it is debt that helped to build this country into the greatest, most powerful country the world has ever known–so long as that debt was taken on in a responsible way and our proper planning and ingenuity allowed us to take that debt and invest it as capital to increase the expansion of our country’s economic prowess. Healthy debt financing is a good thing! Without some way to finance things, the world would be a bleak place indeed.
The opposite of a debt currency is an asset based currency. Truly, there are no asset based currencies except for gold (and sometimes silver). Gold is not always regarded as a currency by the believers of debt currencies–i.e., paper money (“fiat” money). But gold is the anchor in the world economy when debt grows out of hand–gold forms a relief valve which balances out all the debt in the world. As Alan Abelson of Barron’s admirably points out in this week’s edition, the central banks of the world are worried about their own money printing policies–thus they are now net buyers of gold. However, gold is another subject entirely, and not where I wish to go with tonight’s blog, but I only mention it here to show the counter-balance that exists in the financial world to debt.
Now, what has happened in the last few decades is that we as a country have allowed our debt to become unmanageable–and indeed, many of the developed countries have done the same. If one takes the $15 trillion in US government debt and attempts to run it through a long-term finance payoff formula (amortization of debt), say over 40 years or more, one finds that the debt would consume a fair percentage of everyone’s paycheck for a very long time even at the low interest rates we currently enjoy… and I haven’t even mentioned the private debt of the citizens of this country and the under-funded pension debts everywhere. The problem is, no one wants to buy $15 trillion in debt from us on a long term basis–this is why the Treasury Department is often rolling over short term debt–the proverbial “kicking the can down the road” approach to dealing with a problem that has become nearly unmanageable.
So, where am I leading to with all of this? The point is, so long as the debt is managed properly and growth is maintained to help accommodate the debt, then America would be in good shape. However, this has not been the case for many years now.
Like the passengers on the Titanic who re-arranged the deck chairs even as the captain realized that many of them were doomed and would not live to see the morning….
We Americans assume that the world will always honor our debts. We assume that our currency, the US dollar will always be the main reserve currency of the world. Many Americans have taken to conservative strategies like keeping a good portion of their money in money markets, CDs and US treasury bonds. It seems like a smart and sensible strategy for safety, even if the returns aren’t very good in an ultra-low interest rate environment (engineered by a Federal Reserve with a weak balance sheet exposure). Indeed, the financial advisers that many well-off Americans listen to for advice espouse a similar strategy of staying conservatively invested in CDs, money markets and treasuries.
They sit smug in the comfort of their chairs on the deck of the most prosperous country they have ever known–this is America, after all. It’s a given that our dollar will always be strong, and our debt will always be honored, no questions asked. When Europe is failing and when China is landing hard, all eyes will be cast toward America–it’s always been this way, and so it shall be again in times of distress.
Forget that there is no captain in the wheelhouse of this ship–yet, let’s just keep re-arranging the deck chairs to catch a fresh breeze or another view of the moon on the horizon. We need not worry even as the ship tilts nervously to one side–we shall ignore the warning signs–until it is too late.