Ingesting Rabbit for Supper

Posted on June 18, 2013 by MN Gordon

All of the sudden boring old government bonds have become real interesting.  For over the last six weeks a remarkable new awareness has come over the credit market…

If you can believe it, interest rates don’t always go down.  In fact, sometimes they go up.

“In the last six weeks, benchmark 10-year U.S. Treasury note yields have surged to 2.19 percent, from 1.60 percent at the beginning of May,” reports Reuters.

“As a result the market has seen a sharp outflow from bond funds and notable lack of demand in Treasury bond auctions.  The fund outflows and the rise in volatility offer a worrying glimpse of how markets are likely to behave as the Fed works to scale back its enormous monetary stimulus of the U.S. economy.”

Our guess is that as the Fed tapers and turns interest rates will rise – a lot! Continue reading →

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Economic Subsistence

Posted on June 14, 2013 by MN Gordon

Several weeks ago DOW 16,000 was a foregone conclusion…it was practically guaranteed.  Now the DOW’s wildly spiking and diving above and below 15,000.  What gives?

From what we gather, markets are anxious about what central bankers can and can’t do to suppress interest rates.  After five plus years of a Fed funds rate at practically zero and 10 Year Treasury yields bumping along around 2 percent for the last 20 months, the feeling this can’t last forever has begun to set in.  Alan Greenspan’s even talking about it.

Perhaps the economy is improving and no longer warrants all the monetary stimulus.  Or maybe a mass devaluation is approaching.  Regardless, rates must eventually rise.  But what are the consequences?

No doubt, asset prices have been inflated by ultra-low rates.  Take the housing market for instance.  Low rates first cushioned the fall.  Then they floated prices back up.

So what will happen when rates normalize to 4 – or even 6 – percent?  Connecting the dots brings us to the very simple conclusion: when rates rise, prices will fall. Continue reading →

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Salting the Earth with Money

Posted on June 11, 2013 by MN Gordon

Former Federal Reserve Chairman Alan Greenspan opened his mouth last Friday to caution on the perils of quantitative easing and artificially suppressed interest rates.  Greenspan also cogitated upon how to put the worms back into the already opened can.

What follows is a sampling of his utterances…

“The sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve – that everybody agrees is excessive – the better.  There is a general presumption that we can wait indefinitely and make judgments on when we’re going to move.  I’m not sure the market will allow us to do that.

“I think the issue is not only a question of when we taper down, but when do we turn.  The markets may not give us all the leeway we might like to do that.”

The difference between tapering and turning is similar to the difference between slowing down the rate new debt is added and actually paying debt back.  Currently, as you know, the Federal Reserve creates $85 billion a month – from nothing – to prop up the credit market. Continue reading →

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Jabberwocky Adhesive Tape

Posted on June 7, 2013 by MN Gordon

Beware the Jabberwock, my son!
The jaws that bite, the claws that catch!
Beware the Jubub bird, and shun
The frumious Bandersnatch!

– Lewis Carroll, Jabberwocky

One Scratch Below

More is revealed each and every day.  For instance, the St. Louis Federal Reserve recently revealed that American household wealth is down about 55 percent from where it was in late 2007.  This little fact offers a remarkable insight into what’s been going on and why the economy feels like such a tedious slog to the average working stiff.

“Household wealth plunged $16 trillion from the third quarter of 2007 through the first quarter of 2009,” reports The Dallas Morning News.  “By the final three months of 2012, American households as a group had regained $14.7 trillion.

“Yet once those figures are adjusted for inflation and averaged across the U.S. population, the picture doesn’t look so bright: The average household has recovered only 45 percent of its wealth, the St. Louis Fed concluded.” Continue reading →

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