Bond Market to Bernanke: Take Your Foot Off the Accelerator 20 comments
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These charts focus on the market's inflation expectations, which are now almost back to "normal." The first chart is Barclay's calculation of the market's 5-year, 5-year forward inflation expectations, as derived from the difference between TIPS yields and Treasury yields. This is assumed to be the Fed's preferred measure of inflation expectations. The second chart shows the market's expectation for the average inflation rate over the next 10 years. Both charts show how expectations have almost returned to levels that might be considered "normal." The market is now expecting consumer price inflation to average about 2.5% for the foreseeable future.The message to the Fed is clear: It's time to start taking back all the money that has been injected into the banking system over the past 8 months. Deflation risk has all but vanished. The economy is getting back on its feet (see previous post on consumer confidence). Swap spreads are almost back to normal. Liquidity is returning to the bond market. Equity prices are improving. We've most likely seen the worst of the housing market. The yield on 10-year Treasuries is up to 3.46%, and is closing in on the 4% level which I would consider a good sign that the economy has achieved recovery mode.
Will the Fed get the message? That is absolutely the key question for the months ahead. If they keep the pedal to the metal, their job (keeping inflation low) is going to be much tougher in the future. I think it is likely that they will be slow to react. That means that inflation risk is really coming to the fore.
The gold market has been foreseeing this development for some time; in my estimation, today's $950 gold price assumes that we will have a meaningful increase in inflation in coming years. If gold moves higher, that will be a sign that the market is not only becoming quite confident in a rising inflation future, but also confident that the increase in inflation will be significant.
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we've seen this happen before. the fed pursued unsustainable expansionary policy ever since the days of the tech bubble. instead of fixing the cause of the problem, the fed is pushing even further with monetary expansion. this is just going to be a repeat of the 70's and 80's.
If interest rates were determined by supply and demand, rather than being fixed by a central bank (i.e., the Federal Reserve), we wouldn't have inflation, since the money/credit supply would be self correcting. Not enough savings means no capital readily available to lend, means higher interest rates, means more savings. Conversely, an excess of idle capital means more investment demand, lower interest rates, and increased economic growth. There is absolutely no need for some centralized body to be fixing interest rates. That only leads to inefficiencies in capital allocation, due to the time lag between market moves and the Fed's policy reactions.
At the very least, a proper audit of the Fed is called for, to verify to Congress and to the public that everything they're doing is legit. Call your congressperson and instruct him or her to sponsor H.R. 1207, the Federal Reserve Transparency Act of 2009. It's up to 179 cosponsors at last count. (Only 218 votes are needed for a majority of the House.)
The Fed has absolutely ZERO choice because TRILLIONS in supply are being dumped on an already-saturated market.
Yes, the Fed could let Treasuries auctions FAIL - and then even the fraudulent "credit-rating" agencies would be forced to downgrade the "AAA" rating of a hopelessly insolvent government.
agreed
On May 26 04:05 PM Jeff Nielson wrote:
> Yet another commentary suggesting the Fed has a CHOICE about whether
> or not to "buy" its own Treasuries (i.e. "monetize" U.S debt). <br/>
>
> The Fed has absolutely ZERO choice because TRILLIONS in supply are
> being dumped on an already-saturated market.
>
> Yes, the Fed could let Treasuries auctions FAIL - and then even the
> fraudulent "credit-rating" agencies would be forced to downgrade
> the "AAA" rating of a hopelessly insolvent government.
In fact he has made the crisis worse. his cutting interest rates too fast up front drove up the price of oil and triggered a much worse recession.
As for the velocity of money, money supply, etc. if what you believe to be the case was actually true the dollar wouldn't be dropping off a cliff. For every billion or so he throws into the market the american consumer is loosing 2 billion in purchasing power. why are emerging markets out performing us 2/1. Shit in australian dollars our market continues to drop. If the rise in the market is not faster than the loss of value of the currency we are net loosers. the only winner is the banking sector and as usual our government serves their masters very well.
You need to do a bit more thinking and stop drinking the cool aid our government is serving us
My guess is you are one of the many new pundits on this site who have recently appeared and are likely being paid by corporate interests to keep spouting drivel at us in the hope that someone will actually believe it.
If we were in Japan we could at least know that after being such a failure bernanke would commit suicide. No such luck in the US.
On May 26 02:49 PM 427COBRA wrote:
> while debt is being extinguished by consumers, mortgage defaults
> and other loan defaults, and loan volume does not increase, ie. no
> velocity, inlation will not be a problem. Buy long tresuries on
> this dip for substantial gains as well as nice income. Consumer
> might be feeling optimistic but will not borrow for new purchases
> and will begin saving for a change.
On May 26 03:01 PM Whitslack wrote:
> You misunderstand. The Fed's job is to *create* inflation (in moderation)
> in order to lessen the burden of government debt. It performs an
> elaborate balancing act: too little inflation, and the government
> would have to raise taxes to service its debt (an unpopular move);
> too much inflation, and the people would lose confidence in the system.
> (Has it ever struck you as suspicious just how much our monetary
> system relies on public confidence for its continued viability?
> Isn't that the very definition of a con game?)
>
> If interest rates were determined by supply and demand, rather than
> being fixed by a central bank (i.e., the Federal Reserve), we wouldn't
> have inflation, since the money/credit supply would be self correcting.
> Not enough savings means no capital readily available to lend, means
> higher interest rates, means more savings. Conversely, an excess
> of idle capital means more investment demand, lower interest rates,
> and increased economic growth. There is absolutely no need for some
> centralized body to be fixing interest rates. That only leads to
> inefficiencies in capital allocation, due to the time lag between
> market moves and the Fed's policy reactions.
>
> At the very least, a proper audit of the Fed is called for, to verify
> to Congress and to the public that everything they're doing is legit.
> Call your congressperson and instruct him or her to sponsor H.R.
> 1207, the Federal Reserve Transparency Act of 2009. It's up to 179
> cosponsors at last count. (Only 218 votes are needed for a majority
> of the House.)
On May 26 04:18 PM dcb wrote:
> It sounds like you actually believe the garbage that comes out of
> bernake's mouth. ....
> If we were in Japan we could at least know that after being such
> a failure bernanke would commit suicide. No such luck in the US.
dcb
For the life of me I dont know why I follow your comments.. yet somehow i cant help myself.. Its kinda like driving by a traffic accident. You are the naked swordsman holding up the head of Caduceus (sp) in the square in Firenze, insanely violent and proud at the same moment.
re 'Japanese solution', don't be so sure - CFO of Freddie strung himself up just a little while back, and he was only worrying about one company. Bernanke is going to have a whole lot more karma to deal with.
And perhaps you should change your name to "naked swordsman".
If the Fed did what you suggest and raise rates and reduced lending to banks, what would happen? Seems like the only new lending they have been doing is via buying Treasuries and other credit markets are nowhere near back to normal....
The reaction in bond markets to the perceived destruction of our currency due to expansionary policy is not all a bad thing. Our currency may get battered a bit but it will survive as we tough out a few years of escalating interest rates and inflation that always follows devaluation of fiats.
Through your charts you are suggesting that we have achieved inflation targets already but I am of the opinion that many more trillions will be printed before this crisis subsides and that the Fed is actually doing what is in the nations best interest by flooding markets with cash fresh off the press. We need more inflation despite the pain.The price we will pay instead is higher interest and reduced buying power. But only for a time. It is because the public will not tolerate tax increases that Central planners are going this route. What other option is there?
I have puzzled over inflation/deflation for so long now I am almost cross-eyed. I do not believe though that it is time to "take back all the money" that has been infused into the system in the last 8 months. It is my opinion that we must accept that the price for our profligate spending over the last decade is higher interest rates if we are to sow the seeds of a real recovery in the future. Anything less will not bring expectations back in line with the reality of our situation.
It has always been my conclusion that we will in fact experience both deflating asset values and inflating consumer goods/ commodities as the dollar is devalued through expansionary policies and commodities like gold and oil rise. Which presents a conundrum of course. Most everyone sees the debate as either one or the other, never both. So the debate rages without ever being resolved in advance of the problem. That is, we don't see the investment and market pitfalls and opportunities as they arise because we get stuck thinking in patterns from previous economic failures.
And yet why can you not have a deflating real estate and collapsing asset bubbles in conjunction with escalating costs for energy, food, taxes, transportation, consumables and insurance etc? What is taking place in the current economy is driving exactly that kind of experience, multiplying the misery so many people are going through. We have all overspent our credit limit and the unique circumstances we live under as the worlds leading economy dictates a heavy burden when we waste our advantage on consumption. It also means we have a responsibility to clean up our own mess if we want to remain the leading economy. A cost must be paid. In a global community we don't have a free pass anymore.
We are currently experiencing rising equity markets in an environment of inflation expectations while hard assets decline in value cutting off our buying power at the knees. The 1929-1932 crash so many are anticipating may actually never materialize as the market seeks returns to offset the losses in fiat buying power. What I am saying is that we could actually experience a general market rise concurrently with the loss of wealth as the inflation adjusted returns fail to keep pace with the reality on the ground. If you are losing money on reverse ETF's right now (all the rage,..so beware) you know exactly what I am talking about.
When you assess market changes in the rear view mirror and with the benefit of some of the best economic thinkers of the century you are left with the conclusion that market forces will coalesce in a somewhat formulaic way. It goes one way or the other but not both. But it does not work like that in the real world. No two recessions or depressions are alike. Ours is no exception. Inflation and Deflation can and will live in the same house and destroy your wealth as surely as night follows day if you subscribe to one camp and refuse to open your mind to the other. There is no formula for America's problems now as the worlds lead economy. Don't forget that Britain held that title at the time of the Great Depression. We played second fiddle to them pre-Second World War. There is therefore no direct coorelation between our experience in the Thirties and what is happening now. These are different times and we need to look to English history for a birds-eye view of ourselves today. But I digress.
Forget too the lame idea that inflationary forces might offset asset deflation. Even if that works in an general sense it is important to remember that we don't invest "generally". We invest specifically with targets and assumptions tied to them. We are predicting that one force or the other will lead to profitability. But which is it? That is the nub of our current market confusion and the reason that otherwise sage investors can continue to lose money despite the current so-called bear-trap in equities and nagging doubts about national solvency leading us to conclude commodities are our only salvation.
Fear pandering by so many so-called experts is not helping either. They would all have you jump into their sinking life-raft for a smart fee and lead you down the wrong path. As if an apology afterwards would suffice to console your losses after the fact!
So getting back to the title of your article "Take the pedal off the metal" sounds good on the surface insofar as bond markets are concerned but it does not address the intentional process of dollar devaluation that is currently underway nor why we need the dollar to be devalued in the first place. We have ceased to be competitive. And although all the resources are at our disposal to change our course we watch in dismay as our creditors walk off with the trophy, higher interest rates being our penalty, and our wealth being funneled to the developing world.
It seems to me a that a great global rebalancing of wealth is taking place that can only be countered and offset (ironically) by a further devaluation of the dollar. Inflation is all that we really have to work with short term to resolve our debt dilemma. Savings and investment rates are too low and higher taxes seem to be out of the question. If we expect to stay in the big game as a nation we MUST be solvent, even if that means living with reduced buying power for the time being. We will all be broke if we pay our current obligations in current value dollars. Bernanke has his work cut out for him. It is going to be some balancing act to get the job done without going too far especially since almost all programs overshoot their targets. And therein is my objection to your headline.
The pedal must go to the metal awhile longer for our own good.
Cam
The first thing they need to do is bin PPIP
What needs to happen now is that the money that is in the banks needs to get out into the economy, the banks have more than enough money to play with , and until they find productive uses for that money (providing credit for credit-worthy individuals and corporations) it is crazy to give them any more.
That would leave more for the Stimulus Plan which done properly will inject money directly rather than via the gambling cartel.
Nothing could be farther from the truth. The Fed, right from its birth, has never cared for the ordinary citizen and it will never do. It always has and always will serve the interests of its creators, i.e. the people who are running the fed-scam-show till the present day. Private bankers who amass wealth and property by utilizing the Fed and who now even succeeded in exploting the self-created credit crisis to extract the money directly from the taxpayers. Not by inflation, not by deflation, but by TARP, government 'stakes', interest subsidies, TALF etc. etc.
The Fed and the govt (the past Bush-warriors as well as the Goldman-run Obama administration) are driving the nation ever deeper into debt - debt that is owned predominantly by the big private banks and that is already so large that the interest burden alone will suck up ever larger parts of taxes and GDP. A continuous and accelerating wealth transfer from the ordinary citizen (the nation) to the bankers' cartel.
More of the same , to the 'good' and well-being of the nation???
PLEASE!!
On May 26 09:27 PM cameroni wrote:
> Guess I don't agree with your central point.
>
> The reaction in bond markets to the perceived destruction of our
> currency due to expansionary policy is not all a bad thing. Our currency
> may get battered a bit but it will survive as we tough out a few
> years of escalating interest rates and inflation that always follows
> devaluation of fiats.
>
> Through your charts you are suggesting that we have achieved inflation
> targets already but I am of the opinion that many more trillions
> will be printed before this crisis subsides and that the Fed is actually
> doing what is in the nations best interest by flooding markets with
> cash fresh off the press. We need more inflation despite the pain.The
> price we will pay instead is higher interest and reduced buying power.
> ....
> The pedal must go to the metal awhile longer for our own good.<br/>
>
> Cam
Now for the insight of seeing that the market was going to collapse his policies are punishing the shit out of all the money I managed to save. The banks and idiot CEO who got us into this mess get bailed out and keep their loot, while everything I have worked my entire life for gets ruined in his qualitative easing program.
So yes I am very angry. I do the research, and when foreign markets go up 2/1 over ours and investors put their money abroad instead of the us I see things aren't working. A policy can not be considered a success if the currency falls faster than the market goes up. If you believe differently there is something really wrong with you.
Laslty, Obama appoints the exact same crew who designed to get rid of the rules and regulations that would have prevented this disaster. It was all done for bank lobby money and cushy speaking fees and jobs.
So I believe every American should be angry. I don't believe american's are angry enough. There is enough information out there for anyone to read if they want to educate themselves about the scam that is being pulled on the american people. There can only be a few types of people who won't admit to the scam. Bankers, government, money managers who have a direct profit motive, and people getting paid to go around to site like this and shout down those who are attempting to point out such inconvenient truths like the fact we are loosing 2 dollars of value for every stimulus dollar.
Let us add to the fact that we will have to pay off this debt and ever higher interest rates via taxes so Bernanke can give the money to the banks for free. If you aren't mad, there is something wrong with you.
The ft said yesterday he need to do this to keep interest rates down to refinance mortgages. That is another lie. he needs to do this to keep hous prices inflated as much as he can so the banks don't have to mark down assets as much. if interest rates rose house prices would fall in line with affordability. you'd pay more each month, but get a cheaper house. Just another scam.
I think every american should just stop paying the mortgage and lets see how the court system and banks handle 20 million plus american's refusing to pay the bills. Most of the banks can't even produce the documentation saying they own the mortgage. If that is the case you do not have to pay .
a bank looses 50 grand when it forecloses. so why are we paying them 75 billion to refinance mortgages. Just another scam. We are paying banks to do what is in their own financial interest.
The list goes on and on........
Rome is burning and these people are looting it in front of our noses while it's burning, and we are actually helping them to load the goods into their wagon.
the fact that the best ways to make money right now (gold, tbt, commodities, tips, silver, foreign currencies, etc) are all things designed to protect ourselves against the idiots in our own government. doesn't that say something?
On May 26 04:35 PM jambo wrote:
>
NOT the first time the Bond market has disciplined the Fed.
Bond market leads the fed all the time. Look back at a chart of after-market T-bill rates compared to Fed funds (set by fiat). Fed Follows.
Truly we should know better from a historic sense alone. The gov is repeating the same pain prolonging steps of the early thirties.
Actually, and I should be ashamed, I was commenting less on what you said than how you said it... and the only reason for this reply is that you are the only one who'll read it
You know, user 305589, you are right.
I went too far with my remarks and I should really delete the post (but I won't and that will be my punishment for not editing myself). I think I just had one of those moments when the words flew off the keyboard faster than my mind was properly processing them. Don't get me wrong though, I love America and I am sick about the debt levels, QE and monetization. My more personal view is that we are actually witnessing one of the greatest thefts in history and it is being undertaken in broad daylight, in our faces and without a shadow of regret by those in charge. But none of us seem to have power to stop what is taking place and the massive transfer of wealth from middle class America into the banking black hole is so astonishing, brazen and insulting that I don't have words to express my disgust. I cannot see a solution given the situation to bring about the changes to make our system more transparent and ultimately more honest. We are being cheated. We are the victims of a massive, deliberate and well thought out fraud.
But the damage is done and to me it seems that only a period of high interest rates and inflation can right the system and provide a relief valve for our collective indebtedness. And that is why at this stage of the game I now think that more of the same is actually the solution even though on the surface it sounds like complete madness.
Had the economy been allowed to self correct after 9/11 and and the easy money policies not been implemented we would not be in the situation we are now. It seems every interventionist policy is simply magnifying our misery with the result that when "it" finally does hit the fan some years down the road the outcome will be many times worse than what we would have experienced in a natural recession. But the past cannot be changed.
There seems to be only two real alternatives at this point. The government, Fed etc can take a hands off approach and let markets work out a solution on their own or they can intervene and hopefully not make everything worse. We know that intervention is a certainty though because that is what the public demands and they will have it. So inflationary policies are going to be the outcome and we can rightly assume things will get worse. At the minimum, and from an investing standpoint, we, at the very least have insights into building a strategy for surviving, even prospering from the outcome of government policy.
The "do nothing" approach is so frought with dangers though that we cannot allow it. Can we really imagine that system failure, lawlessness brought on by massive unemployment, even anarchy are a better outcome than the pain of a reduced standard of living and reduced buying power dictated by high inflation yet accompanied by full employment? Sadly, we have seen the good old days and they will not likely come back in our lifetime. We are going to pay one way or the other. This cannot be cost-free. I am opting for the high inflation policy despite it's costs because it is a safer alternative, not because I think it is a good thing. Bernanke and company really have very little left in their too-box to work with. Peter Schiff did get it right I just don't subscribe to the "total collapse of the dollar" scenario that is being bandied about on so many sites these days. I still have hope we will manage to clear the books with some inflationary pain that does not kill us in the proceess.
Anyway, I did appreciate your remarks and should probably be grateful you did not call me an idiot straight out because I really was a little over the top and did not edit well before publishing...
Where is that edit button anyway?
Cam
On May 27 06:15 AM User 305589 wrote:
> More of the same , to the 'good' and well-being of the nation???
>
> PLEASE!!