Fed Announced it Would Buy up to $300 Billion in Treasury Bonds
If you can't beat the professionally managed superannuation market (based on yesterday's research report from APRA) should you join it? That's one of the questions we take up in today's Daily Reckoning. We'll also discuss the short, happy life of industrial civilization. But before we get to those subjects, a quick review of the night's financial proceedings is in order.
Stock action on Wall Street was mostly directionless. Stocks have opened lower here in Australia. But all the juicy action is in the bond market, where the Fed is getting its hands dirty again. You wouldn't think the Fed would have to come in and support bond prices with investors wringing their hands about global growth. But the numbers tell another story.
The Federal Reserve Bank of New York bought US$7 billion worth of Treasury bonds maturing between 2013 and 2016, according to Marketwatch.com. Remember, Fed announced last year it would buy up to $300 billion in Treasury bonds to keep interest rates down and borrowing costs low. But there's a slight problem.
According to Credit Suisse, the Fed would have to buy about $37 billion worth of Treasuries a month from now until September to reach its target. But in actual fact, the Fed's been averaging $59 billion in purchases per month since March. Hmm.
There are three points to come to mind here. First, the Fed is going to have trouble keeping long-term interest rates down through its repurchase program. Second, if talking up the bond-market and intervening doesn't work, it wouldn't surprise us to see the Fed talk down the stock market in order to drive investors back into Treasuries.
And the third point deserves its own paragraph. Debasement has consequences. It is perverse enough that the Fed must purchase U.S. government debt to keep rates down (and the bond market auctions chugging along). No one in the media calls this for what it is: market manipulation. But do you reckon there will come a day-perhaps this year-when a U.S. Treasury auction fails and the Fed is forced to buy up the whole lot with new money?
What do you think will happen to the U.S. dollar then? And here's a kicker...what happens when the U.S. Federal government begins throwing loan life-lines to debt-distressed states like California?
Dan Denning
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). Dan draws on his network of global contacts from his base in Melbourne. He’s the managing editor of resource newsletter Diggers and Drillers and the editor of The Daily Reckoning Australia.
Comment by George on 7 July 2009:
There seems to be a dissonance between the financial markets and the real economy. The real economy is in a deflationary spiral heading to a repeat of the 30's. The Fed is trying as best it can to forestall that eventuality. I think they are pissing up a rope. Until the unemployed consumer starts buying toys again (maybe four or five years from now) there won't be anything except direct stimulus (rebuilding the infrastructure) that will do much good. Putting money directly into the hands of people so they can pay down their debts (the government calls it "savings") will do nothing for retail sales and manufacturing until all those debts are unwound. It will be a long time until the "savings" start to accumulate as real "in the bank" wealth.
Only those myopic economists who don't understand the dynamics of massive unemployment and therefore leave it out of the mix of "financial data" see inflation in the near future. Inflation may be down the road sometime in the murky future. I'll look for an increase in trucking miles and rail car usage for at least a couple of quarters before I sell my long bonds.
George
Comment by Fred on 7 July 2009:
How about that. I did review that APRA report. From the scatter charts, basically the more the fees & expenses the lower the returns. Howzat! I'd like to get me a piece of that action; Our new corporate motto will be: "We may not give personal customer focus and we don't always make the returns that the upper 3 quartiles do - and we're expensive!"
I guess I'll have to first go get one of them-thar Porsche-mobiles, some nice Escada suits, a fancy but fairly useless website, a swanky wood paneled office up in a tall and expensive tower in Collins street so I can look the part. Yeah-baby.
I wanted to see charts like those because APRA's normal quarterly report, while constantly it re-iterates that retail funds are laggards, it does not really put the blow torch on anyone. Now I reckon those bright boys APRA that did this one ought to put some names on those dots in the chart. Now that would be something!
It would also be interesting to see the results of Fig. 10 in several other scatter charts that show how fund returns vary by... oh lets say...; post code; marketing budget; number of luxury cars in reserved parking, office height above ground level, or some other variables that the punters can actually make graphic sense of.
As I could not follow Dans link its here: http://www.apra.gov.au/Research/upload/SA_WP_IPRSF_062009_ex.pdf
Comment by Justin on 8 July 2009:
But won't the Fed, or the RBA, talking down the stock market just lead to more problems? If people can't make easy money in shares, they'll park money in the bank, making companies have to issue debt rather than equity, or worse still (for the government) buy gold, which you should be doing anyway.
Comment by George on 8 July 2009:
re: my previous post
Some may want to read John Mauldin's http://www.investorsinsight.com/ take on the inflation/deflation question.
I refer to his article from Outside the Box titled "Make sure you get this one right."
I highly recomend it. He details his arguement meticulously and includes several graphs that make the arguement rather intuitive.
George