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Fateful Words from Ben Bernanke?

On February 8, 2012, in Bonds, Debt, by Tim

I didn’t watch Fed Chief Ben Bernanke’s appearance before the Senate Budget Committee yesterday, but there was an interesting exchange with Sen. Pat Toomey (R-PA) recounted in this Wall Street Journal story($) on the subject of the central bank creating market distortions that they may not be able to counter if and when sentiment changes.

At issue is the Fed’s continuing policy of bond-buying. While the central bank has stopped expanding its balance sheet with new asset purchases, it is engaged in a plan to sell short-dated Treasury bonds and replace them with a like amount of long-dated government debt. The result? Ten-year Treasury borrowing rates are around historic lows, and with them, mortgage rates.

For Bernanke, this is by design, not accident. He told Toomey a significant aim of the Fed is to gobble up enough risk-free Treasury debt so that investors are forced into riskier investments that will in principle generate better levels of growth.

“We don’t want to go too far,” Bernanke told the committee. He said the Fed was “very attentive” to signs that its stimulus was in the process of generating imbalances, and added the central bank had “greatly expanded” its surveillance of financial markets, in a bid not too be caught off guard.
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“The effects of Fed policy, independent of all the other factors, on Treasury rates [are] modest,” Bernanke said. The bigger problem is investor confidence in future government borrowing. “Rates will rise eventually, and if investors were to lose confidence in U.S. federal fiscal policy, there is nothing the Fed can do to stop those rates from rising”.

If memory serves, it was Ken Rogoff (of This Time is Different fame) who observed that, throughout history, there is virtually no warning for when the bond market turns on a nation’s sovereign debt (so much for the Fed’s “attentiveness”) and, when combined with Bernanke’s warning above that there’s little they’ll be able to do under those circumstances, this sets the stage for one monster U.S. sovereign credit crisis somewhere down the road.

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Bernanke in the Shower

On January 26, 2012, in Bonds, Economy, by Tim

Repercussions of yesterday’s Fed meeting continue to be felt as the gold price has now risen about $80 since the central bank announced an extension of its low interest rate forecast and more than a few columnists are taking issue with this approach. Bloomberg’s Caroline Baum chimes in with this commentary today.

What the Fed is saying, in essence, is that as the economy improves, it’s appropriate to provide as much stimulus, or support, as it did in late 2008, when the economy was contracting and the financial system was imploding.

This is a dramatic shift. Given the long and variable lags with which monetary policy operates, past Fed officials at least paid lip service to the notion of acting preemptively: withdrawing excess stimulus — a fancy way of saying they will raise interest rates — as the economy improved.

Not so the current committee, which is tilted toward doves after the annual rotation of voting members. This group seems to think it should “continue to ease as long as there is economic slack,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It’s a classic, elemental mistake,” he said, one described by the late Nobel economist Milton Friedman as the “fool in the shower.”

The fool turns on the water in the shower, steps in and finds that it’s still cold. So he turns the knob all the way to hot, only to get scalded when the water heats up with a predictable lag.

Given the uber-dovish FOMC voting members this year we’ll probably start hearing discussion about “when the chain catches the sprocket” again in 2012, particularly if oil prices begin to rise. In the end, we are likely to look back at this period later in the decade and conclude that the Fed held rates “too low for too long”.

What’s that old saying? Those who don’t learn from history are doomed to repeat it.

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Bernanke’s Disingenuous Message to Savers

On January 26, 2012, in Bonds, Stocks, by Tim

Skip to about the 28 minute mark in the video below of Federal Reserve Chief Ben Bernanke’s press conference yesterday and you’ll hear the confusing, not-very-helpful message the central bank has for savers in our super-low interest rate environment.

Basically, his answer to Gregg Robb of Marketwatch about the difficulties being experienced by fixed-income investors makes no sense as he confuses conservative investments with riskier ones in the rather disingenuous answer excerpted below:

In the case of savers, we think about all these issues and we certainly recognize that the low interest rates we’re using to try to stimulate investment and expansion of the economy also pose a cost on savers who have a lower return. And we do hear about that obviously and we do think about that.

I guess the response I would make is that the savers in our economy are dependent on a healthy economy in order to get adequate returns, in particular, people who own stocks, corporate bonds, as well as Treasury securities. And if our economy is in really bad shape, then they’re not going to get good returns on those investments.

So, I think what we need to do is, when the economy goes into a very weak situation, then low interest rates are needed to help restore the economy to something closer to full employment and increase growth and that, in turn, will lead ultimately to higher returns across all assets for savers and investors.

That’s little comfort for all the risk-averse savers out there just looking to get more than one percent on a certificate of deposit when the inflation rate is running at three or four times that amount (by government measure, your results may be much higher).

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Debt Champions

On August 10, 2011, in Bonds, Debt, by Tim

Here’s an interesting graphic from a Spiegel story the other day that asked if the world is going bankrupt. They didn’t really answer the question in their lengthy account of the world’s economic and financial market woes, but you kind of know what they were thinking.

The only good news here is that total debt above is only about two-thirds of world GDP. Paraphrasing Caddy Shack caddy Carl Spackler, “So we got that goin’ for us, which is nice”.

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This Can’t Be Good…

On July 27, 2011, in Bonds, Debt, by Tim

Yesterday’s Chart of the Day at Bloomberg depicted dramatic changes now taking place in the cost of insuring short-term U.S. Treasuries due to the debt ceiling stalemate, one year credit default swaps now more expensive than the five year variety for the first time ever.

The bad news is that it’s getting worse. According to this Telegraph report, one-year credit default swaps have risen 8 more basis points to a new record high of 85 basis points, higher than at the peak of the financial crisis a few years ago.

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Phrase of the Day: “Debt Talks Stall”

On July 25, 2011, in Bonds, Debt, by Tim

In compiling the links post a short time ago, I couldn’t help but notice a phrase that kept popping up over and over in the headlines for reasons that should be obvious to anyone who’s turned on their computer, picked up a newspaper, or watched any TV news show over the last couple days. Here’s what it looks like for a simple Google search:

A more timely collection of links (but a far smaller number) appears for a search of Google News, in case anyone needs to get caught up to date on the lack of progress over the weekend. I wonder what the phrase of the day will be next Monday.

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