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REMINDER: All investment, economics, and finance related material now appears at the new IaconoResearch.com. For the time being at least, this has become a personal blog covering a variety of mostly unrelated topics.

Stock Market Plunge Spurs Fed to Action

On March 7, 2012, in Bonds, Debt, by Tim

Well, actually, I hope that’s not what happened, but, after the dive equity markets took yesterday (see this item from earlier in the day), it wouldn’t come as too big of a surprise to learn that Fed Chief Ben Bernanke rang up Jon Hilsenrath at the Wall Street Journal and their conversation led to the filing of this report($) today that makes clear, lest anyone get the impression otherwise, that the central bank is still thinking about printing up another half trillion dollars or so for the greater good.

Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.

Ben Bernanke Wields the Printing PressUnder the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.
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In the new novel approach, the Fed could print money to buy long-term bonds, but restrict how investors and banks use that money by employing new market tools they have designed to better manage cash sloshing around in the financial system. This is known as “sterilized” QE.
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Unlike Operation Twist, the size of the program wouldn’t be constrained by the Fed’s own holdings of short-term Treasurys. This approach would also give officials an opportunity to try out some of their new tools to see how they work on a large scale.

I don’t know about you, but, to me, the idea of an “unconstrained” Fed trying out some of their new money printing tools on “a large scale” sounds pretty bullish for just about everything that isn’t the U.S. dollar.

Note that the image above is not the one offered up at the WSJ. It is from this interesting collection of images that are returned when you do a Google image search on Bernanke Money Printing. It actually took a little while to pick one out – the selection was vast.

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Know Your Asset Classes!

On February 28, 2012, in Bonds, Commodities, Stocks, by Tim

Also in the current issue of the Weekend Update at Iacono Research was the graphic below that  goes a long way in explaining why the Iacono Research model portfolio has done so well over the years and how it might continue to do so in the months and years ahead.

As noted in this item yesterday, the new combined blog/investment website will launch in just another week or two, at which time, the cost of the newsletter will be going up quite a bit, so, anyone interested in learning more about the chart above and saving some money on a new subscription might consider going here before that opportunity passes.

As always, there is a 60-day, no questions asked, money back guarantee.

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Those Amazing Treasury Yields

On February 27, 2012, in Bonds, by Tim

One of the many financial oddities in recent months, that is, ever since the European sovereign debt situation entered about its sixth crisis phase over the last two-and-a-half years, is that, now that the latest crisis appears to be over and investors’ mood has again switched from “risk off” to “risk on”, nobody’s selling their super safe Treasuries. The chart below from this Fidelity viewpoints item provides another example of how the historical relationship between U.S. debt and everything else has broken down lately.

Some say the bond market knows something that other markets don’t about the true health of the economy and credit markets while others blame the Fed for making the U.S. bond market dysfunctional with its huge asset purchases in recent years and its “Operation Twist” program of selling short-term debt to buy long dated securities. One thing is certain – the recent stability in long-term Treasuries at near record low yields won’t last forever.

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Asset Class Mean Reversion

On February 24, 2012, in Bonds, Commodities, Stocks, by Tim

Here’s another fascinating chart by Jake over at EconomPicData in which the reversal of fortunes (well, at least, relatively speaking) for various asset classes is plotted in a scatter chart, a graphic format that, in my view, is underused by those wielding spreadsheets.

Of course, upper right being best and lower left being worst, it’s clear to see which assets have been the most consistent performers. But, interestingly, going back to the start of 2011 and using the iShares Barclays 20+ Year Treasury ETF (TLT), Long Treasuries are still outperforming spot gold, the former up 29.3 percent and the latter 25.1 percent higher.

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A New Perspective on the Fed’s Balance Sheet

On February 13, 2012, in Banks, Bonds, by Tim

Following the long-term look at the federal government’s public debt in this item from a short time ago comes this long-term view of the Federal Reserve’s balance sheet compliments of the recently stumbled upon Gresham’s Law blog.

Note that the graphic is interactive in its original form at Gresham’s Law and additional charts are provided that go into great detail regarding what the central bank was doing, money-printing-wise, over 10 year periods beginning in 1915. But, the most important point is made in the right-most portion of the graphic above where even a log-scale chart would indicate an astounding increase in Fed largess.

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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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