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It’s always gratifying when the mainstream media picks up on a theme you’ve been banging away at for weeks. And boy is that happening now. Just get a load of the headlines we’ve seen in recent days:
“Fresh Attack on Fed Move; GOP Economists, Lawmakers Call for Abandoning $600 Billion Bond Purchase” — Wall Street Journal, November 15
“Under Attack, Fed Officials Defend Buying of Bonds” — New York Times, November 16
“Fed officials defend $600bn stimulus” — Financial Times, November 16
“Bond Market Defies Fed; Interest Rates Rise Despite Launch of Treasury Buying as Investors Take Profits” — Wall Street Journal, November 16
The gist of these articles? That the Fed is scrambling to defend its quantitative easing policy.
Key policymakers are giving rare, on-the-record interviews about QE2′s benefits, while simultaneously trying desperately to blunt the criticism coming from foreign central bankers, domestic lawmakers, prominent economists, and more.
Fed Fighting a Losing Battle
Defending the Undefendable!
My take? The Fed is right to worry. I say that because its QE2 program isn’t just not helping. It’s actually hurting the markets.
Take long-term Treasury yields …
As I’ve been pointing out recently, they’ve been rising rather than falling, and that move only gathered steam earlier this week. In fact, the yield on the 30-year Treasury bond hit 4.38 percent on Monday — the highest in six months! And ten-year yields hit a three-and-a-half-month high.
Then there’s the mortgage market …
Yields on mortgage-backed securities surged almost half a percentage point in just a handful of recent days, presaging a rise in retail mortgage rates. So much for the Fed’s policy helping homeowners.
And then there’s the municipal bond market …
It has completely imploded in the past several days. Take a look at this chart of the iShares S&P National AMT-Free Municipal Bond Fund (MUB). It’s one of the most actively traded benchmark ETFs for the municipal bond market, with more than 1,100 securities in its portfolio.
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You can see it’s in freefall, with one of the sharpest declines since the credit crisis days of late 2008. MUB has now lost every penny of gains it’s made in the past 15 months … in just a few days! Long-term muni yields, which move in the opposite direction of prices, surged by the most in 18 months!
The move doesn’t stem entirely from concern about the long-term inflationary impact of Fed money-printing, or the back up in Treasury yields …
Muni investors are worried that federal support for state and local governments could wane now that the political winds are shifting in Washington. They’re also concerned that we could see a fresh upswing in issuance given deteriorating municipal finances.
But clearly, the cost of borrowing is now not only going up for Uncle Sam. It’s also rising for governments all over the country, and mortgage borrowers. And it’s starting to inch higher for corporate debtholders.
Opposition Rising in Washington —
and Everywhere Else
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Is it any wonder then that a large group of prominent economists just published an open letter to Ben Bernanke, begging him to stop the madness before it’s too late?
The group, which includes Michael Boskin, a former chairman of the President’s Council of Economic Advisors … Douglas Holtz-Eakin, a former director of the Congressional Budget Office … and Kevin Hassett, a former senior economist at the Fed itself, said:
“We subscribe to your statement in The Washington Post on November 4 that ‘the Federal Reserve cannot solve all the economy’s problems on its own.’ In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.
“We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.
“The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.”
The rising opposition to the Fed is further evidence that the global money war I’ve been worried about is intensifying. It’s proof positive that my previous advice to stay away from both long-term Treasuries and long-term debt of any kind, including municipals, was on target.
We’ll likely see a bounce in bond prices soon, given the massive sell off. But I think this market action is a signal to take some profits off the table after the recent major run in risk assets.
Until next time,
Mike
P.S. This week on Money and Markets TV, we looked ahead to the holiday shopping season. And our panel of experts explained why it’s so important for the retail industry, the overall economy and how you can profit with ETFs.
If you missed last night’s episode of Money and Markets TV — or would like to see it again at your convenience — it is now available at www.weissmoneynetwork.com.
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Will stocks in foreign companies that are bought and sold through US exchanges drop right along with US companies?
I believe that our 2008 economic Great Correction will remain incomplete until the large “Government” component of GDP has also undergone correction of its excesses, especially its debt. Yes, I know Moodys et al have the governments’ credit rating at AAA indicating that they know of an existing, but yet to be announced, miracle plan (e.g., one that also includes generous tax cuts) to eliminate budget deficits and substantially pay down the debt and reduce its interest expense. But until the miracle plan has been announced and successfully launched to rid GDP of its government component’s excesses, our economy will face the huge ongoing danger of the government’s failure to sell sufficient treasury bonds to maintain its solvency and investors’ trust.
But, if the AAA credit rating is deliberately fraudulent and no miracle plan exists – as I believe – then it seems that Bernanke’s QE really isn’t to reduce interest rates (to increase consumer spending) as much as it is to assure bond buyers/traders that, if they will continue buying treasury bonds, he will protect their bonds’ prices – at least temporarily – from losing value in the open market by using QE to maintain an adequate – but pseudo – market demand.
Judging from last week’s preliminary report from the Obama-appointed National Commission On Fiscal Responsibility and Reform, there is no miracle – or even feasible – plan for avoiding fiscal disaster. Therefore, we must keep our seat belts fastened while awaiting the last blow from the current Great Correction – which will subject me to a second Great Depression in my lifetime.
Bernanke should resign before we dive into the next Great Depression. I wrote him a letter suggesting this. He believes he can prevent what is coming…..he cannot. His name will be tarnished in a few years the equivalent of Herbert Hoover if not worse….the same for Obama.
The Fed will be powerless to stop the magnitude of the terrible financial forces soon to come. The early stages of the coming Municipal Bond debacle are only now showing — as local and state governments refuse to balance their budgets by lowering union existing pay scales and pensions by any means necessary. Bankruptcy will be a de facto reality for many. I am only surprised that it has taken this long for the market to start getting the drift.