MARKET COMPLACENCY MAY SOON BE TESTED
gold-eagle.com
Aided by the breathtaking intervention of late by Japan, the U.S. Treasury market has also become boring in its predictability. Sure, we all know that long-term interest rates (the 10-year Treasury Note, for instance, at a smidgen above 4%) have absolutely no business being this low, what with soaring commodity prices, record U.S. budget and trade deficits, a declining dollar and all the rest. Yet they are; and abetted by Japan (which in January ALONE pumped some $70 billion into supporting Treasuries and keeping the yen's rise in check) and Greenspan's dovish comments in front of Congress last week, the picture has emerged that interest rates across the board will stay low for quite some time to come.
Yep I agree 100%, treasuries have no business being here. Seriously, I do believe that. So FN what? What it means is that Greenspan wasted too many bullets too early.
What we must deal with is:
Where we are NOT where we should be.
Hell stocks should not be here either IMO but here we are.
The reality is here we are.
Now what.
Can we raise interest rates to 5% so we have room to cut the next downturn? I suppose, if you want to start a depression immediately. The reality is that the FED is in a Japan liquidity trap of its own making: It did not hike when it should have, it cut too early and too agressively and is now in a liquidity trap with no way out. Rate hikes will bankrupt many and easy al's banker friends do not want that. It's also election time boys and girls. If a stock market selloff starts, will the FED be hiking agressively into that? Fat chance.
Will Japan suddenly stop buying treasuries when it is bitching about a low US$? Europe is bitching about a low US$ as well. Possibly we have seen intervention there already. Now we have two players supporting (or trying to) the US$. Don't overlook the FED either. If there are no buyers the FED itself will step in and monetize it. Bernanke threatened to do that to the long bond, did he not? Does anyone doubt this FED would not act on a promise to be easy?
No one seems to get it.
The FED will force Europe to cut (assuming a Europe recession does not do it first).
Mish |
