Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Sorry Ben Bernanke, You Don’t Control Long Term Interest Rates

Interest-Rates / US Interest Rates May 04, 2009 - 11:47 AM GMT

By: Michael_Pento

Interest-Rates

Best Financial Markets Analysis ArticleIt is disappointing to discover that the Harvard- and M.I.T.-educated Ben Bernanke did not learn while attending school that long-term interest rates must be set by the free market. Belatedly, the Chairman of the Federal Reserve is about to learn this valuable and costly lesson because these rates cannot be manipulated lower by any central bank for a great length of time.


On March 18th, the Federal Reserve committed to buying up to $300 billion in long-term Treasuries over the ensuing six months. After that announcement, the market initially celebrated and interest rates immediately fell on the 10-year note from 3.02% to 2.51%.  But less than two months later, rates have spiked up to 3.17%, 66 bps higher than the reaction low on the day of the announcement.

That jump in rates places into jeopardy the nascent recovery in the market and economy because so much of Washington’s planned “healing” is predicated on halting the fall in real estate prices, which have implications for consumers’ and banks’ balance sheets. Thirty-year fixed mortgages, which had fallen to a recent low of 4.625%, now face the pressure of a rising 10 year note, which has a direct impact on newly-minted mortgages (as opposed to LIBOR rates which affect ARMs).

The recent rise in Treasuries has created an incredibly important standoff between Mr. Bernanke and the bond vigilantes whose clients demand a real return on their investments.

You see, rates on the long end of the curve are primarily concerned with inflation; if inflation is expected to increase, rates must eventually reflect this by moving higher. I realize that today many are mistaking the deleveraging processes seen in stocks and real estate prices as deflation but as long as the Fed continues to monetize Treasury debt, the money supply will continue to increase dramatically and deflation in the long run will be off the table.

So just how realistic is the current level of Treasuries? As noted in my commentary written in October 2008 entitled “The Debt vs. Interest Rate Conundrum”, the 46 year average constant yield for the 10 year note was 7.04%. The yield rose above 3% in June of 1958 and did not drop below that rate until November of 2008! Back in 1958 the monetary base was just $38 billion and the gross Federal debt was only $279 billion (60% of GDP). Today, base money has grown to $1.7 trillion—with more than half of that amount having been added just since last Autumn— and the National debt has skyrocketed to $11.2 trillion (80% of GDP). Therefore, from both an economic and historic perspective the yield on the Ten year note is unnaturally and unsustainably low.

Some may also say that today’s low rates are justified given the fact that Consumer Price Index increased just .1% for all of 2008. But when you look at the first three months of 2009, the CPI is already rising at a 2.2% annual rate; clearly, traders in the bond market are beginning to realize that deflation will not be our next major concern.

This, when you think about it, is completely justified given the tremendous increase in debt and money supply, which are the progenitors to rising inflation.
So how high will the Fed allow long-term rates to rise and how much money will they print in an attempt to stem that increase? Ben Bernanke may be surprised to learn that the more Treasuries he buys, the lower their prices will go.  After all, printing money is the definition of inflation and investors simply cannot tolerate a negative return on their money for very long.

Will the Federal Reserve abandon its dangerous current course and let our economy experience a painful, but much needed recession or will it persist in its belief that long-term rates are under its dominion? Unfortunately, it seems clear that instead of capitulating to the bond market’s clear signals and reversing course, Bernanke will continue down this path. Indeed, if long-term rates go much higher from here—and it is pathetic to think our economy can’t stand a 10-year Treasury rate of much over 3%-- don’t be surprised if the Fed soon announces additional commitments to purchase even more government debt in a futile attempt to keep Treasury yields artificially low and to sustain the “recovery” now supposedly in progress. And that, unfortunately, spells disaster for both an inflationary outcome and the viability of our debt-laden and credit-dependent economy in the not-too-distant future.

The market will not be fooled by this game indefinitely, as the 10-year yield is already hinting.

*Tired of paying fees while your account value plummets? Learn about our new performance-based pricing.

Be sure to listen in on my Mid-Week Reality Check

Michael Pento
Senior Market Strategist
Delta Global Advisors
800-485-1220
mpento@deltaga.com
www.deltaga.com

With more than 16 years of industry experience, Michael Pento acts as senior market strategist for Delta Global Advisors and is a contributing writer for GreenFaucet.com . He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets. Mr. Pento has worked on the floor of the N.Y.S.E. as well as serving as vice president of investments for GunnAllen Financial immediately prior to joining Delta Global.

© 2009 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules