Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20
How Soon Will We See Stock Market SPX 4000? - 8th Oct 20
Stock Market Spy ETF Testing March Price Peak – What Do the Charts Say? - 8th Oct 20
5 Consequences of US Debt at $50 Trillion - 8th Oct 20
Long Term Cycles Suggest Stock Price Reversion Pending & Gold Price About To Explode High - 8th Oct 20
AMD Zen 3 Ryzen 5000 Launch - Performance, Prices Skews, Cinebench r20 Scores, 5800x, 5900x, 5950x - 8th Oct 20
Gold vs. Silver – Absolutely No Comparison - 8th Oct 20
Gold: Why You Should Be Wary of the "Consensus" - 8th Oct 20
UK Covid-19 Hospital Admissions and Deaths Since Testing Positive in 28 days Analysis - 7th Oct 20
Amazon Prime Day 2020 Sales Top Tips of How To Get Big Savings! - 7th Oct 20
Want To Win Big In Forex Trading? Leverage Is Your Friend - 7th Oct 20
Why I am Voting for Donald J. Hitler - 6th Oct 20
Markets Chop & Grind: Gold, Stocks & Commodities - 6th Oct 20
Silver Price Great Buy Spot Ahead of Second Big Upleg - 6th Oct 20
Forget RTX 3080 Get Zen 3 Ryzen 5900x / 5950x - GPU vs CPU - PC Bottlenecking - 6th Oct 20
How to Get Budgies / Parakeets to Eat Vegetables for the First Time - 6th Oct 20
How to Pick a Reputable Double Glazing Window Company - 6th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Why the Fed Will Be Sidelined in 2010

Interest-Rates / US Interest Rates Dec 21, 2009 - 04:24 PM GMT

By: Michael_Pento

Interest-Rates

The release of the Non-Farm Payroll Report for November along with the latest inflation data from the Bureau of Labor Statistics placed further into question the Federal Reserve’s free money policy. The spate of less bad news on the economy and increases in certain price levels has brought some of the bond vigilantes back from hibernation, while the cacophony from the hard-money guys (me chief among them) to raise interest rates is growing yet louder.


But unfortunately in my opinion, the Fed will be watching the economy from the bench for nearly all of 2010. The reason is simple; the central bank already has scheduled a tremendous de facto tightening which will occur at the end of the first quarter.  As most of us already know, the Fed will conclude its planned purchases of $1.25 trillion in Mortgage Backed Securities (MBS) in March. The problem is that according to the St. Louis Federal Reserve, Mr. Bernanke is responsible for 90% of the purchases of all newly issued agency MBS. That means the Fed is the securitization market for mortgages.

Securitization has become essential to bank lending. That’s because banks lend at fixed rates and borrow at floating rates. Having that ability to sell the loans allows the lender to remove it from their books and thus become more insulated from the fluctuation in interest rates. If the securitization market dries up for financial institutions, then the interest rate on those mortgage loans must rise while the amount of mortgage issuance will become attenuated.

Up until now, the appetite from fixed income investors has been primarily for sovereign debt. The hope is that those investors will supplant the Fed once they exit the MBS market. But if private investors no longer participate in the Treasury market to the same extent as before, then prices will fall and rates will rise on U.S. debt. If the spread between mortgage rates and Treasuries remains the same, then rates on mortgages must rise too. Given the link between the real estate market and the economy, the move higher in Treasury yields and mortgage rates will be a huge drag on home prices and economic growth. And since Ben Bernanke fears deflation much more than inflation, the chances are very high he will wait until the full outcome from exiting the MBS market is realized, which will be measured in months not days.

In addition to less mortgages being issued, there are several other headwinds that face the US economy in 2010. And those forces should give Mr. Bernanke cause to hold in abeyance any desire to raise the Fed Funds rate despite what markets are predicting. Not only will mortgage rates be rising next year but also; there is anticipation in the Fed Funds Futures market of at least a small increase in the overnight lending rate sometime in the late summer or early fall, taxes and regulations will be increasing at the end of the year and we will see the end of mortgage forbearance measures that--according to RealtyTrac and Amherst Securities--could dump millions more homes on the market.

Adding to the Fed’s problems in 2010 should be a stubbornly high rate of inflation. Data released on Tuesday of this week showed that the PPI rose 1.8% in November and 2.4% over the last 12 months. Import prices released on Monday showed a month over month increase of 1.7% and have risen 3.7% year over year. And amazingly enough the price index for U.S. imports rose 10.1% over the last 9 months. Even year over year CPI has pushed solidly into positive territory for the first time since February of 2009, up 1.9% for the last 12 months.

But the Fed will be stuck in neutral despite the data on inflation because they believe a high rate of unemployment will prevent inflation from taking hold.

My view is that economic growth will remain below trend and that is supported by the oil and copper market, which are considered barometers for the economy. Copper has been stuck in a trading range just above $3 a pound and oil has retreated from near $80 a barrel to $70. If the economy was indeed making a “V” shaped recovery, then those growth sensitive commodities would be breaking out of their trading range, despite a modest increase in the value of the US dollar. 

For now the dollar is enjoying a nice bounce because traders believe the Fed will react to the latest inflation data and “less bad” economic data. The truth is the Fed knows the recovery will be weak, they are unsure how the economy will deal with rising mortgage rates and a possible resumption in falling home prices. That is why they mean it when they say “…the Fed Funds Rate will remain exceptionally low for an extended period of time.” For once you should believe what they say and make sure your investments reflect their easy money posture.

Be sure to listen in on my Mid-Week Reality Check and to follow my blog Pentonomics
Follow me on Twitter: http://twitter.com/michaelpento

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