Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Squid Game Stock Market 2025 - 5th Jan 25
Stock Market Bubble Drivers, Crypto Exit Strategy During Musk Presidency - 27th Dec 24
Gold Stocks’ Remain Exceptionally Weak Even as Stocks Rise - 27th Dec 24
Gold’s Remarkable Year - 27th Dec 24
Stock Market Rip the Face Off the Bears Rally! - 22nd Dec 24
STOP LOSSES - 22nd Dec 24
Fed Tests Gold Price Upleg - 22nd Dec 24
Stock Market Sentiment Speaks: Why Do We Rely On News - 22nd Dec 24
Never Buy an IPO - 22nd Dec 24
THEY DON'T RING THE BELL AT THE CRPTO MARKET TOP! - 20th Dec 24
CEREBUS IPO NVIDIA KILLER? - 18th Dec 24
Nvidia Stock 5X to 30X - 18th Dec 24
LRCX Stock Split - 18th Dec 24
Stock Market Expected Trend Forecast - 18th Dec 24
Silver’s Evolving Market: Bright Prospects and Lingering Challenges - 18th Dec 24
Extreme Levels of Work-for-Gold Ratio - 18th Dec 24
Tesla $460, Bitcoin $107k, S&P 6080 - The Pump Continues! - 16th Dec 24
Stock Market Risk to the Upside! S&P 7000 Forecast 2025 - 15th Dec 24
Stock Market 2025 Mid Decade Year - 15th Dec 24
Sheffield Christmas Market 2024 Is a Building Site - 15th Dec 24
Got Copper or Gold Miners? Watch Out - 15th Dec 24
Republican vs Democrat Presidents and the Stock Market - 13th Dec 24
Stock Market Up 8 Out of First 9 months - 13th Dec 24
What Does a Strong Sept Mean for the Stock Market? - 13th Dec 24
Is Trump the Most Pro-Stock Market President Ever? - 13th Dec 24
Interest Rates, Unemployment and the SPX - 13th Dec 24
Fed Balance Sheet Continues To Decline - 13th Dec 24
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investors Lose Confidence in the US Government

Interest-Rates / US Debt Oct 15, 2011 - 10:47 AM GMT

By: Dr_Jeff_Lewis

Interest-Rates

The equity markets staged a rally on Monday, with a buying spree that was largely seen as a response to European fears. Quietly, the same investors who purchased corporate stock on the open markets moved out of other investments, primarily Fannie Mae and Freddie Mac securities.


The move was noteworthy because Fannie and Freddie paper has long been seen as nothing more than another US Treasury obligation. After the fall of Lehman Brothers, the United States announced that it would guarantee the debts of the two largest government sponsored entities. Thus, “too big to fail” was born, and government sponsored entities now had a pad of blank checks from the US Treasury which could be drawn at any time against the taxpayer.

In 2009, the decision by the federal government was enough to encourage plenty of confidence. Investors reasoned that a guarantee to pay the surplus of the losses from Fannie Mae and Freddie Mac was, as any rational person could conclude, the same as owning a similarly structured debt from the US Treasury. Besides the fact the debt is one-step removed from the Treasury—the US government would have to balance Freddie and Fannie’s books and then the payment would be made from Fannie or Freddie to investors—government sponsored entities were as good as US Treasury securities.

No Longer

Now that there are renewed fears about a global recession, investors seem unlikely to accept the government’s word at face value. While the government did agree to absorb the losses from Fannie and Freddie regardless of their size, that didn’t mean the government couldn’t back off from the terms.

Investors now fear just that. In the event of a worst case scenario, will the US government stand behind auxiliary debts, or will it allow some debt obligations to be left behind while others are paid in full?

News reports of the dividing line between Fannie and Freddie debt obligations attempt to downplay the disparity. According to mainstream publications, the spread is the result of Federal Reserve bond buying, which tends to pick one debt or the other. The media contends that since the Fed’s efforts are concentrated, the spread is an obvious natural result of major market participation.

Hypothesis Fails to Scrutiny

The suggestion is an interesting hypothesis for the disparity in debt pricing, but it doesn’t make for good science. It especially does not hold to the modern practices of financial modeling, which would never allow an investor to pay more for one future dollar than it would for the same future dollar. A dollar from the US Treasury in the future is a single dollar, it shouldn’t matter how the funds flow.

Besides, given the complexity of the market, and the sheer number of algorithmic traders in the markets, any spread that is unwarranted is annihilated immediately by rapid trading algorithms. If there is a spread big enough to be arbitraged and yet not small enough to ignore, then it comes as a result of risk pricing. Otherwise, the spread would be eliminated, instantaneous profits earned, and the news would go unpublished.

As subtle shifts in confidence trend in a system over-burden with dollar-denominated obligations, we could be witnessing the beginning of a stampede toward the new real ‘modern’ assets: gold and silver.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2011 Dr. Jeff Lewis- 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.


© 2005-2022 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