< HOME  Sunday, December 18, 2005

inside the belly of the BEAST...

When "short-term rates exceed long-term rates, INVERSION [occurs]."

Sound unpleasant? It is.

According to David Rosenberg, an economist at Merrill Lynch, "in the last three decades there have been five Fed-induced rate INVERSIONS . . . and the economy slipped into RECESSION a year later all five times."

The last one was in 2000: The Fed held its key rate at 6.5% in the second half of that year.

But as the economy weakened, bond investors began to sense that the Fed soon would be easing credit. Long-term bond yields slid.

By the end of December 2000, the 10-year Treasury note yield was 5.11% — about 1.4 percentage points below the Fed's short-term rate.

The Fed began cutting its rate in January 2001, but it was too late. A recession began in March.

What LESSONS can we learn?

  1. When bond investors suspect that the FED will ease credit, long-term bond yields DROP.
  2. When long-term bond yields drop, RECESSION follows.
That's easy, you say, avoid INVERSION!

Small problem: the FED's main concern is making money for its shareholders.

Not only would staving off recession be counterproductive, but as the following excursion demonstrates, the Fed really only dictates short-term interest rates.

Once the genie's out of the bottle, all bets are off!

Now stay with me, because it gets a little sticky inside the belly of the BEAST:
"[T]he Fed [recently] boosted its short-term rate from 1% in June 2004 to the current 4.25% . . . meanwhile, the 10-year Treasury note yield [has] declined, from 4.58% to 4.44%."

But, "in its post-meeting statement [the Fed announced] that 'some further measured policy firming is likely to be needed.'"

So, Wall Street figures "the Fed's benchmark rate . . . will rise to at least 4.75% by spring."

BUT, "even the longest of long-term rates — the annualized yield on 25-year T-bonds — currently is below 4.75%." [mercy!]

"[which means] investors face the prospect of earning LESS on longer-term securities than . . . in very short-term,
NO-risk cash accounts, such as six-month T-bills."

Investors become convinced that interest rates in general will soon come down because historically, after inversion, "the economy [is] poised for a sharp deceleration or a full-on recession."
This is beginning to look like a self-fulfilling prophecy.

But wait, put yourself in the mind of a potential bond investor:
"To buy a 10-year Treasury note, which currently pays a yield of 4.44%, you'd have to believe that even if shorter-term rates climb above that level next year . . . they won't stay there for long."
So, what's your point?
"The bond market is pricing in some event that would cause the Fed to cut rates" later in 2006, said an economist at Lehman Bros . . . "most likely, a marked economic slowdown."
What in the hell does that mean?!! Are they buying or are they selling?

And, how does that affect the long-term yield rate?!! You told me that when long-term bond yields DROP--RECESSION follows!

Simple. It's all about supply and demand.

"Some on Wall Street believe that demand for bonds has remained robust, keeping yields down, because of a global savings glut — meaning that so much money is looking for a place to go that investors . . . are forced to out-compete one another for bonds, depressing returns.
Hmmm, that means the money supply is already HYPERINFLATED and the only thing that saves us from catastrophic inflation is people hoarding cash because they think it's still worth hoarding.

Others think "rates stay low because many investors are permanently poised to rush into the securities as a haven should . . . a financial calamity or a massive terrorist attack [occur]."
Too bad a financial calamity that wipes out the value of the dollar would make buying bonds useless, SUCKERS!

Still others "contend that bond yields have softened because the market believes inflation has been vanquished in the long run . . . government bond returns have averaged 2.3 percentage points above the inflation rate since 1926. [!!!]

If inflation falls back to, say, 2%, a 4.44% bond yield would look fairly generous.

Would you look at that? Bondholders have been raking in the dough since 1926, while everyone else suffers the vagaries of inflation, generation after generation.

Coincidence? I think not. Try causal relationship.

Finally, it's always possible, however unlikely, that "the economy will stay strong," that the new Fed Chairman Ben Bernanke "will keep lifting short-term rates," and that "longer-term interest rates will rise as well," averting INVERSION.

Then, "investors obviously would be better off waiting to lock in bond yields at more attractive levels. And THEY'D BE PAID TO WAIT, as yields . . . continue to rise."
As always, we SUFFER so that they can PROSPER.

"Morgan Stanley . . . believes the Fed's benchmark rate will reach 5% in the second quarter, and will hold there through 2006."

If he's right, we're going to find out how hungry global investors really are to own long-term U.S. bonds at these yields.
How HUNGRY is the BEAST? I don't want to know.

Is RECESSION around the bend? I'm not sure.

But, one thing's certain. The ILLUSION can't last forever.

So please, do what you can to help spread the word.

We must stop this monster before it devours us all.

9 Comments:

At Sunday, December 18, 2005, Blogger Dave the Chaotic Homosapien said...

Nice and informative blog! Bravo! Everybody with any level of intelligence knows that the federal government is screwing us most of the time.

Anyway, visit my web site at www.woce.net if you would like to see what I've done with a web site.

 
At Sunday, December 18, 2005, Blogger Chaos said...

Chaos believes an inverted yield curve is only the beginning...Imperial Nation's economy is now held together with bubble gum and rubber bands. The savings rate is less than zero, the foreign account deficit is staggering, and the real estate bubble is about to pop. Now the Fed has decided to stop publishing M3, as of March 2006. Coincidence?

 
At Sunday, December 18, 2005, Blogger qrswave said...

"bubble gum and rubber bands"

that appears to be an accurate assessment.

 
At Sunday, December 18, 2005, Anonymous Anonymous said...

March 2006 is also the time Iran begins selling oil in euros, I believe. Maybe they are planning on printing up a storm of cash to satisfy investors, while not letting people know just how much money they are printing. Guess they are planning on disaster in March. I do wonder if they will make it...

 
At Sunday, December 18, 2005, Blogger dan said...

you've mentioned a couple key words. i think more elaboration can be done to them.

1) "the FED's main concern is making money for its shareholders." Shareholders as in, people that own Treasury Notes? These shareholders, would not mind a little deflation, for the length of duration of their treasury notes. Ie. japan's 10 year deflation.

2)"Bondholders have been raking in the dough since 1926, while everyone else suffers the vagaries of inflation, generation after generation." Can you give more examples?

i can only think of alexandar hamilton, and the great depression.

 
At Sunday, December 18, 2005, Blogger qrswave said...

Unknown, I talked about Iran's bourse earlier.

I haven't thought about what they'll attempt in the financial markets; but printing up a storm of cash sounds like a fairly good guess. No doubt they have something up their sleeves, besides invade, of course.

----------

dan,

1. Bondholders' interests vary as much as yield rates. When I talk about shareholders, I'm referring to moneylenders/bondholders in general.

At any given time, some will benefit more than others. But, in general and over the long haul, all lenders win, while borrowers lose. No surprise, since the former wins by taking from the latter.

2. I was not thinking of specific examples. Though, Hamilton is a good one.

In general, if bondholders are always at least 2.3 percentage points ahead of inflation, they are always one step ahead of anyone who's not a bondholder, since inflation affects everyone.

 
At Sunday, December 18, 2005, Anonymous navyswan said...

"March 2006 is also the time Iran begins selling oil in euros"

Iraq was about to do the same thing right before we invaded. So, if Iran is going to change to Euros, I will not be surprised to see the government fish up some "intelligence" that proves we need to invade.

Btw, what exactly are we supposed to do about any of this? I am confused about this point. How can people who do not control the money do anything to change the system?

 
At Sunday, December 18, 2005, Blogger qrswave said...

good question, navy.

Spreading the truth about this colossal scam is a start.

You will be amazed at how many people stare at you in disbelief when you break it to them that the Fed is privately owned.

Also, there are a number of links in my side bar that shine the path on a better tomorrow.

For example, the author of "The Perfect System" stopped by today and posted a comment (scroll down to last one). I'm about to read her book and I'll get back to you with the scoop. From what she describes, though, it sounds good.

 
At Monday, December 19, 2005, Anonymous Anonymous said...

"Iran is going to change to Euros, I will not be surprised to see the government fish up some "intelligence" that proves we need to invade"

It has already begun. The entire Iran nuke scare (no mention of the fact that Pakistan has nukes and al Qaeda, or that Israel has nukes, or India?, etc.)... the scare about Iran coming into Iraq and providing them with these high-tech IEDs... trying to make a case that Iran is already attacking US troops, I imagine.

If the US can make it to June '06, around when Iraq is supposed to be "fixed", if the Bush clan has enough political clout and "I told you so" hubris then they might make it to Iran. Other options might be covert CIA action, but that didn't turn out so well after Operation Ajax.. so who knows. The world is watching Iran closely... China and Russia, etc. It would be hard to do covert ops and not be suspect.

 

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